SECURITIES AND EXCHANGE COMMISSION

FORM 6-K

REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13A-16 OR 15D-16
OF THE SECURITIES EXCHANGE ACT OF 1934

For the month of September, 2004

Commission File Number 1-11130

ALCATEL

54, rue La Boétie
75008 Paris — France
(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b) (1):                   

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b) (7):                   

Indicate by check mark whether by furnishing the information contained in this Form, the registrant is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-                  

Table of Contents

Operating and Financial Review and Prospects as of and for the Period Ended June 30, 2004.

Forward-looking Information

This discussion of our Operational and Financial Review and Prospects contains forward-looking statements based on beliefs of our management. We use the words “anticipate,” “believe,” “expect,” “may,” “will,” “intend,” “should,” “plan,” “project,” or similar expressions to identify forward-looking statements. Such statements reflect our current views with respect to future events and are subject to risks and uncertainties. Many factors could cause the actual results to be materially different, including, among others, changes in general economic and business conditions, changes in currency exchange rates and interest rates, introduction of competing products, lack of acceptance of new products or services and changes in business strategy. Such forward-looking statements include, but are not limited to, the forecasts and targets included in this discussion under the heading “Operating and Financial Review and Prospects as of and for the Period Ended June 30, 2004 — Overall Perspective,” with respect to (i) our sales in the third quarter of 2004 and our earnings per share (before goodwill amortization) for such quarter, (ii) the evolution of our various business segments going forward, (iii) our sales and earnings per share (before goodwill amortization) for the full year 2004, and (iv) the amount we would be required to pay in the future pursuant to our existing contractual obligations and off-balance sheet contingent commitments, included in this discussion under the heading “Contractual obligations and off-balance sheet commitments”.

Presentation of Financial Information

The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited interim consolidated financial statements and the related notes presented elsewhere in this document. Our unaudited interim consolidated financial statements have been prepared in accordance with French generally accepted accounting principles (“French GAAP”), which differ in certain significant ways from U.S. generally accepted accounting principles (“U.S. GAAP”). The most significant differences that affect the presentation of our financial results relate to the use of the French pooling-of-interests accounting method, goodwill amortization, accounting of derivative instruments and hedging activities, accounting for sale and leaseback transactions and accounting for restructuring costs. For a discussion of the significant differences between French GAAP and U.S. GAAP as they relate to our unaudited interim consolidated financial statements as of and for the period ended June 30, 2004, and a reconciliation of our net income (loss) for that period and shareholders’ equity as of that date to U.S. GAAP, please refer to Notes 19 through 21 in our unaudited interim consolidated financial statements included elsewhere in this document.

Changes in Accounting Standards as of January 1, 2004

The “Comité de Règlementation Comptable” (Committee of Accounting Regulations) approved, by decree dated December 12, 2002, the “règlement relatif à l’amortissement et à la dépréciation des actifs” (regulations on depreciation and amortization of assets) n° 02-10, which will become effective as of January 1, 2005, with optional implementation as of January 1, 2002. We did not apply this new accounting standard to our 2002 or 2003 financial statements, or to our unaudited interim financial statements for the first half of 2004. We do not anticipate a material impact from the implementation of this regulation on our net income or on our financial position starting with the year 2005.

On April 1, 2003, the “Comité de Règlementation Comptable” (Committee of Accounting Regulations) issued a recommendation on post retirement employee benefits, no. 2003-R01, which became effective as of January 1, 2004, with optional implementation as of January 1, 2003. We did not fully apply this new accounting standard to our 2003 financial statements or to our unaudited interim financial statements for the first half of 2004. As this recommendation is very similar to IAS 19 (Employee Benefits), we will fully apply this recommendation when we implement the changeover to IFRS (International Financial Reporting Standards), and we do not anticipate a material impact from the adoption of IAS 19 on our net income or on our financial position (see “Adoption in 2005 of new accounting standards (International Financial Reporting Standards) — Pensions and other long-term benefits”, below).

As part of the changeover to IFRS on and after January 1, 2005 as discussed below, the presentation of certain income statement captions has been modified. Primarily, the presentation changes concern recurring goodwill amortization charges (charges that will no longer be incurred in accordance with IFRS 3), which are presented separately from exceptional amortization charges (resulting from goodwill impairment tests), and research and development costs (see Note 4 of our unaudited interim consolidated financial statements). These modifications to the captions in our income statement, which were already implemented in our financial statements for the first half of 2004 in anticipation of the changeover to IFRS, are not exhaustive. The new reporting standards will lead to other changes that are currently being analyzed, as described below. In addition, as of January 1, 2004 we no longer use the “pooling of interests” method of accounting for business combinations (the use of this method was optional) (see Note 10 of our unaudited interim consolidated financial statements).

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Adoption in 2005 of new accounting standards (International Financial Reporting Standards)

Effective January 1, 2005, we will adopt International Financial Reporting Standards along with other European listed companies, in accordance with European Union regulations. This will require us to present our 2005 consolidated financial statements, together with 2004 comparative information, in accordance with International Financial Reporting Standards/International Accounting Standards (“IFRS/IAS”).

The full set of IFRS/IAS (the “stable platform”) is now known, but some standards have not yet been endorsed by the European Union and certain recently issued exposure drafts could lead to some changes of standards included in the stable platform, with a possible anticipated application as of January 1, 2004. Based on the information currently available, we are assessing the impact that the change will have on our financial information, and we are working on restating our consolidated opening balance sheet as of January 1, 2004. However, due to the listing of our ADSs on the New York Stock Exchange, we may be obligated to present a second year of comparative information, which would advance the opening balance sheet date to January 1, 2003, although the U.S. Securities and Exchange Commission has proposed some relief on this issue. This matter is currently under review by the U.S. Securities and Exchange Commission. We are not yet in a position to quantify the impact on us of the application of IFRS/IAS.

The principal areas that may be affected by the change are described below.

Research and development costs:

International Accounting Standard (IAS) 38 (Recognition and Initial Measurement of an Intangible Asset) requires development costs to be capitalized, provided that certain criteria are met. We generally record research and development costs as expenses in the year in which they are incurred, except for certain software development costs, which are capitalized.

Convertible bonds or notes mandatorily redeemable for shares:

The application of IFRS will lead to recording all or part of such debt in shareholders’ equity, with the corresponding increase in this item.

Financial Instruments:

IAS 39 and IAS 32 have not yet been endorsed by the European Union. If these standards are endorsed before the end of 2004, derivative financial instruments will be recorded in the balance sheet at fair value in accordance with IAS 39 (Financial Instruments: Recognition and Measurement). Interest rate derivatives account for most of our fair value hedges. Fluctuations in value resulting from these derivatives should be mostly offset in income by revaluations of the underlying debt. We enter into currency derivative financial instruments primarily to hedge our future cash flows and firm commitments, and such instruments are also recorded as fair value hedges. Fluctuations in their value are also principally offset in income by changes in fair value of the hedged items, with the exception of those currency derivative financial instruments that we may enter into from time to time to hedge commercial bids, with respect to which changes in fair value fully impact income without any corresponding offset.

Pensions and other long-term benefits:

The methods of determining and recording pension and retirement obligations and other post-employment benefit obligations are very similar to those required by IAS 19 (Employee Benefits). However, we are currently reviewing some long-term benefits for their potential impact on our opening IFRS balance sheet at January 1, 2004, and we may have to account in equity unrecognized gains and losses on pension reserves at the changeover date.

Presentation of our financial statements:

Our balance sheet will be classified according to a current/non-current distinction, which does not correspond to our existing presentation of assets and liabilities in order of liquidity. Also, certain specific rules regarding the offset between assets and liabilities could lead to reclassifications between captions compared with our current practice (for example, construction contract loss reserves will be presented either as a deduction from net contract work in progress or as an increase in net contract liabilities).

IFRS eliminates the concept of extraordinary items. This will have the effect of classifying in income from operations and/or financial income/expense a certain amount of revenue and expenses that we currently classify in other revenue and expense.

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Critical Accounting Policies

Our Operating and Financial Review and Prospects is based on our unaudited interim consolidated financial statements for the six months ended June 30, 2004, which are prepared in accordance with French GAAP as described in Note 1 to our unaudited interim consolidated financial statements. As noted above, the principal differences between French and U.S. GAAP are detailed in the Notes to our unaudited interim consolidated financial statements. Some of the accounting methods and policies used in preparing our unaudited interim consolidated financial statements under French GAAP and the reconciliation of our net income and shareholders’ equity to U.S. GAAP are based on complex and subjective assessments by our management or on estimates based on past experience and assumptions deemed realistic and reasonable based on the circumstances concerned. The actual value of our assets, liabilities and shareholders’ equity and of our earnings could differ from the value derived from these estimates if conditions changed and these changes had an impact on the assumptions adopted.

We believe that the accounting methods and policies listed below are the most likely to be affected by these estimates and assessments:

Valuation allowance for inventory

We record inventories at the lower of the net realizable value expected from these assets and their carrying value. This valuation is calculated based on our analysis of any predictable changes in demand, technology or the markets, mainly to identify any inventory that is obsolete or in excess.

We record valuation allowances as cost of sales, other expenses or restructuring costs, depending on the nature and the materiality of the amounts concerned.

We have recorded significant charges in recent years due to declining market conditions and discontinuation of certain product lines. The impact of the valuation of inventories at the lower of cost or market on our net income (before taking into account the effect of any taxes) was a charge of approximately € 29 million in the first six months of 2004 (€ 54 million in the first six months of 2003).

Reversal of allowances on inventories accounted for in the first six months of 2003 and 2004 were mainly related to the definitive write-off of inventories and therefore had no material effect on gross margin.

Due to the potential recovery of the telecommunications market, it is possible that future revenues may be positively impacted as a result of the sale of inventories with respect to which valuation allowances were made the first six months of 2003 and 2004.

Valuation allowance for doubtful accounts receivable and loans (customer financing)

A valuation allowance is recorded for customer receivables if the estimated recovery value is less than the book value. The amount of the valuation allowances recorded reflects both the customers’ ability to honor their debts and the age of the debts in question. A higher default rate than estimated or the deterioration of our major customers’ creditworthiness could have an adverse impact on our future results. Valuation allowances were € 360 million as of June 30, 2004 (compared with € 436 million as of December 31, 2003). The impact of valuation allowances for trade receivables on our net income (before taking into account the effect of any taxes) was a profit of € 19 million during the first six months of 2004, and a profit of € 48 million during the first six months of 2003.

Provisions on customer loans and other financial assets (mainly represented by assets related to customer financing arrangements) amounted to € 977 million as of June 30, 2004 (compared to € 1,104 million as of December 31, 2003). The impact of these provisions on our net income (before taking into account the effect of any taxes) was a profit of € 64 million during the first six months of 2004, and a charge of € 17 million during the first six months of 2003.

Goodwill and other intangible assets

When there are signs during the course of the year of a significant adverse change in the business climate, impairment tests are conducted on the assets concerned, and impairment losses are recorded, if necessary. These exceptional amortizations are calculated based on the forecasted discounted operating cash flow or on the market value of such assets if an active market exists. A change in

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the markets may cause us to review the value of some of our goodwill or other intangible assets and to record additional exceptional amortizations.

The net amount of goodwill under French GAAP was € 3,661 million as of June 30, 2004 (€ 3,839 million as of December 31, 2003). Other intangible assets, net, were € 303 million as of June 30, 2004 (€ 284 million as of December 31, 2003) under French GAAP (of which € 278 million and € 258 million, respectively, concerned software).

Certain acquisitions that we made (DSC, Genesys, Newbridge, Kymata, Astral Point and Telera) were recorded at book value under French GAAP, in accordance with the optional method authorized under Article 215 of accounting rule 99-02. Under this method (which is a pooling of interests method) goodwill, corresponding to the difference between the net book value of the acquired company’s assets and liabilities, and the transaction price, was charged to shareholders’ equity. Under U.S. GAAP (which applies purchase accounting) goodwill, corresponding to the difference between the fair value and the transaction price, was recorded as an intangible asset. Since January 1, 2004 we have used purchase accounting to record our stock acquisitions.

Beginning January 1, 2002, for our U.S. GAAP reconciliation, we adopted Statement of Financial Accounting Standards (“SFAS”) 142 “Goodwill and other intangible assets.” SFAS 142 requires that goodwill be tested for impairment at least annually using a two-step approach at the reporting unit level (corresponding to the Business Division level in our company). In the first step, the fair value of the division is compared to its book value, including goodwill. In order to determine the fair value of the division, significant management judgment is applied in order to estimate the underlying discounted future cash flows. If the fair value of the division is less than its book value, a second step is performed which compares the implied value of the division’s goodwill to the book value of its goodwill. The implied value of the goodwill is determined based upon the difference between the fair value of the division and the net of the fair value of the identifiable assets and liabilities of the division. If the implied value of the goodwill is less than its book value, the difference is recorded as an impairment.

The annual impairment test for 2004 was performed in May 2004. No impairment charge was recorded at that time. All these valuations of intangible assets are based upon short and long-term projections of future cash flows and take into account assumptions regarding the evolution of the market and our ability to successfully develop and commercialize our products. Marked changes in market conditions could have a major impact on the valuation of these assets and could justify additional impairment losses.

Impairment of tangible long-lived assets

Whenever events or changes in market conditions indicate a risk of impairment of property, plant, equipment and other tangible assets, a detailed review is carried out in order to determine whether the net carrying amount of such assets remains higher than their fair values. When testing for other than temporary impairment of a tangible asset, the sum of the undiscounted cash flows for the identified tangible assets is compared to the carrying value of these assets. If this sum is lower than the carrying value an impairment loss is recorded based upon the fair value of the asset concerned. Fair value is measured by discounting forecasted operating cash flow or market value, if any.

Planned closure of certain facilities, further reductions in personnel and reduction in market expectations due to the industry downturn were considered impairment events during fiscal years 2003 and 2002. Following our analysis of potential impairment on certain tangible assets, we recorded impairment charges of € 134 million during the six months ended June 30, 2003, mainly in the fixed communications segment. We did not account for any major impairment during the six months ended June 30, 2004 (impairment charge of € 3 million).

Significant assumptions and estimates are taken into account to determine the fair value of our tangible long-lived assets, including market expectations, economic obsolescence and realizable value in case of liquidation. Changes in these estimates could have a major impact on the assessment of the value of these assets and could require us to book additional impairments.

Customer warranties

Reserves are recorded for warranties given to customers on our products to cover manufacturing defects. These reserves are calculated based on historical return rates and warranty costs expensed as well as on estimates. These allowances are part of the cost of sales and are accounted for when the products in question are sold. They represent the best possible estimate, at the time the sale is made, of the expenses to be incurred under the warranty granted. The real costs recorded may differ from the amounts covered by the allowances and therefore may affect future earnings.

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Warranty reserves amounted to € 483 million as of June 30, 2004 (€ 574 million at the end of 2003). The net impact of the change in the warranty reserves on our net income (before taking into account the effect of any taxes) during the first six months of 2004 was a profit of € 1 million (compared to a charge of € 39 million during the first six months of 2003). For further information concerning changes in warranty reserves during the first six months of 2004, see Note 21 to our unaudited interim consolidated financial statements.

Deferred tax assets

Our deferred tax assets mainly result from deductible temporary differences between the book value of our assets and liabilities and their tax basis, net operating loss carryforwards and tax credit carry forwards. Net deferred tax assets are recognized if it is more likely than not they will be realized in future years.

On June 30, 2004, our net deferred tax assets amounted to € 1,948 million (of which € 1,009 million pertained to the United States and € 646 million pertained to France). Significant management judgment is required when determining the recoverability of net deferred tax assets. Management considers all available evidence, both positive and negative, to determine whether it is more likely than not that the deferred tax assets will be realized. Such evidence mainly includes the history of operating loss and the reasons for such loss, the carryforward period associated with the deferred tax assets and the future earnings potential determined through the use of internal forecasts. This analysis is performed on a regular basis in each tax jurisdiction where material net deferred tax assets have been recognized, mainly the United States and France.

The deterioration of our forecasts during 2002 led us to depreciate most of our gross deferred tax assets generated as of the second quarter of 2002, and all of our R&D credits in the United States.

If our actual results are materially worse than the estimates or forecasts referred to above, we will need to adjust them in future periods and consequently, we may need to write off a portion or all of the net deferred tax assets currently recognized, which could materially adversely impact our financial position and results of operations. If our actual results are materially better than the estimates or forecasts referred to above, we may need to reverse a portion of the valuation allowances related to deferred tax assets, which would have a beneficial effect on our net income in a future period.

Pensions and post-retirement benefits

We and our subsidiaries have defined benefit and defined contribution plans and other retirement benefits that cover employees spread over different locations in Europe, America and Asia.

Defined contribution plans are post-employment benefit plans under which we pay fixed contributions into a fund and have no obligation to make any further contributions. No reserve is booked for such plans.

Our obligation for the defined benefit pension plans can be divided basically into two categories:

Moreover, we provide North America employees with other post-employment benefits. They benefit from a post-retirement medical and life insurance plan. These schemes are being progressively closed for most of the beneficiaries, and will be completely closed by 2006.

The actuarial valuation for the defined benefits and other applicable retirement benefits are based upon the projected unit credit cost using actuarial assumptions such as discount rate, expected return, future salary increases, turnover rates and mortality tables.

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We update these assumptions on an annual basis. The discount rate is determined by reference to the risk-free rate on bonds issued by the highest-rated companies, and possibly government securities when no such issuers exist. Moreover, the bonds used as reference have a maturity that is consistent with the period to maturity of the benefits. Each company within Alcatel, together with its actuaries, has the responsibility of determining its set of assumptions to take into account specific local conditions. Naturally, this leads to a certain heterogeneity in the assumptions used; however, special attention is given to achieve consistency in the same monetary area.

The expected return on assets is determined using the expected rate of return on plan assets (calculated taking into account historic returns, change in asset allocation and expected future returns) and the “value of assets”. In most countries this value of assets is equal to the market value. However, some countries use the market-related value of assets where the difference between expected and actual return is recognized over a period of five years. Special attention is given to the expected rate of return — the important variable in the calculation — if the market-related value is used. This process avoids having a market-related value exceeding to a substantial extent the fair value of assets and thus recognizing returns on non-existing assets.

Our losses resulting from changes in these assumptions and from differences between assumptions and actual experience are amortized over the expected remaining service periods of active plan participants (to the extent they exceed 10% of the higher of the projected benefit obligation and the fair value of plan assets). As these unrecognized losses are mainly due to past differences between expected return on plan assets and real return of plan assets, they will mostly impact financial costs, and to a lesser extent, operational costs.

We believe that our assumptions are appropriate, but future changes in those assumptions may materially affect our pension obligation, and future funding requirements may arise depending on market conditions.

Revenue recognition

Most of our revenues result from a wide range of activities: from designing, integrating and installing fixed and mobile networks, and developing and supplying turn-key optical, submarine and terrestrial network solutions and voice/data network infrastructure and application software for businesses, to supplying satellite systems for telecommunications, navigation, etc., all of which require significant revenue recognition assessments, especially in activities going beyond simple deliveries of equipment.

For revenues generated from construction contracts, primarily those related to customized network designs and network build-outs, we generally use the percentage of completion method of accounting, provided certain specified conditions are met, based either on the achievement of contractually defined milestones or on costs incurred compared with total estimated costs. We exercise significant judgment in estimating revenue and costs on such contracts and in measuring progress towards completion, which underpins the timing of revenue recognition and the level of contract profitability. Revenue and costs are reviewed periodically based on the contractual terms and conditions. Any losses foreseen on contracts are recognized immediately. If uncertainty exists relating to customer acceptance, or the construction contract’s duration is relatively short, revenues are recognized only to the extent of costs incurred that are recoverable, or on completion of the contract.

For revenues generated from licensing, selling or otherwise marketing software, we recognize revenue generally upon delivery of the software and on the related services as and when they are performed. For arrangements to sell software licenses with services, we recognize software license revenue separately from the related service revenue, provided the transaction adheres to certain criteria (as prescribed by the AICPA’s SOP 97-2), such as the existence of sufficient vendor-specific objective evidence of fair value to permit allocation of the revenue to the various elements of the arrangement. If the arrangement does not meet the specified criteria, we apply the percentage of completion method of accounting. For arrangements to sell services only, revenue from training, consulting, installation and other services is recognized when the services are performed. Maintenance service revenue, including post-contract customer support, is deferred and recognized ratably over the contracted service period.

We are increasingly entering into the operator service business, which involves multi-year service contracts. Revenues from this activity are deferred and recognized ratably over the contractual service period.

We also sell products to resellers and distributors, for which revenue is recognized at the time of shipment to the distribution channel. In this particular market, collectibility of revenues is critical. Accordingly, estimated returns are recorded at the same time as the corresponding revenue based on contract terms and prior claims experience.

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In the context of the current market environment, assessment of the collectibility of revenues is generally critical. Based on the credit quality of our customers and on our ability to sell customer receivables, we assess whether trade receivables and other accounts receivable are reasonably assured of collection. Where we are able to sell the receivable, revenue is recognized to the extent of the value realizable from the sale. After initial revenue recognition, if we are uncertain as to whether we can collect the receivable, a valuation allowance is set up to cover the estimated loss.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

Overall Perspective

The first six months of 2004 were characterized by a stabilized telecommunications market, and we benefited from this environment. In addition, due to our restructuring and cost-cutting efforts over the past three years, we believe we now have improved our cost structure which should allow us to better leverage our potential future growth. During the first six months of the year, our sales were stable at €5,788 million, and we returned to profitability with a gross margin at 37.7% of sales, income from operations at 4.8% of sales, and a net income of €157 million.

We have formed partnerships in areas where we think consolidation can generate future value and at the same time alleviate the burden that a stand-alone operation was having on our operating profit. We completed the sale of our battery business and formed a joint venture in our optical fiber activity, which closed on July 1, 2004 and in our mobile handset business, which closed on August 31, 2004. In addition, we signed a memorandum of understanding to merge our satellite activities with Alenia Spazio, a unit of Finmeccanica, a large Italian company. We expect this alliance will create synergies that will positively contribute to our operating profit in the medium term. Further, on September 17, 2004 we announced that we signed an agreement for the sale of our electrical power system activities, which should take place in the fourth quarter of this year.

During the first part of this year, the sales in our fixed communications business stabilized, and we believe that in today’s environment there are growth opportunities within this market segment. Although the long distance terrestrial and submarine markets still remain depressed, our optical network activity is beginning to benefit from growth in the metro sector, both in Europe and North America. We are also experiencing growth in our Internet protocol business, which includes edge service routers and multiservice wide area network products. We continue to hold the world leadership position in broadband access, according to a survey by the industry analyst, Dell’Oro, and expect to benefit from growth in this dynamic market segment in all of our key geographical regions. Moreover, even though we expect the fixed voice line market to continue to decline, we are partially offsetting this decline by shifting our focus to revenue-generating maintenance services of the installed base and, more importantly, by providing next-generation network offerings to our customers so that they can enhance their own future revenue streams.

Our mobile communications business continued to increase its income from operations. Our sales growth in 2G (second generation) product offerings remains primarily in the developing countries, and we continue to focus on 3G (third generation) technology as networks migrate to a new architecture with the ability to offer data and Internet services. In addition, we continue to expand the mobile application services and products that we offer to our customers, which include virtual private networks, billing and charging, mobile multimedia services and personal ring back tones.

We continue to expand our business in the private communications, or non carrier sectors. We believe our enterprise product offerings are driving business process transformation throughout the industry by providing increased efficiency, reduced costs, and higher mobility. We expect that this enterprise business will continue to benefit from the advances in IP telephony. In rail communications, we continue to gain momentum both in urban and main line transport systems by providing increased security, increased throughput, and improved customer service. In addition, we expect a good performance from our satellite business which, along with the transport activity, benefits from a strong order backlog.

With the realignment of our business portfolio almost completed, we now see growth potential for a substantial portion of our business. In order to support this momentum, we have selectively increased our development and marketing expenses in key product areas, while ensuring that our continuing year-on-year decreases in general and administrative and fixed operational costs more than offset these increases.

For the third quarter of 2004, on the basis of a similar structure we expect sales to grow by over 10% year-on-year (assuming a constant euro/U.S. dollar exchange rate of €1.1245 for estimated sales in U.S. dollars) with a positive earnings per share (before goodwill amortization) close to that of the second quarter of 2004 (see below for an explanation of how we determine the constant dollar data).

For the full year 2004, we expect the growth in our sales to be in the high single-digit range (assuming a constant euro/U.S. dollar exchange rate of €1.1316 for estimated sales in U.S. dollars) with a positive earnings per share (before goodwill amortization)(see below for an explanation of how we determine the constant dollar data).

We provide our investors with our expected sales growth in constant euro/U.S. dollar rates (i.e., the actual exchange rate for the period in the preceding year with which we are making the comparison) rather than current rates because it would be speculative to estimate the fluctuations in the euro/U.S. dollar exchange rates for future periods and the factors that affect such fluctuations are not within our control. In addition, our management believes that providing such sales information in constant euro/U.S. dollar rates facilitates the comparison by our investors of the evolution of our business with that of our peers.

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Highlights of recent transactions

Acquisition of eDial. On September 17, 2004, we acquired eDial, Inc., a privately-held company specialized in conferencing and collaboration services for enterprises and service providers, for American Depositary Shares (“ADSs”) representing our ordinary shares and cash for a total purchase price of approximately € 22 million (based on the market value of our ADSs on that date). We expect that this acquisition will complement our open software and applications development strategy.

Acquisition of Spatial Wireless. On September 17, 2004, we announced that we signed an agreement to acquire Spatial Communications Technologies, Inc., a privately-held company providing software-based and multi-standard distributed mobile switching solutions, for a number of our ADSs to be determined at closing, representing a value of approximately € 205 million. Our acquisition of Spatial should enable us to offer next-generation mobile switching technology and should facilitate our providing converged IP multimedia subsystems architecture and multimedia services in the future. The closing of this acquisition is expected to occur in the fourth quarter of 2004, and is subject to receipt of regulatory and shareholder approvals and other customary closing conditions.

Sale of Electrical Power System Activities. On September 17, 2004, we announced that we signed an agreement to sell our electrical power system activities to Ripplewood, a private equity firm. The closing of this sale is expected to occur in the fourth quarter of 2004, and is subject to customary closing conditions.

Contribution of Optical Fiber Cable Business. On July 1, 2004, we completed the combination of our global optical fiber and the communication cable business of Draka Holding N.V., a Dutch cable and cable systems producer, into a new company, Draka Comteq B.V., owned 50.1% by Draka and 49.9% by us. We expect that this new company will do business in China, Europe and North America.

Creation of Joint Venture for Mobile Handset Business. On August 31, 2004, our joint venture for our mobile handset business with TCL Communication Technology Holdings Limited (“TCL Communication”) commenced operations. This new entity will engage in research and development, manufacturing, and sales and distribution of mobile handsets and peripheral devices. We contributed cash and our mobile handset business to the joint venture, for a value of €45 million, in exchange for a 45% equity stake, and TCL Communication contributed cash of €55 million, in exchange for a 55% equity stake.

Highlights of transactions during the six months ended June 30, 2004

Sale of Battery Business. On January 14, 2004, we completed the sale of our battery business, Saft, to Doughty Hanson, a European private equity firm, for €390 million in cash.

Exchange Offer. On April 7, 2004, we closed an exchange offer for our 7.00% Notes due 2006, of which € 995 million were then outstanding, for new notes of a longer maturity. The principal objective of the exchange offer was to lengthen our average debt maturity. We exchanged € 366 million principal amount of our 7.00% Notes due 2006 for € 412 million principal amount of our new 6.375% Notes due 2014. We also issued and sold an additional € 50 million principal amount of our new 6.375% Notes due 2014. Interest on the 6.375% notes is payable annually.

Merger of Space Activities. On June 18, 2004, we signed a memorandum of understanding with Finmeccanica S.p.A., a large Italian aerospace and defense company, to merge our space activities and to form alliances in the space sector through the creation of two sister companies. We would hold approximately 67%, and Alenia Spazio, a unit of Finmeccanica, would own approximately 33%, of the new company which will combine our industrial space activities with those of Finmeccanica. The second company, of which Finmeccanica would hold approximately 67% and Alcatel would own approximately 33%, will combine our respective satellite operations and service activities. We expect the creation of these two new companies to be completed by the end of 2004, subject to the signing of definitive agreements and the necessary approvals by shareholders and regulatory authorities.

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Credit rating changes during 2004

Moody’s upgrades outlook and credit rating. On May 10, 2004 Moody’s revised its outlook for our long-term debt from stable to positive, and on September 8, 2004 Moody’s upgraded our long-term debt credit rating from B1 to Ba3 and confirmed its positive outlook for our long-term debt, based on the stabilization of our revenues, our positive net income and healthy cash position.

Standard & Poor’s upgrades credit rating. On March 10, 2004, Standard & Poor’s upgraded our long-term credit and senior unsecured debt rating to BB-. Standard & Poor’s outlook on Alcatel continues to be stable and it also affirmed our short-term B corporate credit rating.

Highlights of transactions during 2003

Acquisitions

Acquisition of iMagicTV. On April 30, 2003, we acquired, for 3.5 million of our ADSs, having a market value on that date of € 26 million, the 84% of the outstanding shares that we did not own of iMagicTV, a Canadian supplier of software products and services that enable service providers to create, deliver and manage digital television and media services over broadband networks. This acquisition, together with our acquisition of ThirdSpace and Packet Video, enabled us to add to our portfolio of content and systems integration products.

Acquisition of TiMetra. On July 18, 2003, we acquired, for 18 million ADSs, having a market value on that date of € 145 million, TiMetra, Inc., a privately held, Silicon Valley-based company that produces routers (devices that interconnect computer networks and move information from one network to another). The customers for our routers are generally carriers.

Divestitures

Sale of optical components business. On August 1, 2003, we sold our optical components business to Avanex. Under the terms of the agreement, we received 28% of Avanex’s stock. We contributed cash in the transaction in the amount of U.S. $ 110 million, the majority of which related to the restructuring of the optical business. We also entered into a supply agreement with Avanex, under which it will provide optical components for Alcatel’s optical networking products over a three-year period.

Sale of European factories. In 2003, we sold a number of manufacturing facilities in Europe. The principal transactions were: our Saintes, France factory that engaged in cutting, stamping and general sheet metal work was sold, and 300 employees were transferred, to GMD, a French manufacturing company; our Coutances, France factory that specialized in producing printed circuit boards used in telecommunications applications was sold in a leveraged management buy out and 220 employees were transferred; and our Hoboken, Belgium factory that produced electro-mechanical devices was sold, and 241 employees were transferred, to Scanfil Oyi. These facilities comprised nearly 80,000 square meters.

Sale of shareholding in Atlinks. On February 12, 2003, we exercised our option to sell our 50% shareholding in Atlinks to Thomson, our joint venture partner. Atlinks is a manufacturer of residential telephones. The sale price was € 68 million in cash.

Other Transactions

Conversion of Class O shares into our ordinary shares. On February 3, 2003, our board of directors decided to submit for approval a resolution at our annual shareholders’ meeting to convert all outstanding Class O shares and Class O ADSs into our ordinary shares and ADSs, as applicable, on a one-for-one basis. This decision was taken after our board analyzed the market conditions of the opto-electronic industry and noted that the conditions were very different than those that existed at the time the Class O shares were created and that the conditions in early 2003 negatively affected the Optronics division’s performance and appeared likely to continue to do so throughout 2003 and later. Our management believed that the elimination of the tracking stock would give us more flexibility as we addressed the future of the Optronics business and continued to explore strategic alternatives for this division. On April 17, 2003, our shareholders approved this resolution and, immediately thereafter, all Class O shares and Class O ADSs were converted into our ordinary shares and ADSs, as applicable.

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Consolidated Results of Operations for the Six Months Ended June 30, 2004 Compared to the Six Months Ended June 30, 2003

In view of the disposal of our optical fiber business in May 2004, such business was booked as income from discontinued operations for the six months ended June 30, 2004. In view of the disposal of our optical components business and our battery business (Saft) in July 2003 and January 2004, respectively, we booked such businesses as income from discontinued operations in 2003. In order to make comparisons easier, and in compliance with French GAAP, we have prepared pro forma income statements reflecting all three of these businesses in income from discontinued operations for the first six months of 2003. These pro forma statements are set forth in Note 2 to our unaudited interim consolidated financial statements. The discussion that follows is based on the 2003 pro forma numbers and 2004 numbers.

Net Sales. Consolidated net sales were stable at €5,788 million for the first six months of 2004, when compared to €5,760 for the same period last year. Somewhat over one third of our consolidated net sales are denominated in or linked to the U.S. dollar. When we translate these sales into euros for accounting purposes, there is an exchange rate impact based on the relative value of the U.S. dollar and the euro. During the first six months of 2004, the decrease in the value of the U.S. dollar relative to the euro had a negative impact on our sales. If there had been a constant euro/U.S. dollar exchange rate in the first six months of 2004 as compared to the same period in 2003, our consolidated net sales would have increased by approximately 5.0%. This is based on applying (i) to our sales made directly in U.S. dollars or currencies linked to U.S. dollars effected during the first half of 2004, the average exchange rate that applied for the same period in 2003, instead of the average exchange rate that applied for such period in 2004, and (ii) to our exports (mainly from Europe) effected during the first half of 2004 which are denominated in U.S. dollars and for which we enter into hedging transactions, our average euro/U.S. dollar hedging rate that applied for the same period in 2003. Our management believes that providing our investors with our consolidated net sales for the first half of 2004 in constant euro/U.S. dollar exchange rates facilitates the comparison by our investors of the evolution of our sales with that of our peers.

The increase in net sales for the first six months of 2004 was primarily due to the increased revenue in our enterprise, rail communication and satellite businesses of our Private Communications segment. Within the Fixed Communications segment, revenues increased in our broadband access and Internet protocol businesses, offset by a decline in our voice switching activity and, to a lesser extent, in optical networks. In the Mobile Communications segment, stable revenue in our mobile infrastructure business was reduced by a decline in wireless transmission revenue, resulting from the migration to a new product range.

Net sales for the first half of 2004 by geographical region were as follows: net sales in Europe were stable at €2,883 million compared to €2,877 million in the same period last year; net sales in Asia Pacific decreased by 8.5% to €929 million compared to €1,015 million in the same period last year; net sales in North America increased by 13.4% to €937 million compared to €826 million in the same period last year; net sales in the rest of the world decreased by 0.4% to €1,038 million compared to €1,042 million in the same period last year. In the first half of 2004, Europe accounted for 49.8% of net sales while Asia Pacific, North America, and the rest of the world accounted for 16.0%, 16.2% and 18.0%, respectively. This compares with the following percentages of net sales for the first half of 2003: Europe — 50.0%, Asia Pacific — 17.6%, North America — 14.3%, and the rest of the world — 18.1%.

Gross Margin. During the first half of 2004, gross margin amounted to 37.7% of sales or €2,180 million, compared to 31.4% of sales or €1,810 million in the same period last year. The improvement in gross margin as a percentage of sales is due primarily to the decrease in fixed costs related to the cost of sales, cost improvements in purchases that are reflected in the cost of sales and workforce reductions.

Administrative and Selling Expenses. For the six-month period ended June 30, 2004, administrative and selling expenses decreased to €1,083 million or 18.7% of sales compared to €1,117 million or 19.4% of sales in the same period last year. The decrease as compared to the first six months of 2003 is primarily attributable to workforce reductions and other fixed costs reductions across all business activities.

R&D Costs. Research and development expenses increased to €821 million for the first six months of 2004 compared to €810 million in the same period last year. However, R&D expenses for the first six months of 2004 as a percentage of sales remained stable at 14.2% compared to 14.1% in the same period last year.

Income (loss) from Operations. Income from operations amounted to €276 million or 4.8% of sales for the first six months of 2004 compared to a loss from operations of €(117) million for the same period last year. The return to profitability is due primarily to restructuring actions and cost-cutting efforts across all business activities, with a significant improvement in our optical networking activity, which registered an operating income in the second quarter of 2004.

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Fixed Communications

Sales of our fixed communications segment decreased by 5.8% to €2,486 million for the first six months of 2004 compared to €2,640 million in the same period last year. This decrease is primarily due to the decline in our fixed line voice business and, to a lesser extent, in optical networks, in particular our submarine business, which remains depressed. However, our broadband access revenue increased despite continuing price pressure and we delivered a total of 10.3 million DSL lines during the first six months of 2004, a 50% increase over the same period last year. Our Internet protocol business also registered a revenue increase due to the positive acceptance by the market of the upgrading of our existing products.

The fixed communications segment’s income from operations was €164 million for the first six months of 2004 compared to a loss of €53 million in the same period last year. This return to profitability is due to a significant improvement in the cost-effectiveness of our optical networks business, which was positive in the second quarter of 2004 (due to the effects of restructuring and cost-cutting efforts), and to our Internet protocol business, which was also profitable during the first half of 2004 (due to an increased sales level), combined with a strong profitability in broadband access.

Mobile Communications

Sales in our mobile communications segment decreased by 2.0% to €1,599 million in the first six months of 2004 compared to €1,632 million in the same period last year. This decrease is primarily due to the significant decline in our wireless transmission revenues as we migrate to a new product range, which was not offset by the increase in our mobile networking and radio frequency businesses.

The mobile communications segment’s income from operations was €118 million for the first six months of 2004 compared to €25 million in the same period last year. This increase is due to an improvement in most of our businesses. Nevertheless, the mobile handset business negatively impacted income from operations.

Private Communications

Sales in our private communications segment increased by 6.5% to €1,794 million in the first six months of 2004 compared to €1,685 million in the same period last year. This increase is due primarily to revenue increases in our transport and space solutions businesses, which benefited from a strong order backlog at the end of 2003. Our enterprise solutions business revenues increased slightly while our integration and services business registered a slight decline in revenues.

The private communications segment’s income from operations was €70 million in the first six months of 2004 compared to a loss of €13 million in the same period last year. This improvement is due to a significant improvement in the enterprise solutions business and, to a lesser extent, in our transport solutions business.

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Liquidity and Capital Resources

Liquidity

Cash Flow for the Six Months Ended June 30, 2004 and 2003

Cash Flow Overview. Cash and cash equivalents decreased by € 1,626 million during the first six months of 2004 to € 5,330 million at June 30, 2004 compared to the same period last year, including short term investments such as treasury bills and money market funds, but excluding listed securities. This decrease was mainly due to net cash used by operating activities of € 511 million, primarily due to an increase in our inventories linked to revenue growth, as well as net cash used by financing activities of € 752 million, due primarily to the cash repayment of short term debt, including through the repurchase of debt . This decrease was partially offset by net cash provided by investing activities, primarily due to the capital gain we registered from the sale of our battery business.

Net Cash Provided (Used) by Operating Activities. Net cash used by operating activities before changes in working capital was €34 million for the first six months of 2004 compared to €481 million in the same period last year. This decrease is primarily due to our positive net income of €157 million during the first six months of 2004 compared to a loss of €1,136 in the same period last year. This €157 million of net income is adjusted for non-cash items, primarily depreciation and amortization and net gain on disposal of current assets (mainly the disposal of our battery business), and adjusted further for cash outflows that had been previously reserved (mainly for ongoing restructuring programs). The cash outflows for restructuring amounted to €539 million for the first six months of 2004 compared to €740 million for the same period last year. Net cash used by operating activities was €511 million during the first six months of 2004 compared to €293 million used during the same period last year, due primarily to an increase in working capital during the first six months of 2004, reflecting our expectations for revenue growth in the coming quarters.

Net Cash Provided by Investing Activities. Net cash provided by investing activities was €353 million during the first half of 2004 compared to €508 million in the same period last year. This decrease is mainly due to a smaller amount of cash proceeds from the disposal of fixed assets, amounting to €75 million in the first half of 2004 compared to € 375 million (including proceeds from the disposal of real estate) in the same period last year. Capital expenditures increased to €158 million compared to €110 million in the same period last year, and cash expenditures for acquisition of consolidated companies, net of cash acquired, and for acquisition of unconsolidated companies and marketable securities amounted to € 131 million in the first half of 2004 compared to €5 million in the same period last year (due mainly to the capital contributed to the optical fibers division prior to entering into the joint venture with Draka). These expenditures were offset by cash proceeds from the sale of previously consolidated companies, net of cash sold, which amounted to €417 million in the first six months of 2004 (of which €390 million related to the disposal of the battery business), compared to €113 million in the same period last year.

Net Cash Provided (Used) by Financing Activities. Net cash used by financing activities amounted to €752 million for the first six months of 2004 compared to net cash provided of €735 million in the same period last year. The main reason for this change was the use of cash to decrease the short term debt (€1,210 million), including through debt repurchases somewhat offset by €462 million of proceeds from the issuance of long term debt. The €735 million of cash provided in the first six months of 2003 resulted mainly from the receipt of €1,022 million from the issuance of a new bond redeemable for ordinary shares, somewhat offset by the cash used to decrease our short-term debt by €281 million.

Capital Resources

Resources and Cash Flow Outlook. We derive our capital resources from a variety of sources, including the generation of positive cash flow from on-going operations, on-going divestitures of assets considered to be non-core to our main telecommunications activities, the issuance of debt and equity in various forms, and banking facilities including the revolving credit facility of € 1,300 million maturing in June 2007 and on which we have not drawn (see “Syndicated Facility” below). 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 debtors and investors, our ability to meet the financial covenants for our syndicated facility and debt and equity market conditions generally.

Our short-term cash requirements are primarily related to funding our operations, including our restructuring program, capital expenditures and short-term debt repayments. We believe that our cash and cash equivalents, including short-term investments such as treasury bills and money market funds but excluding listed securities, of € 5,330 million as of June 30, 2004 are sufficient to fund our cash requirements for the next twelve months.

During 2004 we expect to make cash outlays for our restructuring programs of approximately € 800 million, and to make capital expenditures, which should remain below € 400 million. We will also repay our bonds maturing in 2004, such as the € 339 million of

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our 5% bonds maturing in October 2004 that we did not previously repurchase. In addition, our expected growth in revenues in 2004 compared to 2003 should result in additional cash requirements linked to an increase in working capital.

We can provide no assurance that our actual cash requirements will not exceed our currently expected cash outlays. If we cannot generate sufficient cash 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 (if conditions are considered favorable by us), assets sales or financing from third parties, the availability of which is dependent upon a variety of factors, as noted above. During 2004 we are continuing our bond repurchase program.

Credit Ratings. As of June 30, 2004, our credit ratings were as follows:

Standard & Poor’s. On March 10, 2004, Standard & Poor’s upgraded our long-term corporate credit and senior unsecured debt rating to BB– on the basis of our improved operating and financial performance, healthier market conditions and prospects for the telecom equipment industry and our severe cost cutting. Standard & Poor’s outlook on Alcatel continues to be stable and it also affirmed our short-term B corporate credit rating. The rating grid of Standard & Poor’s ranges from AAA (the strongest rating) to D (the weakest rating). Our BB– rating is in the BB category, which also includes BB+ and BB ratings. Standard & Poor’s gives the following definition to the BB category: “[a]n obligation rated ‘BB’ is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions, which could lead to the obligor’s inadequate capacity to meet its financial commitment on the obligation.”

Moody’s. On May 10, 2004 Moody’s revised its outlook for our long-term debt from stable to positive, and on September 8, 2004 Moody’s upgraded our long-term debt credit rating from B1 to Ba3 and confirmed its positive outlook for our long-term debt, based on the stabilization of our revenues, our positive net income and a healthy cash position. The “Not Prime” rating for our short-term debt was confirmed. The rating grid of Moody’s ranges from Aaa which is considered to carry the smallest degree of investment risk to C, which is the lowest rated class. Alcatel’s Ba3 rating is in the Ba category which also includes Ba1 and Ba2 ratings. Moody’s gives the following definition of its Ba category: “debt which is rated Ba is judged to have speculative elements and is subject to substantial credit risk.”

We can provide no assurances that our credit ratings will not be reduced in the future by Standard & Poor’s, Moody’s or similar rating agencies. In addition, a security rating is not a recommendation to buy, sell or hold securities, and each rating should be evaluated separately of any other rating. Our current short-term and long-term credit ratings as well as any possible future lowering of our ratings may result in additional higher financing costs and in reduced access to the capital markets.

Our short-term debt rating allows us a very limited access to commercial paper, and the non-French commercial paper market is generally not available to us on terms and conditions that we find acceptable.

At June 30, 2004, our total financial debt amounted to € 4,750 million compared to € 5,293 million at December 31, 2003.

Short-term Debt. At June 30, 2004, we had € 685 million of short-term financial debt outstanding, which included € 339 million of bonds and € 32 million in commercial paper, with the remainder representing other bank loans and lines of credit and other financial debt and accrued interest payable.

Long-term Debt. At June 30, 2004, we had € 4,065 million of long-term financial debt outstanding.

On April 7, 2004, we closed an exchange offer for our 7.00% Notes due 2006, of which € 995 million were then outstanding, for new notes of a longer maturity. The principal objective of the exchange offer was to lengthen our average debt maturity. We exchanged € 366 million principal amount of our 7.00% Notes due 2006 for € 412 million principal amount of our new 6.375% Notes due 2014. We also issued and sold an additional € 50 million principal amount of our new 6.375% Notes due 2014. Interest on the 6.375% notes is payable annually.

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Rating Clauses Affecting our Debt. Our outstanding bonds do not contain clauses that would trigger an accelerated repayment in the event of a lowering of our credit ratings. However, the € 1,200 million bond issue maturing in December 2006 includes a “step up rating change” clause, which provides that the interest rate will be increased by 150 basis points if our ratings fall below investment grade. This clause was triggered when our credit ratings were lowered to below investment grade status in July 2002. The 150 basis point increase in the interest rate from 7% to 8.5% became effective in December 2002 and was applied for the first time to the payment of the 2003 coupon. This bond issue also contains a “step down rating change” clause that provides that the interest rate will be decreased by 150 basis points if our ratings move back to investment grade. Our new 6.375% Notes due 2014, which we exchanged against a portion of our 7.00% Notes due 2006, as described above, do not provide for a “step up rating change” clause.

Syndicated Facility. On June 21, 2004, we closed a € 1,300 million syndicated three-year revolving credit facility that replaced the existing undrawn € 1,375 million syndicated facility maturing in April 2005.

The availability of this syndicated revolving credit facility does not depend upon our credit ratings. At June 30, 2004, we had not drawn on this facility. Our ability to draw on this facility is conditioned upon our compliance with certain financial covenants. The facility contains two financial covenants: the first is a gearing ratio (net debt/equity including minority interests) and the second is a ratio linked to our capacity to generate cash to reimburse our debt. We test these covenants every quarter. We were in compliance with these financial covenants at June 30, 2004 (the date of the last published financial statements); as we had cash and cash equivalents in excess of our gross financial debt at June 30, 2004, these ratios were actually not applicable at such quarter-end. However, we can provide no assurance that we will comply with such financial covenants in the future.

Debt to Equity Ratio. Total net financial debt (total financial debt less cash and cash equivalents) on June 30, 2004 was a net cash position of € 634 million, compared with a net cash position of € 976 million at December 31, 2003, and therefore a net financial debt to shareholders’ equity (including minority interests) ratio is not meaningful. Debt linked to our banking subsidiary activities, Electro Banque (which was € 227 on June 30, 2004) is not included in our total net financial debt.

Contractual obligations and off-balance sheet contingent commitments

Contractual obligations. We have certain contractual obligations that extend beyond 2004. Among these obligations we have long-term debt, capital leases, operating leases, commitments to purchase fixed assets and other unconditional purchase obligations. Our total contractual cash obligations at June 30, 2004 for these items are presented below based upon the minimum payments we will have to make in the future under such contracts and firm commitments. Amounts related to financial debt and capital lease obligations are fully reflected in our unaudited interim consolidated balance sheet included in this document.

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Off-balance sheet commitments and contingencies. On June 30, 2004, our off-balance sheet commitments and contingencies amounted to € 2,837 million, consisting primarily of € 1,560 million in undertakings on long-term contracts for the supply of telecommunications equipment and services. Generally we provide these undertakings to back performance bonds issued to customers through financial institutions. These performance bonds and counter-guarantees are standard industry practice and are routinely provided in long-term supply contracts. If certain events occur subsequent to our including these commitments within our off-balance sheet contingencies, such as the delay in promised delivery or claims related to an alleged failure by us to perform on our long-term contracts, or the failure by one of our customers to meet its payment obligations, we reserve the estimated risk on our consolidated balance sheet under the line item “Reserves for product sales” (see Note 14 to our unaudited interim consolidated financial statements) or in inventory reserves. Not included in the € 2,837 million of off-balance sheet commitments and contingencies is a € 678 million guarantee granted to the bank implementing our cash pooling program. This guarantee covers any intraday debit position that could result from the daily transfers between our central treasury account and our subsidiaries’ accounts. Also not included in the € 2,837 million is our contingent liability pursuant to the securitization of other accounts receivable and the sale of a carry-back receivable described below.

Only performance guarantees issued by financial institutions are presented in the table below. The figures published in June 2003 also included guarantees given by parent companies of our group in respect of their subsidiaries’ contracts which, in accordance with current practice, are no longer considered to represent an off-balance sheet commitment of the group. These amounted to € 5,484 million at June 30, 2003.

Off-balance sheet contingent commitments (excluding our commitment to provide further customer financing, as described below) given in the normal course of business are as follows:

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The amounts of guarantees given on contracts reflected in the preceding table represent the maximum potential amounts of future payments (undiscounted) we could be required to make under current guarantees granted by the group. These amounts do not reflect any amounts that may be recovered under recourse, collateralization provisions in the guarantees or guarantees given by customers for the Group’s benefit. In addition, most of the parent company guarantees and performance bonds given to our customers are insured; therefore, the estimated exposure related to the guarantees set forth in the preceding table may be reduced by insurance proceeds that we may receive in case of a claim.

Commitments related to product warranties and pension and post retirement benefits are not included in the preceding table. These commitments are fully reflected in our unaudited interim consolidated financial statements. Contingent liabilities arising out of litigation, arbitration or regulatory actions are not included in the preceding table either, with the exception of those linked to the guarantees given on our long-term contracts.

Commitments related to contracts that have been cancelled or interrupted due to the default or bankruptcy of the customer are included in the above mentioned “Guarantees given on contracts made by Group entities and by non-consolidated subsidiaries” as long as the legal release of the guarantee is not obtained.

Guarantees given on third party long-term contracts could require us to make payments to the guaranteed party based on a non-consolidated company’s failure to perform under an agreement. The fair value of these contingent liabilities, corresponding to the premium to be received by the guarantor for issuing the guarantee, was € 3 million as of June 30, 2004.

Customer Financing. Based on standard industry practice, from time to time we extend financing to our customers by granting extended payment terms, making direct loans, and providing guarantees to third-party financing sources. As of June 30, 2004, net of reserves we had provided customer financing of approximately € 501 million. This amount includes € 383 million of customer deferred payments and accounts receivable, and € 110 million of other financial assets. In addition, we had outstanding commitments to make further direct loans or provide guarantees to financial institutions in an amount of approximately € 144 million.

SVF Trust Program. In 1999, we established a securitized customer financing (SVF) program arranged by Citibank, which was amended in June 2000, May 2002 and May 2003.

As we did not have any equity interest in the SVF trust, the SVF trust was not consolidated within the Group’s accounts, in accordance with Regulation no. 99-02 of the “Comité de la Réglementation Comptable”. However, in accordance with new financial regulations applicable from the first financial accounting year of a company beginning after August 2, 2003, the SVF trust was consolidated since January 1, 2004.

In April 2004, as part of a reassessment of our financing requirements and credit facilities, and with a view to optimizing our financial costs, we decided to cancel this securitized program. As a result, the banks no longer have any financing commitments in this respect, and we bought back from the SVF trust all outstanding receivables at their nominal value during the second quarter of 2004. The cancellation of the program did not have a significant impact on the results and financial position of the Group.

Sale of carry-back receivable. In May 2002, we sold to a credit institution a carry-back receivable with a face value of € 200 million resulting from the choice to carry back tax losses from prior years. The cash received from this sale amounted to € 149 million, corresponding to the discounted value of this receivable, that matures in five years. The difference between the net cash proceeds and the nominal value is recorded over the five year period as a financial expense. The financial expense for the six months ended June 30, 2004 amounted to € 5 million.

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We are required to indemnify the purchaser in case of any error or inaccuracy concerning the amount or nature of the carry-back receivable sold. The sale would be retroactively cancelled if future changes in law resulted in a substantial change in the rights attached to the carry-back receivable sold.

Securitization of accounts receivables. In December 2003, we entered into a further securitization program for the sale of customer receivables without recourse. Eligible receivables are sold to a special purpose vehicle, which benefits from a bank financing, and from a subordinated financing from our Group representing an over-collateralization determined on the basis of the risk profile of the portfolio of receivables sold. At June 30, 2004, our Group was a shareholder of the special purpose vehicle, which is fully consolidated in accordance with paragraph 10052 of Regulation no. 99-02 of the “Comité de Réglementation Comptable”. The receivables sold at June 30, 2004, which amounted to € 52 million, are therefore maintained in the consolidated balance sheet. At June 30, 2004, the maximum amount of bank financing that we could obtain through the sale of receivables was € 150 million. The actual amount of such funding for each receivable is a percentage of the amount of the receivable and the percentage varies depending on the quality of the receivables sold. The purpose of this securitization program is to optimize the management and recovery of receivables, in addition to providing extra financing.

Contractual payment obligations and off-balance sheet contingent commitments under U.S. GAAP. The following table presents minimum payments we will have to make in the future under contracts and firm commitments under U.S. GAAP.

The main differences between contractual obligations under U.S. GAAP and under the accounting principles that we follow are:

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Customer Credit Approval Process and Risks. We engage in a thorough credit approval process prior to providing financing to our customers or guarantees to financial institutions, which provide financing to our customers. Any significant undertakings have to be approved by a central Risk Assessment Committee, independent from our commercial departments. We continually monitor and manage the credit we have extended to our customers, and attempt to limit credit risks by, in some cases, obtaining security interests or by securitizing or transferring to banks or export credit agencies a portion of the risk associated with this financing.

Although, as discussed above, we engage in a rigorous credit approval process and have taken actions to limit our exposure to customer credit risks, the global downturn and deterioration of the telecommunications industry have caused certain of our customers to experience financial difficulties and others to file for protection under the bankruptcy laws. Upon the financial failure of a customer, we have realized and may in the future realize, losses on any extended credit given and loans made to the customer, or on guarantees provided for the customer, as well as the loss of the customer’s ongoing business. Should additional 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.

Capital Expenditures. We expect our capital expenditures in 2004 to be approximately € 400 million.

We believe that our current cash and cash equivalents, cash flows and funding arrangements provide us with adequate flexibility to meet our short-term and long-term financial obligations and to pursue our capital expenditure program as planned. We base this assessment on current and expected future economic and market conditions. Should economic and market conditions deteriorate, we may be required to engage in additional restructuring efforts and seek additional sources of capital, which may be difficult if there is no improvement in the current environment and given our limited ability to access the fixed income market at this point. In addition, if we do not meet the financial covenants contained in our syndicated facility, we may not be able to rely on this funding arrangement to meet our cash needs.

Qualitative and Quantitative Disclosures About Market Risk

At June 30, 2004, our exposure to market risks was not materially different from our exposure at the end of last year, as described in our Form 20-F for the year ended December 31, 2003.

Research and Development

Expenditures. In the first half of 2004, our research and development expenditures totaled € 821 million (14.2% of consolidated net sales for the six months ended June 30, 2004) compared to expenditures of € 810 million in the first six months of 2003 (14.1% of consolidated net sales for the six months ended June 30, 2003).

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September 27, 2004

ALCATEL AND SUBSIDIARIES
INDEX TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2004

ALCATEL AND SUBSIDIARIES

UNAUDITED INTERIM CONSOLIDATED INCOME STATEMENTS

The accompanying Notes are an integral part of these Unaudited Interim Consolidated Financial Statements

F-2

ALCATEL AND SUBSIDIARIES

UNAUDITED INTERIM CONSOLIDATED BALANCE SHEETS

ASSETS

The accompanying Notes are an integral part of these Unaudited Interim Consolidated Financial Statements

F-3

ALCATEL AND SUBSIDIARIES

LIABILITIES AND SHAREHOLDERS’ EQUITY

The accompanying Notes are an integral part of these Unaudited Interim Consolidated Financial Statements

F-4

ALCATEL AND SUBSIDIARIES

UNAUDITED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying Notes are an integral part of these Unaudited Interim Consolidated Financial Statements

F-5

ALCATEL AND SUBSIDIARIES

UNAUDITED INTERIM CONSOL IDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

The accompanying Notes are an integral part of these Unaudited Interim Consolidated Financial Statements

F-6

ALCATEL AND SUBSIDIARIES

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

Note 1
Summary of accounting policies

     The interim consolidated financial statements of Alcatel and its consolidated subsidiaries (the “Group”) as of June 30, 2004 and for the first half of 2004 are presented in accordance with the Conseil National de la Comptabilité (CNC)’s recommendation of March 1999 concerning interim financial statements and apply the same principles and accounting methodology as those applied in the annual consolidated financial statements. From January 1, 2002, Alcatel has applied regulation n°00-06, Regulation on liabilities, approved by the “Comité de la Réglementation Comptable”.

     As part of the changeover to IFRS (International Financial Reporting Standards) on and after January 1, 2005, the method of presenting certain income statement captions has been modified. Primarily, the presentation changes concern recurring goodwill amortization charges (charges that will no longer be incurred in accordance with IFRS 3), which are presented separately from exceptional amortization charges (resulting from goodwill impairment tests), and research and development costs (see note 4). In addition, the “pooling of interests” method of accounting for business combinations occurring in 2004 has been abandoned on and after January 1, 2004 (see note 10). The financial statements as of June 30, 2004 and for the first half of 2004 do not fully reflect the financial statement presentation required by the changeover to IFRS. The new reporting standards will lead to other effects that are currently being analyzed.

     Furthermore, the following should be noted :

a)  Seasonal nature of activity

     Interim net sales and income from operations are highly seasonal due to a high level of activity during the last quarter of the year, particularly in December. This characteristic varies from year to year. Pursuant to the CNC’s recommendation of March 1999, interim net sales are accounted for under the same principles as year-end net sales; that is, in the period in which the sales occured.

b)  Income tax

     For interim financial statements, the income tax charge (current and deferred) is calculated by applying the estimated effective annual tax rate for the year under review to net income for the period for each entity or tax grouping.

     Deferred income tax assets are recorded in the consolidated balance sheet when it is more likely than not that those assets will be realized in the future.

Note 2
Changes in consolidated companies

     The main changes in the consolidated companies for the first half of 2004 were as follows :

F-7

ALCATEL AND SUBSIDIARIES

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

F-8

ALCATEL AND SUBSIDIARIES

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

     In order to make comparisons easier, restated income statements, which have not been subjected to a limited review by the statutory auditiors, are presented to take into account changes in the consolidated companies and discontinuation of the following businesses:

     Data for the first half of 2003 and the first half of 2004 have been restated to show the results of the above businesses under the caption share in net income of equity affiliates and discontinuing or discontinued operations:

Note 3
Information by business segment and by geographical region

a)  Information by business segment

     The first two business segments, Fixed Communications and Mobile Communications, serve the telecom service provider markets and comprise:

F-9

ALCATEL AND SUBSIDIARIES

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

     The third business segment, Private Communications, fulfills a dual function:

     The segment, Other, includes miscellaneous businesses outside Alcatel’s core businesses, such as corporate purchasing, reinsurance and banking activities and corporate holding companies accounting mainly for corporate expenses. None of these activities are sufficiently significant to be disclosed as reportable segments.

     The information by segment follows the same accounting policies as those used and described in these consolidated financial statements.

1)  Net sales

2)  Income (loss) from operations