1. All Rights Reserved © Alcatel-Lucent 2006 UTelco Business Case Ross MacKinnon, WBG Marketing March 27, 2007 ross.mackinnon@alcatel-lucent.com

2. All Rights Reserved © Alcatel-Lucent 2006 2 | Wireline Business Group | Mar. 27, 2007 Case Description Objective: Determine the economic value of implementing a UTelco solution in a European country versus extending the legacy ATM network. Target market:  Enterprises, Wholesale, Internal Customers Services:  Retail Enterprise:  VLL: 100 Mb/s & 1 Gb/s  VPLS: 100 Mb/s & 1 Gb/s  Wholesale:  TDM: E1, E3, STM1, STM4  Internal:  VLL: 10 Mb/s  TDM: E1, E3, STM1, STM4 Study scope:  10 year study  12% cost of capital (WACC); zero terminal value  Currency used: Euro

3. All Rights Reserved © Alcatel-Lucent 2006 3 | Wireline Business Group | Mar. 27, 2007 Market Demand Assumptions ItemBase ValueAnnual Growth Rate Source Business Market5,000 subs.2%Alcatel-Lucent Sales & Marketing Internal Corporate Market 20,000 subs.1%Alcatel-Lucent Sales & Marketing Wholesale Market20 subs.7.5%Alcatel-Lucent Sales & Pyramid Research 2006  Business Market and Wholesale Market penetration follows typical s-curve  For UTelco scenario, Internal Corporate Market is cutover from Legacy ATM network to UTelco solution in Year 1  For Legacy ATM scenario, Internal Corporate Market grows at 1% per year from base of 20,000 subscribers

4. All Rights Reserved © Alcatel-Lucent 2006 4 | Wireline Business Group | Mar. 27, 2007 Service Tariffs Business Market tariffs based on 2005 Telefonica retail tariffs @ 40% discount Excludes local loop component (75% of total), due to incumbent monopoly No revenue charged for Internal Corporate Market services.

5. All Rights Reserved © Alcatel-Lucent 2006 5 | Wireline Business Group | Mar. 27, 2007 Legacy ATM Network Architecture Core GX 550® Multiservice WAN Switch PacketStar® PSAX 4500 Multiservice Media Gateway STM-16 STM-4 E1, E3 STM-1 Single POP (6 POPs total)  Assumed that the Capex for the legacy network is sunk.  Only Capex associated with incremental growth of the network is included.

6. All Rights Reserved © Alcatel-Lucent 2006 6 | Wireline Business Group | Mar. 27, 2007 UTelco Solution - Network Architecture Assumed that the 7750 SRs are co-located with the 1660 SMs in each POP. Optionally City 1, POP 2 City 1, POP 1 City 2 City 3, POP 1 City 3, POP 2 City 4

7. All Rights Reserved © Alcatel-Lucent 2006 7 | Wireline Business Group | Mar. 27, 2007 NPV Results – UTelco Solution vs. Legacy ATM  UTelco NPV = €12.6 M in year 7  Legacy NPV = (€20.2 M) in year 7  Overall NPV benefit of UTelco is €32.8 M in year 7 DPB: Discounted Pay Back UTelco DPB in 2.75 yrs (vs. Legacy ATM) UTelco stand-alone DPB in 4.2 yrs

8. All Rights Reserved © Alcatel-Lucent 2006 8 | Wireline Business Group | Mar. 27, 2007 Cash Flow Comparison  When compared with Legacy ATM, UTelco’s cash flow is superior in less than 1 year  On a stand-alone basis, UTelco solution’s cash flow turns positive in 1.3 years UTelco advantage in <1 yr

9. All Rights Reserved © Alcatel-Lucent 2006 9 | Wireline Business Group | Mar. 27, 2007 Service Revenue Comparison UTelco solution:  Adds 5,020 paying customers to existing base of 20,000 internal connections.  Total PW Revenue generated is €110.1 M over 7 yrs.; averages €15.7 M per year  Key services: VPLS 100 Mb/s (47% of revenue), 1Gb/s (40% of revenue). Legacy ATM network:  No revenue generation.

10. All Rights Reserved © Alcatel-Lucent 2006 10 | Wireline Business Group | Mar. 27, 2007 Opex Comparison  Excluding SG&A costs, the UTelco’s Opex costs over 7 years are 6% less than the Legacy ATM  SG&A costs represent 46% of total UTelco Opex. However, the 7 year PV revenue of €110 M more than offsets this cost.

11. All Rights Reserved © Alcatel-Lucent 2006 11 | Wireline Business Group | Mar. 27, 2007 Sensitivity Analysis – Tornado Chart Clearly, the most sensitive variable is the amount of bookable revenue possible. Keeping more of the local loop revenue has a multiplication effect on NPV. This business case will perform best in markets with local loop competition.

12. All Rights Reserved © Alcatel-Lucent 2006 12 | Wireline Business Group | Mar. 27, 2007 Conclusion The UTelco solution is very positive (NPV= €32.8 M, DPB=2.75 years) when compared to the Legacy ATM network because:  It generates new revenue of €110.1 M over the life of the project  The high density on the 7750 economically serves IP customers with high bandwidth Ethernet services, while the high density of the 1660 economically serves TDM customers (especially at E1 speed)  The throughput of the equipment is able to meet future increases in traffic bandwidth  The path-based network management system improves operations efficiency of provisioning and troubleshooting connections. Even on a stand-alone basis, the UTelco solution is positive, yielding an NPV of €12.6 M and a discounted Pay Back of 4.2 years. The key to success is retaining as much of the local loop revenue as possible, in addition to the network revenue for the services offered. The case will perform better in markets with local loop unbundling or with local loop competition.

13. All Rights Reserved © Alcatel-Lucent 2006 13 | Wireline Business Group | Mar. 27, 2007 Disclaimer PLEASE NOTE: This information is provided free of charge as a convenience to customers. Alcatel-Lucent makes no representations or warranties regarding this information, which is provided on an "as is" basis. Alcatel-Lucent assumes no liability or responsibility for any errors or omissions in the content on the information provided.

14. All Rights Reserved © Alcatel-Lucent 2006 14 | Wireline Business Group | Mar. 27, 2007 For more information, visit: http://aww.alcatel.com/marketing/bus_case www.alcatel-lucent.com