NOT FOR PUBLICATION, RELEASE OR DISTRIBUTION DIRECTLY OR INDIRECTLY IN CANADA, AUSTRALIA OR JAPAN
Alcatel-Lucent launches an offering of bonds convertible into and/or exchangeable for new or existing shares (OCEANE) in an amount of 750 million
Paris, September 2, 2009 - Alcatel-Lucent (Euronext Paris and NYSE: ALU) launches today an offering of bonds convertible into and/or exchangeable for new or existing shares of AlcatelLucent (the Bonds) due January 1, 2015 in an initial nominal amount of 750 million, which may be increased by 15% to approximately 862.5 million in the event that the over-allotment option granted to the Joint Lead-Managers and Joint Bookrunners of the offering is exercised in full at the latest on September 8, 2009. The principal purpose of the offering is to contribute to the refinancing of the groups debt and the extension of its maturity, and, secondarily, to further enhance the groups financial position. In particular, all or part of the proceeds of the issue may be used to finance the repurchase of part of the groups debt, including the bonds convertible into and/or exchangeable for new or existing shares due January 1, 2011 (the 2011 OCEANE), of which the principal amount outstanding is approximately 1,022 million. The nominal value of each Bond will correspond to an issue premium of 35% over AlcatelLucents reference share price on Euronext Paris1. The conversion / exchange ratio of the Bonds will be one new or existing Alcatel-Lucent share per Bond, subject to potential further adjustments. The Bonds will bear interest at a rate of between 5.00% and 5.50% per annum payable semiannually in arrears on January 1st and July 1st of each year, commencing January 1st, 2010 (or, if it is not a business day, the following business day). For the period from and including September 10, 2009, the issue date, up to and including December 31, 2009, the coupon will be payable on January 1, 2010 (or on the following business day if such date is not a business day) and will be calculated on a pro rata temporis basis. The Bonds will be issued at par on September 10, 2009 and will mature and be redeemed in cash at par on January 1, 2015. The Bonds may be redeemed early at the option of Alcatel-Lucent subject to certain conditions. The determination of the final terms of the issue is expected on September 2, 2009. The expected date of issue and settlement and delivery for the Bonds is September 10, 2009. This press release does not constitute an offering to subscribe, and the offering of the Bonds is not a public offering in any jurisdiction except in France, subject to the following: In France, The Bonds will initially be offered only in a private placement in accordance with article L. 411-2-II of the French Financial and Monetary Code;
The reference share price will be the volume-weighted average price (VWAP) of Alcatel-Lucents shares quoted on Euronext Paris from the opening of trading on September 2, 2009 until the final terms of the Bonds are determined.
Following such placement and once the final terms of the offering will have been determined, a visa will be requested from the French Autorit des marchs financiers (the AMF) on the offering circular (prospectus). Upon receipt of such visa, the Bonds will be offered to the public in France during the following three trading days.

DISCLAIMER

This press release must not be published, released or distributed, directly or indirectly, in Canada, Japan or Australia. This press release and the information contained herein do not constitute an offer to sell or subscribe, nor the solicitation of an order to purchase or subscribe, securities in the United States or in any other country. In particular, securities may not be offered or sold in France absent a prospectus approved by the AMF. The release, publication or distribution of this press release in certain jurisdictions may be restricted by laws or regulations. Therefore, persons in such jurisdictions into which this press release is released, published or distributed must inform themselves about and comply with such laws or regulations. The offer and sale of the Bonds in France will first be carried out in a private placement in accordance with article L.411-2-II of the French Financial and Monetary Code. The offer will be made to the public in France only after the granting of the visa by the AMF on the prospectus. With respect to the member States of the European Economic Area, other than France, which have implemented the Directive EC/2003/71 called the Prospectus Directive (each, a relevant member State), no action has been undertaken or will be undertaken to make an offer to the public of the Bonds requiring a publication of a prospectus in any relevant member State. As a result, the Bonds may only be offered in relevant member States: (I) to legal entities which are authorised or regulated to operate in the financial markets or, if not so authorised or regulated, whose corporate purpose is solely to place securities; to any legal entity which has two or more of the following criteria: (1) an average of at (II) least 250 employees during the last financial year; (2) a total balance sheet of more than 43 million; and (3) an annual net turnover of more than 50 million, as per its last annual or consolidated accounts; (III) in any other circumstances, not requiring the issuer to publish a prospectus as provided under article 3(2) of the prospectus directive. The securities referred to in this press release have not been and will not be registered under the U.S. Securities Act of 1933, as amended (US Securities Act), and may not be offered or sold in the United States absent registration or an exemption from registration under the US Securities Act. Alcatel-Lucent does not intend to register any portion of the planned offering in the United States or to conduct a public offering of securities in the United States. This press release is not an invitation nor an inducement to engage in investment activity for the purpose of Section 21 of the Financial Services and Markets Act 2000, as amended (FSMA). This press release is directed only at (i) persons outside the United Kingdom; or (ii) persons in the United Kingdom that are qualified investors within the meaning of Section 86(7) of FSMA that are also (a) persons authorised under FSMA or otherwise having professional experience in matters relating to investments and qualifying as investment professionals under article 19 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the Financial Promotion Order); or (b) high net worth companies, unincorporated associations and other persons to whom article 49(2) (a) to (d) of the Financial Promotion Order applies; or (c) any other persons to whom this press release for the purposes of Section 21 of FSMA can otherwise lawfully be made available (all such persons together being referred to as Relevant Persons). Any person in the United Kingdom that is not a Relevant Person should not act or rely on this press release. The securities referred to in this press release or any investment or controlled activity to which such securities relate are only available to, and will be engaged in only with, Relevant Persons.

One of the Joint-Lead Managers of the offering of the Bonds, acting as stabilizing manager (or any other affiliated institution) will have the ability, but not the obligation, as from the moment on which the final terms of the Bonds and the offering become public, i.e. expected on September 2, 2009, to intervene, so as to stabilize the market for the Bonds and possibly the shares of Alcatel-Lucent, in accordance with applicable legislation, and in particular Regulation (EC) No. 2273/2003 of the Commission dated December 22, 2003. If implemented, such stabilization activities may be suspended at any time and will end at the latest on September 8, 2009, in accordance with Article 8.5 of CE Regulation No. 2273/2003. Such transactions are intended to stabilize the price of the Bonds and/or shares of Alcatel-Lucent. Such transactions could affect the price of the Bonds and/or shares of Alcatel-Lucent and could result in such prices being higher than those that might otherwise prevail.
About Alcatel-Lucent Alcatel-Lucent (Euronext Paris and NYSE: ALU) is the trusted partner of service providers, enterprises and governments worldwide, providing solutions to deliver voice, data and video communication services to end-users. A leader in fixed, mobile and converged broadband networking, IP technologies, applications and services, AlcatelLucent leverages the unrivalled technical and scientific expertise of Bell Labs, one of the largest innovation powerhouses in the communications industry. With operations in more than 130 countries and the most experienced global services organization in the industry, Alcatel-Lucent is a local partner with a global reach. Alcatel-Lucent achieved revenues of Euro 16.98 billion in 2008 and is incorporated in France, with executive offices located in Paris. For more information, visit Alcatel-Lucent on the Internet: http://www.alcatel-lucent.com Alcatel-Lucent Press Contacts regine.coqueran@alcatel-lucent.com Rgine Coqueran-Gelin Tel: + 33 (0)24 Peter Benedict Tel: + 33 (0)84 pbenedict@alcatel-lucent.com Alcatel-Lucent Investor Relations Rmi Thomas Tom Bevilacqua Tony Lucido Don Sweeney

Thales. On December 1, 2006, we signed an agreement with Thales for the transfer of our interests in two joint ventures in the space sector created with Finmeccanica and of our railway signaling business and our integration and services activities for mission-critical systems not dedicated to operators or suppliers of telecommunications services (see Highlights of transactions during 2007 Dispositions above).

Other Transactions

Buy-out of Fujitsu joint venture. In August 2006, we acquired Fujitsus share in Evolium 3G, our wireless infrastructure joint venture with Fujitsu.
Highlights of Transactions during 2005
Acquisition of Native Networks. On March 17, 2005, we completed the acquisition of Native Networks, Inc., a provider of optical Ethernet goods and services, for U.S.$ 55 million in cash.
Sale of shareholding in Nexans. On March 16, 2005, we sold our shareholding in Nexans, representing 15.1% of Nexans share capital, through a private placement. Sale of electrical power systems business. On January 26, 2005, we completed the sale of our electrical power business to Ripplewood, a U.S. private equity firm.
Amendment of credit facility. On March 15, 2005, we amended our existing syndicated revolving 1.3 billion credit facility by extending the maturity date from June 2007 to June 2009, with a possible extension until 2011, eliminating one of the two financial covenants, reducing the cost of the facility and reducing the overall amount to 1.0 billion. Merger of space activities. On July 1, 2005, we completed the merger of our space activities with those of Finmeccanica, S.p.A., an Italian aerospace and defense company, through the creation of two sister companies. We owned 67%, and Alenia Spazio, a unit of Finmeccanica, owned 33%, of the first company, Alcatel Alenia Space, that combined our respective industrial space activities. Finmeccanica owned 67%, and we owned 33%, of the second company, Telespazio Holding, which combined our respective satellite operations and service activities. Exchange of our interest in joint venture with TCL Communication. On July 18, 2005, we exchanged our 45% shareholding in our joint venture with TCL Communication Technology Holdings Limited for shares of TCL Communication, which resulted in TCL Communication owning all of the joint venture company and our owning 141,375,000 shares of TCL Communication.
2007 ANNUAL REPORT ON FORM 20-F - 21
4.3 STRUCTURE OF THE PRINCIPAL COMPANIES CONSOLIDATED IN THE GROUP AS OF DECEMBER 31, 2007

By percentage of share capital held.
22 - 2007 ANNUAL REPORT ON FORM 20-F
4.4 REAL ESTATE AND EQUIPMENT
We occupy, as an owner or tenant, a large number of buildings, production sites, laboratories and service sites around the world. There are two distinct types of sites with different sizes and features: production and assembly sites dedicated to our various businesses; sites that house research and innovation activities and support functions, which cover a specific region and all businesses. A significant portion of assembly and research activities are carried out in Europe and China for all of our businesses. We also have operating subsidiaries and production and assembly sites in Canada, the United States, Mexico, Brazil and India. At December 31, 2007, our total production capacity was equal to approximately 361,000 sq. meters and the table below shows the geographic region by business segment of such production capacity. We believe that these properties are in good condition and meet the needs and requirements of the Groups current and future activity and do not present an exposure to major environmental risks that could impact the Groups earnings. The environmental issues that could affect how these properties are used are mentioned in Section 5.12 of this annual report.
ALCATEL-LUCENT, PRODUCTION CAPACITY AT DECEMBER 31, 2007
In thousands of m Carrier Enterprise Services TOTAL

Europe 4 214

North America 0 69

Asia-Pacific 0 78

Total 4 361
We are present in 130 countries and have approximately 800 sites, the most important of which are as follows:
PRODUCTION/ASSEMBLY SITES
Country China France France Poland United States United States Site Shanghai Calais Eu Bydgoszcz North Andover Columbus Ownership Full ownership Full ownership Full ownership Full ownership Lease Lease
2007 ANNUAL REPORT ON FORM 20-F - 23
RESEARCH AND INNOVATION AND SUPPORT SITES
Country Germany Germany Austria Belgium Brazil Canada China Spain United States United States United States United States United States United States France France France France France India India Italy Mexico Netherlands United Kingdom Singapore Site Stuttgart Nuremberg Vienna Anvers So Paulo Ottawa Shanghai Pudong Madrid San Francisco Daly City Dallas Plano Whippany Naperville Lisle Murray Hill Villarceaux Vlizy Lannion Paris-La Botie Orvault Bangalore Chennai Vimercate Cuautitlan Izcalli Hilversum Swindon Singapore Ownership Lease Lease Full ownership Lease Full ownership Lease Full ownership Lease Lease Full ownership Full ownership Full ownership Full ownership Full ownership Lease Lease Full ownership Lease Full ownership Lease Lease Lease Full ownership Lease Lease Lease

Multicore

The multicore division offers core networking products that extend from classic switching systems, where we have a leading market position supporting approximately one quarter of the worlds installed lines, to IP next-generation core offerings for fixed, mobile and convergent operators. We have deployed our IP/NGN products in more than 260 fixed and mobile networks, and we are involved in more than 25 IMS network transformation projects. However, carrier migration to these IMS-based nextgeneration networks has been slower than expected and growth in our next-generation core networking business has not been sufficient to offset the secular decline in classic switching. Consequently, we are making additional refinements that will further narrow our core NGN portfolio and allow us to leverage common multimedia capabilities and IP-based infrastructure for both fixed and mobile next-generation networks.

5.3 ENTERPRISE SEGMENT

Our enterprise business segment provides software, hardware and services that interconnect networks, people, processes and knowledge. The portfolio includes: secure converged communication infrastructure offering total continuous service for voice, local, wide and wireless area networks; personalized tools for collaboration, customer service and mobility; communication-enabled business process solutions designed to improve execution and service delivery; product offerings that provide context-aware, content-driven knowledge sharing across any access. The enterprise business is a segment where we believe we can stimulate growth. We created a plan to improve profitability and reposition this business as part of the October initiative. Specifically, we are reorganizing and adding resources to our sales force in order to increase our share of the enterprise market. In 2007 the enterprise segment repositioned itself to better align its resources with market opportunities and enhanced its portfolio through two acquisitions and organic growth. In May, we acquired NetDevices, a developer of services gateway products for enterprise branch networks, based in California. NetDevices has a market recognized, innovative and flexible enterprise networking platform known as a Unified Service Gateway (USG) which is designed to reduce the cost and complexity of managing branch office networks. In December 2007, we acquired Informiam LLC, a privately-held U.S.-based company and a pioneer in software that optimizes customer service operations through real-time business performance management. Informiam is now a business unit within Genesys. Throughout 2007 we added to our security product offerings. In April we introduced the OmniAccess 3500 Nonstop Laptop Guardian, the first in a series of enterprise security products developed by Bell Labs for mobile networks. Also in April, we introduced the OmniAccess SafeGuard, an access control device. In December, we introduced the second Bell Labs enterprise security product the OmniAccess 8550 WebServices Gateway, a network appliance that enforces policies in real-time, provides the ability to create the audit trail necessary to meet corporate governance obligations and supports effective business process automation (including on-line business-to-business web services deployed on a services oriented architecture). We also enhanced our voice and data infrastructure products by scaling the OmniPCX Enterprise to support 100,000 users, launching MyInstant Communicator, and providing clients on the move with dual-mode Nokia handsets. We enhanced our customer care capabilities by launching the OmniTouch premium edition for the North American midmarket the offer combines the advanced technology of the Genesys solution with the simplicity of OmniTouch. In December Genesys acquired Informiam LLC, a broader reporting and analytical offering for the entire customer service chain.

2007 ANNUAL REPORT ON FORM 20-F - 43
Stock options granted by foreign subsidiaries
Until 2000 Alcatel USA Inc. (which later became Alcatel-Lucent Holding Inc.) had established its own option plans for executives of our U.S. and Canadian companies which options were exercisable for ADSs. Under these plans, at December 31, 2007 8,229,477 options remain outstanding. In addition, option plans of U.S. and Canadian companies acquired by Alcatel-Lucent are exercisable for Alcatel-Lucent shares or ADSs. There remain outstanding 4,572,274 unexercised options as of December 31, 2007, pursuant to these option plans. The details at December 31, 2007 of the outstanding options granted by U.S. companies (including those issued by Lucent before the business combination between Alcatel and Lucent) and Canadian companies are set forth in Note 23d of the consolidated financial statements included elsewhere in this document. When the options are exercised, we use treasury shares (for Packet Engines, Xylan, Internet Devices Inc., DSC and Genesys), or we issue new ADSs (for Lucent Technologies Inc., Astral Point, Telera, iMagic TV, Timetra and Spatial Wireless).
44 - 2007 ANNUAL REPORT ON FORM 20-F
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
Forward-looking information
This Form 20-F, including the discussion of our Operating and Financial Review and Prospects, contains forward-looking statements based on beliefs of our management. We use the words anticipate, believe, expect, may, intend, should, plan, project, or similar expressions to identify forward-looking statements. Such statements reflect our current views with respect to future events and are subject to risks and uncertainties. Many factors could cause the actual results to be materially different, including, among others, changes in general economic and business conditions, changes in currency exchange rates and interest rates, introduction of competing products, lack of acceptance of new products or services and changes in business strategy. Such forward-looking statements include, but are not limited to, the forecasts and targets set forth in this Form 20-F, such as the discussion in Chapter 4 Information about the Group and below in this Chapter 6 under the heading Outlook for 2008 with respect to (i) our projection that the 2008 global telecommunications equipment and related services market should be flat to slightly up at a constant /U.S.$ exchange rate and slightly down at current exchange rates, (ii) the implementation of a more selective pricing approach and our product cost reduction program that would enable us to improve our gross margin, (iii) our ability to progress our fixed costs reduction program, (iv) our expectation that we will incur a loss from operating activities before restructuring costs, impairment of assets, gain/(loss) on disposal of consolidated entities and post-retirement benefit plan amendment (excluding the negative, non-cash impacts of Lucents purchase price allocation which are expected to be approximately (125) million in the first quarter of 2008, and (v) under the heading Contractual obligations and off-balance sheet contingent commitments with respect to the amount we would be required to pay in the future pursuant to our existing contractual obligations and off-balance sheet contingent commitments, and (vi) the level of capital expenditures in 2008.

6.3 RESULTS OF OPERATIONS BY BUSINESS SEGMENT FOR THE YEAR ENDED DECEMBER 31, 2007 COMPARED TO THE YEAR ENDED DECEMBER 31, 2006
The following discussion takes into account our results of operations under IFRS for the year ended December 31, 2007, (i) including Lucents results of operations starting on December 1, 2006, (ii) excluding the businesses transferred to Thales, and (iii) treating the business segments established after the business combination with Lucent as if they were effective on January 1, 2006. Since October 31, 2007 and the announcement of the reorganisation of our Carrier segment, we no longer manage this segment according to three business groups (Wireline, Wireless and Convergence). The following comments are therefore provided for the continuity of analysis for full year 2007 and may not be provided as such in future reports. The table below sets forth the consolidated revenues (before elimination of inter-segment revenues, except for Other and Total Group results), income (loss) from operating activities before restructuring costs, impairment of intangible assets and gain/(loss) on disposal of consolidated entities and capital expenditures for tangible and intangible assets for each of our business segments for 2007 and 2006.
(In millions of euros) 2007 TOTAL REVENUES Of which: - Wireline - Wireless - Convergence Income (loss) from operating activities before restructuring costs, impairment of assets, gain/(loss) on disposal of consolidated entities and post-retirement benefit plan amendment Capital expenditures Carrier 12,819 6,003 5,287 1,529 Enterprise 1,562 Services 3,173 Other Total Group 238 17,792

(752) 673

131 93

122 40

(208) 36

(707) 842

54 - 2007 ANNUAL REPORT ON FORM 20-F
2006 TOTAL REVENUES Of which: - Wireline - Wireless - Convergence Income (loss) from operating activities before restructuring costs, impairment of assets and gain/(loss) on disposal of consolidated entities Capital expenditures
Carrier 8,989 4,463 3,049 1,477

Enterprise 1,420

Services 1,721
Other Total Group 152 12,282

393 473

109 84

195 29

(10) 98

687 684

Carrier Segment
Carrier segment revenues were 12,819 million for 2007 compared with 8,989 million for 2006. The increase is due to the inclusion of twelve months of Lucent, and to a lesser degree the UMTS business acquired from Nortel, in results of operations for 2007, while our 2006 results include only one month of Lucents results. A key development within the carrier market is the transformation of networks to a high-bandwidth, full IP architecture. While that IP transformation has had positive impacts across our carrier business, those impacts have been more pronounced in wireline than in wireless. For example, increased shipments of our IP-based products helped drive our broadband access business in 2007, when we shipped 33 million DSL lines and counted more than 170 customers for our IP-based products. However, growth in that market slowed as the year progressed, reflecting high market penetration rates and the somewhat slower than expected transition to new GPON technology. The demand for metro and long haul DWDM optical networks to support high-bandwidth requirements for IP video services, including IPTV, was a key contributor to growth in both our terrestrial and submarine optics business. Our IP service routing business was up 33% in 2007, excluding reseller sales, and reached a milestone of U.S.$ 1 billion in revenues for the year, while our multi-service wide-area-network switching business continued its long-term decline. In total, our wireline revenues were 6,003 million in 2007 compared with 4,463 million in 2006. The increase is largely due to the inclusion of twelve months of Lucents results of operations for 2007, while our 2006 results include only one month of Lucents results. In our convergence business in 2007 our core circuit switch business reflected the ongoing long-term decline that dominates carrier spending for that legacy technology. While that legacy market continued its decline, revenues in our next-generation core networking business remained too small to offset the declining legacy business. Our convergence revenues were 1,529 million in 2007 compared with 1,477 million in 2006. All of the increase was due to the inclusion of twelve months of Lucents results of operations for 2007, while our 2006 results include only one month of Lucents results. On the wireless side, a growing number of subscribers on CDMA and GSM networks continued to drive higher traffic volumes, spending for capacity, and, in some cases, additional footprint. However, both of these businesses operate in mature markets that have started to decline, although revenues in our GSM business grew considerably as 2007 progressed, due to a refreshed product portfolio. 2007 was a year of investment for our W-CDMA business as we took three portfolios one from historical Alcatel, one from Lucent and one from our acquisition of Nortels UMTS radio access assets and converged them into one portfolio. We have completed the convergence from three platforms to two, and will complete the move to one converged platform, at least for the radio network controller, in 2008. In total, our wireless revenues were 5,287 million in 2007 compared with 3,049 million in 2006. The increase is due to the inclusion of twelve months of Lucents results of operations in 2007, while our 2006 results included only one month of Lucents results. The carrier segment had a loss from operating activities before restructuring costs, impairment of assets, gain/(loss) on disposal of consolidated entities and post-retirement benefit plan amendment of 752 million in 2007 compared with income of 393 million in 2006. This decrease resulted from competitive pricing pressures that impacted our gross profit, from investments in current products and platforms that we will eventually discontinue, from 98 million that we recognized in cost of sales due to the problems we experienced on a large W-CDMA construction contract and from the negative, non-cash impact of purchase accounting entries resulting from the Lucent business combination which more than offset Lucents contribution to revenues and gross margin.

Enterprise Segment

Enterprise segment revenues were 1,562 million for 2007, an increase of 10% over revenues of 1,420 million for 2006. Part of the increase was due to the inclusion of twelve months of Lucents results of operations for 2007, while our 2006 results include only one month of Lucents results, but the impact of Lucents results on this segment was much smaller than it was on either the carrier or services segments. 2007 revenues showed strength across all parts of the enterprise business, with particularly strong gains in our data business and our contact center business, where we added more than 200 new customers during the year. There was also continued good momentum in the migration to IP-based telephony systems. Key growth regions were Europe and Asia. Enterprise segment income from operating activities before restructuring costs, impairment of assets, gain/(loss) on disposal of consolidated entities and post-retirement benefit plan amendment was 131 million in 2007, compared with 109 million in the same period last year. The increase was largely due to higher revenues in 2007.
2007 ANNUAL REPORT ON FORM 20-F - 55

Services Segment

Revenues in the services segment were 3,173 million in 2007, compared with 1,721 million in 2006. Nearly all of the increase is attributable to the inclusion of twelve months of Lucents results of operations for 2007, while our 2006 results include only one month of Lucents results. Additionally, the transformation of networks to an all-IP architecture has increased carrier spending for our network integration and transformation capabilities. Also, growth in our outsourced network operations services and professional services reflected an ongoing shift in the services market from traditional product-attached deployment and maintenance-type services to integration, network operations and other managed services. The services segment had income from operating activities before restructuring costs, impairment of assets, gain/(loss) on disposal of consolidated entities and post-retirement benefit plan amendment of 122 million in 2007 compared with income of 195 million in 2006. The decline reflects increased costs associated with new network operations contracts, a shift in the mix of services revenues and the negative, non-cash impact of purchase accounting entries resulting from the Lucent business combination.

2007 ANNUAL REPORT ON FORM 20-F - 57
Income (loss) Before Tax, Related Reduction of Goodwill and Discontinued Operations. Income (loss) before tax, related reduction of goodwill and discontinued operations was a loss of 256 million in 2006 compared to income of 1,001 million in 2005. Income Tax (Expense) Benefit. Income tax (expense) benefit was a net benefit of 42 million in 2006 compared to a net expense of 146 million in 2005. The net income tax benefit for 2006 resulted from a current income tax expense of 71 million (compared with a current income tax expense of 48 million in 2005) more than offset by a deferred income tax benefit of 113 million mainly due to the amortization for one month of Lucents intangible assets resulting from the purchase price accounting entries made in connection with the Lucent business combination that are not deductible for tax purposes (compared with a deferred income tax charge of 98 million in 2005). Income (Loss) from Continuing Operations. Loss from continuing operations was 219 million compared to income of 855 million in 2005. Income (Loss) from Discontinued Operations. Income from discontinued operations was 158 million in 2006 corresponding mainly to the businesses that will be transferred to Thales in 2007 (as discussed above and in Note 3 of our consolidated financial statements) compared to income generated primarily by those businesses of 108 million in 2005. Minority Interests. Minority interests were 45 million in 2006 compared to 41 million in 2005, due primarily to higher results from Alcatel Shanghai Bell. Net Income (Loss) Attributable to the Equity Holders of the Parent. As a result of the foregoing, we recorded a net loss (Group share) of 106 million in 2006 compared to a net income of 922 million in 2005.
6.5 RESULTS OF OPERATIONS BY BUSINESS SEGMENT FOR THE YEAR ENDED DECEMBER 31, 2006 COMPARED TO THE YEAR ENDED DECEMBER 31, 2005
Introduction. The following discussion takes into account our results of operations under IFRS for the year ended December 31, 2006, (i) including Lucents results of operation starting on December 1, 2006, (ii) excluding the businesses to be transferred to Thales, (iii) treating the business segments established after the business combination with Lucent as if they were effective on January 1, 2006 and (iv) taking into account the effect of the change in accounting policies on employee benefits with retroactive effect from January 1, 2005. In addition, the following discussion takes into account our results of operations for the year ended December 31, 2005 which have been re-presented, (i) treating the business segments established after the business combination with Lucent as if they were effective on January 1, 2005, (ii) excluding the businesses to be transferred to Thales, which are presented as discontinued activities and (iii) taking into account the effect of the change in accounting policies on employee benefits with retroactive effect from January 1, 2005. The table below sets forth the consolidated revenues (before elimination of inter-segment revenues, except for Other and Total Group results), income (loss) from operating activities before restructuring costs, impairment of intangible assets and gain/(loss) on disposal of consolidated entities and capital expenditures for tangible and intangible assets for each of our business segments for 2006 and 2005.

98 - 2007 ANNUAL REPORT ON FORM 20-F

Internal control

The Audit and Finance Committee ensures that internal procedures for collecting and verifying financial information are in place to ensure the reliability of this information. The head of internal audit within the Group periodically reports to the committee on the results of the work of his department. In addition, twice a year the committee reviews the Groups internal audit plan and the operation and organization of the Internal Audit Department. The committee is consulted when necessary on the selection of the internal audit manager and on his eventual replacement. The committee examines all complaints, alerts or other reports, including those on an anonymous basis, that reveal a potential malfunction in the financial and consolidation processes set up within the Group. Our Audit and Finance Committee meets periodically with our Chief Compliance Officer to check the adequacy of our compliance programs, any significant violations of these programs and the corrective measures taken by us.

Financial position

Our Audit and Finance Committee also reviews our indebtedness and our capitalization and possible changes in this capitalization, as well as all financial or accounting matters presented to it by the Chairman of the Board or the Chief Financial Officer (such as risk hedging or centralized cash management). It examines the risks to which the Group may be exposed (and the measures taken by senior management to mitigate their effects) and the Groups significant off-balance sheet commitments. It also reviews financial transactions having a significant impact on the Groups accounts, such as issuance of securities in excess of 400 million.

Statutory Auditors

Our Audit and Finance Committee oversees the selection process for our Statutory Auditors and makes a recommendation on such auditors to the Board. Assignments that do not pertain to the audit of our accounts, or that are neither incidental nor directly supplemental to our audit, but which are not incompatible with the functions of the Statutory Auditors must be authorized by the Audit and Finance Committee, regardless of their scope. The committee ensures that these assignments do not violate the provisions of article L. 822.11 of the French Commercial Code. It also reviews and determines the independence of the Statutory Auditors and expresses an opinion on the amount of their fees for the audit of the accounts. Based on the total amount of the fees paid for the audit of our accounts during a given fiscal year, our committee sets the level(s) of fees beyond which the Committee must give a specific authorization for previously authorized assignments.
The Committees work in 2007 and early 2008
The members of the Audit and Finance Committee met six times in 2007. Their attendance rate at these meetings was 96%. In 2007, the Audit and Finance Committee conducted a review of the year-end financial statements for the year ended December 31, 2006 and the half-year consolidated financial statements for 2007 prepared under IFRS and and reconciled to U.S. GAAP. It also reviewed the quarterly financial statements for the Group based on IFRS and the year-end parent company financial statements based on French GAAP. To prepare for this review, it relied on the work of the Disclosure Committee created to meet the requirements of the Sarbanes-Oxley Act in order to ensure the disclosure of reliable information about the Group. At each of its meetings, the Audit and Finance Committee was briefed by the Chief Financial Officer and the Statutory Auditors and examined, in the Auditors presence, the key points discussed with the Chief Financial Officer at the time of preparation of the financial statements. At the beginning of the year, the budget and financial forecasts for 2007 were presented. On several occasions, the Committee also discussed the risks specific to certain large contracts. With regard to accounting principles, the committee reviewed the option offered by an amendment to IAS 19 Employee benefits for recognizing actuarial gains and losses and an adjustment arising from asset ceiling, net of deferred taxes, in the period in which they occur, outside the income statement. It also reviewed the consequences of applying SFAS 158 Employers accounting for defined benefit pension and other post-retirement plans on deferred taxes. The Committee approved the way the segment information should be presented. In addition, it provided information for the Boards decisions regarding the general guidelines for allocating Lucents pension fund assets and the appointment of the members of the advisory committee charged with overseeing the management of these assets (Pension Benefits Investment Committee). It studied the new provisions of the U.S. securities laws that eliminates the need to reconcile, under certain circumstances, accounts prepared according to IFRS with U.S. GAAP standards. Our Audit and Finance Committee received the Internal Audit departments annual report for 2006 as well as the internal audit plan for 2007. In the context of its review of the internal audits, the Committee was briefed by the Internal Audit department and, together with it, analyzed the departments resources. At regular intervals, the committee monitored the progress made regarding the certification required by Article 404 of the Sarbanes-Oxley Act. On several occasions, it was briefed by the General Counsel about developments in the Costa Rica, Taiwan and Kenya matters (see Section 6.10, Legal matters). Finally, the committee implemented a new financial alert procedure as required by the Sarbanes-Oxley Act, while at the same time complying with the requirements of the Commission nationale de linformatique et des liberts or CNIL, the French authority charged with the enforcement of data privacy laws.

f/ Deferred taxes

Deferred tax assets relate primarily to tax loss carry forwards and to deductible temporary differences between reported amounts and the tax bases of assets and liabilities. The assets relating to the tax loss carry forwards are recognized if it is probable that the Group will generate future taxable profits against which these tax losses can be set off. At December 31, 2007, deferred tax assets were 1,232 million of which 675 million related to the United States and 404 million to France (1,692 million at December 31, 2006 of which 746 million related to the United States and 372 million to France and 1,768 million at December 31, 2005, of which 850 million related to the United States and 369 million to France). Evaluation of the Groups capacity to utilize tax loss carry forwards relies on significant judgment. The Group analyzes the positive and negative elements of certain economic factors that may affect our business in the foreseeable future and past events to conclude as to the probability of utilization in the future of these tax loss carry forwards, which also consider the factors indicated in note 1n. This analysis is carried out regularly in each tax jurisdiction where significant deferred tax assets are recorded. If future taxable results are considerably different from those forecast that support recording deferred tax assets, the Group will be obliged to revise downwards or upwards the amount of the deferred tax assets, which would have a significant impact on Alcatel-Lucent's balance sheet and net income (loss). As a result of the business combination with Lucent, 2,395 million of net deferred tax liabilities have been recorded as of December 31, 2006, resulting from the temporary differences generated by the differences between the fair valuation of assets and liabilities acquired (mainly intangible assets, such as acquired technologies) and their corresponding tax bases. These deferred tax liabilities will be reduced in future Group income statements as and when such differences are amortized. The remaining deferred tax liabilities related to the purchase price allocation of Lucent as of December 31, 2007 are 1,629 million. As prescribed by IFRSs, Alcatel-Lucent had a twelve-month period to complete the purchase price allocation resulting from the Lucent transaction and to determine the amount of deferred tax assets related to the carry-forward of Lucents unused tax losses that should be recognized in the financial statements of the combined company. If any additional deferred tax assets attributed to the combined companys unrecognized tax losses existing as of the transaction date are recognized in future financial statements, the tax benefit will be included in the income statement. Goodwill will also be reduced (resulting in an expense) for that part of the deferred tax assets recognized relating to Lucents tax losses. On the other hand, as a result of the business combination, a former Alcatel entity may consider that it becomes probable that it will recover its own tax losses not recognized as a deferred tax asset before the business combination. For example, an entity may be able to utilize the benefit of its own unused tax losses against the future taxable profit of the Lucent business. In such cases, Alcatel-Lucent would recognize a deferred tax asset but would not include it as part of the accounting for the business combination. It could therefore have a positive impact on Alcatel-Lucent future net results.

(402) (2) 231 (173) 3 (4) (16) (29) (19) (16) 6 544

126 (82) 541 368

21 (61) (34) (132)

119 (19) 24 (69)

137 (19) 42 (51)
As indicated in note 1u, certain marketable securities previously included in the category of financial assets at fair value through profit or loss are now designated as financial assets available for sale, further to the Fair Value Option amendment to IAS 39 Financial Instruments : Recognition and Measurement. The impact of this change on other financial income (loss), had it been applied in 2005, is presented in the above represented column. Impairment loss of 23 million on the Avanex shares recorded in the first quarter of 2005 due to an unfavorable change in market price. Mainly related to Lucent pension credit for 2006 and 2007 (refer to note 25). Net gain on disposal of Draka Comteq BV shares for 74 million during the fourth quarter of 2007. Net gain on disposal of Nexans shares for 69 million during the first quarter of 2005 and net gain on disposal of Mobilrom shares for 45 million during the second quarter of 2005. 2006: of which a loss of 18 million related to the adjustment of the conversion ratio of Lucent's series A and B convertible debentures (refer to note 24c) in the fourth quarter of 2006. Of which 15 million relates to an interest charge recorded in other financial loss in the third quarter 2006, which is due to a late payment of a debt relating to a tax dispute. 2007: of which in the first quarter 2007, a loss of 12 million related to the early redemption of the 8% convertible debenture (refer to note 24). This loss was computed in accordance with IAS 32 AG33 and AG34 requirements (see note 1m). Interactions between IAS 32 and IAS 39 and accounting issues related to early redemption of compound financial instruments are being currently analyzed by IFRIC. A future IFRIC interpretation could potentially lead us to revise our current accounting treatment.

(2) (3) (4) (5)

Note 9 Income tax and related reduction of goodwill
a/ Analysis of income tax (charge) benefit and related reduction of goodwill.
(In millions of euros) Reduction of goodwill related to deferred tax assets initially unrecognized (2) Current income tax (charge) benefit Deferred taxes related to the purchase price allocation for the Lucent transaction (1) Recognition of deferred tax asset initially unrecognized at Lucent closing date Deferred tax (charge) related to the post-retirement benefit plan amendment (2) (3) Other deferred income tax (charge) benefit, net Deferred tax (charge) benefit, net Income tax (charge) benefit and related reduction of goodwill

(2) Mainly related to Lucent business combination (refer to note 3)
Land (1) (12) (1) (35) 239 (2) 1 (96) (21) (2) 161
Buildings (55) (1) (79) 28 (49) (161) 489 (18) (14) (105) (44) (11) 11 (52) (17) 577
Other (35) (12) (59) (24) (2) (31) 50 (1) (47) (49) (21) (3) 2 (4) (43) 153
Total 1,(284) (1) (162) 7 1,(250) (2) (303) 1,015 (34) 4 1,(416) (94) (131) 18 (103) (22) 1,428
Note 15 Finance leases and operating leases

a/ Finance leases (IFRS)

Property, plant and equipment held under finance leases have a net carrying amount of 0 million at December 31, 2007 (45 million at December 31, 2006 and 54 million at December 31, 2005). Such finance leases relate primarily to plant and equipment. Future minimum lease payments under non-cancelable finance leases are shown in note 31a Off balance sheet commitments. The main finance lease contract concerns a company consolidated proportionately at 51%, Alda Marine, which leases four vessels as part of its activity of laying and maintaining submarine cables. The net carrying amount of these vessels recognized in property, plant and equipment was 45 million at December 31, 2006 and 53 million at December 31, 2005). The corresponding obligation to pay future lease payments was 51 million at December 31, 2006 and 59 million at December 31, 2005. The option to purchase the vessels was exercised during 2007 by Alda Marine.

b/ Operating leases

Future minimum lease payments under non-cancelable operating leases are shown in note 31a - Off balance sheet commitments. Future minimum sublease rentals income expected to be received under non-cancelable operating subleases were 180 million at December 31, 2007 (202 million at December 31, 2006 and 27 million at December 31, 2005). Lease payments under operating leases recognized as an expense in the income statement are analyzed as follows:
(In millions of euros) 2007 Lease payments - minimum Lease payments - conditional Sublease rental income Total recognized in the income statement (22) (14) (10) 129
2007 ANNUAL REPORT ON FORM 20-F - 191
Note 16 Share in net assets of equity affiliates and joint ventures
a/ Share in net assets of equity affiliates

198 - 2007 ANNUAL REPORT ON FORM 20-F
December 31, 2005 Number of ordinary shares issued (share capital) (1) Treasury shares Number of shares in circulation Weighting effect of share issues for stock options exercised Weighting effect of treasury shares Weighting effect of share issues in respect of business combinations Number of shares used for calculating basic earnings per share
Number of shares 1,428,541,640 (58,920,710) 1,369,620,930 (1,223,804) (402,473) 1,367,994,653
Alcatel-Lucent shares owned by Alcatel-Lucent and other consolidated subsidiaries include remaining exchangeable shares related to the Newbridge transaction and considered as issued for accounting purposes.
b/ Capital increase program for employees with subscription stock option plan
Under a capital increase program for employees of the Group, approved by the Board of Directors on March 7, 2001, 91,926 Class A shares were issued at a price of 50 per share (all Class A shares are now referred to as ordinary shares). Each share subscribed included the right to receive three options, each exercisable for one Class A share. 275,778 options were granted and are exercisable during the one-year period from July 1, 2004 until July 1, 2005 or from the end of the unavailability period set by article 163 bis C of the General Tax Code (4 years from July 1, 2004), for the beneficiaries who were employees of a member of the Group whose registered office is located in France at the time the options were granted.
c/ Capital stock and additional paid-in capital
At December 31, 2007, the capital stock consisted of 2,317,441,420 ordinary shares of nominal value 2 (2,309,679,141 ordinary shares of nominal value 2 at December 31, 2006 and 1,428,541,640 ordinary shares of nominal value 2 at December 31, 2005). During 2007, increases in capital stock and additional paid-in capital amounted to 44 million. These increases related to the following transactions: issuance of 2,755,287 shares for 18 million, as a result of the exercise of options and warrants (including additional paidin capital of 13 million) ; conversion of 4,506,992 convertible bonds into Alcatel-Lucent shares generating a capital increase of 25 million (including additional paid-in capital of 16 million) ; redemption of 500,000 bonds redeemable for Alcatel-Lucent shares in connection with the acquisition of TiMetra Inc in 2003 to cover stock options, generating a capital increase of 4 million (including additional paid-in capital of 3 million) ; and other increases for 4 million. During 2006, increases in capital stock and additional paid-in capital amounted to 8,942 million. These increases related to the following transactions: issuance of 878,139,615 shares related to the business combination with Lucent for 8,922 million (including additional paid-in capital of 7,166 million); issuance of 2,697,886 shares for 20 million, as a result of the exercise of 2,697,886 options (including additional paid-in capital of 11 million); redemption of 300,000 bonds redeemable for Alcatel-Lucent shares in connection with the acquisition of Spatial Wireless in 2004 to cover stock options, generating a capital increase of 3 million (including additional paid-in capital of 3 million). During 2005, increases in capital stock and additional paid-in capital amounted to 662 million. These increases related to the following transactions: issuance of 1,855,913 shares for 12 million, as a result of the exercise of 1,855,913 options (including additional paid-in capital of 8 million); redemption of 450,000 bonds redeemable for Alcatel shares in connection with the acquisition of Imagic TV in 2003 and Spatial Wireless in 2004 to cover stock options generating a capital increase of 5 million (including additional paid-in capital of 4 million); redemption of 120,780,266 ORANE notes issued in 2002 and redeemable for new or existing Alcatel shares, generating a capital increase of 645 million, including additional paid-in capital of 403 million. In order to maintain or adjust the capital structure, the Group can adjust the amount of dividends paid to shareholders (see note 22), or repurchase its own shares (see note 23f) or issue new shares, or issue convertible bonds or similar instruments (see note 24). The Group is not subject to any constraints on equity capital imposed by third parties.

Conversion ratio Conversion price Redemption period at Lucent option Maturity date 40.3306 $24.80 After March 19, 2007 March 15, 2017
The effective rate of interest of the debt component is 9.86%. At December 31, 2007, the fair value of the debt component of the convertible bonds was 478 million and the market value of the convertible bonds was 549 million (725 million and 853 million respectively as of December 31, 2006). 8% Convertible Securities Lucent's 8% convertible securities were redeemed on March 29, 2007 at the option of the issuer for an aggregate amount of U.S.$ 486 million. The consideration was allocated to the liability component (U.S.$ 408 million) and the equity component (U.S.$ 78 million), resulting in a financial loss of 12 million (see notes 8 and 26 (c)).
Note 25 Pensions, retirement indemnities and other post-retirement benefits
In accordance with the laws and customs of each country, the Group provides to its employees pension plans, certain medical insurance and reimbursement of medical expenses. In France, Group employees benefit from a retirement indemnity plan. In other countries, the plans depend upon local legislation, the business and the historical practice of the subsidiary concerned. In addition to state pension plans, the plans can be defined contribution plans or defined benefit plans. In the latter case, such plans are wholly or partially funded by assets solely to support these plans (listed shares, bonds, insurance contracts or other types of dedicated investments).
2007 ANNUAL REPORT ON FORM 20-F - 211
State plans In certain countries, and more particularly in France and Italy, the Group participates in mandatory social security plans organized at state or industry level, for which contributions expensed correspond to the contributions due to such state or equivalent organizations. Such plans are considered to be defined contribution plans. However, in certain countries, the element of social security contributions paid that relates to pension plans is not clearly identifiable. Other defined contribution plans The benefits paid out depend solely on the amount of contributions paid into the plan and the investment returns arising from the contributions. The Groups obligation is limited to the amount of contributions that are expensed. Contributions made to defined contribution plans (excluding mandatory social security plans organized at state or industry level) were 79 million for 2007 (56 million for 2006 and 40 million for 2005). Defined benefit plans Independent actuaries calculate annually the Groups obligation in respect of these plans, using the projected unit credit method. Actuarial assumptions comprise mortality, rates of employee turnover, projection of future salary levels, healthcare cost trend rates and revaluation of future benefits. Future estimated benefits are discounted using discount rates appropriate to each country. These plans have differing characteristics : life annuity : the retirees benefit from receiving a pension during their retirement. These plans are to be found primarily in Germany, United Kingdom and the United States. lump-sum payment on the employees retirement or departure. These plans are to be found primarily in France, Belgium and Italy. post-employment medical care during retirement. In the United States, Alcatel-Lucent reimburses medical expenses of certain retired employees. Pensions and retirement obligations are determined in accordance with the accounting policies presented in note 1k. For former Lucent activities, Alcatel-Lucent maintains defined benefit pension plans covering employees and retirees, a majority of which are located in the US, as well as other post-retirement benefit plans for U.S. retirees that include health care, dental benefits and life insurance coverage. The U.S. pension plans feature a traditional service-based program, as well as a cash balance program. The cash balance program was added to the defined benefit pension plan for U.S. management employees hired after December 31, 1998. No employees were transitioned from the traditional program to the cash balance program. Additionally, employees covered by the cash balance program are not eligible to receive company-paid postretirement health and group life coverage. U.S. management employees with less than 15 years of service as of June 30, 2001 are not eligible to receive post-retirement group life and health care benefits. As of January 1, 2008, there are no new entrants into the defined benefit plan for Management retirees.