Our consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union. IFRS, as adopted by the European Union, differs in certain respects from the International Financial Reporting Standards issued by the International Accounting Standards Board. However, our consolidated financial statements presented in this document in accordance with IFRS would be no different if we had applied International Financial Reporting Standards issued by the International Accounting Standards Board. As permitted by U.S. securities laws, we no longer provide a reconciliation of our net income and shareholders’ equity as reflected in our consolidated financial statements to U.S. GAAP.

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

As a result of the Lucent transaction, our 2006 consolidated financial results include (i) 11 months of results of only historical Alcatel and (ii) one month of results of the combined company. As a result of the Thales transaction, our 2006 financial results pertaining to the businesses transferred to Thales are treated as discontinued operations. Further, our 2006 financial results take into account the effect of the change in accounting policies on employee benefits with retroactive effect from January 1, 2005 and our 2007 and 2006 financial results take into account the effect of the application of the interpretation IFRIC 14 with retroactive effect from January 1, 2006.

As a result of the purchase accounting treatment of the Lucent business combination required by IFRS, our results for 2010, 2009, 2008, 2007 and 2006 included several negative, non-cash impacts of purchase accounting entries.

1

SELECTED FINANCIAL DATA

1.1. CONDENSED CONSOLIDATED INCOME STATEMENT AND STATEMENT OF FINANCIAL POSITION DATA

The table below shows the average noon buying rate of euro from 2006 to 2010. As used in this document, the term “noon buying rate” refers to the rate of exchange for the euro, expressed in U.S. dollars per euro, as certified by the Federal Reserve Bank of New York for customs purposes.

The table below shows the high and low noon buying rates expressed in U.S. dollars per euro for the previous six months.

On March 11, 2011, the noon buying rate was €1.00 = U.S.$1.3864

1

SELECTED FINANCIAL DATA

1.2. EXCHANGE RATE INFORMATION

2

ACTIVITY OVERVIEW

2.1 NETWORKS SEGMENT

2

ACTIVITY OVERVIEW

2.2 APPLICATIONS SEGMENT

Our business, financial condition or results of operations could suffer material adverse effects due to any of the following risks. We have described the specific risks that we consider material to our business but the risks described below are not the only ones we face. We do not

discuss risks that would generally be equally applicable to companies in other industries, due to the general state of the economy or the markets, or other factors. Additional risks not known to us or that we now consider immaterial may also impair our business operations.

We adopted a new strategic focus in 2009 and we continue to shift our resources to support that focus. If our strategic plan is not aligned with the direction our customers take as they invest in the evolution of their networks, customers may not buy our products or use our services.

We adopted a new strategic plan as of January 1, 2009, when we initiated a strategic transformation and realignment of our operations in support of that plan. The transformation includes a change in the composition of our spending on research and development as we accelerate the shift in our investments from mature technologies that previously generated significant revenue for us toward certain next-generation technologies. Our choices of specific technologies to pursue and those to de-emphasize may prove to be inconsistent with our customers’ investment spending.

The telecommunications industry fluctuates and is affected by many factors, including the economic environment, decisions by service providers and other customers that buy our products and services regarding their deployment of technology and their timing of purchases, as well as demand and spending for communications services by businesses and consumers.

Spending trends in the global telecommunications industry stabilized in 2010 as the 2008-2009 recession ended and the global economic environment generally turned more positive. However, we expect only moderate improvement in the global economy in 2011. Actual market conditions could be very different from what we expect and are planning for due to the uncertainty that exists about the strength of the recovery in the global economy. Moreover, market conditions could vary geographically and across different technologies, and are subject to substantial fluctuations. Conditions in the specific industry segments in which we participate may be weaker than in other segments. In that case, the results of our operations may be adversely affected.

If capital investment by service providers and other customers that buy our products and services is weaker than we anticipate, our revenues and profitability may be adversely affected. The level of demand by service providers and other customers that buy our products and services can change quickly and can vary over short periods of time, including from month to month. As a result of the uncertainty and variations in the telecommunications industry, accurately forecasting revenues, results and cash flow remains difficult.

In addition, our sales volume and product mix will affect our gross margin. Therefore, if reduced demand for our products results in lower than expected sales volume, or if we have an unfavorable product mix, we may not achieve the expected gross margin rate, resulting in lower than expected profitability. These factors may fluctuate from quarter to quarter.

Our business requires a significant amount of cash, and we may require additional sources of funds if our sources of liquidity are unavailable or insufficient to fund our operations.

Our working capital requirements and cash flows have historically been, and they are expected to continue to be, subject to quarterly and yearly fluctuations, depending on a number of factors. If we are unable to manage fluctuations in cash flow, our business, operating results and financial condition may be materially adversely affected. Factors which could lead us to suffer cash flow fluctuations include:

We derive our capital resources from a variety of sources, including the generation of positive cash flow from on-going operations, the issuance of debt and equity in various forms, and banking facilities, including our revolving credit facility of €1.4 billion maturing in April 2012 (with an extension until April 5, 2013 for an amount of €837 million) and on which we have not drawn. Our ability to draw upon these resources is dependent upon a variety of factors, including our customers’ ability to make payments on outstanding accounts receivable; the perception of our credit quality by lenders and investors; our ability to meet the financial covenant for our revolving credit facility; and debt and equity market conditions generally. Given current conditions, access to the debt and equity markets may not be relied upon at any time. Based on our current view of our business and capital resources and the overall market environment, we believe we have sufficient resources to fund our operations. If, however, the business environment were to materially worsen, or the credit markets were to limit our access to bid and performance bonds, or our customers were to dramatically pull back on their spending plans, our liquidity situation could deteriorate. If we cannot generate sufficient cash flow from operations to meet cash requirements in excess of our current expectations, we might be required to obtain supplemental funds through additional operating improvements or through external sources, such as capital market proceeds, asset sales or financing from third parties. We cannot provide any assurance that such funding will be available on terms satisfactory to us. If we were to incur high levels of debt, this would require a larger portion of our operating cash flow to be used to pay principal and interest on our indebtedness. The increased use of cash to pay indebtedness could leave us with insufficient funds to finance our operating activities, such as Research and Development expenses and capital expenditures, which could have a material adverse effect on our business.

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RISK FACTORS

3.1 RISKS RELATING TO THE BUSINESS

Our ability to have access to the capital markets and our financing costs will be, in part, dependent on Standard & Poor’s, Moody’s or similar agencies’ ratings with respect to our debt and corporate credit and their outlook with respect to our business. Our current short-term and long-term credit ratings, as well as any possible future lowering of our ratings, may result in higher financing costs and reduced access to the capital markets. We cannot provide any assurance that our credit ratings will be sufficient to give us access to the capital markets on acceptable terms, or that once obtained, such credit ratings will not be reduced by Standard & Poor’s, Moody’s or similar rating agencies.

Credit and commercial risks and exposures could increase if the financial condition of our customers declines.

A substantial portion of our sales are to customers in the telecommunications industry. Some of these customers require their suppliers to provide extended payment terms, direct loans or other forms of financial support as a condition to obtaining commercial contracts. We have provided and in the future we expect that we will provide or commit to financing where appropriate for our business. Our ability to arrange or provide financing for our customers will depend on a number of factors, including our credit rating; our level of available credit; and our ability to sell off commitments on acceptable terms. More generally, we expect to routinely enter into long-term contracts involving significant amounts to be paid by our customers over time. Pursuant to these contracts, we may deliver products and services representing an important portion of the contract price before receiving any significant payment from the customer. As a result of the financing that may be provided to customers and our commercial risk exposure under long-term contracts, our business could be adversely affected if the financial condition of our customers erodes. Over the past few years, certain of our customers have sought protection under the bankruptcy or reorganization laws of the applicable jurisdiction, or have experienced financial difficulties. In 2010, there appeared to be fewer instances where our customers experienced such difficulties, presumably as a result of the recovery in the global economy. We cannot predict how that situation may evolve in 2011, when we expect only moderate improvement in the global economy. Upon the financial failure of a customer, we may experience losses on credit extended and loans made to such customer, losses relating to our commercial risk exposure, and the loss of the customer’s ongoing business. If customers fail to meet their obligations to us, we may experience reduced cash flows and losses in excess of reserves, which could materially adversely impact our results of operations and financial position.

The Group's U.S. pension and post-retirement benefit plans are large and have funding requirements that fluctuate based on how their assets are invested, the performance of financial markets world wide, interest rates, medical price increases, and changes in legal requirements. These plans are costly, and our efforts to fund or control these costs may be ineffective.

Many former and current employees and retirees of the Group in the U.S. participate in one or more of our major defined benefit plans that provide post-retirement pension, healthcare, and group life benefits.

Volatility in discount rates and asset values will affect the funded status of our pension plans.

As required for funding purposes, we use one of the corporate bond-based yield curves issued by the U.S. Internal Revenue Service (the "IRS") in order to determine the discount rate, which directly impacts our funding obligation. The yield curve that we choose may significantly affect the size of our benefit obligation. The IRS also provides a number of methods to use to measure plan assets, which may materially affect the value of the assets used in the funding valuation. We are not

required to select a discount rate or asset measurement method to measure our 2010 funding valuation until October 15, 2011; but once we choose these methodologies, with a few exceptions, we will be required to use them for future funding valuations until we request a change that is approved by the IRS. Our preliminary assessment of our pension plans suggests that no funding contribution will be required through 2012. While the array of available funding methodologies may have a material impact on the funded status of our plans, we cannot give any assurances that the asset valuation and discount rate methodologies selected for the 2010 and 2011 funding valuations will not result in required contributions after 2012.

Pension and postretirement health plan participants may live longer than has been assumed, which would result in an increase in our benefit obligation.

For pension funding purposes, we use the mortality table issued by the IRS which includes fifteen years of projected improvements in life span for active and former employees not yet receiving pension payments, and seven years for retirees receiving payments. This table determines the period of time over which we assume that benefit payments will be made. The longer the period, the larger the benefit obligation and the amount of assets required to cover that obligation. For our retiree healthcare plans, we use the specific mortality experienced by plan participants consistent with our practice for all our benefit obligations determined under accounting standards. As with pension benefits, longer lives of our participants would likely increase our retiree healthcare benefit obligation. We cannot be certain that the longevity of our participants in our retiree healthcare plans or pension plans will not exceed that indicated by the mortality table we currently use, or that future updates to these tables will not reflect materially longer life expectancies.

We may not be able to fund the healthcare costs of our formerly represented retirees with excess pension assets in accordance with Section 420 of the U.S. Internal Revenue Code.

We expect to fund our current healthcare costs for retirees who were represented by the Communications Workers of America and the International Brotherhood of Electrical Workers with transfers of excess pension assets from our Occupational – inactive pension plan in which these retirees are participants. Excess assets are defined by Section 420 as being those assets in excess of either 120% or 125% of the plan's funding obligation, depending on the type of transfer selected. Excess assets are a function of the funded status of the specific plan involved. The provisions of Section 420 expire on December 31, 2013; however, Section 420 has been extended by Congress three times in the past. We can make no assurances that the Section 420 provisions of the IRC will be extended beyond December 31, 2013. Further, we can make no assurances that sufficient excess assets will be available for future transfers to cover all future healthcare costs beyond 2013 for these specific retirees.

Healthcare cost increases and an increase in the use of services may significantly increase our retiree healthcare costs.

Our current healthcare plans cap the subsidy we provide to those persons who retired after February 1990 and all future retirees, representing almost half of the retiree healthcare obligation, on a per capita basis. We may take steps in the future to reduce the overall cost of our current retiree healthcare plans, and the share of the cost borne by us, consistent with legal requirements and any collective bargaining obligations. However, cost increases may exceed our ability to reduce these costs. In addition, the reduction or elimination of U.S. retiree healthcare benefits by us has led to lawsuits against us. Any initiatives we undertake to control these costs may lead to additional claims against us.

Our financial condition and results of operations may be harmed if we do not successfully reduce market risks through the use of derivative financial instruments.

Since we conduct operations throughout the world, a substantial portion of our assets, liabilities, revenues and expenses are denominated in various currencies other than the euro and the U.S. dollar. Because our financial statements are denominated in euros, fluctuations in currency exchange rates, especially the U.S. dollar against the euro, could have a material impact on our reported results.

We also experience other market risks, including changes in interest rates and in prices of marketable equity securities that we own. We may use derivative financial instruments to reduce certain of these risks. If our strategies to reduce market risks are not successful, our financial condition and operating results may be harmed.

An impairment of other intangible assets or goodwill would adversely affect our financial condition or results of operations.

We have a significant amount of goodwill and intangible assets, including acquired intangibles, development costs for software to be sold, leased or otherwise marketed and internal use software development costs as of December 31, 2010. In connection with the combination between Alcatel and Lucent, a significant amount of additional goodwill and acquired intangible assets were recorded as a result of the purchase price allocation.

Goodwill and intangible assets with indefinite useful lives are not amortized but are tested for impairment annually, or more often, if an event or circumstance indicates that an impairment loss may have been incurred. Other intangible assets are amortized on a straight-line basis over their estimated useful lives and reviewed for impairment whenever events such as product discontinuances, plant closures, product dispositions or other changes in circumstances indicate that the carrying amount may not be wholly recoverable.

Historically, we have recognized significant impairment charges due to various reasons, including some of those noted above as well as potential restructuring actions or adverse market conditions that are either specific to us or the broader telecommunications industry or more general in nature. For instance, we accounted for an impairment loss of €4.7 billion in 2008 related to a re-assessment of our near-term outlook, our decision to streamline our portfolio and our weaker than expected CDMA business. Additional impairment charges may be incurred in the future that could be significant and that could have an adverse effect on our results of operations or financial condition.

We operate in a highly competitive industry with many participants. Our failure to compete effectively would harm our business.

We operate in a highly competitive environment in each of our businesses, competing on the basis of product offerings, technical capabilities, quality, service and pricing. Competition for new service provider and enterprise customers as well as for new infrastructure deployments is particularly intense and increasingly focused on price. We offer customers and prospective customers many benefits in addition to competitive pricing, including strong support and integrated services for quality, technologically-advanced products; however, in some situations, we may not be able to compete effectively if purchasing decisions are based solely on the lowest price.

We have a number of competitors, many of which currently compete with us and some of which are very large, with substantial technological and financial resources and established relationships with global service providers. Some of these competitors have very low cost structures. In

addition, new competitors may enter the industry as a result of acquisitions or shifts in technology. These new competitors, as well as existing competitors, may include entrants from the telecommunications, computer software, computer services and data networking industries. We cannot assure you that we will be able to compete successfully with these companies. Competitors may be able to offer lower prices, additional products or services or a more attractive mix of products or services, or services or other incentives that we cannot or will not match or offer. These competitors may be in a stronger position to respond quickly to new or emerging technologies and may be able to undertake more extensive marketing campaigns, adopt more aggressive pricing policies and make more attractive offers to customers, prospective customers, employees and strategic partners.

Technology drives our products and services. If we fail to keep pace with technological advances in the industry, or if we pursue technologies that do not become commercially accepted, customers may not buy our products or use our services.

The telecommunications industry uses numerous and varied technologies and large service providers often invest in several and, sometimes, incompatible technologies. The industry also demands frequent and, at times, significant technology upgrades. Furthermore, enhancing our services revenues requires that we develop and maintain leading tools. We will not have the resources to invest in all of these existing and potential technologies. As a result, we concentrate our resources on those technologies that we believe have or will achieve substantial customer acceptance and in which we will have appropriate technical expertise. However, existing products often have short product life cycles characterized by declining prices over their lives. In addition, our choices for developing technologies may prove incorrect if customers do not adopt the products that we develop or if those technologies ultimately prove to be unviable. Our revenues and operating results will depend, to a significant extent, on our ability to maintain a product portfolio and service capability that is attractive to our customers; to enhance our existing products; to continue to introduce new products successfully and on a timely basis and to develop new or enhance existing tools for our services offerings.

The development of new technologies remains a significant risk to us, due to the efforts that we still need to make to achieve technological feasibility; due – as mentioned above – to rapidly changing customer markets; and due to significant competitive threats.

Our failure to bring these products to market in a timely manner could result in a loss of market share or a lost opportunity to capitalize on new markets for emerging technologies, and could have a material adverse impact on our business and operating results.

We depend on a limited number of internal and external manufacturing organizations, distribution centers, suppliers and service providers. Their failure to deliver or to perform according to our requirements may adversely affect our ability to deliver our products, services and solutions on-time, and in sufficient volumes while meeting our quality, safety or security standards.

Our Global Supply Chain is a complex network of internal and external organizations responsible for the supply, manufacture, logistics and implementation of advanced telecommunications solutions and services anywhere in the world. Failure by any of our suppliers, including contract manufacturers, to supply materials, components, subassemblies, finished goods and software could significantly impact our operations and our ability to satisfy our customer commitments. We are significantly dependent on our logistics network to efficiently and effectively move materials and products across national boundaries. Accordingly, we are

3

RISK FACTORS

3.1 RISKS RELATING TO THE BUSINESS

vulnerable to abrupt changes in customs, tax and currency regulations that may have significant negative impact on our supply chain. Strikes, boycotts and the lack of appropriately skilled resources within our organization or at our contract manufacturers would put at risk our ability to satisfy our customer commitments.

We have undertaken a major reorganization of our operating model in order to enhance our efficiency; however, this reorganization may entail certain contingent future costs which could have a negative impact on the economic benefits that we expect to derive from our improved operating efficiency.

In 2010 we undertook a major reorganization of our operating model involving, among other things, reorganizing roles and responsibilities of legal entities within the Group and reorganizing the contractual arrangements between them as concerns the sale of products and services to customers, with a view to allowing the Group to streamline its operations and processes, reduce multiple inter-company transactions, reduce order fulfillment lead time, reduce general and administrative costs, and improve control over contract execution, thereby improving our efficiency. Although we believe that the steps we have taken will be very positive for our operations, they may also entail certain contingent future costs which could have a negative impact on the economic benefits that we expect to derive from our improved operating efficiency.

We have outsourced a significant portion of our information technology (IT) systems and infrastructure, increasing our dependence on the security and reliability of external companies. Interruptions in the availability of these IT systems and infrastructure could have material adverse effects on our operations.

Our business operations rely on complex IT systems, networks and other related infrastructure. We have outsourced a significant portion of our IT operations, increasing our reliance on the precautions taken by external companies to insure the security, safety and reliability of those operations. Despite these precautions, IT operations are susceptible to disruption from equipment failure, vandalism, computer viruses, security breaches, natural disasters, power outages and other events. Although we have selected reputable companies to provide outsourced IT services, and have worked closely with them to identify risks and implement countermeasures and controls, we can not be sure that interruptions in the availability of these IT services with material adverse effects on our operations will not occur.

Many of our current and planned products are highly complex and may contain defects or errors that are detected only after deployment in telecommunications networks. If that occurs, our reputation may be harmed.

Our products are highly complex, and we cannot assure you that our extensive product development, manufacturing and integration testing is, or will be, adequate to detect all defects, errors, failures and quality issues that could affect customer satisfaction or result in claims against us. As a result, we might have to replace certain components and/or provide remediation in response to the discovery of defects in products that have been shipped.

The occurrence of any defects, errors, failures or quality issues could result in cancellation of orders, product returns, diversion of our resources, legal actions by customers or customers’ end users and other losses to us or to our customers or end users. These occurrences could also result in the loss of or delay in market acceptance of our products and loss of sales, which would harm our business and adversely affect our revenues and profitability.

Rapid changes to existing regulations or technical standards or the implementation of new regulations or technical standards for products and services not previously regulated could be disruptive, time-consuming and costly to us.

We develop many of our products and services based on existing regulations and technical standards, our interpretation of unfinished technical standards or the lack of such regulations and standards. Changes to existing regulations and technical standards, or the implementation of new regulations and technical standards relating to products and services not previously regulated, could adversely affect our development efforts by increasing compliance costs and causing delay. Demand for those products and services could also decline.

Our ten largest customers accounted for 43% of our revenues in 2010 (among which AT&T and Verizon each represented 11% of our revenues), and most of our revenues come from telecommunications service providers. The loss of one or more key customers or reduced spending by these service providers could significantly reduce our revenues, profitability and cash flow.

Our ten largest customers accounted for 43% of our revenues in 2010 (among which AT&T and Verizon each represented 11% of our revenues). As service providers increase in size, it is possible that an even greater portion of our revenues will be attributable to a smaller number of large service providers going forward. Our existing customers are typically not obligated to purchase a fixed amount of products or services over any period of time from us and may have the right to reduce, delay or even cancel previous orders. We, therefore, have difficulty projecting future revenues from existing customers with certainty. Although historically our customers have not made sudden supplier changes, our customers could vary their purchases from period to period, even significantly. Combined with our reliance on a small number of large customers, this could have an adverse effect on our revenues, profitability and cash flow. In addition, our concentration of business in the telecommunications service provider industry makes us extremely vulnerable to a downturn in spending in that industry, like the one that took place in 2009.

We have long-term sales agreements with a number of our customers. Some of these agreements may prove unprofitable as our costs and product mix shift over the lives of the agreements.

We have entered into long-term sales agreements with a number of our large customers, and we expect that we will continue to enter into long-term sales agreements in the future. Some of these existing sales agreements require us to sell products and services at fixed prices over the lives of the agreements, and some require, or may in the future require, us to sell products and services that we would otherwise discontinue, thereby diverting our resources from developing more profitable or strategically important products. Since our strategic plan entails a streamlined set of product offerings, it may increase the likelihood that we may have to sell products that we would otherwise discontinue. The costs incurred in fulfilling some of these sales agreements may vary substantially from our initial cost estimates. Any cost overruns that cannot be passed on to customers could adversely affect our results of operations.

We have significant international operations and a significant amount of our revenues are earned in emerging markets and regions.

In addition to the currency risks described elsewhere in this section, our international operations are subject to a variety of risks arising out of the economy, the political outlook and the language and cultural barriers in countries where we have operations or do

business. We expect to continue to focus on expanding business in emerging markets in Asia, Africa, Latin America and Eastern Europe. In many of these emerging markets, we may be faced with several risks that are more significant than in other countries. These risks include economies that may be dependent on only a few products and are therefore subject to significant fluctuations, weak legal systems which may affect our ability to enforce contractual rights,

possible exchange controls, unstable governments, privatization actions or other government actions affecting the flow of goods and currency. Also, it is possible that the current political developments in certain countries in the Middle East and North Africa may have, at least temporarily, a negative impact on our operations in those countries.

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RISK FACTORS

3.2 LEGAL RISKS

We are involved in lawsuits and investigations which, if determined against us, could require us to pay substantial damages, fines and/or penalties.

We are defendants in various lawsuits. These lawsuits against us include such matters as commercial disputes, claims regarding intellectual property, customer financing, product discontinuance, asbestos claims, labor, employment and benefit claims and others. We are also involved in certain investigations by government authorities. For a discussion of some of these legal proceedings and investigations, you should read “Legal Matters” in Section 6.10 of this annual report and Note 34 to our consolidated financial statements included elsewhere in this document. We cannot predict the extent to which any of the pending or future actions will be resolved in our favor, or whether significant monetary judgments will be rendered against us. Any material damages resulting from these lawsuits and investigations could adversely affect our profitability and cash flow.

If we fail to protect our intellectual property rights, our business and prospects may be harmed.

Intellectual property rights, such as patents, are vital to our business and developing new products and technologies that are unique is critical to our success. We have numerous French, U.S. and foreign patents and numerous pending patents. However, we cannot predict whether any patents, issued or pending, will provide us with any competitive advantage or whether such patents will be challenged by third parties. Moreover, our competitors may already have applied for patents that, once issued, could prevail over our patent rights or otherwise limit our ability to sell our products. Our competitors also may attempt to design around our patents or copy or otherwise obtain and use our proprietary technology. In addition, patent applications currently pending may not be granted. If we do not receive the patents that we seek or if other problems arise with our intellectual property, our competitiveness could be significantly impaired, which would limit our future revenues and harm our prospects.

We are subject to intellectual property litigation and infringement claims, which could cause us to incur significant expenses or prevent us from selling certain products.

From time to time, we receive notices or claims from third parties of potential infringement in connection with products or software. We also

may receive such notices or claims when we attempt to license our intellectual property to others. Intellectual property litigation can be costly and time-consuming and can divert the attention of management and key personnel from other business issues. The complexity of the technology involved and the uncertainty of intellectual property litigation increase these risks. A successful claim by a third party of patent or other intellectual property infringement by us could compel us to enter into costly royalty or license agreements or force us to pay significant damages and could even require us to stop selling certain products. Further, if one of our important patents or other intellectual property rights is invalidated, we may suffer losses of licensing revenues and be prevented from attempting to block others, including competitors, from using the related technology.

We are involved in significant joint ventures and are exposed to problems inherent to companies under joint management.

We are involved in significant joint venture companies. The related joint venture agreements may require unanimous consent or the affirmative vote of a qualified majority of the shareholders to take certain actions, thereby possibly slowing down the decision-making process. Our largest joint venture, Alcatel-Lucent Shanghai Bell Co., Ltd, has this type of requirement. We own 50% plus one share of Alcatel-Lucent Shanghai Bell Co., Ltd, the remainder being owned by the Chinese government.

We are subject to environmental, health and safety laws that restrict our operations.

Our operations are subject to a wide range of environmental, health and safety laws, including laws relating to the use, disposal and clean up of, and human exposure to, hazardous substances. In the United States, these laws often require parties to fund remedial action regardless of fault. Although we believe our aggregate reserves are adequate to cover our environmental liabilities, factors such as the discovery of additional contaminants, the extent of required remediation and the imposition of additional cleanup obligations could cause our capital expenditures and other expenses relating to remediation activities to exceed the amount reflected in our environmental reserves and adversely affect our results of operations and cash flows. Compliance with existing or future environmental, health and safety laws could subject us to future liabilities, cause the suspension of production, restrict our ability to utilize facilities or require us to acquire costly pollution control equipment or incur other significant expenses.

The trading price of our ADSs may be affected by fluctuations in the exchange rate for converting euro into U.S. dollars.

Fluctuations in the exchange rate for converting euro into U.S. dollars may affect the market price of our ADSs.

If a holder of our ADSs fails to comply with the legal notification requirements upon reaching certain ownership thresholds under French law or our governing documents, the holder could be deprived of some or all of the holder’s voting rights and be subject to a fine.

French law and our governing documents require any person who owns our outstanding shares or voting rights in excess of certain amounts specified in the law or our governing documents to file a report with us upon crossing this threshold percentage and, in certain circumstances, with the French stock exchange regulator (Autorité des Marchés Financiers).

If any shareholder fails to comply with the notification requirements:

Holders of our ADSs will have limited recourse if we or the depositary fail to meet obligations under the deposit agreement between us and the depositary.

The deposit agreement expressly limits our obligations and liability and the obligations and liability of the depositary.

Neither we nor the depositary will be liable despite the fact that an ADS holder may have incurred losses if the depositary:

This means that there could be instances where holders of an ADS would not be able to recover losses that you may have suffered by reason of our actions or inactions or the actions or inactions of the depositary pursuant to the deposit agreement.

In addition, the depositary has no obligation to participate in any action, suit or other proceeding in respect of our ADSs unless we provide the depositary with indemnification that it determines to be satisfactory.

We are subject to different corporate disclosure standards that may limit the information available to holders of our ADSs.

As a foreign private issuer, we are not required to comply with the notice and disclosure requirements under the Securities Exchange Act of 1934, as amended, relating to the solicitation of proxies for shareholder meetings. Although we are subject to the periodic reporting requirements of the Exchange Act, the periodic disclosure required of non-U.S. issuers under the Exchange Act is more limited than the periodic disclosure required of U.S. issuers. Therefore, there may be less publicly available information about us than is regularly published by or about most other public companies in the United States.

Judgments of U.S. courts, including those predicated on the civil liability provisions of the federal securities laws of the United States in French courts, may not be enforceable against us.

An investor located in the United States may find it difficult to:

Preemptive rights may not be available for U.S. persons.

Under French law, shareholders have preemptive rights to subscribe for cash issuances of new shares or other securities giving rights to acquire additional shares on a pro rata basis. U.S. holders of our ADSs or ordinary shares may not be able to exercise preemptive rights for their shares unless a registration statement under the Securities Act of 1933 is effective with respect to such rights or an exemption from the registration requirements imposed by the Securities Act is available.

We may, from time to time, issue new shares or other securities giving rights to acquire additional shares at a time when no registration statement is in effect and no Securities Act exemption is available. If so, U.S. holders of our ADSs or ordinary shares will be unable to exercise their preemptive rights.

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RISK FACTORS

3.3 RISKS RELATING TO OWNERSHIP OF OUR ADSS

The long-trusted partner of service providers, enterprises, strategic industries and governments around the world, we are a leader in mobile, fixed, IP and optics technologies, and a pioneer in applications and services. We include Bell Labs, one of the world’s foremost centres of research and innovation in communications technology.

With operations in more than 130 countries and one of the most experienced global services organizations in the industry, we are a local partner with global reach

Alcatel-Lucent is a French société anonyme, established in 1898, originally as a listed company named Compagnie Générale d’Électricité. Our corporate existence will continue until June 30, 2086, which date may be extended by shareholder vote. We are subject to all laws governing business corporations in France, specifically the provisions of the commercial code and the financial and monetary code.

Effective May 17, 2010 our registered office and principal place of business is 3, avenue Octave Gréard, 75007 Paris, France, our telephone number is +33 (0)1 40 76 10 10 and our website address is www.alcatel-lucent.com. The contents of our website are not incorporated into this document.

The address for Stephen R. Reynolds, our authorized representative in the United States, is Alcatel-Lucent USA Inc., 600 Mountain Avenue, Murray Hill, New Jersey 07974.

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INFORMATION ABOUT THE GROUP

4.2 HISTORY AND DEVELOPMENT

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INFORMATION ABOUT THE GROUP

4.2 HISTORY AND DEVELOPMENT

RECENT EVENTS

No 2010 dividend. Our Board has determined that it is not prudent to pay a dividend on our ordinary shares and ADSs based on 2010 results. Our Board will present this proposal at our Annual Shareholders’ Meeting on May 27, 2011.

Repayment of convertible bonds. On January 3, 2011 we repaid our 4.75% convertible/exchangeable bonds (which we refer to as OCEANE) issued in June 2003 and due January 2011 that remained outstanding at that date, for their nominal value of €818 million.

HIGHLIGHTS OF TRANSACTIONS DURING 2010

DISPOSITIONS

Sale of 2Wire stake. On October 20, 2010 we concluded the sale of our 26.7% shareholding in 2Wire, a U.S.-based provider of advanced residential gateways for the broadband service provider market, to Pace plc, a technology developer for the global pay-TV market, for cash proceeds of €75 million. This transaction was part of the acquisition by Pace of the stock of 2Wire owned by a consortium that included, in addition to Alcatel-Lucent, AT&T, Telmex and Oak Investments Partners.

Sale of vacuum business. On December 31, 2010 we completed the sale of our Vacuum pump solutions and instruments business to Pfeiffer Vacuum Technology AG, a world leader in the vacuum industry. We received preliminary cash proceeds of €197 million. This amount is subject to a purchase price adjustment that will be determined in 2011.

OTHER MATTERS

Notes issuances. In July 2010 and October 2010, we issued a series of notes for an aggregate €100 million in nominal value upon each issuance (€200 million in total). The notes bear interest at a floating rate and are due in several instalments throughout 2011 and in February 2012, with the right to extend their maturity at our option either annually or until 2016.

On December 2, 2010, we closed our private placement of €500 million Senior Notes due January 15, 2016 with an 8.5% coupon, for which we received net proceeds of €487.3 million. We used all of these net proceeds to partially refinance the 4.75% convertible/exchangeable bonds (OCEANE) due on 1 January 2011 mentioned above.

Repurchases of convertible bonds. In February and March 2010, we repurchased and cancelled a portion of the outstanding Alcatel-Lucent Inc. 2.875% Series A convertible bonds due June 2023 for U.S.$74.8 million in cash, excluding accrued interest, corresponding to a nominal value of U.S.$75.0 million.

Further, on June 15, 2010, many of the remaining holders of the Alcatel-Lucent Inc. Series A bonds exercised their optional redemption right, and as a result we paid the redeeming holders U.S.$360 million in cash, excluding accrued interest, corresponding to the nominal value of the bonds redeemed.

Developments in Microsoft cases. On February 22, 2010, Microsoft filed a Petition for a Writ of Certiorari in the United States Supreme Court asking the Supreme Court to review the Federal Circuit’s September 11, 2009 decision to affirm the District Court’s finding that Microsoft’s Outlook, Money and Windows Mobile products infringed the Day patent. On April 23, 2010, Alcatel-Lucent filed its Brief in Opposition and the Supreme Court denied Microsoft’s Petition on May 24, 2010. A trial is scheduled for July 19, 2011 in the U.S. District Court in San

Diego to determine the amount of compensation owed to us by Microsoft for its infringement of the Day patent.

On March 2, 2010, the United States Patent and Trademark Office issued a Reexamination Certificate confirming the validity of the Day Patent in response to the re-examination request filed by Dell in May of 2007.

FCPA investigations. In December 2010 we entered into final settlement agreements with the SEC and the DOJ. Under the agreement with the SEC, which has been approved by the U.S. Federal Court, we neither admit nor deny the allegations of violations of the antibribery, internal controls and books and records provisions of the FCPA in the SEC’s complaint, we are permanently restrained and enjoined from future violations of U.S. securities laws, we are liable for U.S.$45.4 million in disgorgement of profits and prejudgment interest, and we agree to engage a French anticorruption compliance monitor for three years. Under the agreement with the DOJ, if the settlement is approved by the court we will enter into a three-year deferred prosecution agreement (“DPA”) charging us with violations of the internal controls and books and records provisions of the FCPA, and we will pay a total criminal fine of U.S.$92 million – payable in four installments over the course of three years. If we fully comply with the terms of the DPA, the DOJ will dismiss the charges upon conclusion of the three-year term. In addition, three of our subsidiaries – Alcatel-Lucent France, Alcatel-Lucent Trade International AG and Alcatel Centroamerica – will each plead guilty to conspiracy to violate the FCPA’s antibribery, books and records and internal accounting controls provisions. The DPA also contains provisions relating to engaging a French anticorruption compliance monitor for three years. The settlement agreement with the DOJ is currently under consideration by the U.S. Federal Court for approval, and we can provide no assurance that it will be approved.

HIGHLIGHTS OF TRANSACTIONS DURING 2009

DISPOSITIONS

Thales. In May 2009, we completed the sale of our 20.8% stake in Thales to Dassault Aviation for €1.566 billion (refer to Highlights of transactions during 2008, below).

Electrical motors. On December 31, 2009, we completed the sale of Dunkermotoren GmbH, our electrical fractional horsepower motors and drives subsidiary, to Triton, a leading European private equity firm, for an enterprise value of €145 million.

OTHER MATTERS

Joint venture with Bharti Airtel. On April 30, 2009, we announced the formation of a joint venture with Bharti Airtel to manage Bharti Airtel’s pan-India broadband and telephone services and help Airtel’s transition to a next generation network across India.

Co-sourcing and joint marketing arrangement with Hewlett-Packard (HP). On June 18, 2009, we and HP jointly announced a 10-year co-sourcing agreement which is expected to help improve the efficiency of our IS/IT (Information Systems/Information Technology) infrastructure and create a joint go-to-market approach. Under the joint marketing agreement, the two companies will be able to jointly and separately deliver integrated IT and telecom products and services to service providers and mid- to large-size enterprise customers. Definitive agreements were signed on October 20, 2009, and were implemented beginning December 2009.

Changes in credit ratings. On November 9, 2009, Standard & Poor’s lowered to “B” from “B+” its long-term corporate credit ratings and senior unsecured ratings on Alcatel-Lucent and on Alcatel-Lucent USA Inc. The “B” short-term credit ratings of Alcatel-Lucent and of Alcatel-Lucent USA Inc. were affirmed. The rating on the trust preferred notes of Lucent Technologies Capital Trust was lowered from “CCC+” to “CCC”. The negative outlook was maintained.

On March 3, 2009, Standard & Poor’s lowered to B+ from BB- its long-term corporate credit ratings and senior unsecured ratings on Alcatel-Lucent and on Alcatel-Lucent USA Inc.. The rating on the trust preferred notes of Lucent Technologies Capital Trust was lowered to CCC+. The B short-term rating on Alcatel-Lucent was affirmed. The B1 short-term credit rating on Alcatel-Lucent USA Inc. was withdrawn and a negative outlook was issued.

On February 18, 2009, Moody’s lowered the Alcatel-Lucent Corporate Family Rating as well as the rating for senior debt of the Group from Ba3 to B1. The trust preferred notes of Lucent Technologies Capital Trust were downgraded from B2 to B3. The Not-Prime rating for the Group’s short-term debt was confirmed. The negative outlook of the ratings was maintained.

Issuance and repurchases of convertible bonds. On September 2, 2009, we launched a convertible bond offering. The bonds are convertible into and/or exchangeable for new or existing shares of Alcatel-Lucent (we refer to these convertible bonds as OCEANE). The bonds carry a 5% annual interest rate and the initial conversion price is €3.23, equivalent to a conversion premium of 35%. They are redeemable in cash, at par, on January 1, 2015. Early redemption at our option is possible under certain conditions. On settlement date (September 10, 2009), the proceeds of this offering, including the over-allotment option, were approximately €1 billion.

Concurrently, we offered to repurchase and cancel some of our existing convertible bonds due 2011. On settlement date for the repurchase (September 11, 2009), we purchased 11.97% of the outstanding 2011 bonds. The price per bond was €16.70 (including accrued interest) and the total amount paid was €126 million.

Repurchases of the 2011 bonds also took place after the closing of the repurchase offer. Overall, in 2009, we repurchased bonds of a nominal value of €204 million, corresponding to 19.98% of the outstanding 2011 bonds, for a total cash amount paid of €204 million, excluding accrued interest.

We also partially repurchased and cancelled outstanding Lucent 7.75% convertible bond due March 2017 in 2009, using a total cash amount of U.S.$28 million, corresponding to a nominal value of U.S.$99 million.

We partially repurchased and cancelled outstanding Lucent 2.875% Series A convertible bonds due June 2023 in 2009, using U.S.$218 million in cash excluding accrued interest, corresponding to a nominal value of U.S.$220 million.

Developments in Microsoft cases. On December 15, 2008, we and Microsoft executed a settlement and license agreement whereby the parties agreed to settle the majority of a series of patent litigations that had been outstanding between them. This settlement included dismissing pending patent claims by Microsoft against us and provided us with licenses to all Microsoft patents-in-suit in these cases. Also, on May 13, 2009, we and Dell agreed to a settlement and dismissal of certain issues appealed after a trial involving us, Dell and Microsoft, held in April, 2008. Thereafter, the only matter that remained pending was the appeal filed by Microsoft with the Court of Appeals for the Federal Circuit in Washington, D.C. relating to the “Day” Patent, which relates to a

computerized form entry system. On June 19, 2008, the District Court had entered a judgment based on a jury award to us of approximately U.S.$357 million in damages for Microsoft’s infringement of the Day Patent in the April 2008 trial, and had also awarded us prejudgment interest exceeding U.S.$140 million.

Oral argument before the Federal Circuit was held on June 2, 2009, and on September 11, 2009, the Federal Circuit issued its opinion affirming that the Day Patent is both a valid patent and infringed by Microsoft in Microsoft Outlook, Microsoft Money, and Windows Mobile products. However, the Federal Circuit vacated the jury’s damages award and ordered a new trial in the District Court in San Diego to re-calculate the amount of damages owed to us for Microsoft’s infringement. On November 23, 2009, the Federal Circuit denied Microsoft’s “en banc” petition for a rehearing on the validity of the Day Patent.

In a parallel proceeding, Dell filed a reexamination of the Day Patent with the United States Patent and Trademark Office (“Patent Office”) in May of 2007, alleging that prior art existed that was not previously considered in the original examination and the Day patent should therefore be re-examined for patentability. The Patent Office granted Dell’s reexamination request and the examiner issued three office actions rejecting the two claims of the Day patent at issue in the April 2008 trial as unpatentable. In the appeal of that decision, the Patent Office withdrew its rejection of the Day Patent and confirmed that the Day Patent is a valid patent.

FCPA investigations: In December 2009 we reached agreements in principle with the SEC and the U.S. Department of Justice with regard to the settlement of their ongoing investigations involving our alleged violations of the Foreign Corrupt Practices Act (FCPA) in several countries, including Costa Rica, Taiwan, and Kenya.

HIGHLIGHTS OF TRANSACTIONS DURING 2008

ACQUISITIONS

Acquisition of Motive Networks. On October 7, 2008, we completed the acquisition of Motive, Inc., a U.S.-based company, through a tender offer for an aggregate purchase price of U.S.$67.8 million. The acquisition solidified the existing three-year relationship between the two companies, which had jointly developed and sold remote management software solutions for automating the deployment, configuration and support of advanced home networking devices called residential gateways (RGs). As a result of this combination, more than 70 service providers worldwide can now rely on a single solution to deliver a seamless, consistent, converged customer experience across a range of services, networks and devices, both fixed and mobile.

DISPOSITIONS

Thales. On December 19, 2008, we announced the signature of a definitive agreement regarding the acquisition by Dassault Aviation of our interest in Thales (41,262,481 shares). The total purchase price is based on a price of €38 per Thales share, representing approximately €1.57 billion.

OTHER MATTERS

Moody’s. On April 3, 2008, Moody’s affirmed the Alcatel-Lucent Corporate Family Rating as well as that of the debt instruments originally issued by historical Alcatel and Lucent. The outlook was changed from stable to negative.

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INFORMATION ABOUT THE GROUP

4.3 STRUCTURE OF THE PRINCIPAL COMPANIES CONSOLIDATED IN THE GROUP AS OF DECEMBER 31, 2010

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 the following features:

A significant portion of production, assembly and research activities are carried out in Europe, in the United States and in China for all of our businesses. We also have operating subsidiaries and production and assembly sites in Canada, Mexico, Brazil and India.

At December 31, 2010, our total production capacity was equal to approximately 284,000 sq. meters and the table below shows the breakdown by region and by business segment.

We believe that these properties are in good condition and meet the needs and requirements of the Group’s current and future activity and do not present an exposure to major environmental risks that could impact the Group’s earnings.

The environmental issues that could affect how these properties are used are mentioned in Section 5.12 (Environmental matters) of this annual report.

The sites mentioned in the tables below were selected among our portfolio of 677 sites to illustrate the diversity of the real estate we use, applying four main criteria: region, business segment, type of use (production/assembly, research/innovation or support function), and whether the property is owned or leased.

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INFORMATION ABOUT THE GROUP

4.4 REAL ESTATE AND EQUIPMENT

NATIONAL SECURITY AGREEMENT AND SPECIALTY SECURITY AGREEMENT

On November 17, 2006, the Committee on Foreign Investment in the United States (“CFIUS”), approved our business combination with Lucent. In the final phase of the approval process CFIUS recommended to the President of the United States that he not suspend or prohibit our business combination with Lucent, provided that we execute a National Security Agreement (“NSA”) and Specialty Security Agreement (“SSA”) with certain U.S. Government agencies within a specified time period. As part of the CFIUS approval process, we entered into a NSA with the Department of Justice, the Department of Homeland Security, the Department of Defense and the Department of Commerce (collectively, the “USG Parties”) effective on November 30, 2006. The NSA provides for, among other things, certain undertakings with respect to our U.S. businesses relating to the work done by Bell Labs and to the communications infrastructure in the United States. Under the NSA, in the event that we materially fail to comply with any of its terms, and the

failure to comply threatens to impair the national security of the United States, the parties to the NSA have agreed that CFIUS, at the request of the USG Parties at the cabinet level and the Chairman of CFIUS, may reopen review of the business combination with Lucent and revise any recommendations submitted to the President. In addition, we agreed to establish a separate subsidiary to perform certain work for the U.S. government, and hold government contracts and certain sensitive assets associated with Bell Labs. This separate subsidiary has a Board of Directors including at least three independent Directors who are resident citizens of the United States who have or are eligible to possess personnel security clearances from the Department of Defense. These Directors are former U.S. Secretary of Defense William Perry, former National Security Agency Director Lt. Gen. Kenneth A. Minihan, USAF (Ret.) and former Assistant Secretary of the U.S Navy Dr. H. Lee Buchanan. The SSA, effective December 20, 2006, that governs this subsidiary contains provisions with respect to the separation of certain employees, operations and facilities, as well as limitations on control and influence by the parent company and restrictions on the flow of certain information.

4

4 INFORMATION ABOUT THE GROUP

4.5 MATERIAL CONTRACTS

Strategic Focus. Our strategic vision that we call Application Enablement, launched in 2009, is to improve the Internet or “web” experience of service providers, enterprises and end-users while improving our customers’ return on their investments. To do that, we are working to provide consumers and business users with a rich and more trusted web experience by combining:

Our offer is the Alcatel-Lucent High Leverage Network^TM (HLN) that supports our Application Enablement vision. A High Leverage Network^TM addresses the key challenge faced by our customers, which is delivering innovative, revenue-generating, value-added services to their customers in a timely fashion while reducing the cost of transporting rapidly growing video and mobile internet traffic on their networks.

A High Leverage Network^TM is a converged, all-IP (Internet protocol) network that can carry all of the different services that are carried today over a service provider’s multiple networks. It delivers broadband access to users on any device (wired or wireless), and automatically provides whatever bandwidth is needed to deliver the services being used. It has the intelligence to manage traffic while providing the quality of service that is appropriate for each user and each of his services, and to do that at optimum cost. It is suitable for deployment in both emerging markets and the developed world, and in both densely populated and remote areas. It requires state of the art capabilities in IP, Optics, wireless and wireline broadband access - as well as the software and services that together support Application Enablement.

Through Application Enablement, service providers can make their High Leverage Network^TM available to content and application partners in a managed and controlled way. This approach helps service providers to develop new business models and improve subscriber loyalty with unique and personalized services that help generate more revenue and boost brand value. These services include multi-screen and high-definition video services, application-assured business services and collaborative communication services. We also believe that a High Leverage Network^TM will help service providers address new market opportunities such as next generation open access fiber networks, cloud computing and machine-to-machine (M2M) communication.

Organization. We organized our business in 2010 as follows:

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DESCRIPTION OF THE GROUP’S ACTIVITIES

5.1 BUSINESS ORGANIZATION

For financial information by operating segment (also called business segment) and geographic market, see Note 5 to our consolidated financial statements and Chapter 6 - “Operating and financial review and prospects”, included elsewhere in this document.

Globally, end-user demand for high-bandwidth services that are delivered with an enhanced quality of experience is surging. In addition, global market dynamics are dictating that service providers must have the agility to support multiple business models to deliver innovative revenue-generating services. To meet all these challenges, service providers are evolving their networks to a next-generation, all-IP multiservice infrastructure that is fully converged, optimized and scalable. The Networks segment supplies a broad portfolio of products and offerings used by fixed, wireless and converged service providers to address these needs, as well as enterprises and governments for their business critical communications.

The High Leverage Network™ is our vision of how networks need to evolve, leveraging fundamental technology shifts in wireline and wireless broadband access, IP and optics to address evolving networking needs. It allows service providers to address the key challenge of how to simultaneously deliver innovative, revenue-generating services and provide scalable, low-cost bit delivery. It is also a critical enabler of, and the foundation for, our Application Enablement vision. In order to achieve this objective, in 2010 we increased our investment in:

In 2010, our Networks segment revenues were €9,643 million including intersegment revenues and €9,603 million excluding intersegment revenues, representing 60% of our total revenues.

INTERNET PROTOCOL

Our portfolio of third generation IP routers and switches is designed to support IP-based applications and services while helping service

providers monetize their network investment and reduce customer churn. Leveraging our silicon innovation in delivering the world’s first 100 Gigabit per second network processor, we were the first to announce and commercially deliver a 100 Gigabit Ethernet interface, which is a leading-edge technology that helps service providers deliver data and voice at the highest speeds without compromising quality of service.

Our IP portfolio consists of four product families that deliver multiple services - including broadband triple play for residential customers; Ethernet and IP Virtual Private Network (VPN) services for Enterprise customers; and wireless 2G, 3G and LTE broadband services for mobile operators. The main product families are:

The applicability of our service router and switch portfolio continues to expand to meet the needs of service providers:

Our IP/MPLS and Carrier Ethernet products are designed to facilitate the development and availability of applications for the more participatory and interactive Web 2.0 business and consumer services. These products offer carriers the opportunity to increase the profitability of their fixed and mobile networks and services without relying on subscriber growth alone. The products make it possible for service providers to offer and deliver quality services.

Our service routers and Carrier Ethernet service switches share a single network management system that provides consistency of features, quality of service, and operations, administration and maintenance capabilities from the network core to the customer edge. These capabilities are critical as carriers transform their networks to support new Internet-based services. Our service routers are particularly well suited to deliver complex services to business, residential and mobile end-users, ensuring the high capacity, reliability and quality of service required to support HDTV channels, voice calls and high bandwidth Internet access. Our IP/MPLS service routers and Carrier Ethernet service switches are often used in conjunction with our DSL and GPON (Gigabit Passive Optical Network) access products to deliver these newer triple-play services, or with our wireless access products to deliver LTE solutions, or with our DWDM (Dense Wave Division Multiplexing) and optical switching products to deliver converged backbone transformation solutions for optimizing IP transport.

OPTICS

Our Optics division designs and markets equipment for the long distance transportation of data over fiber optic connections via land (terrestrial) and under sea (submarine), as well as for short distances in metropolitan and regional areas. Our leading transport portfolio also includes our microwave wireless transmission equipment.

Terrestrial optics

Our terrestrial optical products offer a portfolio designed to seamlessly support service growth from the metro to the network core. With our products, carriers manage voice, data and video traffic patterns based on different applications or platforms and can introduce a wide variety of managed data services, including multiple service quality capabilities, variable service rates and traffic congestion management. Most importantly, these products allow carriers to leverage their existing network infrastructure to offer these new services.

As a leader in optical networking, we play a key role in the transformation of optical transport networks within a High Leverage Network^TM. Our wavelength-division multiplexing (WDM) products address a variety of markets, from the enterprise to the ultra-long-haul, to meet service provider requirements for cost-effective, scalable networks that can handle their increased data networking needs. Our WDM product portfolio is based on the “Zero Touch Photonics” approach which eliminates the need for frequent on-site configuration and provisioning. Our WDM products allow operators to solve bandwidth bottlenecks, while offering the lowest cost per transported bit. This new approach facilitates the design and installation of a more flexible WDM network that is easier to operate, manage and monitor.

In 2010, the Terrestrial optics unit focused its R&D efforts on:

These products and technologies provide cost-effective, managed platforms that support different services and are suitable for many different network configurations.

Submarine

We are an industry leader in the development, manufacturing, installation and management of undersea telecommunications cable networks. Our submarine cable networks can connect continents (using optical amplification required over long distances), a mainland and an island, several islands together, or many points along a coast. This market is characterized by relatively few large contracts that often require more than one year to complete. Projects are currently concentrated on links between Europe and India, West and East Africa, the Mediterranean and Southeast Asia, as well as around the Indian sub-continent. In addition to new cable systems, this market also includes significant activity upgrading existing submarine networks - e.g. in Latin America - as our service provider customers add capacity in response to surging broadband traffic volumes.

Wireless transmission

We offer a comprehensive portfolio of point-to-point microwave radio products meeting both European telecommunications standards (or ETSI) and American standards-based (or ANSI) requirements. These products include high, medium and low capacity microwave transmission systems for mobile backhaul applications, fixed broadband access applications, and private applications in markets like digital television broadcasting, defense and security, energy and utilities. As a complement to optical fiber and other wireline systems, our portfolio of wireless transmission equipment supports a full range of network/radio configurations, network interfaces and frequency bands with high spectral efficiency.

In 2010, the Wireless Transmission unit focused its R&D efforts on:

In the wireless transmission market, we maintained our leadership in the long haul segment and we gained a leadership position in the growing packet microwave segment.

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DESCRIPTION OF THE GROUP’S ACTIVITIES

5.2 NETWORKS SEGMENT

WIRELESS

Our “Wireless All Around” message developed in 2010 describes how our unique combination of wireless and IP products, services expertise and experience are key differentiators for today’s mobile operator challenges. We believe we possess the cross-domain experience, credibility, capabilities and portfolio to migrate operators to an all-IP wireless infrastructure that helps customers meet the increasing demands of mobile broadband devices as they move to an all-IP 4G/LTE (Long Term Evolution) infrastructure that does not compromise their 2G/3G revenue streams.

CDMA

Our CDMA strategy is focused on maintaining our installed base by delivering quality, capacity and OA&M (operations, administration and management) improvements while we position ourselves to migrate our customers to LTE (Long Term Evolution). In 2010, we continued to focus on our customers’ total cost of ownership with products that can reduce capital expenditures and operating expenses. For example, high-efficiency amplifiers can reduce base station power consumption by up to 60%. We are also aggressively deploying LTE-ready products that support EV-DO growth with enhanced system capacity, reliability and performance. These enhancements provide an evolution to LTE for operators with an embedded base of our 3G technology, allowing them to reuse base station assets, while at the same time minimizing the footprint and improving the power efficiency of the products. This reinforces our commitment to eco-sustainability.

The current version of CDMA technology, known as 1X EV-DO Revision A, enables operators to offer two-way, real-time, high-speed data applications such as VoIP (Voice over Internet Protocol), mobile video, push-to-talk and push-to-multimedia. The next enhancement, Revision B, increases throughput performance with minimal upgrades. We are offering EV-DO Rev B upgrades to our customers so they can compete with the latest upgrades offered by their WCDMA-based competitors. Skylink (in Russia) and China Telecom are deploying our EVDO Rev B technology.

GSM

We develop mobile radio products for the second generation (or 2G) GSM (or Global System for Mobile communications) standard, including GPRS/EDGE (or General Packet Radio Service / Enhanced Data Rates for GSM Evolution) technology upgrades to that standard. As part of our multi-technology or multi-mode strategy, our GSM radio products also support 3G and 4G technologies to allow a smooth network evolution at minimum cost. While GSM is a mature technology, operators in emerging markets, such as China and India, continue to add capacity to accommodate subscriber growth.

Our GSM product strategy focuses on providing operators with total cost of ownership savings and eco-sustainability without compromising performance, scalability or future evolution. For example, we launched our new SDR- (Software Defined Radio) based multi-technology radio module (the MC-TRX) in February 2010. This product gives mobile operators the flexibility to support any mix of 2G, 3G, and 4G (LTE) services simultaneously, thus enabling the introduction of newer wireless technologies while maintaining the GSM capability of the base station. Since 1999, our product strategy has focused on the ability to upgrade our radio technology while maintaining compatibility with earlier versions.

As part of our innovation program, we are active in the “Green” base station market with products powered by renewable energy sources. We have already deployed more than 400 solar-powered base stations worldwide, including base stations powered by two alternative energy sources, wind and solar. Moreover, we have deployed radio base stations designed to blend into the urban environment. These so-called “camouflage radio base stations” can be located in cities and help reduce visual pollution by blending into the city’s skyline.

W-CDMA

Wideband Code Division Multiple Access, referred to as W-CDMA or Universal Mobile Telephone Communications Systems (UMTS), is the third generation wireless technology derived from the GSM standard deployed worldwide. The focus on W-CDMA and other 3G wireless technologies has increased along with increasing end-user demand for mobile broadband capabilities because pre-3G technologies have an extremely limited broadband data capability. Growing demand for mobile broadband has driven increased investment in 3G networks so that our service provider customers can offer new mobile high-speed data capabilities to end-users.

In 2010, W-CDMA infrastructure spending was particularly strong in the U.S. where mobile broadband, mobile Internet and mobile video have become very popular services. The original iPhone^® phenomenon now extends to a broader array of smartphones, which offer easy access to user-friendly applications that drive strong demand for W-CDMA’s mobile broadband capabilities. The recent introduction of High Speed Packet Access (HSPA) and HSPA+ (the latest evolutions of W-CDMA technology) on networks and devices has led to significant increases in data speeds available to broadband devices.

We are a key supplier of some of the W-CDMA networks carrying the highest amount of traffic in the world, including AT&T in the U.S., networks in Korea and China Unicom in China. Our portfolio strategy is based on improving network capacity while reducing total cost of ownership, consistent with our High Leverage Network^TM concept. For example, our multi-technology and multi-carrier radio modules are key components of our converged RAN (radio access network) solution that allows for a smooth technology evolution to LTE.

TD-SCDMA

We have an alliance with Datang Mobile to foster the development of the TD-SCDMA (or Time Division-Synchronized Code Division Multiple Access) 3G mobile standard in China, where we deployed trial TD-SCDMA networks starting in 2006. In 2008, we were awarded the phase II trial of the TD-SCDMA network for China Mobile, leveraging our experience accumulated in the first phase that started in early 2007. In 2009, we were selected, along with Datang Mobile, by China Mobile for deployment of its phase III TD-SCDMA mobile networks in 11 provinces. In 2010, we continued to work with China Mobile as it continued its massive TD-SCDMA rollout (phase IV) to expand 3G coverage across China, with the networks covering 339 Chinese cities.

LTE (Long-Term Evolution)

Fuelled by the proliferation of 3G-enabled devices, the increasing number of multimedia applications and the resulting surge of mobile broadband data traffic, the market for LTE, or fourth-generation wireless, is materializing faster than originally predicted. The first commercially available LTE networks are now up and running, several large new

commercial deployments were announced in 2010, and there are also a significant number of service providers who are participating in trials of this technology. LTE offers service providers a highly compelling evolution path from all existing networks (GSM, W-CDMA, CDMA or WiMAX) by simplifying the radio access network and converging on a common IP base, leading to better network performance and a lower cost per bit. LTE creates an environment in which consumers will be able to use wireless networks to access high-bandwidth content at optimal cost, enabling a new generation of affordable services.

We are focusing our LTE R&D spending on a differentiating, end-to-end all-IP wireless offering that includes our converged RAN (radio access network), mobile backhaul that supports 2G, 3G and 4G/LTE traffic, a high-performing evolved packet core and a full set of differentiating 4G/LTE services and applications. In the converged RAN, with the launch of our multi-carrier, multi-technology radio modules that are based on Software Defined Radio (SDR) technology, we can offer operators a seamless transition from 2G/3G to 4G/LTE. Also included in our RAN offering is our small cell femto product which provides low powered, plug-and-play radio access nodes for the home, the enterprise or in neighborhood public areas. Small cells benefit 4G/LTE and 3G deployments by improving indoor or outdoor coverage to increase capacity and offload traffic, while ensuring collaboration with macro cells. As for services, we founded the ngConnect Program to link operators with a broad coalition of device, content and application partners committed to the development and rapid deployment of new services based on LTE and other high bandwidth technologies. Finally, we are leveraging our strong IP transformation skills in assisting our customers with their evolution towards an all-IP LTE network.

We have entered into contracts to deploy commercial LTE networks with 12 operators worldwide, including Verizon Wireless (which includes RAN, an evolved packet core network (EPC), and IMS) and AT&T. We currently have more than 60 LTE trials or commercial agreements underway, and in many cases we are engaged in multiple trials with a single operator, covering different geographies, frequencies and applications.

In 2010, we met Verizon’s aggressive LTE rollout plan, and Verizon’s commercial LTE network went live in 38 cities, reaching 110 million people, making it the first large-scale commercial LTE network worldwide.

RFS (Radio Frequency Systems)

RFS designs and sells cable, antenna, tower systems and their related electronic components, providing an end-to-end suite of radio frequency products. RFS serves OEMs, distributors, system integrators, network operators and installers in the broadcast, wireless communications, microwave and defense sectors. Specific applications for RFS products include cellular sites, in-tunnel and in-building radio coverage, microwave links, TV and radio.

WIRELINE

Fixed access

We are the worldwide leader in the fixed broadband access market, supporting the largest mass deployments of video, voice and data services. According to Dell’Oro (December 2010), we are the largest global supplier of digital subscriber line (or DSL) technology, with 39% of global DSL revenues, and the largest global supplier of Gigabit Passive Optical Networking (or GPON) technology, with 32% of global port shipments (for central office and subscriber premise GPON equipment

combined). Today, one out of three fixed broadband subscribers around the world is served through one of our access networks. Our global installed base now includes more than 220 million DSL lines and more than 1.7 million GPON end-user connections. Alcatel-Lucent’s fixed access customers include leading global service providers as well as utility companies and municipalities. We are present in most major GPON deployments worldwide, including 100+ fiber-to-the-home (FTTH) projects, more than 86 of which are GPON-based.

With the wireline broadband access market largely built out in developed economies, growth in the fixed access market today is driven by the increased penetration of broadband in developing economies, such as China and India, by the DSL technology evolution, and by the technology migration to fiber-based broadband access. Triple play offerings (high speed Internet, Internet-based telephony and TV) by service providers are also driving the market. These enhanced services require increased bandwidth delivered to the end-user over copper telephone lines and optical fiber. The continuing evolution of our DSL technology allows operators to fully leverage their existing copper-based networks as they accommodate surging growth in applications and the broadband traffic they generate. For example, there are very high-speed variants of DSL that are being deployed or demonstrated today (including VDSL where, according to Dell’Oro, we have a 52% share of the market). Similarly, in fiber access, we have successfully demonstrated the next generation of GPON technology, 10Gbps GPON, in a symmetric configuration with two major carriers in North America and Europe.

Our family of IP-based fixed access products provides support for both copper- and fiber-based broadband access. These products allow customers to extend DSL and fiber to end users’ premises or to use them in highly optimized combinations. To meet the needs of carriers that want to deploy both fiber and copper on the same platform, we have introduced an upgrade to our current family of IP-based access products that supports both, simultaneously. Our fixed access solutions allow carriers to offer triple-play services over a single access line. Our carrier customers are offering both residential and business customers multiple services such as a large number of broadcast channels, video on demand, HDTV, VoIP (or Voice over IP), high speed Internet, and business access services. For our carrier customers, these offerings add new revenue streams although they want to provide them at the lowest possible cost. The flexibility of our products enables cost optimized deployment in all customer settings: urban, suburban and rural.

IMS/NGN

We offer products that extend from legacy switching systems to IP multimedia subsystem (IMS) solutions for fixed, mobile, and converged operators. We have deployed our NGN (next-generation network) products in more than 170 fixed NGN networks, and we have provided the core network for more than 66 full IMS fixed and mobile networks.

Carriers have expressed a strong desire to migrate their embedded base with products that are scalable, beginning with basic voice services and growing into video, social communication, and enriched multimedia services enabled by IMS. Using our IMS architecture, operators can differentiate the services they offer their end-users with quality of service controls and deliver new services that go beyond simple voice and Internet usage. Our IMS offering was one of the first to reach commercial deployment, and is designed to meet a diverse set of network objectives. Typically, those objectives include the provisioning of services that range from consumer and business VoIP, to enhanced and multimedia communications services, as well as the replacement of legacy central office switches. Our IMS technology is flexible and scalable enough to be deployed in various configurations across different geographies and network types – fixed, mobile, converged, and cable.

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DESCRIPTION OF THE GROUP’S ACTIVITIES

5.3 APPLICATIONS SEGMENT

We achieve these objectives by delivering a single set of software assets that are highly scalable and secure. Our IMS products work across all types of access networks (wireline and wireless) and all network technologies. Our IMS portfolio can be deployed in either a distributed or integrated configuration. In either case, the same software supports both traditional POTS (plain old telephone service) and IP

endpoints. The integrated product is packaged within a single hardware platform (or server) while the distributed product is packaged based on a customer’s business needs and network topology (multiple chassis). As an added capability, the product elements can be located in different sites (geo-redundancy) for high reliability.

OVERVIEW

The Applications segment develops software-based applications and solutions that contribute to the enrichment of the personal communications experience for end-users. Our global customers include over 300 service providers and more than 40% of the companies included in the Fortune 500. The Applications group is divided into two businesses – Enterprise Applications and Network Applications. The Enterprise Applications business includes our IP-based communications and collaboration applications for enterprises, including the Genesys contact center business. The Network Applications business develops applications used by service providers to deliver a variety of services to their customers, and also includes Motive, which provides software for service providers to remotely manage their customers’ at-home networks, networked devices and broadband and mobile data services.

The Applications segment is investing resources in:

In 2010, our Applications segment revenues were €1,979 million including intersegment revenues and €1,917 million excluding intersegment revenues, representing 12% of our total revenues.

ENTERPRISE APPLICATIONS

Our enterprise applications group provides software, hardware and services that interconnect a business enterprise’s networks, people, processes and knowledge. We refer to this interconnected enterprise as “The Dynamic Enterprise”, where communication and networking systems and collaboration applications optimize productivity and customer satisfaction.