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Alcatel-Lucent Posts Q3

PARIS — Third quarter revenue increased 10.5% year-over-year and increased 6.8% sequentially to Euro 4.074 billion. At constant currency exchange rates and perimeter, revenue increased 2.9% year-over-year and increased 6.8% sequentially. Networks saw a year-over-year single-digit increase in revenue, driven by an acceleration of growth in IP and wireless, partly offset by a decline in wireline networks. Terrestrial optics revenues were almost stable this quarter. Applications revenues were stable both for Networks applications and Enterprise applications. Services revenues grew at a low single digit rate with good performance this quarter for Managed & Outsourcing solutions.From a geographic standpoint, traction remained strong in North America with a double digit rate of growth and sales trends improved in all other regions of the world, especially with Asia Pacific and Eastern Europe growing at mid single digit rates. Specifically, growth in India and Russia was significant, and resumed in China this quarter.

• Adjusted2 operating1 income of Euro 61 million or 1.5% of revenue. Adjusted gross margin came in at 33.8% of revenue for the quarter, compared to 33.4% in the year ago quarter and 36.1% in the second quarter 2010. The year-over-year increase in gross margin was driven by the product/geographic mix. The sequential decrease in the gross margin was driven by a change in geographical and product mix, the latter being mainly related to less software upgrades recorded in the third quarter than in the second quarter. Operating expenses decreased 0.7% year-over-year at constant currency and increased 5.9% on a reported basis due to the rise of the US dollar. On a sequential basis, operating expenses at constant currency decreased by 2.0% and decreased by 2.4% as reported, reflecting a decrease in SG&A due to our initiatives on costs.

• Reported net income (group share) of Euro 25 million or Euro 0.01 per share. This includes a one-time gain related to post-retirement benefit plan amendment of Euro 30 million pre-tax and to Euro 18 million after tax. Purchase Price Adjustments amounted to Euro 72 million pre-tax and to Euro 43 million after tax.

• Net (debt)/cash of Euro (190) million, versus Euro 107 million as of June 30, 2010.The sequential decrease in net cash of Euro 297 million primarily reflects restructuring cash outlays of Euro (73) million, contribution to pensions and OPEB of Euro (56) million and capital expenditures of Euro (184) million which offset positive operating cash flow of Euro 193 million. The positive operating cash flow results from the level of adjusted operating profit offset by an increase in operating working capital requirements of Euro 82 million.

• Funded status of Pensions and OPEB of Euro (1,409) million at end of September, compared to Euro (1,802) million as of June 30, 2010. Excluding currency impact, the sequential narrowing in the deficit mainly results from an increase of the fair value of the plan assets for 1,229 million offset by the increase of our obligations for 1,106 million due to the decrease in the discount rates used for pensions and post-retirement healthcare plans. The net effect of currency changes on the fair value of the plan assets and on our obligations is positive Euro 109 million. On December 1, 2010, we intend to transfer approximately 6,300 participants from the U.S. occupational pension plans to the U.S. management pension plan. We expect to transfer about US$ 810 million in assets and between US$ 520 million and US$ 490 million in obligations, depending of the discount rate methodology ultimately chosen for the January 1, 2010 funding valuation, and thereby improve the funded status of the U.S. management pension plan by about US$ 290 million to US$ 320 million at the time of the transfer. See note 23 of Alcatel-Lucent’s condensed consolidated financial statements at September 30, 2010 for more details.

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