Alcatel reports third quarter 2003 results

* Sales close to stable sequentially at Euro 3,039 million

* Gross margin improved to 35.6%

* Income from operations at Euro 160 million, 5.3% return on sales

* Net loss at Euro (284) million, including Euro (214) million of restructuring charges

* Net cash position remains strong at Euro 541 million

Alcatel`s Board of Directors reviewed third quarter 2003 results. Third quarter sales were close to stable at Euro 3,039 million versus Euro 3,149 million in second quarter 2003. Year over year, sales decreased by 13% (6% at constant exchange rate). Income from operations amounted to Euro 160 million, while net loss was registered at Euro 284 million or diluted Euro (0.23) per share (USD (0.27) per ADS).

Serge Tchuruk, Chairman and CEO summarized the Board`s observations:

"We are pleased to see third quarter results confirm encouraging indications of our return to profitability. Continuing cost savings and gross margin improvements have translated into reaching our Euro 3 billion quarterly sales breakeven target ahead of schedule.

Operating performance continued to be strong in broadband access, in mobile networks, and in the rail communication and control business, reflecting our competitiveness in those markets. We were also successful in achieving key wins in new markets with good potential, namely 3G, IP and applications software, as we are now getting good traction in return for our large R&D investments in those areas. On the other hand, we still recorded operating losses in cellular handsets and optics.

Overall, our third quarter sales were close to stable sequentially, somewhat better than the usual seasonal pattern, in a market characterized by strong pressure on prices and a continuing USD/Euro weakness. Our return on sales exceeded 5% and our net cash position remained solid around Euro 500 million. We are currently completing our restructuring programs with a view of optimizing our operating efficiency around the "One Company" concept, which can achieve further economies of scale at the current level of business. In addition, actions are being prepared to eliminate losses next year in the above mentioned areas of handsets and optics. We will take necessary decisions in this regard before the end of this year. Our aim in preparing next year`s operating plan is now to target a positive net income in 2004 (pre-goodwill)."

"Fourth quarter sales should grow sequentially in the twenties, with our operating return on sales up by a few points. With year to date operating income already in the black we will exceed our full year target of a breakeven operating income; similarly, we are comfortable with our objectives of a breakeven fourth quarter net income (before goodwill and non-recurring charges). For the full year 2003 our net loss should be nearly equivalent to goodwill and non-recurring charges and our net cash position about stable compared to year end 2002."

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Third quarter revenue decreased sequentially by 4.6% to Euro 1,341 million from Euro 1,405 million. A strong demand for broadband access, particularly in the U.S. market, was registered during the quarter and a total of 4.3 million DSL lines were delivered (10 million shipped in the first nine months versus 5 million in the first nine months of 2002). Alcatel`s IP services offering is gaining a foothold following the acquisition of TiMetra, while ATM sales were weak for the quarter. Voice networks were adversely affected by the usual seasonality and the activity in both terrestrial and submarine optical networks declined. This mitigated the good performance of broadband access.

Despite the adverse volume effect in voice and optical networks, income from operations increased to Euro 66 million from breakeven in Q2 due to continuing improvement in fixed cost reduction. Significant restructuring continues in the optical network division.

Third quarter revenue decreased sequentially by 2.3% to Euro 815 million from Euro 834 million. Mobile networks turned in a good performance in the quarter and continued to gain market share. In addition to on going 2G sales, a ramp-up in 3G sales was registered during the quarter. In mobile applications, commercial successes were recorded in convergent payment applications (voice/data and prepaid/postpaid) as well as next generation data messaging software (MMS, MMS premium and instant messaging). Mobile phones continued to be weak with 1.5 million phones delivered during the quarter.

Income from operations represented a 9.7% return on sales at Euro 79 million compared to Euro 10 million in Q2. Overall mobile networks` profitability was strong and increased sequentially while losses remained in mobile phones.

Third quarter revenue decreased sequentially by 3.7% to Euro 975 million compared with Euro 1,012 million. The IP/PBX business enjoyed an increase in demand in Europe and, as a result, Alcatel consolidated its leading market position. Genesys` contact center software business also continued to turn in a good performance. The rail communication and control business also saw increasing demand in signaling networks for main line and urban rail systems and was a significant contributor to the quarter. The overall strategy to develop outsourcing services for carriers began to pay off during the quarter. The segment`s gain was offset by a decline in space revenues, which is attributable to timing effects stemming from the lumpiness of that business. However, order intake for the space business continued to be satisfactory.

Income from operations was Euro 55 million compared to Euro 37 million in Q2. Profitability increased across all businesses with significant contributions from Enterprise and Transport Solutions.

Alcatel will host an audio webcast at 1:00 p.m. Paris time (12:00 p.m. London and 7:00 a.m. New York), which can be accessed at http://www.alcatel.com/3q2003 or http://www.alcatel.fr/3q2003.

Net Sales: Euro 3,039 million vs. Euro 3,508 million Q3 02 (down 13.4%) and vs. Euro 3,149 million sequentially (down 3.5%). Geographical distribution of sales:

W. Europe: 42%

Other Europe: 7%

North America: 18%

Asia: 17%

RoW: 16% Gross margin: 35.6% (31.4% for Q2 2003). Selling, general and administration ("SG&A") costs: Euro (534) million (17.6% of sales). Research and development ("R&D") expenses: Euro (389) million (12.8% of sales). Income (loss) from operations: Euro 160 million, which included Euro 19 million in inventory depreciation vs. Euro 21 million in Q2 03, of which Euro (2) million in inventory depreciation. Earnings before tax and amortization of goodwill: Euro (145) million and included:

* Interest paid on convertible bonds Euro (11) million

* Net financial loss of Euro (70) million

* Restructuring costs of Euro (214) million

* Net other revenue/(expenses) of Euro (10) million Net Income Pre-Goodwill and Minority Interest: Euro (175) million Net Income: Euro (284) million and included a related tax charge of Euro (24) million, share in net income of equity affiliates and discontinued activities of Euro (6) million, goodwill amortization of Euro (104) million, and minority interests of Euro (5) million. Diluted A share EPS: Euro (0.23) [USD (0.27) per ADS] based on an average of 1.22 billion shares.

Operating working capital: Euro 857 million, a sequential decrease of Euro 130 million Cash and equivalents: Euro 6,451 million, compared to Euro 7,000 million at the end of Q2 2003. Net Cash: Euro 541 million. Gearing: (14%) Operating Cash Flow: Euro 304 million.