Nov. 8, 2005

Dear Lucent Employees and Retirees,

Today's story in The New York Times on pension accounting and the comments by Lucent retiree Herb Zydney are a disappointment to the company and a distortion of the standards and integrity we exhibit in our pension accounting and all of our financial disclosures.

Lucent has spent countless hours discussing these issues with Mr. Zydney and trying to educate the Lucent Retiree Organization leadership on our practices, but to no avail. I would like to share with you some of the facts we shared with The New York Times regarding Mr. Zydney's criticism of the company. I want to reassure you that Lucent's practices are in line with U.S. Generally Accepted Accounting Principles (GAAP), which all public companies are required to apply; we remain prudent in our management of these assets, including a well-diversified portfolio; and Lucent's pensions remain well-funded under the federally mandated ERISA guidelines.

On the issue of pension disclosures and transparency:

  • We take our responsibility to investors very seriously and consistently report our financial results with transparency and integrity.
  • Lucent consistently reports its earnings in accordance with GAAP and takes additional measures to provide our investors with robust disclosures.
  • The investment community is well aware of the impact of our pension credit when analyzing our company and its prospects, and many in the financial investment community cite Lucent positively for its detailed disclosures.

On the issue of executive compensation and pension impacts:

  • We have consistently excluded pension credits as a factor in calculating executive compensation in the past. In 2003, we decided to clarify and commit to this practice as a matter of policy.
  • Due to our detailed disclosures around the pension credit, the investment community's consideration of its impact on our financial results, and its exclusion as a factor in executive compensation, the company has no incentive to make "risky investments."

On the issue of pension asset allocations and assumptions:

  • Lucent's Board of Directors sets the asset allocation policy of Lucent's pension plan and reviews that policy on a regular basis.
  • The asset allocation policy is prudent to meet our current and future pension obligations. The policy mandates a well-diversified portfolio consistent with the approach employed by other large U.S. corporate pension plans. This asset allocation is also disclosed in our regular filings.
  • The returns on our pension assets have generally outpaced our assumptions for return on assets (most recently 8.5 percent). Our actual 10-year annual rate of return on pension plan assets were 11%, 9.9% and 9.5% during fiscal 2004, 2003 and 2002, respectively.
  • The percentage of our pension plan assets invested in "private equity and other" is 8 percent, and has been targeted at 8 percent since 1998.
  • Lucent's pension assets are managed by the Lucent Asset Management Company (LAMCO), a separate wholly owned subsidiary staffed with investment professionals whose objective is to maximize returns with a prudent level of risk.

SEC investigations:

  • The SEC's investigation of Lucent's revenue recognition issues was resolved in May 2004, with the announcement of a consent decree. That action concluded the SEC's investigation of the revenue recognition issues that Lucent brought to its attention in late 2000.
  • Unlike some other companies cited in the article, we are not aware of any SEC investigation concerning our pension accounting.

I hope these points address any concerns you may have about the story in The New York Times and will help you better understand an issue that has become an unjustified crusade of a few Lucent retirees.

Frank D'Amelio
Lucent Technologies
Chief Financial Officer