2007 ANNUAL REPORT ON FORM 20-F - 67

Interest rate risk

In the event of an interest rate decrease, the fair value of our fixed-rate debt would increase and it would be more costly for us to repurchase it (not taking into account that an increased credit spread reduces the value of the debt). In the table below, the potential change in fair value for interest rate sensitive instruments is based on a hypothetical and immediate one percent fall or rise for 2007 and 2006, in interest rates across all maturities and for all currencies. Interest rate sensitive instruments are fixed-rate, long-term debt or swaps and marketable securities.
In millions of euros Booked value Fair value December 31, 2007 Fair value Fair value variation variation if rates if rates fall rise by 1% by 1% 10 (136) (134) 34 (226) (10) (32) 199 Booked value Fair value December 31, 2006 Fair value Fair value variation variation if rates if rates fall rise by 1% by 1% (314) (256) (1) 49 (512) (11) (46) 438
Assets Marketable securities (1) Cash and cash equivalents (2) Liabilities Convertible bonds Non convertible bonds Other financial debt Interest rate derivatives Loan to co-venturer (DEBT)/CASH POSITION
894 4,377 (2,273) (2,381) (394) 271
894 4,377 (2,104) (2,310) (394) 511
1,942 4,749 (2,682) (2,672) (855) 26 508
1,942 4,749 (2,834) (2,828) (856) 26 199
For bank overdrafts, the booked value is considered as a good estimation of the fair value. Over 99% of our bonds have been issued with fixed rates. At year-end 2007, the fair value of our long-term debt was lower than its booked value due to increasing interest rates. At year-end 2006, the fair value of our long-term debt was higher than its booked value due to falling interest rates.
Assumptions and calculations
The fair value of the instruments in the table above is calculated with market standard financial software according to the market parameters prevailing on December 31, 2007.

Fair value hedge

The ineffective portion of changes in fair value hedges was a loss of 19 million at December 31, 2007, compared to a loss of 18 million at December 31, 2006 and a loss of 9 million at December 31, 2005. We did not have any amount excluded from the measure of effectiveness. There was no impact of contract cancellation in the income statement at December 31, 2007, 2006 and 2005.

Net investment hedge

We have stopped using investment hedges in foreign subsidiaries. At December 31, 2007, 2006 and 2005, there were no derivatives that qualified as investment hedges.

Powers of the Board of directors
Our Board, in addition to matters that come under its legal or regulatory authority, regularly decides on the Groups strategic direction and the key decisions affecting its activities. It fully exercises its authority and tries to ensure that each Directors contribution is entirely effective, in accordance with the principles of corporate governance described above and the provisions of its Operating Rules. Our Board of directors also make sure that its activities are transparent to our shareholders by reporting generally on its activities and those of its Committees during the previous year and on its procedures, in our annual report. Finally, the Board performs an annual evaluation of the manner in which it does its work and of the performance of the executive officers. At least once every three years, it has its performance evaluated by an outside consultant. Excerpt from the Board of directors Operating Rules In addition to matters related to its legal or regulatory function, the board shall regularly decide upon, among other things, the Groups strategic orientations and the main decisions affecting its activities. This relates in particular to the projects of important investments of organic growth and the operations of internal reorganizations, major acquisitions and divestitures of shares and assets, transactions or commitments that may significantly affect the financial results of the group or considerably modify the structure of its balance sheet and the strategic alliances and financial cooperation agreements.
Preparation of meetings, organization and functioning of the Board of directors
The Operating Rules govern the manner in which our Board of directors functions. The Board meets at least once each quarter either at our head office or at any other location indicated in the notice of meeting, whether in France or abroad. We provide our Directors with all the information they need to perform their duties. Board members regularly receive relevant information concerning our company, such as press articles and financial analysts reports. They may also seek the opinion of senior officers within the Group on any subject they deem appropriate. The documentation provided at Board meetings supports the items on the agenda and includes the documents sent to the Directors prior to the meeting as well as additional documents. In general, each item on the agenda is supported by internal and/or external documentation, depending on the nature of the topic discussed and, if applicable, is accompanied by a draft of the proposed resolution of the Board. Where appropriate in light of the agenda, the documentation also includes a draft press release, which is generally published the day after the meeting and before Euronext Paris opens, in accordance with the AMFs recommendations. Lastly, the documentation contains a list of the main contracts and agreements signed since the previous meeting as well as information about changes in our share price. The work of the Board is generally based on presentations made by our senior management, which generate open discussions among the Directors. However, certain portions of Board meetings are not attended by our CEO or employees, pursuant to one of the recommendations of the New York Stock Exchange and the principles of corporate governance recommended by the AFEP and the MEDEF in October 2003. Directors may participate in Board meetings by videoconference or by means of telecommunication through which they can be identified. Directors participating in this manner are deemed in attendance for determining the quorum and the majority of votes unless the matters being discussed are prohibited by law from being considered by these means. Directors must notify the Chairman of the Board of any conflict of interest, even potential. Moreover, if this conflict concerns a particular matter, they must refrain from voting on such matter. Depending on the Boards agenda and the nature of the topics discussed at the meeting, Board meetings may be preceded by a meeting of one or several of its four specialized committees. Excerpt from the Board of directors Operating Rules In the course of carrying out its various responsibilities, the Board of directors may create specialized committees, composed of Directors appointed by the Board, that review matters within the scope of the Boards responsibilities and submit to the Board their opinions and proposals, in accordance with the internal rules governing such committees. The Board of directors shall have the following standing committees: the corporate governance and nominating committee, the compensation committee, the audit and finance committee and the strategy and investments committee.

2007 ANNUAL REPORT ON FORM 20-F - 95
Except in case of an emergency, all information required for the Boards discussions is sent prior to the meeting in a manner that is consistent with the confidentiality to be respected when delivering insider information, and that allows the Directors to carefully review the documents prior to the meeting. This also applies to the specialized committees created by the Board of directors. Board meetings called to prepare the year-end, six-month and quarterly financial statements are systematically preceded by a review of the financial statements by the Audit and Finance Committee.
Activity of the Board in 2007 and early 2008
Our Board of directors met 10 times in 2007. To the meeting schedule for the year 2007 set in the prior year, there were added two extraordinary meetings, in view of new developments. The average attendance rate of its members at these meetings was 93%. Despite the fact that some meetings were held outside the country in which certain Directors reside and although Directors are permitted by law to participate in meetings remotely, 77% of the members attended meetings in person in 2007. In early 2008, our Board of directors met four times, in February, in March and early April, and the attendance rate of its members was 93%. The Boards meetings were held at the companys head office in Paris or in Murray Hill, New Jersey. They lasted three and a half hours on average and were often preceded or followed by informal meetings with members of the Management Committee, which allowed the Directors to discuss on a periodic basis with the Groups main operating executives our strategic and technological direction. In 2007, the Board met on two occasions, and in 2008 on two occasions, without the CEO and employees being in attendance. The main topics addressed by the Board of directors in 2007 and early 2008 were as follows:
Accounts and financial position
In 2007, our Board reviewed and approved the year-end Alcatel-Lucent and the Groups consolidated financial statements for the fiscal year ended December 31, 2006, which were subsequently approved by our Shareholders at the meeting held in June 2007. It approved a budget forecast for 2007, and proposed an appropriation of results, that is, the appropriation of the profit or loss of the final year to legal reserves, statutory reserves or retained earnings. It reviewed certain matters related to the accounting principles either temporarily or permanently applicable as a result of the business combination with Lucent, such as the election of the SORIE method (Statement of Recognized Income and Expense) as permitted by the IASB for recognizing actuarial gains/losses and changes in asset ceiling outside the income statement. It also studied the impact of eliminating the reconciliation of our net income and shareholders equity, prepared in accordance with IFRS, with U.S. GAAP, which new SEC regulations allow, in certain circumstances. In addition, it reviewed and approved the quarterly and half-year consolidated financial statements for the year ended December 31, 2007. At each of these meetings, the accounts were examined in the presence of our Statutory Auditors and a report was presented on the work of the Audit and Finance Committee. More generally, our Board monitored changes in the Groups results and financial structure as well as the progress of restructuring and cost reduction plans. This prompted the Board to convene two extraordinary meetings and to request various specific reports from senior management as well as the preparation of a general action plan in late October 2007. Moreover, on several occasions the Board addressed the specific issue of Lucents pension fund management. The Board concluded that it was incumbent upon the Board to establish general guidelines for allocating the assets of these funds, and to appoint the members of the advisory committee responsible for overseeing this management (Pension Benefits Investment Committee). The Board therefore appointed the members of this Committee and approved a change to the asset allocation policy. Our Board was also informed of the terms and conditions under which the revolving syndicated lines of credit previously issued to historical Alcatel and Lucent were renegotiated for the benefit of the Group following the business combination with Lucent. In 2008, our Board reviewed and approved the year-end Alcatel-Lucent and consolidated financial statements for the year ended December 31, 2007, to be submitted to the shareholders for definitive approval. It approved a budget forecast for 2008, and proposed an appropriation of results.

2007 ANNUAL REPORT ON FORM 20-F - 99
Our Audit and Finance Committee gave prior authorization for assignments carried out by its Statutory Auditors which are not related to statutory audits. After presentations by the Chief Financial Officer and the Statutory Auditors, the committee also set the Auditors fees for 2007. Our Audit and Finance Committee met twice in the first quarter of 2008 to conduct a review of the results and financial statements for the year ended December 31, 2007 and of the annual report of the Internal Audit department for 2007, as well as the internal audit plan for 2008. It reviewed the draft annual report on Form 20-F and the reference document, and the internal and external auditors reports on internal control procedures in place within our Group.
Corporate Governance and Nominating Committee
The Corporate Governance and Nominating Committee consists of no less than three members, at least two-thirds of whom must be independent. Since November 30, 2006, the members of this committee are Mr. Daniel Bernard, committee chairman, Ms. Linnet Deily, Mr. Frank Blount, Mr. Henry Schacht and Mr. Jean-Cyril Spinetta.
The first responsibility of our Corporate Governance and Nominating Committee, as defined 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 the Board individuals who are qualified 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 Groups other senior executives.
Our Corporate Governance and Nominating Committee met three times in 2007. Among other things, it reviewed the Directors Charter, advised the Board as to the position it should take on the amendments to the Articles of Association proposed by certain shareholders concerning statutory limitations on voting rights and double voting rights, examined the succession plans for members of the Management Committee, reviewed the training of Directors, proposed the appointment of a deputy secretary to the Board, and made suggestions for changing the organization of the management team. The committee met once in early 2008. It reviewed in depth the self-evaluation report of the Board, examined the independence of the Directors (see in this Section "Activity of the Board in 2007 and early 2008") and considered the candidates for the replacement of the current observers.

114 - 2007 ANNUAL REPORT ON FORM 20-F
Stock options and other stock-based compensation instruments issued by Lucent Technologies Inc.
As part of the business combination with Lucent, we agreed to issue Alcatel-Lucent shares to holders of stock options and other stock-based compensation instruments (restricted stock units, performance shares and Directors deferrals) granted by Lucent Technologies Inc., in the event of such holders exercise or conversion of the rights attached to their instruments. As of November 30, 2006, the date of the business combination between historical Alcatel and Lucent, these instruments entitled holders to a total of 311,307,596 common shares of Lucent Technologies Inc. Consequently, and in accordance with the decision made by our Board of directors on November 30, 2006, acting on the authority granted by the Shareholders Meeting of September 7, 2006, Alcatel-Lucents Coralec subsidiary issued to Lucent 60,767,243 bonds, each of which may be converted into one Alcatel-Lucent share. When the Lucent stock options or other stock-based compensation instruments are exercised by their holders, Lucent requests conversion of the corresponding number of convertible bonds and immediately delivers the number of Alcatel-Lucent shares resulting from the conversion to those holders who have exercised their rights. At December 31, 2007, there was a total of 56,260,251 outstanding bonds convertible into Alcatel-Lucent shares. However only a maximum of 33,139,094 of these bonds may still be converted, given the cancellation of stock options on that same date. These bonds are not listed on any stock exchange.

Redeemable notes (ORAs)

Issues related to acquisitions
In 2004, we authorized the issuance by our subsidiary Coralec of debt represented by notes redeemable for Alcatel-Lucent shares (ORAs), in order to allow for the acquisition of Spatial Wireless (United States). In connection with this acquisition, 18,988,334 notes redeemable for Alcatel-Lucent shares were issued to historical Alcatel at a unit price of 11.91. There were no redemptions in 2007 and the number of Alcatel-Lucent shares issued since the issuance of the ORAs to repay these notes is 18,483,297. In 2003, we authorized the issuance by Coralec of debt represented by notes redeemable for Alcatel-Lucent shares, in order to allow for the acquisition of iMagic TV Inc. (Canada) and TiMetra Ltd. (United States). In connection with the acquisition of iMagic TV Inc., 3,717,254 notes redeemable for Alcatel-Lucent shares were issued to historical Alcatel at a unit price of 7.44. There were no redemptions in 2007. The number of Alcatel-Lucent shares issued since the issuance of the ORAs to repay these notes is 3,631,332. In connection with the acquisition of TiMetra Ltd., 17,979,738 notes redeemable for Alcatel-Lucent shares were issued to historical Alcatel at a unit price of 8.08. During 2007, 500,000 shares were issued in exchange for these notes, thus bringing the number of Alcatel-Lucent shares issued since the issuance of these notes to repay the ORAs to 17,034,934. In 2002, we authorized the issuance by Coralec of debt represented by notes redeemable for Alcatel-Lucent shares, in order to allow for the acquisition of Astral Point Communications Inc. (United States). In connection with the acquisition of Astral Point Communications Inc., 9,506,763 notes redeemable for Alcatel-Lucent shares were issued to historical Alcatel at a unit price of 16.41. There were no redemptions in 2007 and the number of AlcatelLucent shares issued since issuance of the ORAs to repay these notes is 9,123,396. At December 31, 2007, there was a total of 1,919,130 outstanding notes redeemable for Alcatel-Lucent shares. These bonds are not listed on any stock exchange.

b) Exceeding the statutory thresholds
In accordance with the statutory provisions, any individual or legal entity and/or shareholder that comes to own a number of shares in the company equal to or above 2% of the total number of shares must, within a period of five trading days from the date on which this share ownership threshold is exceeded, inform the company of the total number of shares owned, by letter or fax. A further notification must be sent in the same manner each time a new threshold of 1% is exceeded. If the threshold of 3% of the total number of shares is exceeded, the shareholder must, within a period of five trading days from the date on which this share ownership threshold is reached, request the registration of the shares. The copy of the request for registration, sent by letter or fax to the company within fifteen days from the date on which this share ownership threshold is exceeded, is deemed to be a notification that the threshold has been reached. A further request must be sent in the same manner each time a further threshold of 1% is exceeded, up to 50%. For purposes of the calculation of the thresholds, indirectly held shares which are considered to be owned pursuant to Articles L. 233-7 et seq. of the French Commercial Code must be taken into account. In each notification referred to above, the shareholder must certify that all securities held indirectly as well as the shares considered to be owned are included. The notification must also indicate the date(s) of acquisition. These obligations of share notification and registration apply to the holders who own shares through ADSs. If a shareholder fails to comply with the provisions relating to notification that the thresholds have been exceeded, the voting rights for the shares exceeding the thresholds are, at the request of one or more shareholders holding at least 3% of the share capital, suspended under the conditions provided for by law. Any shareholder whose shareholding falls below either of the thresholds provided for above must also inform the company thereof, within the same period of five trading days and in the same manner.
c) Exceeding the legal thresholds
Beyond the notification obligations, provided for in our Articles of Association, French law requires that any individual or legal entity, acting alone or in concert, which comes to hold a total number of shares (including through ADSs), above 5%, 10%, 15%, 20%, 25%, 33 1/3%, 50%, 66 2/3%, 90% or 95% of the capital or of the voting rights of a company, notify the company and the AMF within five trading days from the date on which these thresholds are exceeded. This notification must also be made, within the same period, when the holding in capital or voting rights falls below these thresholds. In the event of failure to appropriately notify that these thresholds have been exceeded, the voting rights of the shares in excess of the threshold that should have been notified are suspended for any shareholders meeting that might be held up to the expiration of a period of two years from the date the notification is eventually filed.

Changes in the capital

a) Capital increases
In accordance with applicable law, our capital may be increased by cash or in-kind contributions, pursuant to a resolution of the Extraordinary General Meeting approved by two-thirds of the shareholders present or represented. This power may also be delegated to the Board of directors. In the event of a delegation to the Board of directors, the Chief Executive Officer may be granted specific powers to make the capital increase. The capital may also be increased: by the capitalization of reserves, profits or issuance premium pursuant to a decision of the General Meeting of Shareholders taken with the approval of a simple majority of the shareholders present or represented; in case of payment of a dividend in shares decided by an Ordinary General Meeting of Shareholders; or upon tender of securities or rights giving access to the companys capital (bonds convertible into shares, bonds repayable in shares, warrants to purchase shares or other securities).

b) Capital decreases

The share capital may be decreased pursuant to a decision of two-thirds of the shareholders present or represented at an Extraordinary General Meeting of Shareholders, either by decreasing the nominal value of the shares or by reducing the number of shares outstanding.
126 - 2007 ANNUAL REPORT ON FORM 20-F
Management of the company
Our company is managed by a Board of directors consisting of at least six and not more than fourteen members. If there is any vacancy following the death or resignation of one or more Directors, the Board of directors must temporarily appoint for each vacancy one replacement Director, such appointment being subject to approval at the next General Meeting of Shareholders. The appointment of a replacement Director in the event of a vacancy by reason of death or resignation requires the simple majority of the Directors present or represented. Each Director must hold at least 500 company shares.
Term of Directors mandate Age Limit
Directors are elected for a four-year term. Directors may be re-elected subject to the following provisions. A Director appointed to replace another Director may hold office only for the remainder of his predecessors term of office. The maximum age for holding a Directorship shall be 70. This age limit does not apply if less than one third, rounded up to the nearest whole number, of serving Directors have reached the age of 70. No Director over 70 may be appointed if, as a result, more than one third of the serving Directors rounded up as defined above, are over 70. If for any reason whatsoever the number of serving Directors over 70 should exceed one third as defined above, the oldest Director(s) shall automatically be deemed to have retired at the ordinary General Meeting of Shareholders called to approve the accounts of the fiscal year in which the proportion of Directors over 70 years was exceeded, unless the proportion was reestablished in the meantime. Directors representing legal entities are taken into account when calculating the number of Directors to which the age limit does not apply. Legal entities that are represented on the Board must replace any 70 year old representative at the latest at the ordinary General Meeting of Shareholders called to approve the accounts of the fiscal year in which such representative reached the age of 70. The age limitations apply to any Chairman of the Board of directors, provided that such Chairman is not at the same time the Chief Executive Officer of the Company, in which case the age limitation of 68 shall apply.

Capital stock 2,852

Additional paid-in capital 8,226
Retained Earnings (4,430) 18
Fair value and other reserves 43 (144)
Cumulative Treasury translation stock adjustments (1,607) (183) 357

1,365,973,827

2,305,660 1,341,444

(37) (6) 32

1,369,620,931

(4,455) 922

(1,575)

922 (922)

6,130 6,8,922 20

6,605 -

(3,533) 8

(101) 473

174 (289)

475 10

6,8,922 20

878,139,615 2,997,886

1,756 6

7,166 14

180,718 (7) (219) 20 3

(4) (219) 20

(4) (219) 30

2,250,939,150

16,443

(3,731) (106)

(1,572)

(106) 106

15,910 15,910 (4,432) 44 (30) (361) (2)

16,405 -

(3,837) (14)

372 70

(115) (970)

(3,518)

(18) -
16,405 (4,394) 44 (30) (379) (2)

7,762,279

28 (30) 102

349,304

(4) (361) (2)

2,259,050,733

16,543

(4,218) (3,518)

(1,567)

(1,085)

(3,518) 3,518

11,232

11,747 -
Balance at December 31, 2007 after appropriation (1) (2) (3)

(7,736)

11,747
See consolidated statements of recognized income and expense. For more details on the acquisition of Lucent, please refer to note 3. The appropriation is proposed by the Board of Directors and need to be approved by the Shareholders Meeting before being final.
2007 ANNUAL REPORT ON FORM 20-F - 157
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Alcatel-Lucent (formerly called Alcatel) is a French public limited liability company that is subject to the French Commercial Code and to all the legal requirements governing commercial companies in France. Alcatel changed its name to Alcatel-Lucent on completion of the business combination with Lucent Technologies Inc. Alcatel-Lucent was incorporated on June 18, 1898 and will be dissolved on June 30, 2086, except if dissolved earlier or if its existence is extended by shareholder vote. AlcatelLucents headquarters are situated at 54, rue la Botie, 75008 Paris, France. Alcatel-Lucent is listed principally on the Paris and New York stock exchanges. The consolidated financial statements reflect the results and financial position of Alcatel-Lucent and its subsidiaries (the Group) as well as its investments in associates (equity affiliates) and joint ventures. They are presented in Euros rounded to the nearest million. The Group develops and integrates technologies, applications and services to offer innovative global communications solutions. On March 25, 2008, Alcatel-Lucent's Board of Directors authorized for issuance these consolidated financial statements at December 31, 2007. The consolidated financial statements will be final once approved at the Annual Shareholders Meeting to be held on May 30, 2008.

2. In the domain of critical systems for security:
On January 5, 2007, with respect to this transfer, 25 million new Thales shares were issued to Alcatel-Lucent, and AlcatelLucent received a cash payment of 50 million. As a result of the issuance of the shares, Alcatel-Lucent increased its shareholdings to 20.95%, which continue to be accounted for as an investment in associates, and the French State remained the main shareholder with a 27.29% stake (held directly or indirectly). The assets envisaged for the contribution and disposal were accounted for as assets held for sale in the consolidated financial statements at December 31, 2006, as the criteria for classification in assets held for sale as defined by IFRS 5 Non-current Assets Held for Sale and Discontinued Operations were met at the balance sheet date and as some of the remaining uncertainties as of September 30, 2006 had then been cleared (i.e. signature of a final agreement between historical Alcatel and Thales, receipt of Finmeccanicas waiver concerning the transfer of Spatial business assets, receipt of French State approval, etc.) The assets contributed or disposed of to Thales were considered as one single transaction and one disposal group of assets as defined by IFRS 5 based upon the following facts and circumstances: the transaction was a global transaction that had to be carried out in two phases with two closing dates due exclusively to the European Commissions authorization process concerning the Space business; the Space activities disposal was contingent on the assets contribution of Transport Systems and Critical Systems Integration, and the amount of 670 million concerning the disposal of the Space business was considered a preliminary payment of the selling price (as an external expert will establish the definitive price in 2009) and is therefore not entirely representative of the market price of this business. It is one of the reasons why Alcatel-Lucent had no intention of disposing of the Space business without including it in the larger transaction defined in the Master Agreement.
As the fair value less costs to sell of this disposal group is higher than the carrying amount, such carrying amount was not adjusted as of December 31, 2006. All net assets to be disposed of/contributed to Thales were isolated on the two specific line items related to discontinued operations in the consolidated balance sheet (that is, Assets held for sale and Liabilities related to disposal groups held for sale) as of December 31, 2006. The 2006 result of the disposal group was presented in the Income (loss) from discontinued operations line item in the consolidated income statement and the prior periods consolidated income statements have been re-presented accordingly. Detailed impacts are presented in note 10. The capital gain related to this disposal and the difference between the preliminary selling price of the Space business (as described above) and its carrying value, was accounted for during the first quarter of 2007.

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.

Funding requirements are usually determined for each individual plan, and as a result excess plan assets for over funded plans cannot be used for under funded plans. The over funded status, which amounted to 2,806 million at December 31, 2007 (under funded status amounted to 33 million at December 31, 2006 and 1,217 million at December 31, 2005) relates primarily to Lucents post-retirement benefits (see below) and to plans in France and Germany. Decisions on funding the benefit obligations are taken based on each countrys legal requirements and the tax-deductibility of the contributions made. In France and Germany, the funding of pension obligations relies primarily on defined contribution plans; setting up other funding arrangements is not common practice. Furthermore, in Germany, the benefits accruing to employees are guaranteed in the event of bankruptcy through a system of mutual insurance common to all companies involved in similar plans. See section D below for information on Lucent's plans. The benefit obligation, the fair value of the plan assets and the actuarial gains (losses) generated for the current year and the previous years are as follows:
Experience adjustments generated on the benefit obligation In percentage of the benefit Amount obligation (166) 0.65% 21 0.07% 72 2.06% (In millions of euros) Experience adjustments generated on the plan assets

Benefit obligation

Plan assets
Funded (unfunded) status 2,806 (33) (1,217)

Amount 1,111

(25,425) (30,230) (3,503)

28,231 30,197 2,286

In percentage of the plan assets 3.80% 0.19% 4.86%
2007 ANNUAL REPORT ON FORM 20-F - 215
In respect of the medical care plans, a change of one percentage point in the assumed medical costs has the following impact (in millions of euros):
Impact on the current service cost and interest costs Impact on the benefit obligation Increase of 1% (7) (115) Decrease of 1% 7 102
The plan assets of retirement plans are invested as follows:
Bonds 17,154 61% 14,382 48% 941 41% Equity securities 5,628 20% 10,966 36% 626 28% Private equity and other 3,139 11% 2,537 8% 348 15% (In millions of euros and percentage) Real estate Total 2,310 28,231 8% 100% 2,312 30,197 8% 100% 371 2,286 16% 100%
As part of the prudent management of its funds relative to the corresponding obligations, the Group reduced the exposure of its defined benefit pension plans to equity markets in November 2007. As of December 31, 2007, the global asset allocation of the groups plans was as follows: 20% in equity securities, 61% in bonds and 19% in alternatives (i.e., real estate, private equity and hedge funds). This compares to respectively 36%, 48% and 16% as of December 31, 2006. For historical Alcatel companies, the investment policy relating to plan assets within the Group depends upon local practices. In all cases, the proportion of equity securities cannot exceed 80% of plan assets and no individual equity security may represent more than 5% of total equity securities within the plan. The equity securities held by the plan must be listed on a recognized exchange. The bonds held by the plan must have a minimum A rating according to Standard & Poors or Moodys rating criteria. The contributions that are expected to be paid for 2008 are 124 million for the pension and other post-retirement benefits plans. Expected benefit payments made for beneficiaries from defined benefit pension plans through 2017 are as follows:

(1) Loan to a co-venturer (refer to note 26).

(4) (35) (45) (21)

(12) (10) (17) (23) (1) (60) (30) 29 (20) (22) (50) (32) (11) (38)
Members of the Board of Directors and members of the Groups executive committee are those present during the year and listed in the Corporate Governance section of the Annual Report. In 2007, 2006 and 2005, compensation, benefits and social security contributions attributable to members of the Board of Directors and to the executive committee members (Key management personnel) were as follows: Recorded expense in respect of compensation and related benefits attributable to Key management personnel during the year.
2007 ANNUAL REPORT ON FORM 20-F - 237
(In millions of euros) 2007 Short-term benefits Fixed remuneration Variable remuneration Directors fees Employers social security contributions Termination benefits and retirement indemnities Other benefits Post-employment benefits Share-based payments (stock option plans) Total
(1) Variable remuneration and retention bonuses.
Note 33 Employee benefit expenses and staff training rights
Wages and salaries Restructuring costs

2007 5,(258) (544) 5,315

(In millions of euros) 3,392 3,(31) 3,45 3,848
Post-retirement benefit plan amendment Net employee benefit expenses
Financial component of pension and post-retirement benefit costs
Including social security expenses and operational pension costs. This is reported in Income (loss) from operating activities before restructuring costs, impairment of assets, gain/(loss) on disposal of consolidated entities and post-retirement benefit plan amendment. See note 27d. See note 25e. See note 8.
The law of May 4, 2004 in France provides French company employees with the right to receive individual training of at least 20 hours per year that can be accumulated over six years. Rights related to terminated or dismissed employees exercised during the notice period and rights exercised by employees considered as not adapted to the needs of their employer or not professional in nature, are assimilated to short and long-term employee benefits as defined in IAS 19 and have been provided for accordingly. All other rights are accounted for as incurred, as Alcatel-Lucent expects to receive an amount of economic benefits from the training to be taken that exceeds the costs to be incurred to settle the present obligation. Accumulated individual staff training rights were 844,515 hours at December 31, 2007 (652,811 hours at December 31, 2006 and 601,179 hours at December 31, 2005). Rights exercised so far are not material.

Note 34 Contingencies

In addition to legal proceedings incidental to the conduct of its business (including employment-related collective actions in France and the U.S.) which management believes are adequately reserved against in the financial statements or will not result in any significant costs to the Group, Alcatel-Lucent is involved in the following legal proceedings: Class A and Class O shareholders Beginning in May 2002, several purported class action lawsuits were filed against Alcatel-Lucent and certain of its officers and Directors challenging the accuracy of certain public disclosures that were made in the prospectus for the initial public offering of Alcatel Class O shares and in other public statements regarding market demand for our former Optronics divisions products. The lawsuits purport to be brought on behalf of persons who (i) acquired Alcatel Class O shares in or pursuant to the initial public offering of the American Depositary Shares (ADSs) conducted by Alcatel in October 2000, (ii) purchased Alcatel Class A and Class O shares in the form of ADSs between October 20, 2000 and May 29, 2001 and (iii) purchased Alcatel Class A shares in the form of ADSs between May 1, 2000 and May 29, 2001. The amount of damages sought by these lawsuits was not specified.

2007 ANNUAL REPORT ON FORM 20-F - 239
On February 21, 2005, Taisel, the former president of Taisel, and others were indicted in Taiwan for violation of the Taiwanese Government Procurement Act. On November 15, 2005, the Taipei criminal district court found Taisel not guilty of the alleged violation of the Government Procurement Act. The former President of Taisel was not judged because he was not present or represented at the proceedings. The court found two Taiwanese businessmen involved in the matter guilty of violations of the Business Accounting Act. The prosecutor has filed an appeal with the Taipei court of appeals. Should the higher court find Taisel guilty of the bidrigging allegations in the indictment, Taisel may be banned from participating in government procurement contracts within Taiwan for a certain period and fines or penalties may be imposed on Alcatel-Lucent, in an amount not to exceed 25,000. Other allegations made in connection with this matter may still be under ongoing investigation by the Taiwanese authorities. The SEC and the DOJ are also looking into these allegations. As a group, Alcatel-Lucent expects to generate approximately 80 million of revenue from Taiwanese contracts in 2008, of which only a part will be from governmental contracts. Based on the amount of revenue expected from these contracts, AlcatelLucent does not believe a loss of business in Taiwan would have a material adverse effect on the Alcatel-Lucent group as a whole. Kenya The SEC and the DOJ have asked Alcatel-Lucent to look into payments made by CIT to a consultant arising out of a supply contract between CIT and a privately-owned company in Kenya in 2000. Alcatel-Lucent understands that the French authorities are also conducting an investigation with respect to these payments. Alcatel-Lucent is cooperating with the U.S. and French authorities and has submitted to these authorities its findings regarding those payments. Government investigations related to Lucent Saudi Arabia In August 2003, the DOJ and the SEC informed Lucent that they had each commenced an investigation into possible violations of the FCPA with respect to Lucents operations in Saudi Arabia. These investigations followed allegations made by National Group for Communications and Computers Ltd. (NGC) in an action filed against Lucent on August 8, 2003, which is described below. Alcatel-Lucent does not expect any further action by the SEC or the DOJ relating to the Saudi allegations. China In April 2004, Lucent reported to the DOJ and the SEC that an internal FCPA compliance audit and an outside counsel investigation found incidents and internal control deficiencies in Lucents operations in China that potentially involve FCPA violations. Lucent cooperated with those agencies. On December 21, 2007, Lucent entered into agreements with the DOJ and the SEC to settle their respective investigations. Lucent signed a non-prosecution agreement with the DOJ. Pursuant to that agreement, the DOJ agreed not to charge Lucent with any crime in connection with the allegations in China. Lucent agreed to pay a 1 million monetary penalty and adopt or modify its existing internal controls, policies, and procedures. On December 21, 2007, the SEC filed civil charges against Lucent in the United States District Court for the District of Columbia alleging violations of the books and records and internal controls provisions of the FCPA. That same day, Lucent and the SEC entered into a consent agreement, resolving those charges. Pursuant to that consent agreement, Lucent, without admitting or denying the allegations in the SECs complaint, agreed to a permanent injunction enjoining Lucent from any future violations of the internal controls and books and records provisions of the FCPA. Lucent further agreed to pay a civil penalty of U.S.$ 1.5 million. If Lucent abides by the terms of its agreements with the DOJ and the SEC, Lucent does not anticipate any further actions by the DOJ and the SEC with respect to allegations regarding Lucents conduct in China. Subpoenas and discovery requests In May 2005, Lucent received subpoenas on two different matters, requesting specific documents and records. One of the subpoenas relates to a DOJ investigation of potential antitrust and other violations by various participants in connection with the United States governments E-Rate program. The subpoena requires Lucent to produce documents before a grand jury of the U.S. District Court in Georgia. The second subpoena was from the Office of Inspector General, U.S. General Services Administration and relates to a federal investigation into certain sales to the federal government of telecommunications equipment and related maintenance services. During April 2006, the California Department of Justice served Lucent with discovery requests related to sales to California governmental agencies of telecommunications equipment and related maintenance services. Lucents employment and benefits related cases Lucent has implemented various actions to address the rising costs of providing retiree health care benefits and the funding of Lucent pension plans. These actions have led to the filing of cases against Lucent and may lead to the filing of additional cases. Purported class action lawsuits have been filed against Lucent in connection with the elimination of the death benefit from its U.S. management pension plan in early 2003. Three such cases have been consolidated into a single action pending in the U.S. District Court in New Jersey, captioned In Re Lucent Death Benefits ERISA Litigation. The elimination of this benefit reduced Lucent future pension obligations by U.S.$ 400 million. The benefit was paid out of the pension plan assets to certain qualified surviving dependents, such as spouses or dependent children of management retirees. The case alleges that Lucent wrongfully terminated this death benefit and requests that it be reinstated, along with other remedies. This case has been dismissed by the court, but the dismissal has been appealed to a higher court and that appeal is pending. Another such case, Chastain, et al. v. AT&T, was filed in the U.S. District Court in the Western District of Oklahoma. The Chastain case also involves claims related to changes to retiree health care benefits. That case too has been dismissed, but the dismissal has been appealed to a higher court. The appeal remains pending.