10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007

or

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                   to                   

Commission File Number 001-15951

AVAYA INC.

(Exact name of registrant as specified in its charter)

Delaware	22-3713430
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
211 Mount Airy Road Basking Ridge, New Jersey	07920
(Address of principal executive offices)	(Zip Code)

(908) 953-6000

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x    No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x Accelerated filer  o Non-accelerated filer  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes  o     No  x

As of July 31, 2007, 456,934,358 shares of Common Stock, $.01 par value of Avaya Inc. were outstanding.

TABLE OF CONTENTS

Item		Description	Page
PART I—FINANCIAL INFORMATION
1.	Financial Statements (unaudited)		3
2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		29
3.	Quantitative and Qualitative Disclosures About Market Risk		51
4.	Controls and Procedures		52
PART II—OTHER INFORMATION
1.	Legal Proceedings		53
1A.	Risk Factors		53
2.	Unregistered Sales of Equity Securities and Use of Proceeds		61
3.	Defaults Upon Senior Securities		62
5.	Other Information		62
6.	Exhibits		62
	Signatures		63

This Quarterly Report on Form 10-Q contains trademarks, service marks and registered marks of Avaya Inc. and its subsidiaries and other companies, as indicated. Unless otherwise provided in this Quarterly Report on Form 10-Q, trademarks identified by ® and ™ are registered trademarks or trademarks, respectively, of Avaya Inc. or its subsidiaries. All other trademarks are the properties of their respective owners.

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PART I   FINANCIAL INFORMATION

Item 1.   Financial Statements.

AVAYA INC.

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

	Three months ended								Nine months ended
	June 30,								June 30,
	2007				2006				2007			2006
	Dollars in millions, except per share amounts
REVENUE
Sales of products		$	626			$	636		$	1,884		$	1,820
Services		507				507			1,525			1,503
Rental and managed services		143				154			441			461
		1,276				1,297			3,850			3,784
COSTS
Sales of products		302				304			892			856
Services		312				335			960			976
Rental and managed services		65				70			204			197
		679				709			2,056			2,029
GROSS MARGIN		597				588			1,794			1,755
OPERATING EXPENSES
Selling, general and administrative		402				423			1,184			1,207
Research and development		104				115			332			318
Restructuring charges, net		13				22			29			42
Merger-related costs		8				—			8			—
TOTAL OPERATING EXPENSES		527				560			1,553			1,567
OPERATING INCOME		70				28			241			188
Other income, net		10				5			23			16
Interest expense		(1		)		—			(1		)	(3		)
INCOME BEFORE INCOME TAXES		79				33			263			201
Provision for (benefit from) income taxes		24				(11		)	80			48
NET INCOME		$	55			$	44		$	183		$	153
Earnings Per Common Share—Basic:		$	0.12			$	0.10		$	0.40		$	0.33
Earnings Per Common Share—Diluted:		$	0.12			$	0.10		$	0.40		$	0.32

The accompanying Notes to Consolidated Financial Statements are an integral part of these Statements.

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AVAYA INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

	June 30, 2007				September 30, 2006
	Dollars in millions,  except per share amounts
ASSETS
Current assets:
Cash and cash equivalents		$	1,057			$	899
Accounts receivable, less allowances of $59 million and $57 million as of June 30, 2007 and September 30, 2006, respectively		869				871
Inventory		304				285
Deferred income taxes, net		177				153
Other current assets		212				151
TOTAL CURRENT ASSETS		2,619				2,359
Property, plant and equipment, net		626				668
Deferred income taxes, net		700				787
Intangible assets		275				263
Goodwill		1,121				941
Other assets		222				182
TOTAL ASSETS		$	5,563			$	5,200
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	395			$	418
Payroll and benefit obligations		400				377
Deferred revenue		327				286
Business restructuring reserve		70				98
Other current liabilities		228				249
TOTAL CURRENT LIABILITIES		1,420				1,428
Benefit obligations		1,372				1,321
Deferred income taxes, net		79				77
Other liabilities		266				288
TOTAL NON-CURRENT LIABILITIES		1,717				1,686
Commitments and contingencies
STOCKHOLDERS’ EQUITY
Series A junior participating preferred stock, par value $1.00 per share, 7.5 million shares authorized; none issued and outstanding		—				—
Common stock, par value $0.01 per share, 1.5 billion shares authorized, 457,182,852 and 452,203,778 issued (including 1,060,315 and 461,429 treasury shares) as of June 30, 2007 and September 30, 2006, respectively		5				5
Additional paid-in-capital		2,713				2,637
Retained earnings		331				148
Accumulated other comprehensive loss		(609		)		(698		)
Less: Treasury stock at cost		(14		)		(6		)
TOTAL STOCKHOLDERS’ EQUITY		2,426				2,086
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	5,563			$	5,200

The accompanying Notes to Consolidated Financial Statements are an integral part of these Statements.

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AVAYA INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Nine months ended
	June 30,
	2007			2006
	Dollars in millions
OPERATING ACTIVITIES:
Net income	$	183			$	153
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	221				202
Share-based compensation	28				22
Deferred income taxes, net	55				24
Impairment charges	—				29
Reversal of liabilities related to tax settlements	(8		)		(25		)
Gain resulting from sale of real estate	(8		)		—
Restructuring charges, net	29				42
Unrealized losses on foreign currency exchange	19				11
Adjustments for other non-cash items, net	5				7
Changes in operating assets and liabilities, net of effects of acquired businesses:
Accounts receivable	14				40
Inventory	(9		)		(4		)
Accounts payable	(28		)		(12		)
Payroll and benefit obligations	38				42
Business restructuring reserve	(83		)		(56		)
Deferred revenue	57				29
Other assets and liabilities	(89		)		(48		)
NET CASH PROVIDED BY OPERATING ACTIVITIES	424				456
INVESTING ACTIVITIES:
Capital expenditures	(79		)		(83		)
Capitalized software development costs	(71		)		(53		)
Acquisitions of businesses, net of cash acquired	(162		)		—
Proceeds from sale of real estate	13				2
Other investing activities, net	(5		)		(5		)
NET CASH USED FOR INVESTING ACTIVITIES	(304		)		(139		)
FINANCING ACTIVITIES:
Issuance of common stock	110				20
Repurchase of common stock	(94		)		(256		)
Capital lease payments	(3		)		(14		)
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES	13				(250		)
Effect of exchange rate changes on cash and cash equivalents	25				5
Net increase in cash and cash equivalents	158				72
Cash and cash equivalents at beginning of fiscal year	899				750
Cash and cash equivalents at end of period	$	1,057			$	822

The accompanying Notes to Consolidated Financial Statements are an integral part of these Statements.

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AVAYA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.Background and Basis of Presentation

Background

Unless otherwise indicated by the context in this Quarterly Report on Form 10-Q, “we,” “us,” “our,” “the Company” and “Avaya” refer to Avaya Inc. and its consolidated subsidiaries. We are a leading provider of communications solutions that help enterprises transform their businesses by intelligently connecting customers, employees and business partners with enhanced business processes. Our enterprise communications solutions offerings are comprised of a product portfolio that includes infrastructure hardware, application software, phone appliances and a comprehensive portfolio of enterprises services focused on IT and communications solutions. We support our broad customer base with comprehensive global service offerings that enable our customers to plan, design, implement, monitor and manage their communications systems and/or converged networks. The term “traditional” with respect to “voice communications,” “enterprise voice communications,” “telephony,” “voice telephony,” “voice systems,” or “TDM,” refers to circuit-based enterprise voice communications.

Basis of Presentation

The accompanying unaudited interim Consolidated Financial Statements as of June 30, 2007 and for the three and nine months ended June 30, 2007 and 2006, have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial statements and the rules and regulations of the U.S. Securities and Exchange Commission (“the SEC”) for interim financial statements, and should be read in conjunction with our Consolidated Financial Statements and other financial information for the fiscal year ended September 30, 2006, which were included in our Annual Report on Form 10-K filed with the SEC on December 8, 2006. The significant accounting policies used in preparing these unaudited interim Consolidated Financial Statements are the same as those described in Note 2 to our Annual Report on Form 10-K filed with the SEC on December 8, 2006. In our opinion, the unaudited interim Consolidated Financial Statements reflect all adjustments, consisting of normal and recurring adjustments, necessary for a fair statement of the financial condition, results of operations and cash flows for the periods indicated.

Certain prior year amounts have been reclassified to conform to the current year presentation. The consolidated results of operations for the interim periods reported are not necessarily indicative of the results to be experienced for the entire fiscal year.

Merger Agreement with Silver Lake Partners and TPG Partners

On June 4, 2007, Avaya entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Sierra Holdings Corp., a Delaware corporation (“Parent”), and Sierra Merger Corp., a Delaware corporation and wholly owned subsidiary of Parent (“Merger Sub”). Under the terms of the Merger Agreement, Merger Sub will be merged with and into the Company, with the Company continuing as the surviving corporation and a wholly owned subsidiary of Parent (the “Merger”). Parent was formed by two private equity funds, Silver Lake Partners III, L.P. and TPG Partners V, L.P. (collectively, the “Sponsors”), solely for the purpose of entering into the Merger Agreement and consummating the Merger. The Merger Agreement provides for a purchase price of $17.50 per share of Avaya common stock (the “Merger Consideration”), or approximately $8.21 billion in the aggregate (excluding fees and expenses in connection with the Merger of approximately $0.28 billion).

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The proposed transaction is expected to be completed in the fall of 2007, subject to receipt of shareholder approval and customary regulatory approvals, as well as satisfaction of other customary closing conditions. There is no financing condition to the obligations of the Sponsors to consummate the transaction, and equity and debt commitments sufficient to fund the Merger Consideration have been delivered to Parent. The Company filed its preliminary proxy statement with the SEC on July 18, 2007 and filed its Hart-Scott-Rodino notification with the Federal Trade Commission and the Department of Justice on June 15, 2007. The Department of Justice and the Federal Trade Commission granted early termination of the Hart-Scott-Rodino waiting period effective June 28, 2007. The date for the special meeting of shareholders to vote on adoption of the Merger Agreement is September 28, 2007, and the record date related to this meeting is August 9, 2007.

During the three months ended June 30, 2007, the Company incurred third-party costs associated with the Merger of $8 million (approximately $4.6 million after tax, or $0.01 per diluted share) consisting primarily of investment banking and legal fees directly related to the proposed Merger.

2.Recent Accounting Pronouncements

SFAS 159

In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”) which permits companies the option, at specified election dates, to measure financial assets and liabilities at their current fair value, with any corresponding changes in fair value from period to period recognized in the income statement. Additionally, SFAS 159 establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar assets and liabilities. SFAS  159 is effective for the Company beginning in fiscal 2009. The Company is currently evaluating the impact that adoption of SFAS 159 may have on its Consolidated Financial Statements.

SFAS 158

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Post Retirement Plans—an amendment of FASB Statements No. 87, 88, 106 and 132(R)” (“SFAS 158”). SFAS 158 improves reporting of obligations for pensions and other post-retirement benefits by recognizing the over-funded or under-funded status of plans as an asset or liability. The pronouncement does not change how plan assets and benefit obligations are measured under FAS 87 and FAS 106 nor does it change the approach for measuring annual benefit cost reported in earnings. Instead, it eliminates the provisions that permit plan assets and obligations to be measured as of a date not more than three months prior to the balance sheet date, instead requiring measurement as of the reporting date. In addition, the pronouncement requires previously unrecognized items, such as actuarial gains or losses and unrecognized prior service costs or credits to be recognized on the balance sheet as a component of other comprehensive income (loss). The Company will adopt the provisions of SFAS 158 by the end of fiscal 2007. The estimated impact of adopting this new standard depends upon several factors, including the market discount rate at September 30, 2007 and the actual return on plan assets. The Company estimates an increase in the liability for benefit obligations recognized on the September 30, 2007 Consolidated Balance Sheet of approximately $150 to $180 million with an addition to accumulated other comprehensive loss. This range is an estimate and is subject to change pending the funded status of the plans as of the measurement date, which is September 30, 2007. The Company is also assessing the potential impact that adoption of SFAS 158 may have on the Company’s postemployment liabilities established under SFAS No. 112, “Employers’ Accounting for Postemployment Benefits.”

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SFAS 157

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value and establishes a framework for measuring fair value under U.S. GAAP. The pronouncement describes fair value as being based on a hypothetical transaction to sell an asset or transfer a liability at a specific measurement date, as considered from the perspective of a market participant who holds the asset or owes the liability. In addition, fair value should be viewed as a market-based measurement, not an entity-specific measurement. Therefore fair value should be determined based on the assumptions that market participants would use in pricing an asset or liability, including all risks associated with that asset or liability. SFAS 157 will be effective for the Company beginning in fiscal 2009. The adoption of SFAS 157 is not expected to have a material impact on the Company’s Consolidated Financial Statements.

SAB 108

In September 2006, the SEC issued SAB 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). In SAB 108, the SEC staff established an approach that requires quantification of financial statement misstatements based on the effect of the misstatements on each of the Company’s financial statements and the related financial statement disclosures. This model is commonly referred to as a “dual approach” because it requires quantification of errors under both the iron curtain (year-end balance sheet effect) and the rollover (current-year effect on consolidated statements of operations) methods, along with the evaluation of all relevant qualitative factors.

SAB 108 permits existing public companies to initially apply its provisions either by (i) restating prior financial statements as if the “dual approach” had always been used or (ii) recording the “cumulative effect” of initially applying the “dual approach” as adjustments recorded to the opening balance of retained earnings. Use of the “cumulative effect” transition method requires detailed disclosure of the nature and amount of each individual error being corrected through the cumulative adjustment and how and why it arose. We expect to initially apply the provisions of SAB 108 in connection with the preparation of our annual financial statements for the year ended September 30, 2007. We are currently evaluating the impact that the adoption of SAB 108 will have on our consolidated results of operation and financial position.

FIN 48

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes (an interpretation of FASB Statement No. 109)” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in tax positions and requires that companies recognize in their financial statements the impact of a tax position if it is more likely than not that the position would be sustained on audit, based on the technical merits of the position. The Company will be required to adopt the provisions of FIN 48 beginning in fiscal 2008, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings as well as requiring additional disclosures. The Company is currently assessing the impact that adoption of FIN 48 may have on its Consolidated Financial Statements.

3.Business Combinations

Acquisition of Ubiquity

On January 12, 2007, the Company announced that Avaya International Enterprises Limited (“AIEL”), a wholly-owned subsidiary of the Company, commenced a conditional tender offer to acquire Ubiquity Software Corporation plc (“Ubiquity”). Ubiquity develops and markets SIP-based communications software. Ubiquity was publicly traded on the Alternative Investment Market of the

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London Stock Exchange and is headquartered in the United Kingdom. Terms of the offer provided for a purchase price of 37.3 pence per Ubiquity share.

On February 15, 2007, the Company announced that it received binding acceptances representing 96.7 percent of the outstanding shares of Ubiquity through its tender offer and declared the offer wholly unconditional. On February 28, 2007, the Company used $146 million of cash to acquire substantially all of the Ubiquity shares. During April 2007, the Company purchased the remaining outstanding shares for $1 million.

Based upon a preliminary purchase price allocation, the Company recognized $41 million of intangible assets related primarily to existing core technology with a weighted average useful life of approximately nine years, and recorded $122 million of goodwill. Management has made estimates and assumptions in the preliminary purchase price allocation that could affect the reported amounts of assets, liabilities and expenses resulting from this acquisition. Actual amounts could differ from these estimates. Management expects to finalize its purchase price allocation by the end of fiscal 2007. The purchase price for this acquisition is not considered to be material to the Consolidated Financial Statements and, therefore, pro forma financial information has not been presented. The financial results of Ubiquity are included in the Company’s Consolidated Financial Statements beginning on February 28, 2007.

Acquisition of Traverse

On November 9, 2006, the Company acquired Traverse Networks, Inc. (“Traverse”) for $15 million in cash. Traverse is a U.S.-based developer of enterprise mobility solutions for unified communications. The Company acquired $3 million in intangible assets with a weighted average useful life of 4.5 years, $4 million in other assets and recorded $8 million of goodwill as part of the purchase price allocation. Management has made estimates and assumptions that could affect the reported amounts of assets, liabilities and expenses resulting from this acquisition. Actual amounts could differ from these estimates. The purchase price for this acquisition is not considered to be material to the Consolidated Financial Statements and, therefore, pro forma financial information has not been presented. The financial results of Traverse are included in the Company’s Consolidated Financial Statements beginning on November 9, 2006.

4.Goodwill and Intangible Assets

The changes in the carrying value of goodwill for the nine months ended June 30, 2007 by operating segment are as follows:

	Global			Avaya
	Communications			Global
	Solutions			Services			Total
	Dollars in millions
Balance as of September 30, 2006		$	658		$	283	$	941
Acquisition of Traverse		8			—		8
Acquisition of Ubiquity		122			—		122
Impact of foreign currency exchange rate fluctuations		37			13		50
Balance as of June 30, 2007		$	825		$	296	$	1,121

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The following table presents the components of the Company’s acquired intangible assets:

	June 30, 2007								September 30, 2006
	Gross								Gross
	Carrying			Accumulated					Carrying			Accumulated
	Amount			Amortization			Net		Amount			Amortization			Net
	Dollars in millions
Existing technology		$	161		$	74	$	87		$	103		$	57	$	46
Customer relationships and other intangibles		303			134		169			292			94		198
Total amortizable intangible assets		$	464		$	208	$	256		$	395		$	151	$	244
Minimum pension adjustment		19			—		19			19			—		19
Total intangible assets		$	483		$	208	$	275		$	414		$	151	$	263

During the nine months ended June 30, 2007, the acquisitions of Ubiquity and Traverse as well as the impact of foreign currency, partially offset by amortization, resulted in a net increase of $12 million in the net intangible assets balance. The weighted average useful lives of the existing technology and customer relationships and other intangibles are approximately six years and seven years, respectively.

Amortization expense for the Company’s acquired intangible assets was $17 million and $49 million for the three and nine months ended June 30, 2007, respectively, and was $15 million and $48 million for the three and nine months ended June 30, 2006, respectively. Estimated future amortization expense is shown in the following table:

	Estimated future
	amortization expense
	Dollars in millions
Remainder of fiscal 2007		$	19
2008		70
2009		68
2010		54
2011		14
2012 and thereafter		31
Future amortization expense		$	256

The minimum pension adjustment represents unrecognized prior service costs associated with the recording of a minimum pension liability in prior fiscal years. This intangible asset may be eliminated or adjusted as necessary when the amount of minimum pension liability is reassessed, which is conducted on an annual basis.

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5.Supplementary Financial Information

Statements of Income Information

	Three months ended								Nine months ended
	June 30,								June 30,
	2007				2006				2007				2006
	Dollars in millions
OTHER INCOME, NET
Interest income		$	13			$	9			$	35			$	24
Loss on foreign currency transactions		(1		)		(1		)		(4		)		(3		)
Other, net		(2		)		(3		)		(8		)		(5		)
Total other income, net		$	10			$	5			$	23			$	16
COMPREHENSIVE INCOME:
Net income		$	55			$	44			$	183			$	153
Other comprehensive income:
Cumulative translation adjustment		22				53				88				102
Unrealized holding (loss) gain on available for sale securities		—				(1		)		1				(4		)
Total comprehensive income		$	77			$	96			$	272			$	251

Balance Sheet Information

	June 30, 2007			September 30, 2006
	Dollars in millions
INVENTORY:
Finished goods	$	300			$	281
Raw materials	4				4
Total inventory	$	304			$	285
PROPERTY, PLANT AND EQUIPMENT, NET:
Land and improvements	$	47			$	56
Buildings and improvements	473				460
Machinery and equipment	697				654
Rental equipment	251				230
Assets under construction	9				8
Internal use software	234				226
Total property, plant and equipment	1,711				1,634
Less: Accumulated depreciation and amortization	(1,085		)		(966		)
Property, plant and equipment, net	$	626			$	668

6.Restructuring Programs

The net restructuring charge of $29 million recorded in the nine months ended June 30, 2007 is primarily comprised of employee separation charges related to our Europe, Middle East and Africa (“EMEA”) operations, in addition to operating lease obligations. These charges were partially offset by a net benefit due to changes in estimates for prior restructuring plans.

Restructuring charges, net, of $13 million for the third quarter of fiscal 2007 represent charges for employee separation costs recorded with respect to the fiscal 2007 restructuring plan.

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Fiscal 2007 Restructuring Plan

The following table summarizes the components of this reserve during the nine months ended June 30, 2007:

	Employee
	Separation				Lease
	Costs				Obligations				Total
	Dollars in millions
Balance as of September 30, 2006		$	—			$	—		$	—
Charges		30				6			36
Cash payments		(10		)		(3		)	(13		)
Balance as of June 30, 2007		$	20			$	3		$	23

The employee separation costs are primarily related to workforce actions in the EMEA region as a result of the Company’s continuing efforts to improve the region’s operational performance, in addition to other charges in the U.S. The operating lease obligations relate to future rent payments, net of estimated sublease income, for unused space in connection with the closing or consolidation of office facilities.

Fiscal 2006 Restructuring Plan

This reserve reflects the remaining balances associated with restructuring actions initiated during fiscal 2006. The following table summarizes the components of this reserve during the nine months ended June 30, 2007:

	Employee
	Separation				Lease
	Costs				Obligations				Total
	Dollars in millions
Balance as of September 30, 2006		$	70			$	17		$	87
Adjustments		(2		)		(7		)	(9		)
Cash payments		(43		)		(3		)	(46		)
Impact of foreign currency fluctuations		1				1			2
Balance as of June 30, 2007		$	26			$	8		$	34

The employee separation costs are related to workforce actions in the EMEA region, as well as a reduction in the number of service technicians in the U.S. The headcount reductions identified in this action have been completed and the cash payments are expected to be made through the end of fiscal 2008. The operating lease obligations relate to future rent payments, net of estimated sublease income, for unused space in connection with the closing or consolidation of international office facilities, primarily located in the United Kingdom. During the nine months ended June 30, 2007, the Company concluded lease renegotiations, resulting in a change in the estimate and a $7 million reversal of the initial liability.

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Restructuring Plans Prior to Fiscal 2006

This reserve reflects the remaining balances associated with restructuring actions initiated prior to fiscal 2006. During the fourth quarter of fiscal 2005, the Company recorded a restructuring charge to reorganize its North American sales and service organizations, consolidate facilities and reduce the workforce in order to optimize the cost structure. The Company also previously recorded reserves in fiscal 2000 and 2002 for lease terminations. The following summarizes the components of this restructuring reserve during the nine months ended June 30, 2007:

	Employee
	Separation				Lease
	Costs				Obligations				Total
	Dollars in millions
Balance as of September 30, 2006		$	1			$	22			$	23
Adjustments		1				1				2
Cash payments		(2		)		(7		)		(9		)
Impact of foreign currency fluctuations		—				1				1
Balance as of June 30, 2007		$	—			$	17			$	17

EITF 95-3 Reserve

This reserve reflects the remaining balance associated with employee separation costs related to the acquisition of Tenovis Germany GmbH in November 2004 (“Tenovis”). The following table summarizes the components of this reserve during the nine months ended June 30, 2007:

	Employee
	Separation
	Costs
	Dollars in millions
Balance as of September 30, 2006		$	30
Cash payments		(15		)
Impact of foreign currency fluctuations		1
Balance as of June 30, 2007		$	16

The headcount reductions identified in this action have been completed. The remaining balance includes costs related to some former employees who have elected to receive payments over an extended period of time.

7.Financing Arrangements

Capital Lease Obligations

The Company has entered into capital lease obligations for certain equipment and automobiles, for which payment obligations extend through fiscal 2010. These obligations are classified as other current liabilities and other liabilities within the Consolidated Balance Sheets and consist of the following:

	June 30, 2007			September 30, 2006
	Dollars in millions
As reported in other current liabilities		$	3		$	4
As reported in other liabilities		7			9
Total capital lease obligations		$	10		$	13

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Credit Facility Amendments

On February 23, 2005, the Company entered into a Credit Agreement among the Company, Avaya International Sales Limited, an indirect subsidiary of the Company, a syndicate of lenders and Citicorp USA, Inc., as agent for the lenders (the “credit facility”). The commitments pursuant to the Company’s previous Amended and Restated Five Year Revolving Credit Facility Agreement, dated as of April 30, 2003 (as amended), among the Company, the lenders party thereto and Citibank, N.A., as agent for the lenders, were terminated and the security interests securing obligations under that facility were fully released.

Under the credit facility, borrowings are available in U.S. dollars or euros, and the maximum amount of borrowings that can be outstanding at any time is $400 million, of which $150 million may be in the form of letters of credit. The credit facility is a five-year revolving facility and is not secured by any of the Company’s assets. The credit facility was amended in May 2006 to extend the expiration date of the credit facility to May 24, 2011 and to amend certain definitions resulting in reductions in interest and various fees payable to the lenders. The credit facility contains affirmative and restrictive covenants, including: (a) periodic financial reporting requirements, (b) maintaining a maximum ratio of consolidated debt to earnings before interest, taxes, depreciation and amortization, adjusted for certain business restructuring charges and related expenses and non-cash charges, referred to as adjusted EBITDA, a non-GAAP measure, of 2.00 to 1.00, (c) maintaining a minimum ratio of adjusted EBITDA, as defined, to interest expense of 4.00 to 1.00, (d) limitations on the incurrence of subsidiary indebtedness, (e) limitations on liens, (f) limitations on investments and (g) limitations on the creation or existence of agreements that prohibit liens on our properties.

The credit facility also limits our ability to make dividend payments or distributions or to repurchase, redeem or otherwise acquire shares of our common stock to an amount not to exceed 50% of consolidated net income for the fiscal year immediately preceding the fiscal year in which such dividend, purchase, redemption, retirement or acquisition is paid or made. On September 8, 2006, the credit facility was amended to provide that the Company may use an additional $500 million during the period from October 1, 2006 through September 30, 2008 for such activities, over the amount provided for under the 50% of consolidated net income test each year. Therefore, as of June 30, 2007, Avaya has remaining availability of $507 million in fiscal 2007 for share repurchases under the credit facility.

Provided that the Company is in compliance with the terms of the credit facility, the Company may use up to $1 billion in cash (excluding transaction fees) and assumed debt for acquisitions completed after February 23, 2005, and the Company has used $200 million as of June 30, 2007. The acquisition amount will be permanently increased to $1.5 billion after consolidated adjusted EBITDA of the Company and its subsidiaries for any period of twelve consecutive months equals or exceeds $750 million.

As of June 30, 2007, the Company was in compliance with all of the covenants included in the credit facility. There are currently $27 million of letters of credit issued under the credit facility. There are no other outstanding borrowings under the facility and the remaining availability is $373 million as of June 30, 2007.

In addition, the Merger Agreement limits Avaya’s ability without the Sponsors’ consent during the period from the date of the Merger Agreement until the closing of the Merger to, among other things, incur indebtedness and make acquisitions over certain thresholds. The Merger Agreement also prohibits Avaya without the Sponsors’ consent from repurchasing shares of its common stock or issuing shares of its common stock, in each case subject to certain exceptions.

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8.Earnings Per Share of Common Stock

Basic earnings per common share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per common share is calculated by adjusting net income and weighted average outstanding shares, assuming conversion of all potentially dilutive securities including stock options and restricted stock units (“RSUs”).

	Three months ended						Nine months ended
	June 30,						June 30,
	2007			2006			2007			2006
	Dollars in millions, except per share amounts
Earnings Per Common Share—Basic:
Net income		$	55		$	44		$	183		$	153
Earnings per share—basic		$	0.12		$	0.10		$	0.40		$	0.33
Weighted average shares outstanding—basic		452			459			453			465
Earnings Per Common Share—Diluted:
Net income		$	55		$	44		$	183		$	153
Earnings per share—diluted		$	0.12		$	0.10		$	0.40		$	0.32
Diluted Weighted Average Shares Outstanding:
Weighted average shares outstanding—basic		452			459			453			465
Dilutive Potential Common Shares:
Stock Options		5			5			5			5
Restricted Stock Units		2			1			1			1
Warrants		—			—			—			1
Weighted average shares outstanding—diluted		459			465			459			472
Securities excluded from the computation of diluted earnings per common share:
Stock options(1)		20			40			25			40

(1)These securities have been excluded from the diluted earnings per common share calculation because their inclusion would have been antidilutive as their exercise prices were higher than the average market price during the period.

On April 19, 2005, the Board of Directors authorized a share repurchase plan (the “2005 plan”). Under the provisions of the 2005 plan, Avaya was authorized to use up to $500 million of cash to repurchase shares of its outstanding common stock through April 2007. During February 2007, Avaya completed the 2005 plan.

On February 15, 2007, the Board of Directors authorized another share repurchase plan (the “2007 plan”), under which Avaya may use up to $500 million of cash for repurchases of its outstanding shares through February 2009. Avaya repurchased 7,304,779 shares of its common stock during the nine months ended June 30, 2007. This represented 5,008,479 shares of common stock pursuant to the 2005 plan and 2,296,300 shares of common stock pursuant to the 2007 plan. Approximately $471 million is available through February 2009 for further share repurchases under the 2007 plan.

All repurchases are made at management’s discretion in the open market or in privately negotiated transactions in compliance with applicable securities laws and other legal requirements and are subject to market conditions, share price, the terms of Avaya’s credit facility and other factors.

The Merger Agreement prohibits Avaya without the Sponsors’ consent from repurchasing shares of its common stock during the period from the date of the Merger Agreement until the closing of the Merger, subject to certain exceptions.

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9.Income Taxes

The following table provides the provision for (benefit from) income taxes for the three and nine months ended June 30, 2007 and 2006:

	Three months ended							Nine months ended
	June 30,							June 30,
	2007			2006				2007			2006
	Dollars in millions
Provision for (benefit from) income taxes		$	24		$	(11	)		$	80		$	48

The provision for (benefit from) income taxes for the periods shown above are comprised of U.S. Federal, state and non-U.S. taxes. The provision for the nine months ended June 30, 2007 includes a $6 million benefit from the retroactive extension to January 1, 2006 of the research tax credit pursuant to the Tax Relief and Health Care Act of 2006, a $7 million tax benefit due to a reduction in estimated taxes payable for fiscal 2006 in Germany as a result of additional restructuring charges reported for statutory purposes, and a $4 million tax benefit attributable to tax return to provision adjustments due to the filing of U.S. and non-U.S. income tax returns in the quarter.

10.Benefit Obligations

The components of net periodic benefit cost for the three and nine months ended June 30, 2007 and 2006 are provided in the table below:

	Pension Benefits— U.S.								Pension Benefits— Non-U.S.							Postretirement Benefits—U.S.
	Three months ended June 30,								Three months ended June 30,							Three months ended June 30,
	2007				2006				2007			2006				2007				2006
	Dollars in millions
Components of Net Periodic Benefit Cost
Service cost		$	3			$	4			$	3		$	4			$	1			$	1
Interest cost		42				41				4			4				11				8
Expected return on plan assets		(50		)		(51		)		—			(1		)		(3		)		(2		)
Amortization of unrecognized prior service cost		—				1				—			—				8				4
Recognized net actuarial loss		11				14				—			—				—				1
Net periodic benefit cost		$	6			$	9			$	7		$	7			$	17			$	12

	Pension Benefits— U.S.								Pension Benefits— Non-U.S.								Postretirement Benefits—U.S.
	Nine months ended June 30,								Nine months ended June 30,								Nine months ended June 30,
	2007				2006				2007				2006				2007				2006
	Dollars in millions
Components of Net Periodic Benefit Cost
Service cost		$	10			$	13			$	8			$	9			$	3			$	3
Interest cost		125				124				14				12				31				25
Expected return on plan assets		(152		)		(154		)		(1		)		(1		)		(7		)		(6		)
Amortization of unrecognized prior service cost		2				4				—				—				24				12
Recognized net actuarial loss		34				42				—				—				—				2
Net periodic benefit cost		$	19			$	29			$	21			$	20			$	51			$	36

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The Company provides certain pension benefits for U.S. and non-U.S. employees, which are not pre-funded. The Company makes payments as these benefits are disbursed. For the nine months ended June 30, 2007, the Company made payments for these U.S. and non-U.S. pension benefits totaling $7 million and $11 million, respectively. Estimated payments for these U.S. and non-U.S. pension benefits for the remainder of fiscal 2007 are $2 million and $2 million, respectively.

In compliance with the terms of the Agreement dated May 28, 2006 between the Company and the Communications Workers of America, the Company has contributed $24 million to the represented employees’ post-retirement health trust for the nine months ended June 30, 2007, and expects to make additional contributions totaling $11 million for the remainder of fiscal 2007. The Company also provides certain retiree medical benefits for U.S. employees, which are not pre-funded. Consequently, the Company makes payments as these benefits are disbursed. For the nine months ended June 30, 2007, the Company made payments totaling $22 million for these retiree medical benefits. Estimated payments for these retiree medical benefits for the remainder of fiscal 2007 are $5 million.

11.Stock Compensation Plans

The Company has a stock compensation plan that provides for the issuance to eligible employees of nonqualified stock options and restricted stock units representing Avaya common stock. In addition, the Company has a stock purchase plan under which eligible employees have the ability to purchase shares of Avaya common stock at 85% of market value. As of June 30, 2007, there were 36 million shares authorized for future grants to purchase Avaya common stock under the Company’s stock compensation plan. The Merger Agreement contains a covenant requiring Avaya to suspend or terminate its employee stock purchase plan as soon as practicable.

Stock Options

Stock options are generally granted with an exercise price equal to the market value of a share of common stock on the date of grant, have a term of 10 years or less and vest within four years from the date of grant. Most of the stock options granted in fiscal 2004 or later have a term of seven years and vest over three years. For the nine months ended June 30, 2007 and 2006, approximately $14 million and $9 million, respectively, of compensation expense related to stock options was recorded.

In connection with certain of the Company’s acquisitions, outstanding stock options held by employees of acquired companies became exercisable for Avaya’s common stock, according to their terms, effective at the acquisition date. The fair value of these options was included as part of the purchase price of the acquisition.

The Company considers several factors in calculating the fair value of share-based awards based on the lattice-binomial model. The Company calculates expected volatility based on implied and historical volatility of the Company’s common stock and other factors. The risk-free interest rate assumption is based upon observed interest rates appropriate for the term of the Company’s employee stock options. The dividend yield assumption is based on the Company’s intent not to issue a dividend under its dividend policy. The expected holding period assumption was estimated based on the Company’s historical experience.

Share-based compensation expense recognized in the Consolidated Statements of Income for the nine months ended June 30, 2007 and 2006 is based on awards ultimately expected to vest, reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on the Company’s historical experience.

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The fair value of each fiscal 2007 option grant was estimated on the grant-date using the lattice-binomial model with the following weighted average assumptions:

	Nine months ended
	June 30, 2007
WEIGHTED AVERAGE ASSUMPTIONS:
Dividend yield		0.00	%
Expected volatility		56.59	%
Risk-free interest rate		4.65	%
Annual forfeiture rate		5.13	%
Expected holding period (in years)		3.57

The following table summarizes information concerning options granted under the Company’s stock compensation plan for the year ended September 30, 2006 and the nine months ended June 30, 2007, including information regarding exercises, forfeitures and expirations of stock options granted under the Company’s stock compensation plan and predecessor plans:

	Shares		Weighted Average
	(000’s)		Exercise Price
OPTIONS OUTSTANDING AS OF SEPTEMBER 30, 2005	48,525			$	13.95
Granted	6,503			10.85
Exercised	(3,338	)		4.25
Forfeited and Expired	(2,759	)		15.57
OPTIONS OUTSTANDING AS OF SEPTEMBER 30, 2006	48,931			14.10
Granted	5,681			12.56
Exercised	(9,513	)		9.97
Forfeited and Expired	(6,564	)		14.90
OPTIONS OUTSTANDING AS OF JUNE 30, 2007	38,535			$	14.76

The following table summarizes the status of the Company’s outstanding stock options as of June 30, 2007:

	Stock Options Outstanding								Stock Options Exercisable
		Average		Weighted			Aggregate			Weighted			Aggregate
		Remaining		Average			Intrinsic			Average			Intrinsic
Range of	Shares	Contractual		Exercise			Value		Shares	Exercise			Value
Exercise Prices	(000’s)	Life (Years)		Price			(000’s)		(000’s)	Price			(000’s)
$0.01 to $6.39	3,451		2.18		$	4.24	$	43,678	3,451		$	4.24		$	43,678
$6.40 to $11.18	5,564		5.15		10.46		35,821		1,555		10.42			10,083
$11.19 to $14.84	11,483		4.87		12.82		46,843		5,841		13.19			21,697
$14.85 to $17.44	11,409		3.61		15.28		18,616		11,281		15.27			18,497
$17.45 to $51.21	6,628		1.62		26.34		—		6,628		26.34			—
Total	38,535				$	14.76	$	144,958	28,756		$	15.81		$	93,955

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on the Company’s average stock price on June 30, 2007, which would have been received by the option holders had all option holders exercised their options as of that date. The total number of in-the-money options exercisable on June 30, 2007 was approximately 22 million. The weighted average remaining contractual life on June 30, 2007 for outstanding and exercisable options is 3.74 and 2.96 years, respectively.

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Time-Vesting Restricted Stock Units

The Company’s stock compensation plan permits the granting of RSUs to eligible employees and non-employee Directors at fair market value at the date of grant. RSUs typically become fully vested over a four-year period and are payable in shares of the Company’s common stock upon vesting.

The following table summarizes information concerning unvested RSUs granted under the Company’s stock compensation plan as of September 30, 2006, and includes information regarding grants under that plan and vesting and forfeitures of RSUs granted under that plan and predecessor plans that occurred during the nine months ended June 30, 2007:

			Weighted-Average
	Shares		Grant-Date
Unvested Shares	(000’s)		Fair Value
Unvested shares at September 30, 2006	5,319			$	12.44
Granted	2,800			12.64
Vested	(390	)		10.99
Forfeited	(1,138	)		13.00
Unvested shares at June 30, 2007	6,591			$	12.51

As of June 30, 2007, there was approximately $53 million of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under the Company’s stock compensation plan and predecessor plans. That cost is expected to be recognized over a weighted average period of four years. Compensation expense related to RSUs was $4 million for each of the three month periods ended June 30, 2007 and 2006, and was $12 and $11 million for the nine month periods ended June 30, 2007 and 2006, respectively.

Performance-Vesting and Market-Vesting Restricted Stock Units

Performance-vesting and market-vesting RSUs vest upon the achievement of certain targets and are payable in shares of the Company’s common stock upon vesting, typically with a three-year performance period. Different targets may be established for different awards, some of which may contain “performance-vesting” conditions and some of which may contain “market-vesting” conditions.

“Performance-vesting” awards measure the Company’s performance against pre-established targets. The fair value of RSUs containing a performance-vesting condition is based on the market price of the Company’s stock on the grant-date and assumes that the target payout level will be achieved. Compensation cost is adjusted for subsequent changes in the expected outcome of the performance-vesting condition until the vesting date.

“Market-vesting” awards measure the Company’s relative market performance against that of other companies. The fair value of RSUs containing a market-vesting condition is based on the market price of the Company’s stock on the grant date modified to reflect the impact of the market-vesting condition including the estimated payout level based on that condition. Compensation cost is not adjusted for subsequent changes in the expected outcome of the market-vesting condition.

Effective December 19, 2006, the Compensation Committee of the Board of Directors approved awards of 381,000 RSUs to executive officers of the Company pursuant to the terms of the Company’s stock compensation plan, each with a market-vesting condition based on the Company’s total shareholder return performance as a percentile against a peer group.

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Employee Stock Purchase Plan

Under the terms of the employee stock purchase plan, eligible employees may have up to 10% of eligible compensation deducted from their pay to purchase Avaya common stock. The per share purchase price is 85% of the average high and low per share trading price of Avaya’s common stock on the New York Stock Exchange on the last trading day of each month. Compensation expense related to the employee stock purchase plan was $0.6 million for each of the three month periods ended June 30, 2007 and 2006, and was $1.8 million for each of the nine month periods ended June 30, 2007 and 2006.

The Merger Agreement contains a covenant requiring Avaya to suspend or terminate its employee stock purchase plan as soon as practicable

12.Operating Segments

The Company reports its operations in two segments—Global Communications Solutions (“GCS”) and Avaya Global Services (“AGS”). The GCS segment develops, markets and sells communications systems including IP telephony systems, multi-media contact center infrastructure and converged applications in support of customer relationship management, unified communications applications, appliances such as IP telephone sets and traditional voice communications systems. The AGS segment develops, markets and sells comprehensive end-to-end global service offerings that enable customers to plan, design, implement, monitor and manage their converged communications networks worldwide.

The GCS segment includes the portion of the rental and managed services revenue attributed to the equipment used in connection with the customer rental and managed services contracts. The portion of these contracts attributed to maintenance and other services is included in the AGS segment.

The segments are managed as two individual businesses and, as a result, include certain allocated costs and expenses of shared services, such as information technology, human resources, legal and finance (collectively, “corporate overhead expenses”). At the beginning of each fiscal year, the amount of certain corporate overhead expenses, including targeted annual incentive awards, to be charged to operating segments is determined and fixed for the entire year. The annual incentive award accrual is adjusted quarterly based on actual year to date results and those estimated for the remainder of the year. Any adjustment of the annual incentive award accrual, as well as any other over/under absorption of corporate overhead expenses against planned amounts, is recorded within Corporate/Other Unallocated Amounts. Restructuring and impairment charges, as well as Merger-related costs, are also recorded and reported within Corporate/Other Unallocated Amounts.

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Summarized financial information relating to the Company’s reportable segments is shown in the following table:

	Reportable Segments
	Global			Avaya			Corporate/Other
	Communications			Global			Unallocated
	Solutions			Services			Amounts				Total
	Dollars in millions
Three months ended June 30, 2007
Revenue		$	686		$	590		$	—		$	1,276
Operating income (loss)		25			63			(18		)	70
Three months ended June 30, 2006
Revenue		$	704		$	593		$	—		$	1,297
Operating income (loss)		36			34			(42		)	28
Nine months ended June 30, 2007
Revenue		$	2,066		$	1,784		$	—		$	3,850
Operating income (loss)		85			172			(16		)	241
Nine months ended June 30, 2006
Revenue		$	2,026		$	1,758		$	—		$	3,784
Operating income (loss)		111			135			(58		)	188

The following table sets forth the Company’s long-lived assets by geographic area:

	June 30, 2007			September 30, 2006
	Dollars in millions
U.S.		$	373		$	399
Outside the U.S.:
Germany		184			200
EMEA—Europe / Middle East / Africa (excluding Germany)		42			45
APAC—Asia Pacific		18			18
Americas, non-U.S.		9			6
Total outside the U.S.		253			269
Total		$	626		$	668

13.Commitments and Contingencies

Legal Proceedings

In the ordinary course of business, the Company is involved in litigation, claims, government inquiries, investigations, charges and proceedings, including, but not limited to, those identified below, relating to intellectual property, commercial, securities, employment, employee benefits, environmental and regulatory matters. Other than as described below, the Company believes there is no litigation pending against the Company that could have, individually or in the aggregate, a material adverse effect on the Company’s financial position, results of operations or cash flows.

In accordance with SFAS No. 5, “Accounting for Contingencies,” the Company records an accrual for a contingency when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. If a range of liability is probable and estimable and some amount within the range appears to be a better estimate than any other amount within the range, the Company accrues that amount. If a range of liability is probable and estimable and no amount within the range appears to be a better estimate than any other amount within the range, the Company accrues the minimum of such probable range. Often these issues are subject to substantial uncertainties and, therefore, the probability of

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loss and an estimation of damages are difficult to ascertain. These assessments can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions that have been deemed reasonable by management. Although the Company believes it has substantial defenses in these matters, it could in the future incur judgments or enter into settlements of claims that could have a material adverse effect on its financial position, results of operations or cash flows in any particular period.

Securities Litigation

In April and May of 2005, purported class action lawsuits were filed in the U.S. District Court for the District of New Jersey against us and certain of our officers alleging violations of the federal securities laws. The actions purport to be filed on behalf of purchasers of our common stock during the period from October 5, 2004 (the date of our signing of the agreement to acquire Tenovis) through April 19, 2005.

The complaints, which are substantially similar to one another, allege, among other things, that the plaintiffs were injured by reason of certain allegedly false and misleading statements made by us relating to the cost of the Tenovis integration, the disruption caused by changes in the delivery of our products to the market and reductions in the demand for our products in the U.S., and that based on the foregoing we had no basis to project our stated revenue goals for fiscal 2005. The Company has been served with a number of these complaints. No class has been certified in the actions. The complaints seek compensatory damages plus interest and attorneys’ fees. In August 2005, the court entered an order identifying a lead plaintiff and lead plaintiff’s counsel. A consolidated amended complaint was filed in October 2005. Pursuant to a scheduling order issued by the District Court, defendants filed their motion to dismiss the consolidated complaint in December 2005. In September 2006, the District Court granted defendants’ motion to dismiss the case in its entirety and with prejudice, which was appealed by the plaintiffs. The appeal is currently pending with the United States Court of Appeals for the Third Circuit, with the parties having completed their briefing submissions.

Derivative Litigation

In May and July of 2005, three derivative complaints were filed against certain officers and the members of the Board of Directors (“Board”) of the Company. Two complaints were filed in the United States District Court for the District of New Jersey, and one was filed in the Superior Court of New Jersey—Somerset County. The allegations in each of the complaints are substantially similar and include the Company as a nominal defendant. The complaints allege, among other things, that defendants violated their fiduciary duties by failing to disclose material information and/or by misleading the investing public about the Company’s business, asserting claims substantially similar to those asserted in the actions described above under “Securities Litigation.” The complaints seek contribution from the defendants to the Company for alleged violations of the securities laws, restitution to the Company and disgorgement of profits earned by defendants, and fees and costs. The state court matter has been dismissed without prejudice to plaintiff’s possibly re-filing the complaint, pending outcome of the appeal in the “Securities Litigation” action described above. The matters pending in federal court have been administratively terminated possibly to be reinstated pending the outcome of the appeal in the “Securities Litigation” action described above. Insofar as all of these actions are inactive, but subject to reinstatement, outcomes cannot be predicted and, as a result, we cannot be assured that these cases will not have a material adverse effect on our financial position, results of operations or cash flows.

ERISA Class Action—Securities Litigation

In July 2005, a purported class action lawsuit was filed in the United States District Court for the District of New Jersey against the Company and certain of its officers, employees and members of the Board of Directors (the “Directors”), alleging violations of certain laws under the Employee Retirement Income Security Act of 1974 (“ERISA”). On October 17, 2005, an amended purported class action was

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filed against us and certain of our officers, employees and Directors. Like the initial complaint, the amended complaint purports to be filed on behalf of all participants and beneficiaries of the Avaya Inc. Savings Plan, the Avaya Inc. Savings Plan for Salaried Employees and the Avaya Inc. Savings Plan for the Variable Workforce (collectively, the “Plans”), during the period from October 5, 2004 through July 20, 2005. It contains factual allegations substantially similar to those asserted in the matters under the heading of “Securities Litigation.”

The complaint alleged, among other things, that the named defendants breached their fiduciary duties owed to participants and beneficiaries of the Plans and failed to act in the interests of the Plans’ participants and beneficiaries in offering Avaya common stock as an investment option, purchasing Avaya common stock for the Plans and communicating information to the Plans’ participants and beneficiaries. The complaint sought a monetary payment to the plans to make them whole for the alleged breaches, costs and attorneys’ fees. The Defendants filed a motion to dismiss the amended complaint in December 2005. In an order and opinion dated April 24, 2006, the District Court judge granted the Defendants’ motion and dismissed the amended complaint in its entirety. In May 2006, the plaintiffs filed a Notice of Appeal with the United States Court of Appeals for the Third Circuit. The parties have completed their respective briefing submissions and the court heard argument on the matter in April 2007. Although the defendants believe that the District Court correctly decided the motion to dismiss, given the uncertainties of the appeal, at this time the Company cannot determine if this matter will have an effect on its business or, if it does, whether its outcome will have a material adverse effect on its financial position, results of operations or cash flows. Due to the uncertainty surrounding the issues involved in this matter and based on the facts and circumstances known to date, the Company believes that an estimate or potential range of any loss that may be incurred cannot be made at this time.

ERISA Class Action—Stock Funds

In April 2006, a purported class action was filed in the United States District Court for the District of New Jersey, alleging that the Company, certain employees and the Pension and Employee Benefits Investment Committee violated the Employee Retirement Income Security Act of 1974 (“ERISA”), by including in the Avaya Inc. Savings Plan for Salaried Employees, the Avaya Inc. Savings Plan and the Avaya Inc. Savings Plan for the Variable Workforce (“Plans”), investment options for the Lucent Technologies Inc. Stock Fund (“Lucent Fund”) and the Avaya Inc. Stock Fund (“Avaya Fund”) for the period of October 2000 to April 2003 (“Alleged Class Period”). The complaint asserts, among other things, that during the Alleged Class Period defendants breached their fiduciary duties under ERISA by violating ERISA’s provisions against prohibited transactions; offering the Lucent Fund and Avaya Fund imprudently as investment options; failing properly to monitor the funds; and, failing properly to monitor the actions of other plan fiduciaries, thus causing the Plans to suffer damages. The complaint seeks monetary relief on behalf of the Plans and their participants, and also seeks injunctive relief and costs, including attorneys’ fees. Defendants have filed a motion to dismiss this case in its entirety and with prejudice. In April 2007, the District Court issued an opinion dismissing all but one portion of one count of the complaint, reasoning that the circumstances surrounding the distribution of Avaya shares of common stock prior to the spin-off of Avaya from Lucent in October 2000 into the various Avaya Plans could not be addressed in the procedural posture of a motion to dismiss. In July 2007, the District Court dismissed the remaining count of the complaint with prejudice. The Plaintiff has appealed this case to the United States Third Circuit Court of Appeals.

Antitrust Lawsuit

In July 2005, United Asset Coverage, Inc. (“UAC”) filed a verified complaint against the Company in the United States District Court, Northern District of Illinois, alleging, among other things, violations of federal and state antitrust laws, in the manner in which the Company seeks to protect its proprietary

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information. The verified complaint sought a temporary restraining order against the Company to enjoin immediately its practice of limiting the use of its proprietary information in a manner which UAC believes is in violation of its contracts and licensing agreements. The court denied UAC’s motion for temporary restraints in August 2005 as well as its motion for preliminary injunction in January 2006. The plaintiff, after pursuing this action for over a year after the preliminary injunction was denied, has dismissed this matter in its entirety and with prejudice.

Shareholder Litigation Related to Proposed Merger

In June and July 2007, seven purported class action complaints were filed against Avaya Inc., members of the Board, certain officers of Avaya who are members of the Board, and Silver Lake Partners, L.L.P. and TPG Capital, L.P., in the Superior Court of New Jersey, Chancery and Law Divisions, Somerset County, related to the Merger Agreement. The complaints contain allegations substantially similar to one another and allege that the purchase price of $17.50 per share of outstanding Avaya common stock is inadequate and unfair consideration for the acquisition of the Company. The complaints also allege that defendants, including the Directors and/or officers of Avaya, breached their fiduciary duties to shareholders in entering into the Merger Agreement, including, but not limited to, their duties of loyalty, good faith, and independence and engaged in self-dealing and in conflicts of interests with respect to the proposed Merger. Plaintiffs seek to have the court certify these cases as class actions, enjoin the proposed Merger and award plaintiffs costs and expenses, including attorneys’ fees. Plaintiffs have also requested the court to consolidate the various actions into one consolidated case, which defendants have not opposed. The motion is pending. While the defendants believe these cases to be without merit, because they are in their early stages, an outcome cannot be predicted at this time, and we cannot be assured that they will not prevent or delay the consummation of the Merger and/or result in substantial costs. Due to the uncertainties surrounding the issues involved in these matters and based on the facts and circumstances known to date, the Company believes that an estimate or potential range of any loss that may be incurred or the scope of any injunctive relief that may occur cannot be made at this time.

Other Matters

Government Subpoenas

On April 29, 2005, the Company received a subpoena to produce documents before a grand jury of the United States District Court, District of South Carolina, relating to the United States’ investigation of potential antitrust and other violations in connection with the federal E-Rate Program. The subpoena requests records from the period January 1, 1997 to the present. The Company complied with the subpoena and has received no indication from the Department of Justice that it has any further obligations or involvement in this matter. Nonetheless, at this time, we cannot determine if this matter will have an effect on our business or, if it does, whether its outcome will have a material adverse effect on our financial position, results of operations or cash flows.

On May 3, 2005, the Company received a subpoena from the Office of Inspector General, U.S. General Services Administration, relating to a federal investigation of billing by the Company for telecommunications equipment and maintenance services. The subpoena requests records from the period January 1, 1990 to the present. At this time, we cannot determine if this matter will have an effect on our business or, if it does, whether its outcome will have a material adverse effect on our financial position, results of operations or cash flows.

The Company is cooperating with the relevant government entities with respect to these subpoenas. Based on the facts and circumstances known to date, the Company believes that an estimate or potential range of any loss that may be incurred with respect to these subpoenas cannot be made at this time.

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Environmental, Health and Safety Matters

The Company is subject to a wide range of governmental requirements relating to employee safety and health and to the handling and emission into the environment of various substances used in its operations. The Company is subject to certain provisions of environmental laws, particularly in the United States and Germany, governing the cleanup of soil and groundwater contamination. Such provisions impose liability for the costs of investigating and remediating releases of hazardous materials at currently or formerly owned or operated sites. In certain circumstances, this liability may also include the cost of cleaning up historical contamination, whether or not caused by the Company. The Company is currently conducting investigation and/or cleanup of known contamination at nine of its current or former facilities either voluntarily or pursuant to government directives. Based on currently available information, none of the sites is reasonably likely to generate environmental costs that will be individually material, nor will environmental costs for all sites in the aggregate be material, to the Company’s financial position, results of operations or cash flows, in any fiscal year. There are no known third parties who may be responsible for investigation and/or cleanup at these sites and therefore, for purposes of assessing the adequacy of accruals for these liabilities, the Company has not assumed that it will recover amounts from any third party, including under any insurance coverage or indemnification arrangement.

It is often difficult to estimate the future impact of environmental matters, including potential liabilities. The Company has established financial reserves to cover environmental liabilities where they are probable and reasonably estimable. Reserves for estimated losses from environmental matters are undiscounted and consist primarily of estimated remediation and monitoring costs and are, depending on the site, based primarily upon internal or third party environmental studies and the extent of contamination and the type of required cleanup. The Company is not aware of, and has not included in reserves any provision for, unasserted environmental claims.

The reliability and precision of estimates of the Company’s environmental costs may be affected by a variety of factors, including whether the remediation treatment will be effective, contamination sources have been accurately identified and assumptions regarding the movement of contaminants are accurate. In addition, estimates of environmental costs may be affected by changes in law and regulation, including the willingness of regulatory authorities to conclude that remediation and/or monitoring performed by the Company is adequate.

The Company assesses the adequacy of environmental reserves on a quarterly basis. The Company does not expect the outcome of these matters to have a material impact on its financial position. Expenditures for environmental matters for the three and nine months ended June 30, 2007 and 2006 were not material to the Company’s financial position, results of operations or cash flows. Payment for the environmental costs covered by the reserves may be made over a 30-year period. Although the Company does not separately track recurring costs of managing hazardous substances and pollutants in ongoing operations, it does not believe them to be material.

We also may from time to time be subject to various state, federal and international laws and regulations governing the environment, including those restricting the presence of certain substances in electronic products and making producers of those products financially responsible for the collection, treatment, recycling and disposal of certain products. For example, the European Union (“EU”) has adopted the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (“RoHS”) and Waste Electrical and Electronic Equipment (“WEEE”) directives. RoHS prohibits the use of certain substances, including mercury and lead, in certain products put on the market after July 1, 2006. The WEEE directive obligates parties that place electrical and electronic equipment onto the market in the EU to put a clearly identifiable mark on the equipment, register with and report to EU member countries regarding distribution of the equipment, and provide a mechanism to take back and properly dispose of the equipment. Each EU member country has enacted, or is expected soon to enact,

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legislation clarifying what is and what is not covered by the WEEE directive in that country. We believe that we have met the requirements of the RoHS and WEEE directives. Similar laws and regulations have been or may be enacted in other regions which may require additional obligations to be undertaken by the Company.

Product Warranties

The Company recognizes a liability for the estimated costs that may be incurred to remedy certain deficiencies of quality or performance of the Company’s products. These product warranties extend over a specified period of time generally ranging up to two years from the date of sale depending upon the product subject to the warranty. The Company accrues a provision for estimated future warranty costs based upon the historical relationship of warranty claims to sales. The Company periodically reviews the adequacy of its product warranties and adjusts, if necessary, the warranty percentage and accrued warranty reserve, which is included in other current liabilities in the Consolidated Balance Sheets, for actual experience.

	Dollars in millions
Balance as of September 30, 2006		$	29
Reductions for payments and costs to satisfy claims		(37		)
Accruals for warranties issued during the period		39
Balance as of June 30, 2007		$	31

Guarantees of Indebtedness and Other Off-Balance Sheet Arrangements

Letters of Credit

In addition to its $400 million committed credit facility, which is discussed in Note 7, “Financing Arrangements,” the Company has entered into uncommitted credit facilities that vary in term totaling $133 million as of June 30, 2007. These uncommitted facilities are for the purpose of securing third party financial guarantees such as letters of credit that ensure the Company’s performance or payment to third parties. As of June 30, 2007, the Company has outstanding an aggregate of $102 million in irrevocable letters of credit under the committed and uncommitted credit facilities ($27 million under its committed credit facility and $75 million under uncommitted facilities).

Surety Bonds

The Company arranges for the issuance of various types of surety bonds, such as license, permit, bid and performance bonds, which are agreements under which the surety company guarantees that the Company will perform in accordance with contractual or legal obligations. These bonds vary in duration although most are issued and outstanding from six months to three years. These bonds are backed by $5 million of our letters of credit. If the Company fails to perform under its obligations, the maximum potential payment under these surety bonds is $33 million as of June 30, 2007. Historically, no surety bonds have been drawn upon.

Purchase Commitments and Termination Fees

The Company purchases components from a variety of suppliers and uses several contract manufacturers to provide manufacturing services for its products. During the normal course of business, in order to manage manufacturing lead times and to help assure adequate component supply, the Company enters into agreements with contract manufacturers and suppliers that allow them to produce and procure inventory based upon forecasted requirements provided by the Company. If the Company does not meet these specified purchase commitments, it could be required to purchase the inventory, or in the case of certain agreements, pay an early termination fee. As of June 30, 2007, the maximum potential payment

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under these commitments was approximately $120 million. Historically, the Company has not been required to pay a charge for not meeting its designated purchase commitments with these suppliers.

All manufacturing of the Company’s products is performed in accordance with detailed specifications and product designs furnished by the Company and is subject to rigorous quality control standards.

Product Financing Arrangements

The Company sells products to various resellers that may obtain financing from certain unaffiliated third party lending institutions. For the Company’s product financing arrangement with resellers outside the U.S., in the event participating resellers default on their payment obligations to the lending institution, the Company is obligated under certain circumstances to guarantee repayment to the lending institution. The repayment amount fluctuates with the level of product financing activity. The guaranteed repayment amount was approximately $7 million as of June 30, 2007. The Company reviews and sets the maximum credit limit for each reseller participating in this financing arrangement. Historically, there have not been any guarantee repayments by the Company since it became publicly traded in 2000. The Company has estimated the fair value of this guarantee as of June 30, 2007, and has determined that it is not significant. There can be no assurance that the Company will not be obligated to repurchase inventory under this arrangement in the future.

Performance Guarantee

In connection with the sales of certain businesses, the Company has assigned its rights and obligations under several real estate leases to the acquiring companies (the “assignees”). The remaining terms of these leases vary from one year to eight years. While the Company is no longer the primary obligor under these leases, the lessor has not completely released the Company from its obligation, and holds it secondarily liable in the event that the assignees default on these leases. The maximum potential future payments the Company could be required to make, if all of the assignees were to default as of June 30, 2007, would be approximately $13 million. The Company has assessed the probability of default by the assignees and has determined it to be remote.

Credit Facility Indemnification

In connection with its obligations under the credit facility described in Note 7, “Financing Arrangements,” the Company has agreed to indemnify the third party lending institutions for costs incurred by the institutions related to changes in tax law or other legal requirements. While there have been no amounts paid to the lenders pursuant to this indemnity in the past, there can be no assurance that the Company will not be obligated to indemnify the lenders under this arrangement in the future.

Transactions with Lucent Technologies Inc.

Pursuant to the Contribution and Distribution Agreement, Lucent Technologies Inc., predecessor to Alcatel-Lucent (“Lucent”), contributed to the Company substantially all of the assets, liabilities and operations associated with its enterprise networking businesses (“Company’s Businesses”). The Contribution and Distribution Agreement, among other things, provides that, in general, the Company will indemnify Lucent for all liabilities including certain pre-distribution tax obligations of Lucent relating to the Company’s Businesses and all contingent liabilities primarily relating to the Company’s Businesses or otherwise assigned to the Company. In addition, the Contribution and Distribution Agreement provides that certain contingent liabilities not allocated to one of the parties will be shared by Lucent and the Company in prescribed percentages. The Contribution and Distribution Agreement also provides that each party will share specified portions of contingent liabilities based upon agreed percentages related to

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the business of the other party that exceed $50 million. The Company is unable to determine the maximum potential amount of other future payments, if any, that it could be required to make under this agreement.

In addition, if the separation from Lucent fails to qualify as a tax-free distribution under Section 355 of the Internal Revenue Code because of an acquisition of the Company’s stock or assets, or some other actions of the Company, then the Company will be solely liable for any resulting corporate taxes.

The Tax Sharing Agreement governs Lucent’s and the Company’s respective rights, responsibilities and obligations after the distribution with respect to taxes for the periods ending on or before the distribution. Generally, pre-distribution taxes or benefits that are clearly attributable to the business of one party will be borne solely by that party, and other pre-distribution taxes or benefits will be shared by the parties based on a formula set forth in the Tax Sharing Agreement. The Company may be subject to additional taxes or benefits pursuant to the Tax Sharing Agreement related to future settlements of audits by state and local and foreign taxing authorities for the periods prior to the Company’s separation from Lucent.

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with the unaudited interim Consolidated Financial Statements and the notes included elsewhere in this Quarterly Report on Form 10-Q.

Our accompanying unaudited interim Consolidated Financial Statements as of June 30, 2007 and for the three and nine months ended June 30, 2007 and 2006, have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and the rules and regulations of the U.S. Securities and Exchange Commission, or the SEC, for interim financial statements, and should be read in conjunction with our Consolidated Financial Statements and other financial information for the fiscal year ended September 30, 2006, which were included in our Annual Report on Form 10-K filed with the SEC on December 8, 2006. In our opinion, the unaudited interim Consolidated Financial Statements reflect all adjustments, consisting of normal and recurring adjustments, necessary for a fair presentation of the financial condition, results of operations and cash flows for the periods indicated.

Certain prior year amounts have been reclassified to conform to the current year presentation.The consolidated results of operations for the interim periods reported are not necessarily indicative of the results to be experienced for the entire fiscal year.

Merger Agreement with Silver Lake Partners and TPG Partners

On June 4, 2007, Avaya entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Sierra Holdings Corp., a Delaware corporation (“Parent”), and Sierra Merger Corp., a Delaware corporation and wholly owned subsidiary of Parent (“Merger Sub”). Under the terms of the Merger Agreement, Merger Sub will be merged with and into the Company, with the Company continuing as the surviving corporation and a wholly owned subsidiary of Parent (the “Merger”). Parent was formed by two private equity funds, Silver Lake Partners III, L.P. and TPG Partners V, L.P. (collectively, the “Sponsors”), solely for the purpose of entering into the Merger Agreement and consummating the Merger. The Merger Agreement provides for a purchase price of $17.50 per share of Avaya common stock (the “Merger Consideration”), or approximately $8.21 billion in the aggregate (excluding fees and expenses in connection with the Merger of approximately $0.28 billion).

The proposed transaction is expected to be completed in the fall of 2007, subject to receipt of shareholder approval and customary regulatory approvals, as well as satisfaction of other customary closing conditions. There is no financing condition to the obligations of the Sponsors to consummate the transaction, and equity and debt commitments sufficient to fund the Merger Consideration have been delivered to Parent. The Company filed its preliminary proxy statement with the SEC on July 18, 2007 and filed its Hart-Scott-Rodino notification with the Federal Trade Commission and the Department of Justice on June 15, 2007. The Department of Justice and the Federal Trade Commission granted early termination of the Hart-Scott-Rodino waiting period effective June 28, 2007. The date for the special meeting of shareholders to vote on adoption of the Merger Agreement is September 28, 2007, and the record date related to this meeting is August 9, 2007.

During the three months ended June 30, 2007, the Company incurred costs associated with the Merger of $8 million (approximately $4.6 million after tax, or $0.01 per diluted share) consisting primarily of investment banking and legal fees directly related to the proposed Merger.

Pursuant to the terms of the stock compensation plans under which they were issued, outstanding stock options and time-vesting RSUs will vest and become exercisable on the later of: (i) the adoption by the Company’s stockholders of the Merger Agreement and (ii) the date on which all governmental consents required to complete the Merger, if any, are obtained (the “Vesting Conditions”). The proposed

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Merger is the contingent event which would result in cash settlement of the Company’s outstanding stock options and time-vesting RSUs. Due to the existence of certain unfulfilled conditions, including the approval of the proposed Merger by the Company’s stockholders, that must be satisfied before the transaction is completed, no accelerated stock compensation expense was recorded during the third quarter of fiscal 2007. If the Vesting Conditions are satisfied, the Company expects to record an accelerated stock compensation charge of approximately $85 million related to time-vesting RSUs. If a Vesting Condition occurs or is to occur during a performance period, then the Compensation Committee of the Board shall determine the extent to which performance-vesting RSUs and market-vesting RSUs shall vest or shall be adjusted.

Forward-Looking Statements

Our disclosure and analysis in this Quarterly Report on Form 10-Q contains some forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public.

Any or all of our forward-looking statements in this report and in any other public statements we make may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section below entitled “Risk Factors.” Consequently, no forward-looking statement can be guaranteed and you are cautioned not to place undue reliance on these forward-looking statements. Actual future results may vary materially. Except as may be required under the federal securities laws, we undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our reports to the SEC.

Overview

Products, Applications and Services

We are a leading provider of communications solutions that help enterprises transform their businesses by intelligently connecting customers, employees and business partners with enhanced business processes. A key component of our enterprise communications strategy is to leverage our substantial experience and expertise in voice communications systems with an innovative communications platform, advanced software development and expert services to capitalize on the transition of traditional voice systems to our mature IP telephony solutions. Our offers support advanced business communications applications that can help our customers gain cost efficiencies, higher workforce productivity, new types of business automation and more responsive connections for all enterprise constituents.

Our enterprise communications solutions offerings are comprised of a product portfolio that includes infrastructure hardware, application software, phone appliances and a comprehensive portfolio of enterprises services focused on IT and communications solutions. These offerings are used by enterprises to deploy our platforms of IP telephony systems and/or circuit-based voice telephony systems that can be converged with IP networks to enable IP telephony. Our communication solutions platforms are the basis for us to provide enterprises with communications systems in the following key areas: multi-media contact center communications in support of customer relationship management, unified communications that

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integrate unified desktop, conferencing, messaging and mobility solutions with third party enterprise applications and business communication applications that combine specialized services with software connectors to facilitate communications-enabled business processes. We support our broad customer base with comprehensive global service offerings that enable our customers to plan, design, implement, monitor and manage their communications systems and/or converged networks.

Our global services organization is an important consideration for customers purchasing our products and applications and is a source of significant revenue for us, primarily from maintenance contracts, but with a growing emphasis by us to provide our customers with communications focused professional services. Our end-to-end portfolio of services offerings provides a single point of accountability that connects the skilled professionals of our services organization together with our network of business partners, development partners and our ability to diagnose customer network faults remotely, can provide 24-hours-a-day, seven-days-a-week service to our customers around the world.

These offerings are part of what we collectively refer to as “Intelligent Communications,” which is about embedding communications solutions into our customers’ business processes and business interactions to help them transform their businesses and innovate their business models. We believe our comprehensive suite of Intelligent Communications offerings, as supported by our global services organization and extensive network of business and development partners, transforms the enterprise communications system into a strategic asset for businesses, by enabling them to communicate to “anyone, at any place, at any time and in any way” they choose.

Customers and Competitive Advantages

Our customer base is diverse, ranging in size from small businesses employing a few employees to large government agencies and multinational companies with over 100,000 employees. Our customers include enterprises operating in a broad range of industries around the world, including financial services, manufacturing, media and communications, professional services, health care, education and government.

We operate in approximately 50 countries and sell products and services through a network of business partners, distributors and dealers who have customers in nearly 100 other countries. In the first nine months of fiscal 2007, approximately 44% of our revenues were generated outside the U.S.

We enjoy several strengths that we believe provide us with a competitive advantage in the enterprise communications market:

·business focus on IP telephony and converged network technologies;

·extensive voice experience and expertise, and a reputation for superior products and technology for voice processing and applications;

·a comprehensive suite of industry-leading communications applications, including remote/mobile offerings such as speech access, remote agents and softphones, which allow our customers to improve worker productivity and reduce network and real estate costs by providing secure business communications to a dispersed workforce;

·investment protection for traditional telephony systems, allowing customers to upgrade and take advantage of the benefits of IP communications while maintaining a significant portion of their previous equipment investment (i.e. “IP-enable” their existing voice communications systems);

·a large installed global customer base;

·world-class contact center offerings that assist our customers in managing communications with their clients;

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·a global services organization that offers end-to-end customer solutions, including remote maintenance and diagnostic services that sense and fix software outages, often before customers even realize there may be a problem; and

·strategic alliances with world-class business partners, including our large network of software development partners who develop vertical and other software applications that work with our telephony and contact center offerings to meet specific customer needs.

Financial Results Summary

Revenue—Revenue was $3,850 million and $3,784 million for the first nine months of fiscal 2007 and 2006, respectively. Overall revenue grew by 1.7% as a result of increases in both of our operating segments outside the U.S. Revenues for the first nine months of fiscal 2007 included a favorable currency impact of $93 million that benefited both operating segments, primarily in Europe.

Gross Margin—Our gross margin for the first nine months of fiscal 2007 increased by $39 million to $1,794 million compared with the first nine months of fiscal 2006 due to an increase in sales volume and a benefit from foreign currency, and the gross margin rate for fiscal 2007 was slightly higher at 46.6% versus 46.4% for the first nine months of fiscal 2006. The increase in the overall rate was the result of lower costs in our services segment. The gross margin for the first nine months of fiscal 2006 includes an $11 million benefit, or a 0.3 percentage point impact, from a change in our vacation policy eliminating carryover vacation days for U.S. non-represented employees.

Operating Expenses—Our selling, general and administrative (SG&A) expenses decreased by $23 million to $1,184 million for the first nine months of fiscal 2007 compared to the first nine months of fiscal 2006. This net decrease was primarily due to lower headcount and lower discretionary spending in connection with our cost management initiatives, as well as several benefits in the first nine months of fiscal 2007, including a gain on the sale of real estate and an $8 million benefit from the favorable resolution of non-income tax audits in several jurisdictions. These benefits were partially offset by expected increased employee benefit costs and unfavorable foreign currency. The increased employee benefit costs were primarily due to the previously-disclosed increase in post-retirement health benefits for union employees. The first nine months of fiscal 2006 included a $22 million benefit from the favorable resolution of non-income tax audits in several jurisdictions and a $7 million benefit related to the change in our vacation policy, as well as $29 million of asset impairment charges, primarily related to internal-use software assets.

During the first nine months of fiscal 2007, our research and development (R&D) expenses increased by $14 million to $332 million compared with the first nine months of fiscal 2006 due to an increase in gross investment and to a lesser extent, the acquisitions of Traverse and Ubiquity. The first nine months of fiscal 2006 included a $3 million benefit related to the change in our vacation policy.

We also recorded $29 million in net charges for restructuring actions during the first nine months of fiscal 2007. These represent $36 million of charges for employee separation costs and lease obligations, partially offset by a net benefit of $7 million for changes in estimates for prior restructuring plans primarily related to leased facilities. During the first nine months of fiscal 2006, we recorded net restructuring charges of $42 million.

During the first nine months of fiscal 2007, we incurred costs associated with the Merger of $8 million consisting primarily of investment banking and legal fees directly related to the proposed Merger.

Profitability—We earned net income of $183 million and $153 million for the first nine months of fiscal 2007 and 2006, respectively. Our operating income was $241 million, or 6.3% of revenue, for the first nine months of fiscal 2007, compared to $188 million, or 5.0% of revenue, for the first nine months of fiscal 2006. Operating income for the first nine months of fiscal 2007 includes an increase in gross margin dollars

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due to sales volume and favorable foreign currency, as well as several benefits in costs and operating expenses as described above, partially offset by increased R&D investment and Merger-related costs. Operating income for the first nine months of fiscal 2006 included a $21 million benefit from the change in our vacation policy and the $22 million benefit from the favorable resolution of non-income tax audits in several jurisdictions, as well as the $29 million asset impairment charge.

Key Trends and Uncertainties Affecting Our Results

Trends and Uncertainties Affecting Our Revenue

The following are the key factors we believe are currently affecting our revenue:

·Technology transition—Our growth strategy relies heavily on capturing a significant share of the spending by enterprises on their transition of technology from traditional communications systems to IP communications. We believe that IP communications has gained widespread acceptance in the marketplace and over time we expect demand to continue to increase as the industry goes through the mainstream adoption phase in the product lifecycle. According to the latest available industry statistics, approximately half of all lines currently being shipped are IP rather than traditional, or TDM. As a result of the technology transition, spending by enterprises on traditional voice communication systems has been declining. Increases in our product revenue attributable to sales of IP telephony systems continue to be offset in part by declines in product revenue attributable to traditional voice communication systems.

·Competitive environment—We have historically operated, and continue to operate, in an extremely competitive environment. However, the migration of traditional technology to IP communications has resulted in an increased number of competitors offering similar products and applications. One aspect of this environment is that we regularly face pricing pressures in the markets in which we operate which may negatively impact our gross margins. In addition, we also face pricing pressure when long-term maintenance and managed services contracts expire. They are typically renewed at lower prices due to continuing competitive pressure and expectations from the marketplace to acquire technology at lower costs. The impact of the price erosion affects both our rental and managed services offers, as well as maintenance. We have been able to partially mitigate the effects of pricing pressures on profitability through our cost reduction initiatives.

For other uncertainties related to the competitive environment in which we operate, see “Risk Factors—Risks Related To Our Revenue and Business Strategy—We face intense competition from our current competitors and, as the enterprise communications and information technology markets evolve, may face increased competition from companies that do not currently compete directly against us.”

·Pressures on services business—Due to advances in technology, our customers continue to expect traditional services to be at lower prices to them. In addition, our customers routinely look for opportunities to reduce their information technology and related costs. A high correlation exists with respect to customers in our direct channel who purchase products also electing to purchase maintenance contracts at the time of the product purchase. However, at the time of contract renewal, maintenance and managed services revenues have been affected by reductions in scope of contracted services (i.e. number of ports, number of sites, or hours and levels of coverage), cancellations and increased competition, as well as the price erosion noted above. These factors have resulted in challenges to our Avaya Global Services segment. We have been able to partially offset these impacts by focusing on new types of services such as consulting and system integration. These new types of services may have lower margins than our traditional services. In addition, we have also been able to reduce our costs to minimize the impact on our operating income.

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·Disruption in logistics—As we continue to seek to optimize our end-to-end supply chain, we have been outsourcing various logistics functions over the course of the past few years. As previously disclosed, in the fourth quarter of fiscal 2006 and the first half of fiscal 2007, we moved certain warehousing and physical distribution operations to a different third party provider at a new facility. Following this move we experienced disruption, resulting in delays in delivery of products from this warehouse and warehousing operational inefficiencies. We have been working with this third party provider to resolve these issues. See “Manufacturing and Logistics” for more information.

·Foreign currency—Our revenues outside of the U.S. were 44% of our consolidated revenues in the first nine months of fiscal 2007 compared to 42% in the first nine months of fiscal 2006. Revenues for the first nine months of fiscal 2007 include a favorable currency impact of $93 million as compared to the first nine months of fiscal 2006. Any strengthening of the U.S. dollar against other currencies, particularly the euro, will have a negative impact on our reported revenues. Conversely, any weakening of the U.S. dollar will have a positive impact.

·Economic conditions—An important factor affecting our ability to generate revenue is the effect of general economic conditions on our customers’ willingness to spend on information technology and, particularly, enterprise communications technology. Variability in employment, corporate profit growth, interest rates, energy prices and other factors in specific markets could impact corporate willingness to spend on communications technology in the near term. Additionally, country-to-country variability in worldwide economic growth could also impact our business as growth rates of developed and more stable economies tend to be lower than that of emerging economies, where there could be more variables affecting the economic growth.

Manufacturing and Logistics

The Company’s products are supplied through contract manufacturers and original equipment manufacturers. Our manufacturers produce a majority of our products in facilities located in Mexico, Malaysia, the Czech Republic, China, Israel, Poland, Ireland, France, Germany and the United States. The contract manufacturing of the Company’s products is performed in accordance with detailed specifications and product designs furnished by the Company and is subject to rigorous quality control standards.

As we continue to seek to optimize our end-to-end supply chain, we have outsourced various logistics functions. We rely on third-party logistics (3PL) service providers to provide certain services for our business, including warehousing, physical distribution, repairs and returns processing. If a logistics service provider does not meet our service level and quality requirements, we may be unable to fulfill our customers’ orders or meet certain customer support obligations in a timely and accurate manner, which could delay or decrease our revenue or otherwise have an adverse effect on our revenue and our costs. In the fourth quarter of fiscal 2006 and first quarter of fiscal 2007, we moved certain warehousing and physical distribution operations to a different 3PL service provider at a new facility. That provider and facility provide our 3PL needs in North America and certain 3PL needs outside of North America. There were disruptions and delays in delivery of certain products from this facility in the first quarter of fiscal 2007. Additionally, there was an adverse impact on our costs at this facility throughout the first half of fiscal 2007. We and the 3PL service provider operating this facility continue to work to promote stability in the 3PL operations there. We have been making improvements as we progress through this transition. However, we cannot assure you that this issue will not continue to have an adverse effect on our revenue and our costs.

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We also face increasing complexity in our product design, logistics and procurement operations due to existing and upcoming requirements relating to the materials composition of our products, such as the European Union (“EU”) directives regarding Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (“RoHS”) and the Waste Electrical and Electronic Equipment (“WEEE”) directive. We may be required to reengineer products to utilize components compatible with these changing environmental requirements and the resulting reengineering and component substitution may result in additional costs to us. Even if we are able and willing to reengineer products or pay additional costs, we still may be adversely affected if the materials and components that we need are unavailable to us. In addition, if we were found to be in violation of these regulations, we could be subject to government fines, noncompliant products may be banned from markets covered by the regulations and our customers could incur liability. Although we do not anticipate any material adverse effects based on the nature of our operations and the effect of such regulations, there is no assurance that existing regulations or future regulations will not have an adverse effect on us.

We also purchase certain hardware components and license certain software components from third-party original equipment manufacturers and resell them under the Avaya brand. In some cases certain components are only available from a single source or from a limited source of suppliers. Delays or shortages associated with these components could cause significant disruption to our operations.

For more information on risks associated with all of the above activities, see Item 1A. “Risk Factors—Risks Related To Our Operations—We rely on outsourced product manufacturers, distributors and warehousing agents for our products and various issues with respect to the delivery of our products could arise which could adversely impact both our revenue and our costs.”

Results from Continuing Operations

Three Months Ended June 30, 2007 Compared with Three Months Ended June 30, 2006

Revenue

The following table sets forth a comparison of revenue by type:

									Third Fiscal Quarter
													Mix
3Q06		4Q06		1Q07		2Q07			2007		2006		2007			2006			Change
									Dollars in millions
$	636	$	690	$	619	$	639	Sales of products	$	626	$	636		49	%		49	%		$	(10	)	-1.6	%
507		514		509		509		Services	507		507			40	%		39	%		—			0.0	%
154		160		152		146		Rental and managed services	143		154			11	%		12	%		(11		)	-7.1	%
$	1,297	$	1,364	$	1,280	$	1,294	Total revenue	$	1,276	$	1,297		100	%		100	%		$	(21	)	-1.6	%

The decrease in revenue for the third quarter of fiscal 2007 compared to the same period last fiscal year was due to decline in sales of products and rental and managed services, partially offset by a $30 million benefit from favorable foreign currency.

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The following table sets forth a geographic comparison of revenue:

									Third Fiscal Quarter
													Mix
3Q06		4Q06		1Q07		2Q07			2007		2006		2007			2006			Change
									Dollars in millions
$	753	$	788	$	732	$	746	U.S.	$	694	$	753		54	%		58	%		$	(59	)	-7.8	%
								Outside the U.S.:
182		183		186		178		Germany	172		182			13	%		14	%		(10		)	-5.5	%
205		208		203		190		EMEA—Europe / Middle East / Africa (Excluding Germany)	216		205			17	%		16	%		11			5.4	%
387		391		389		368		Total EMEA	388		387			30	%		30	%		1			0.3	%
87		110		88		111		APAC—Asia Pacific	116		87			10	%		7	%		29			33.3	%
70		75		71		69		Americas, non-U.S.	78		70			6	%		5	%		8			11.4	%
544		576		548		548		Total outside the U.S.	582		544			46	%		42	%		38			7.0	%
$	1,297	$	1,364	$	1,280	$	1,294	Total revenue	$	1,276	$	1,297		100	%		100	%		$	(21	)	-1.6	%

Revenues in the U.S. decreased by 7.8% compared with the third quarter of fiscal 2006, primarily due to declines in sales of products and related implementation services. Germany revenue declined due to lower sales of products, the decline in our rental base and lower implementation services, partially offset by the benefit from foreign currency. EMEA revenue, excluding Germany, grew by 5.4%, helped by strong demand in Eastern Europe, as well as a benefit from foreign currency. Revenues in APAC and Americas, non-U.S. increased by 33% and 11%, respectively.

The following table sets forth a comparison of revenue from sales of products by channel:

									Third Fiscal Quarter
													Mix
3Q06		4Q06		1Q07		2Q07			2007		2006		2007			2006			Change
									Dollars in millions
$	277	$	302	$	259	$	277	Direct	$	258	$	277		41	%		44	%		$	(19	)	-6.9	%
359		388		360		362		Indirect	368		359			59	%		56	%		9			2.5	%
$	636	$	690	$	619	$	639	Total sales of products	$	626	$	636		100	%		100	%		$	(10	)	-1.6	%

The mix of sales of products in the third quarter of fiscal 2007 shifted three percentage points toward indirect due to the decline in U.S. and Germany direct product sales compared to the same quarter last fiscal year. The revenue growth in APAC and in EMEA, primarily Eastern Europe, is primarily driven through the indirect channel.

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Gross Margin

The following table sets forth a comparison of gross margin by type:

													Third Fiscal Quarter
																	Percent of Revenue
3Q06			4Q06			1Q07			2Q07				2007		2006		2007			2006			Change
													Dollars in millions
	52.2	%		54.8	%		53.3	%		52.9	%	On sales of products	$	324	$	332		51.8	%		52.2	%		$	(8	)	-2.4	%
	33.9	%		32.1	%		36.3	%		36.3	%	On services	195		172			38.5	%		33.9	%		23			13.4	%
	54.5	%		57.5	%		55.3	%		51.4	%	On rental and managed services	78		84			54.5	%		54.5	%		(6		)	-7.1	%
	45.3	%		46.6	%		46.8	%		46.2	%	Total gross margin	$	597	$	588		46.8	%		45.3	%		$	9		1.5	%

The $9 million increase in gross margin for the third quarter of fiscal 2007 reflects a benefit from foreign currency and reductions in cost of products and services.

Sales of products gross margin and rate both decreased primarily due to the decline in the volume of U.S. and Germany direct product sales, resulting in a higher proportion of indirect channel non-U.S. sales, which generally carry lower margins.

Services gross margin increased by $23 million compared to third quarter of fiscal 2006, and the gross margin rate increased by over four percentage points. The increase in gross margin was due to improved efficiencies and expense controls.

Rental and managed services gross margin decreased due to reductions in scope of contracted services at the time of contract renewal particularly related to our rental base in Germany, cancellations of contracts with historically higher margins, and price erosion on new contracts. The gross margin rate was flat.

Operating expenses

								Third Fiscal Quarter
												Percent of Revenue
3Q06	4Q06		1Q07		2Q07			2007		2006		2007			2006			Change
								Dollars in millions
$423	$	388	$	389	$	393	Selling, general and administrative	$	402	$	423		31.5	%		32.6	%		$	(21	)	-5.0	%
115	110		114		114		Research and development	104		115			8.2	%		8.9	%		(11		)	-9.6	%
22	62		6		10		Restructuring charges, net	13		22			1.0	%		1.7	%		(9		)	-40.9	%
—	—		—		—		Merger-related costs	8		—			0.6	%		0.0	%		8			100.0	%
$560	$	560	$	509	$	517	Total operating expenses	$	527	$	560		41.3	%		43.2	%		$	(33	)	-5.9	%

The $21 million decrease in SG&A expenses is primarily due to the impact of lower headcount and lower discretionary spending in connection with our cost management initiatives, partially offset by expected higher employee benefit costs. The third quarter of fiscal 2006 also included $29 million of asset impairment charges primarily related to internal-use software assets, partially offset by a $22 million benefit for the favorable resolution of non-income tax audits.

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R&D expenses decreased by $11 million compared to the same quarter last fiscal year due to a higher proportion of costs for development of software products, resulting in increased capitalization of R&D spending. This decrease is partially offset by spending in connection with Traverse and  a full quarter of Ubiquity expenses, two companies which we have acquired during the fiscal year.

Restructuring charges, net for the third quarter of fiscal 2007 represent $13 million of net charges for employee separation costs.

Merger-related costs consist primarily of investment banking and legal costs associated with the proposed Merger with an entity controlled by the Sponsors.

Other Income, Net

													Third Fiscal Quarter
3Q06			4Q06			1Q07			2Q07				2007			2006			Change
													Dollars in millions
	$	5		$	8		$	6		$	7	Other income, net		$	10		$	5	$	5	100	%

Other income, net for the third quarters of fiscal 2007 and 2006 primarily represents interest income earned on cash and cash equivalents.

Interest Expense

													Third Fiscal Quarter
3Q06			4Q06			1Q07			2Q07				2007			2006			Change
													Dollars in millions
	$	—		$	—		$	—		$	—	Interest expense		$	1		$	—	$	1	100	%

Capital lease obligations of $10 million represent our only financing arrangement as of June 30, 2007, and therefore, we have incurred insignificant interest expense.

Provision for (Benefit from) Income Taxes

												Third Fiscal Quarter
3Q06		4Q06			1Q07			2Q07				2007			2006			Change
												Dollars in millions
$	(11)		$	35		$	25		$	31	Provision for (benefit from) income taxes		$	24	$	(11	)	$	35	-318	%

The provision for income taxes in the third quarter of fiscal 2007 is comprised of U.S. Federal, state and non-U.S. taxes including a $4 million tax benefit attributable to tax return to provision adjustments due to the filing, in the quarter, of U.S. and non-U.S. income tax returns resulting in an effective tax rate of 31.3%.

The benefit from income taxes in the third quarter of fiscal 2006 was primarily due to an $18 million tax benefit associated with transfer pricing adjustments and a $3 million tax benefit resulting from a non-U.S. audit settlement. These benefits were partially offset by provisions for U.S. Federal, state and non-U.S. taxes, resulting in an effective tax benefit rate of 33.1%.

Segment Results

Global Communications Solutions (“GCS”)

The GCS segment is focused on the sale of communications systems, equipment and applications to our enterprise customers. Our primary offerings in this segment include IP communications and traditional

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voice communications solutions, multi-media contact center infrastructure and applications in support of customer relationship management, unified communications applications and appliances.

Large communications systems are IP and traditional communications systems marketed to large enterprises. These systems include:

·media servers which provide call processing on the customer’s local area network;

·media gateways which support traffic routing between traditional voice and IP communications solutions;

·associated appliances, such as telephone handsets and related software applications;

·Avaya Integrated Management, a Web-based comprehensive set of tools that manages complex voice and data network infrastructures;

·Avaya Communications Manager, a voice application software that manages call processing, facilitates secure customer interactions across a variety of media and supports a range of Avaya and third-party applications; and

·Avaya Extension to Cellular, which transparently bridges any cellular phone to any Avaya communications server.

Small communications systems are IP and traditional telephony systems marketed to smaller enterprises. These systems include:

·Avaya IP Office, an IP telephony solution for small and medium-sized enterprises;

·traditional key systems, Partner®, Merlin Magix®, Merlin Legend™ and I5 brands;

·associated appliances, such as telephone handsets; and

·media servers for voice applications used by smaller businesses.

Converged voice applications consist of applications for multi-media contact centers and unified communications. These include:

·applications in support of customer relationship management;

·messaging for IP and traditional systems;

·application enablement services; and

·unified communication client applications.

The following table sets forth revenue by similar class of products within the GCS segment:

									Third Fiscal Quarter
													Mix
3Q06		4Q06		1Q07		2Q07			2007		2006		2007			2006			Change
									Dollars in millions
$	455	$	483	$	435	$	440	Large Communications Systems	$	437	$	455		64	%		65	%	$	(18	)	-4.0	%
92		96		85		84		Small Communications Systems	74		92			11	%		13	%	(18		)	-19.6	%
144		169		151		162		Converged Voice Applications	153		144			22	%		20	%	9			6.3	%
13		12		11		12		Other	22		13			3	%		2	%	9			69.2	%
$	704	$	760	$	682	$	698	Total GCS revenue	$	686	$	704		100	%		100	%	$	(18	)	-2.6	%

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Overall GCS revenue declined by $18 million, or 2.6% due to product revenue decreases in the U.S. and a decline in our rental base in Germany. These declines were partially offset by a benefit from foreign currency and increased sales volume in EMEA, excluding Germany, and APAC. The $18 million decrease in large communications systems revenue was primarily the result of decreased sales of enterprise gateways and other equipment, particularly in our U.S. direct market, partially offset by growth in Asia Pacific and Latin America. Small communications systems revenues decreased by $18 million due to continued declines of our sales of traditional products in the U.S. and in our Germany rental base. Converged voice applications revenues increased by $9 million due to increased demand for applications outside of the U.S., especially IP messaging and certain contact center applications, offset by declines in demand for traditional messaging products.

The following table sets forth operating income of the GCS segment:

				Third Fiscal Quarter
						Percent of Revenue
3Q06	4Q06	1Q07	2Q07	2007	2006	2007	2006	Change
				Dollars in millions

$ 36 $ 86 $ 22 $ 38 Operating income $ 25 $ 36 3.6 % 5.1 % $ (11 ) -30.6 %

The $11 million decrease in operating income was primarily due to lower gross margin as a result of decreased sales volumes in the U.S. and Germany and unfavorable channel mix, as well as expenses associated with Ubiquity and Traverse. These unfavorable items were partially offset by decreases in net R&D expense due to a higher proportion of costs for development of software products resulting in increased capitalization of R&D spending and benefits from our cost savings initiatives.

Avaya Global Services (“AGS”)

The AGS segment is focused on supporting our broad customer base with comprehensive end-to-end global service offerings that enable our customers to plan, design, implement, monitor and manage their converged communications networks and contact center systems worldwide. AGS provides its services through the following offerings:

Product Support Services—AGS monitors and optimizes customers’ network performance ensuring availability and keeps communication networks current with the latest software releases. In the event of an outage, our services team helps customers restore their networks. This division was previously referred to as “Maintenance.”

Consulting and Systems Integration—Through operation, implementation and integration specialists and consultants worldwide, AGS helps customers leverage and optimize their multi-technology, multi-vendor environments through the use of contact centers, unified communication networks and IP communications. This division was previously referred to as “Implementation and Integration Services.”

Global Managed Services—AGS supplements our customers’ in-house staff and manages complex multi-vendor, multi-technology networks, optimizes network performance and configurations, backs up systems, detects and resolves faults, performs moves, adds and changes, and manages our customers’ communication environment and related assets. This category includes customers who have chosen a bundled solution with enhanced services not provided in a basic maintenance contract, and service of solutions sold under a rental payment basis. The managed services business generally involves larger contracts with customers who outsource responsibility for their voice applications domain to us. We face challenges in this area, including ensuring that we deliver consistent levels of service globally to these large, and often multi-national, customers while controlling costs and expanding the required skill set of our AGS organization.

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The profitability of our AGS segment is also affected by the fixed costs associated with our represented workforces in the U.S. and EMEA and includes the impact of increases in employee benefit costs. In addition, our profitability is impacted by the complexities associated with maintenance of global, multi-vendor IP networks as compared with local, closed, proprietary TDM networks, such as the need to assure a sufficient level of service technicians with IP skills.

The following table sets forth revenue by similar class of services within the AGS segment:

								Third Fiscal Quarter
												Mix
3Q06	4Q06		1Q07		2Q07			2007		2006		2007			2006			Change
								Dollars in millions
$402	$	404	$	411	$	412	Product Support Services	$	408	$	402		69	%		68	%		$	6		1.5	%
106	111		98		97		Consulting and Systems Integration	99		106			17	%		18	%		(7		)	-6.6	%
84	89		89		87		Global Managed Services	83		84			14	%		14	%		(1		)	-1.2	%
1	—		—		—		Other	—		1			0	%		0	%		(1		)	-100.0	%
$593	$	604	$	598	$	596	Total AGS revenue	$	590	$	593		100	%		100	%		$	(3	)	-0.5	%

Overall AGS revenue for the third quarter of fiscal 2007 was roughly flat compared to the same quarter last fiscal year. Product support services revenues increased by $6 million, due to growth in contract maintenance revenues outside the U.S. Consulting and systems integration revenues declined by $7 million due to lower direct product sales, resulting in lower implementation revenues, particularly in the U.S and Germany. Global managed services revenues were relatively flat due to reductions in scope related to our Germany rental base, cancellations of contracted services, and price erosion on new contracts, substantially offset by a benefit from foreign currency.

The following table sets forth operating income of the Avaya Global Services segment:

				Third Fiscal Quarter
						Percent of Revenue
3Q06	4Q06	1Q07	2Q07	2007	2006	2007	2006	Change
				Dollars in millions

$ 34 $ 36 $ 53 $ 56 Operating income $ 63 $ 34 10.7 % 5.7 % $ 29 85.3 %

The $29 million increase in operating income is primarily due to higher gross margin as a result of improved efficiencies and expense controls, partially offset by expected increased employee benefit costs.

Corporate/Other Unallocated Amounts

												Third Fiscal Quarter
3Q06		4Q06			1Q07			2Q07				2007			2006			Change
												Dollars in millions
$	(42)	$	(47	)		$	15	$	(13	)	Operating (loss) income	$	(18	)	$	(42	)	$	24	57	%

Corporate/Other Unallocated amounts include a $13 million net restructuring charge and $8 million of Merger-related costs in the third quarter of fiscal 2007. At the beginning of each fiscal year, the amount of corporate overhead and certain other expenses, including targeted annual incentive awards, to be charged to operating segments is determined and fixed for the entire year. Any adjustment of the annual incentive accrual, as well as any other over/under absorption of corporate overhead expenses against planned amounts, is recorded within Corporate/Other Unallocated Amounts. In addition, certain discrete items, such as charges relating to restructuring actions, as well as Merger-related costs, are not allocated to the operating segments and remain in Corporate/Other Unallocated Amounts.

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The operating loss for the third quarter of fiscal 2006 was primarily related to restructuring charges of $22 million and asset impairment charges of $29 million primarily related to certain internal-use software assets. These items were partially offset by $22 million related to the favorable resolution on non-income tax audits in several jurisdictions.

Nine Months Ended June 30, 2007 Compared with Nine Months Ended June 30, 2006

Revenue

The following table sets forth a comparison of revenue by type:

	Nine Months Ended June 30,
					Mix
	2007		2006		2007			2006			Change
	Dollars in millions
Sales of products	$	1,884	$	1,820		49	%		48	%	$	64		3.5	%
Services	1,525		1,503			40	%		40	%	22			1.5	%
Rental and managed services	441		461			11	%		12	%	(20		)	-4.3	%
Total revenue	$	3,850	$	3,784		100	%		100	%	$	66		1.7	%

The increase in revenue for the nine months ended June 30, 2007 compared to the same period last fiscal year was due to increases in sales of products and services, partially offset by a decline in rental and managed services. Revenue for the nine months of fiscal 2007 include a benefit of $93 million from favorable foreign currency.

The following table sets forth a geographic comparison of revenue:

	Nine Months Ended June 30,
					Mix
	2007		2006		2007			2006			Change
	Dollars in millions
U.S.	$	2,172	$	2,206		56	%		58	%	$	(34	)	-1.5	%
Outside the U.S.:
Germany	536		550			14	%		14	%	(14		)	-2.5	%
EMEA—Europe / Middle East / Africa (Excluding Germany)	609		557			16	%		15	%	52			9.3	%
Total EMEA	1,145		1,107			30	%		29	%	38			3.4	%
APAC—Asia Pacific	315		273			8	%		8	%	42			15.4	%
Americas, non-U.S.	218		198			6	%		5	%	20			10.1	%
Total outside the U.S.	1,678		1,578			44	%		42	%	100			6.3	%
Total revenue	$	3,850	$	3,784		100	%		100	%	$	66		1.7	%

Revenues in the U.S. decreased 1.5% compared with the first nine months of fiscal 2006, primarily due to decreases in sales of large and small communications systems and product support services. Germany’s revenue decreased 2.5% due to the decline in our rental base, partially offset by a benefit from foreign currency. EMEA revenue, excluding Germany, grew by 9.3% due to a benefit from foreign currency and strong demand in Eastern Europe. The increases in APAC and Americas, non-U.S. revenue were primarily due to the increased demand for IP products through the direct channel.

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The following table sets forth a comparison of revenue from sales of products by channel:

	Nine Months Ended June 30,
					Mix
	2007		2006		2007			2006			Change
	Dollars in millions
Direct	$	794	$	795		42	%		44	%	$	(1	)	-0.1	%
Indirect	1,090		1,025			58	%		56	%	65			6.3	%
Total sales of products	$	1,884	$	1,820		100	%		100	%	$	64		3.5	%

The mix of sales of products in the first nine months of fiscal 2007 shifted two percentage points toward indirect due to the decline in the U.S. and Germany direct product sales compared to the same period last fiscal year.

Gross Margin

The following table sets forth a comparison of gross margin by type:

	Nine Months Ended June 30,
					Percent of Revenue
	2007		2006		2007			2006			Change
	Dollars in millions
On sales of products	$	992	$	964		52.7	%		53.0	%	$	28		2.9	%
On services	565		527			37.0	%		35.1	%	38			7.2	%
On rental and managed services	237		264			53.7	%		57.3	%	(27		)	-10.2	%
Total gross margin	$	1,794	$	1,755		46.6	%		46.4	%	$	39		2.2	%

The $39 million increase in gross margin for the first nine months of fiscal 2007 reflects an increase in the volume of sales of products, the impact of improved efficiencies and a benefit from foreign currency. The overall gross margin rate was flat compared to the first nine months of fiscal 2006. The first nine months of fiscal 2006 gross margin includes an $11 million benefit, or a 0.3 percentage point impact, from the change in our vacation policy.

Gross margin on sales of products increased by $28 million primarily due to higher sales volume. Factors affecting the slight decline in the gross margin rate included higher costs associated with our warehousing issues and the higher proportion of indirect sales which generally carry lower margins, partially offset by benefits from cost reductions from employee restructuring actions.

Services gross margin increased by $38 million and the rate increased by almost two percentage points when compared to first nine months of fiscal 2006. Cost reductions from employee restructuring actions in prior periods and from improved efficiencies and expense controls were partially offset by expected increases in employee benefit costs.

Rental and managed services gross margin and rate both decreased due to reductions in scope of contracted services at the time of contract renewal particularly related to our rental base in Germany, cancellation of contracts with historically higher margins and price erosion on new contracts.

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Operating expenses

	Nine Months Ended June 30,
					Percent of Revenue
	2007		2006		2007			2006			Change
	Dollars in millions
Selling, general and administrative	$	1,184	$	1,207		30.7	%		31.9	%	$	(23	)	-1.9	%
Research and development	332		318			8.6	%		8.4	%	14			4.4	%
Restructuring charges, net	29		42			0.8	%		1.1	%	(13		)	-31.0	%
Merger-related costs	8		—			0.2	%		0.0	%	8			100.0	%
Total operating expenses	$	1,553	$	1,567		40.3	%		41.4	%	$	(14	)	-0.9	%

The $23 million decrease in SG&A expenses is primarily due to lower headcount, lower discretionary spending, an $8 million benefit resulting from the favorable resolution of non-income tax audits and a gain on the sale of real estate in fiscal 2007, partially offset by expected increases in employee benefit costs. The first nine months of fiscal 2006 included a $7 million benefit related to the change in our vacation policy, as well as a $29 million asset impairment charge primarily related to internal-use software assets.

R&D expenses increased by $14 million compared to the first nine months of the last fiscal year due to increased gross investment and to a lesser extent, the acquisitions of Traverse and Ubiquity. The first nine months of fiscal 2006 included a $3 million benefit related to the change in our vacation policy.

Restructuring charges, net for the first nine months of fiscal 2007 represent $36 million of charges for employee separation costs and lease obligations, partially offset by a net benefit of $7 million for changes in estimates for prior restructuring plans primarily related to facilities.

Merger-related costs for the first nine months of fiscal 2007 consist primarily of investment banking and legal costs associated with the proposed Merger.

Other Income, Net

	Nine Months Ended June 30,
	2007			2006			Change
	Dollars in millions
Other income, net		$	23		$	16	$	7	44	%

Other income, net for the first nine months of fiscal 2007 and 2006 primarily represents interest income earned on cash and cash equivalents.

Interest Expense

	Nine Months Ended June 30,
	2007			2006			Change
	Dollars in millions
Interest expense		$	1		$	3	$	(2	)	-67	%

Capital lease obligations of $10 million represent our only financing arrangement as of June 30, 2007, and therefore, we have incurred insignificant interest expense.

Provision for Income Taxes

	Nine Months Ended June 30,
	2007			2006			Change
	Dollars in millions
Provision for income taxes		$	80		$	48	$	32	67	%

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The provision for income taxes for the nine month periods shown above is comprised of U.S. Federal, state and non-U.S. taxes. The provision for the nine months ended June 30, 2007 includes a $6 million benefit from the retroactive extension to January 1, 2006 of the research tax credit pursuant to the Tax Relief and Health Care Act of 2006, a $7 million tax benefit due to a reduction in estimated tax payable for fiscal 2006 in Germany as a result of additional restructuring charges reported for statutory purposes, and a $4 million tax benefit attributable to tax return to provision adjustments due to the filing, in the quarter, of U.S. and non-U.S. income tax returns. The provision for the first nine months of fiscal 2007 resulted in an effective tax rate of 30.5%, which we believe is not indicative of the estimated tax rate for the full fiscal year.

The provision for income taxes for the nine months ended June 30, 2006 was impacted by an $18 million tax benefit associated with transfer pricing adjustments. The provision for income taxes for the nine months ended June 30, 2006 resulted in an effective rate of 23.9%.

Segment Results

Global Communications Solutions

The following table sets forth revenue by similar class of products within the GCS segment:

	Nine Months Ended June 30,
					Mix
	2007		2006		2007			2006			Change
	Dollars in millions
Large Communications Systems	$	1,312	$	1,282		64	%		62	%	$	30		2.3	%
Small Communications Systems	243		274			12	%		14	%	(31		)	-11.3	%
Converged Voice Applications	466		436			22	%		22	%	30			6.9	%
Other	45		34			2	%		2	%	11			32.4	%
Total GCS revenue	$	2,066	$	2,026		100	%		100	%	$	40		2.0	%

Overall GCS revenue grew by $40 million, or 2.0%. Product revenue increases, particularly related to converged voice applications and a benefit from foreign currency, were offset by the expected reduced sales of traditional products and a decline in our rental base in Germany. The $30 million increase in large communication systems revenue was the result of increased demand for enterprise gateways and other equipment. Small communications systems revenues decreased by $31 million due to continued declines of our sales of traditional products and our rental base. Converged voice applications revenues increased by $30 million due to increased demand for applications, especially IP messaging and contact center applications, offset by declines in demand for traditional messaging products.

The following table sets forth operating income of the GCS segment:

	Nine Months Ended June 30,
						Percent of Revenue
	2007			2006		2007			2006			Change
	Dollars in millions
Operating income		$	85	$	111		4.1	%		5.5	%	$	(26	)	-23.4	%

The $26 million decline in operating income was primarily due to higher costs associated with our warehousing issues, increases in R&D investment and the benefit of $11 million from a change in the Company’s vacation policy for the first nine months of fiscal 2006, partially offset by the impact of increases in sales volume.

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Avaya Global Services

The following table sets forth revenue by similar class of services within the AGS segment:

	Nine Months Ended June 30,
					Mix
	2007		2006		2007			2006			Change
	Dollars in millions
Product Support Services	$	1,231	$	1,215		69	%		69	%	$	16		1.3	%
Consulting and Systems Integration	294		290			16	%		17	%	4			1.4	%
Global Managed Services	259		251			15	%		14	%	8			3.2	%
Other	—		2			0	%		0	%	(2		)	-100.0	%
Total AGS revenue	$	1,784	$	1,758		100	%		100	%	$	26		1.5	%

Overall AGS revenue increased by $26 million, or 1.5%, due to increases in product support services, as well as a benefit from foreign currency.

Product support services revenues increased by $16 million compared to the third quarter of fiscal 2006, particularly in the international regions. Consulting and systems integration revenues increased by $4 million due to an increase in professional services in the U.S. Global managed services revenues increased by $8 million due to higher customer termination fees and favorable foreign currency, which were partially offset by reductions in scope related to our Germany rental base, cancellations of contracted services and price erosion on new contracts.

The following table sets forth operating income of the Avaya Global Services segment:

	Nine Months Ended June 30,
					Percent of Revenue
	2007		2006		2007			2006			Change
	Dollars in millions
Operating income	$	172	$	135		9.6	%		7.7	%	$	37	27.4	%

The $37 million increase in operating income is primarily due to the shift in mix of contract maintenance and implementation revenues, lower inventory-related costs, reduced costs resulting from prior restructuring actions and improved efficiencies and expense controls. These items were partially offset by expected increases in employee benefit costs. Operating income for the first nine months of fiscal 2006 included a benefit of $10 million from the change in our vacation policy.

Corporate/Other Unallocated Amounts

	Nine Months Ended June 30,
	2007			2006			Change
	Dollars in millions
Operating loss	$	(16	)	$	(58	)	$	42	72	%

For the first nine months of fiscal 2007, the operating loss in Corporate/Other Unallocated Amounts is primarily attributable to $29 million of net restructuring charges and $8 million of Merger-related costs, partially offset by $8 million in gains on the sale of real estate and the $8 million benefit from non-income tax audit settlements in several jurisdictions. The operating loss for the nine months of fiscal 2006 was primarily related to a $29 million impairment charge primarily associated with certain internal-use software assets, $42 million of net restructuring charges, and certain real estate expenses. These costs were partially offset by lower accruals for employee incentive awards and a $22 million benefit from the favorable resolution of non-income tax audits in several jurisdictions.

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Liquidity and Capital Resources

During the first nine months of fiscal 2007, we generated positive cash flow from operations of $424 million. We also received $110 million in connection with the issuance of common stock under our employee stock purchase plan and stock compensation plans. This source of cash was partially offset by $94 million of cash used during the first nine months of fiscal 2007 to repurchase shares in connection with our 2005 and 2007 share repurchase plans. In addition, we used $15 million and $147 million of cash to acquire Traverse and Ubiquity, respectively, and used $150 million of cash for capital expenditures and software development costs. Cash and cash equivalents increased by $158 million to $1,057 million as of June 30, 2007 from $899 million as of September 30, 2006.

Sources and Uses of Cash for the Nine Months Ended June 30, 2007

A condensed statement of cash flows for the first nine months of fiscal 2007 and 2006 follows:

	Nine months ended June 30,
	2007				2006
	Dollars in millions
Net cash provided by (used for):
Operating activities		$	424			$	456
Investing activities		(304		)		(139		)
Financing activities		13				(250		)
Effect of exchange rate changes on cash and cash equivalents		25				5
Net increase in cash and cash equivalents		158				72
Cash and cash equivalents at beginning of year		899				750
Cash and cash equivalents at end of period		$	1,057			$	822

Operating Activities

Our net cash provided by operating activities was $424 million for the first nine months of fiscal 2007, compared to $456 million in the first nine months of fiscal 2006. The lower amount of cash provided by operating activities compared to the prior year was primarily driven by higher employee incentive payments. The first nine months of fiscal 2007 included payment of employee incentives based on fiscal 2006 performance. The first nine months of fiscal 2006 included payments of lower discretionary awards based on fiscal 2005 performance. This change in the level of incentive payments resulted in an approximately $70 million increase in cash usage in the first nine months of fiscal 2007 compared with the same period of fiscal 2006.

Accounts Receivable, Net—The following summarizes our accounts receivable, net and related metrics:

	June 30,				September 30,
	2007				2006				Change
	Dollars in millions
Accounts receivable, gross		$	928			$	928		$	—
Allowance for doubtful accounts		(59		)		(57		)	(2		)
Accounts receivable, net		$	869			$	871		$	(2	)
Allowance for doubtful accounts as a percent of accounts receivable, gross		6.4		%		6.1		%	+0.3 pts
Past due receivables as a percent of accounts receivable, gross		18.5		%		17.8		%	+0.7 pts

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	For the three months ended
	June 30,		September 30,
	2007		2006		Change
Days sales outstanding (DSO)		61 days		57 days	+4 days

The accounts receivable balance as of June 30, 2007 was substantially flat when compared to September 30, 2006. The increase in DSO was the result of current quarter sales occurring later in the quarter when compared to the three months ended September 30, 2006 as well as the increase in the deferred revenue balance as of June 30, 2007.

Inventory—The following summarizes our inventory and inventory turnover:

	June 30,		September 30,
	2007		2006			Change
	Dollars in millions
Finished goods	$	300		$	281	$	19
Raw materials	4			4		—
Total inventory	$	304		$	285	$	19
Inventory turnover	8.9 times			10.2 times		-1.3 times

Inventory increased by $19 million since the beginning of the fiscal year and inventory turnover declined due to changes in the mix of product demand as well as in anticipation of seasonally strong demand for our products in the fourth fiscal quarter.

Accounts Payable—The following summarizes our accounts payable:

	June 30,			September 30,
	2007			2006			Change
	Dollars in millions
Accounts payable		$	395		$	418	$	(23	)
Days payable outstanding		52			51		+1 day

Accounts payable decreased in the first nine months of fiscal 2007 due to lower spending levels and the timing of payments during the quarter.

Investing Activities

Net cash used for investing activities was $304 million in the first nine months of fiscal 2007, compared with $139 million in the same period last year. Activities in the current period include $162 million for the acquisitions of Ubiquity and Traverse, $79 million for capital expenditures and $71 million for capitalized software development costs.

Cash used in the same period of fiscal 2006 included $83 million for capital expenditures and $53 million for capitalized software development costs.

Financing Activities

Net cash provided by financing activities was $13 million in the first nine months of fiscal 2007, compared with cash used of $250 million in the same period last year. Activities in the current period primarily include $110 million of cash received in connection with the issuance of common stock under our employee stock purchase plan and stock compensation plans, partially offset by $94 million of cash used to repurchase our common stock pursuant to our share repurchase plans.

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Cash used in the same period of fiscal 2006 consisted primarily of $256 million to repurchase our common stock and $14 million to repay our senior notes partially offset by $20 million of cash received in connection with the issuance of common stock under employee stock purchase plan and the exercise of options under our stock compensation plans.

Future Cash Requirements and Sources of Liquidity

Impact of Proposed Merger

We expect the proposed Merger to be completed in the fall of 2007, subject to receipt of shareholder approval and customary regulatory approvals, as well as satisfaction of other customary closing conditions.

We will incur indebtedness and utilize cash in order to complete the proposed Merger. As a result, our future cash requirements, sources of liquidity and uncertainties regarding our liquidity may change after the completion of the Merger. Because the proposed Merger is not complete, the discussion in this section does not consider the impact of proposed costs which will only be incurred upon consummation of the proposed Merger, nor does it consider the incurrence of the related indebtedness contemplated by the Merger.

Future Cash Requirements

Our primary future cash requirements will be to fund capital expenditures, restructuring payments, employee benefit obligations and Merger-related costs.

Specifically, we expect our primary cash requirements for the remainder of fiscal 2007 to be as follows:

·Capital expenditures—We expect to spend approximately $75 million for capital expenditures and capitalized software development costs during the fourth quarter of fiscal 2007.

·Restructuring payments—We expect to make payments of approximately $20 million during the remainder of fiscal 2007 for employee separation costs and lease termination obligations associated with restructuring actions we have taken to date. If we take any further actions to reduce costs and expenses, we would expect to make additional payments throughout the remainder of fiscal 2007.

·Employee benefit obligations—We estimate that we will pay $2 million each for U.S. and non-U.S. pension benefits for the remainder of fiscal 2007. We also estimate that we will make payments of $5 million for retiree medical benefits that are not pre-funded during the remainder of fiscal 2007.

·Merger-related costs—We have incurred $8 million for Merger-related costs during the third quarter of fiscal 2007, and we expect to incur an additional $15 million during the remainder of fiscal 2007. Payment of these costs is not dependent on the successful completion of the Merger. Substantially all accrued Merger-related costs are expected to be paid after closing of the Merger, which we expect to complete in the fall of 2007.

Future Sources of Liquidity

We expect our primary source of cash during the remainder of fiscal 2007 to be positive net cash provided by operating activities. We expect that growth in profitable revenues and continued focus on accounts receivable, inventory management and cost containment will enable us to continue to generate positive net cash from operations.

We and a syndicate of lenders are currently party to a $400 million revolving credit facility, which expires in May 2011. The Merger Agreement limits Avaya’s ability without the Sponsors’ consent during the period from the date of the Merger Agreement until the closing of the Merger to, among other things,

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incur indebtedness over certain thresholds. For more information regarding the credit facility, see Note 7 “Financing Arrangements” to our Consolidated Financial Statements.

Based on past performance and current expectations, we believe that our existing cash and cash equivalents of $1,057 million and our net cash provided by operating activities will be sufficient to meet our future cash requirements described above. Our ability to meet these requirements will depend on our ability to generate cash in the future, which is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

Uncertainties Regarding Our Liquidity

If we do not generate sufficient cash from operations, face unanticipated cash needs such as the need to fund significant strategic acquisitions or do not otherwise have sufficient cash and cash equivalents, we may need to incur debt or issue equity. In order to meet our cash needs we may, from time to time, borrow under our credit facility or issue other long- or short-term debt or equity, if the market and the terms of our existing debt instruments permit us to do so.

We believe the following uncertainties exist regarding our liquidity:

·Ability to Increase Revenue—Our ability to generate net cash from operating activities has been a primary source of our liquidity. If our revenues were to decline, our ability to generate net cash from operating activities in a sufficient amount to meet our cash needs could be adversely affected.

·Acquisitions—We may from time to time in the future make acquisitions. Such acquisitions may require significant amounts of cash or may result in increased debt service requirements to the extent we assume or incur debt in connection with such acquisitions.

Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value because of their short-term maturity and variable rates of interest.

We conduct our business on a multi-national basis in a wide variety of foreign currencies. We are therefore subject to the risk associated with foreign currency exchange rates and interest rates that could affect our results of operations, financial position and cash flows. We manage our exposure to these market risks through our regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. We use derivative financial instruments to reduce earnings and cash flow volatility associated with foreign exchange rate changes. Derivative financial instruments are used as risk management tools and not for speculative or trading purposes. As of June 30, 2007 and September 30, 2006, the estimated fair values of our foreign currency forward contracts were a gain of $3 million and a loss of $2 million, respectively. The gain was included in other current assets, while the loss was included in other current liabilities. The estimated fair values of these forward contracts were based on market quotes obtained through independent pricing sources.

Debt Ratings

Our ability to obtain external financing and the related cost of borrowing is affected by our debt ratings, which are periodically reviewed by the major credit rating agencies. As of June 30, 2007, we had a long-term corporate family rating of Ba3 with ratings under review for possible downgrades from Moody’s and a corporate credit rating of B+ with ratings on the credit watch with negative implications from Standard & Poor’s. These ratings are not recommendations to buy, sell or hold securities. The ratings are subject to change or withdrawal at any time by the respective credit rating agencies. Each credit rating should be evaluated independently of any other ratings.

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Credit Facility

Our credit facility contains affirmative and restrictive covenants that we must comply with, as described in Note 7, “Financing Arrangements” to our Consolidated Financial Statements. As of June 30, 2007, we were in compliance with all of the covenants included in the credit facility.

There are currently $27 million of letters of credit issued under the credit facility. There are no other outstanding borrowings under the facility and the remaining availability is $373 million as of June 30, 2007. We believe the credit facility provides us with an important source of backup liquidity.

Critical Accounting Policies and Estimates

The preparation of the Consolidated Financial Statements and related disclosures in conformity with accounting principles generally accepted in the United States requires us to establish accounting policies that contain estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. These policies include:

·Revenue recognition;

·Collectibility of accounts receivable;

·Inventories;

·Deferred tax assets and tax liabilities;

·The measurement of long-lived assets, including goodwill, the impairment of which would impact operating expenses;

·Restructuring programs;

·Pension and post-retirement benefits costs;

·Commitments and contingencies; and

·Accounting for stock options.

We have other important accounting policies and practices; however, once adopted, these other policies either generally do not require us to make significant estimates or assumptions or otherwise only require implementation of the adopted policy and not a judgment as to the policy itself. We base our estimates on our historical experience and also on assumptions that we believe are standard and reasonable. Despite our intention to establish accurate estimates and assumptions, actual results could differ from those estimates for various reasons including those described in “Forward Looking Statements.”

During the nine months ended June 30, 2007, management believes there have been no significant changes to the items that we disclosed as our critical accounting polices and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended September 30, 2006.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

See Avaya’s Annual Report on Form 10-K filed with the SEC on December 8, 2006. As of June 30, 2007, there has been no material change in this information.

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Item 4.Controls and Procedures.

a)Evaluation of Disclosure Controls and Procedures.

As of the end of the period covered by this report, our management, under the supervision and with the participation of the principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on this evaluation, our principal executive officer and principal financial officer have concluded (1) that the disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (2) that the disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

b)Changes in Internal Control Over Financial Reporting.

There were no changes in our internal control over financial reporting during the third quarter of fiscal 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART IIOTHER INFORMATION

Item 1.Legal Proceedings.

See Note 13, “Commitments and Contingencies” to the Consolidated Financial Statements.

Item 1A.Risk Factors.

(Cautionary Statements Under the Private Securities Litigation Reform Act of 1995)

We provide the following cautionary discussion of risks, uncertainties and possibly inaccurate assumptions relevant to our businesses. We note these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These are factors that we think could cause our actual results to differ materially from expected and historical results. However, it is not possible to predict or identify all such factors. Consequently, you should not consider the following to be a complete discussion of all potential risks or uncertainties.

It should also be noted that we may not be able to complete the proposed Merger on the terms summarized elsewhere in this Form 10-Q or on other acceptable terms, or at all, due to a number of factors, including the failure to satisfy customary closing conditions. The risks and uncertainties described below do not contemplate or give effect to potential risks associated with the proposed Merger, including any potential adverse reaction of our customers, suppliers, distributors and other business partners to the proposed Merger.

The risks and uncertainties discussed in more detail below include, but are not limited to:

·price and product competition, including from competitors who may offer products and applications similar to those we offer as part of another offering, and from current leaders in information technology which benefit from the convergence of enterprise voice and data networks;

·rapid or disruptive technological development, including the effects of the technology shift from traditional TDM to IP telephony;

·dependence on new product development;

·customer demand for our products and services, including risks specifically associated with the services business and, in particular, the maintenance and rental and managed services lines of business, primarily due to renegotiations of customer contracts and changes in scope, pricing erosion and cancellations;

·supply issues related to our outsourced manufacturing operations, logistics, distribution or components;

·risks related to inventory, including warranty costs, obsolescence charges, excess capacity, material and labor costs, and our distributors’ decisions regarding their own inventory levels;

·general industry and market conditions and growth rates and general domestic and international economic conditions including interest rate and currency exchange rate fluctuations;

·the economic, political and other risks associated with international sales and operations, including increased exposure to currency fluctuations and to European economies as a result of a large percentage of our business being conducted in Europe;

·the ability to successfully integrate acquired companies, which may require significant management time and attention;

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·the ability to attract and retain qualified employees;

·control of costs and expenses, including difficulties in completing restructuring actions in a timely and efficient manner due to labor laws and required approvals;

·U.S. and non-U.S. government regulation; and

·the ability to form and implement alliances.

Below is a detailed discussion of certain risks affecting our business. The categorization of risks set forth below is meant to help you better understand the risks facing our business and is not intended to limit your consideration of the possible effects of these risks to the listed categories. Any adverse effects related to the risks discussed below may, and likely will, adversely affect many aspects of our business.

Risks Related To Our Revenue and Business Strategy

A key component of our strategy is our focus on the development and sale of advanced communications products and applications and related services, including IP communications solutions, and this strategy may not be successful.

A key component of our strategy is our focus on the development and sale of IP communications solutions and other advanced communications products and applications and related services.  Our product offerings include IP communications and traditional voice communications systems, multi-media contact center infrastructure and applications in support of customer relationship management, unified communications applications and appliances, such as IP telephone sets.  These offerings are part of what we refer to as “Intelligent Communications,” which is about embedding communications solutions into our customers’ business processes to help them transform their businesses and innovate their business models.

In order to execute our strategy successfully, we must continue to:

·expand our current customer base by selling our advanced communications products, applications and services to enterprises that have not previously purchased our products and applications;

·make sales to our existing customers that incorporate our advanced communications products, applications and services;

·train our sales staff and distribution partners to sell new types of products, applications and services and improve our marketing of such products, applications and services;

·research and develop IP communications solutions and other advanced communications products and applications;

·increase the performance and reliability of new products and ensure that the performance and reliability of these products meet our customers’ expectations;

·acquire key technologies through licensing, development contracts, alliances and acquisitions;

·train our services employees and channel partners to service new products and applications, and take other measures to ensure we can deliver consistent levels of service globally to our multinational customers;

·enhance our services organization’s ability to service more complex, multi-vendor IP networks, versus traditional closed, proprietary TDM networks, and in general ensure that there is a sufficient level of service technicians with IP skills;

·develop relationships with new types of channel partners who are capable of both selling more advanced products and extending our reach into new and existing markets; and

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·establish presence in key geographic markets.

Our investments are targeted around achieving our strategic vision of Intelligent Communications. Our vision may fail to predict our customers’ business needs or changes in technological trends, which may adversely affect our operating results. If we do not successfully execute our strategy, our operating results may be adversely affected.

The market opportunity for advanced communications products, applications and services, including IP communications solutions, may not develop in the ways that we anticipate.

The demand for our products can change quickly and in ways that we may not anticipate because the market is characterized by rapid, and sometimes disruptive, technological developments, evolving industry standards, frequent new product introductions and enhancements, changes in customer requirements and a limited ability to accurately forecast future customer orders. Our operating results may be adversely affected if the market opportunity for advanced communications products, applications and services, including IP telephony solutions, does not develop in the ways that we anticipate. The ratio of revenue attributable to IP telephony solutions versus traditional voice communication systems is expected to increase as more and more companies convert to IP telephony solutions. However, IP lines currently constitute a small percentage of global installed enterprise lines and if IP does not gain widespread acceptance in the marketplace as an alternative replacement option for enterprise communications systems our overall revenue and operating results may be adversely affected. Even if we are successful in increasing our revenue from sales of IP communications solutions, if revenue from traditional enterprise voice communications systems and services declines faster than revenue from IP communications solutions increases, our overall revenue and operating results may be adversely affected. We cannot predict whether:

·the demand for advanced communications products, applications, and services, including IP solutions, will grow as quickly as we anticipate;

·current or future competitors or new technologies will cause the market to evolve in a manner different than we expect;

·other technologies will become more accepted or standard in our industry; or

·we will be able to maintain a leadership or profitable position as this opportunity develops.

We face intense competition from our current competitors and, as the enterprise communications and information technology markets evolve, may face increased competition from companies that do not currently compete directly against us.

Historically, our GCS segment has competed against other providers of enterprise voice communications solutions such as Nortel Networks Corporation, Siemens AG, Alcatel-Lucent and NEC Corporation. As we focus on the development and marketing of advanced communications solutions, such as IP solutions, we face intense competition from these providers of voice communications solutions as well as from data networking companies such as Cisco Systems, Inc. and 3Com Corp. The GCS segment also faces competition in the small and medium business market from many competitors, including Cisco, Nortel, Alcatel-Lucent, NEC, Matsushita Electric Corporation of America, Inter-Tel, Incorporated, 3Com, and Mitel Networks Corp., although the market for these products is fragmented. Our AGS segment competes with companies like those above offering services with respect to their own product offerings, as well as many consulting and systems integration firms and network service providers.

In addition, because the market for our products is subject to rapid technological change, as the market evolves we may face competition in the future from companies that do not currently compete in the enterprise communications market, including companies that currently compete in other sectors of the information technology, communications and software industries or communications companies that serve

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residential rather than enterprise customers. In particular, as the convergence of enterprise voice and data networks becomes more widely deployed by enterprises, the business, information technology and communication applications deployed on converged networks become more integrated. We may face increased competition from current leaders in information technology infrastructure, information technology, personal and business applications and the software that connects the network infrastructure to those applications, such as the alliance entered into between Microsoft Corp. and Nortel. We may also face competition from companies that seek to sell remotely hosted services or software as a service directly to the end customer. Competition from these potential market entrants may take many forms, including offering products and applications similar to those we offer as part of another offering. In addition, these technologies continue to move from a proprietary environment to an open standards-based environment.

Several of these existing competitors have, and many of our future competitors may have, greater financial, personnel, research and other resources, more well-established brands or reputations and broader customer bases than we and, as a result, these competitors may be in a stronger position to respond quickly to potential acquisitions and other market opportunities, new or emerging technologies and changes in customer requirements. Some of these competitors may have customer bases that are more geographically balanced than ours and, therefore, may be less affected by an economic downturn in a particular region. Competitors with greater resources also may be able to offer lower prices, additional products or services or other incentives that we cannot match or do not offer. Industry consolidations such as the merger between Alcatel and Lucent Technologies Inc. may also create competitors with broader and more geographic coverage, with the ability to reach enterprises through service provider customers.

In addition, existing customers of data networking companies that compete against us may be inclined to purchase enterprise communications solutions from their current data networking vendor rather than from us. Also, as communications and data networks converge, we may face competition from systems integrators that traditionally have been focused on data network integration. We cannot predict with precision which competitors may enter our markets in the future, what form such competition may take or whether we will be able to respond effectively to the entry of new competitors into our markets or the rapid evolution in technology and product development that has characterized our markets. In addition, in order to effectively compete with any new market entrant, we may need to make additional investments in our business or use more capital resources than our business currently requires or reduce prices, which may adversely affect our profitability.

Our revenues are dependent on general economic conditions and the willingness of enterprises to make capital investments.

One factor that significantly affects our operating results is the impact of economic conditions on the willingness of enterprises to make capital investments, particularly in enterprise communications technology and related services. Although general economic conditions have improved in recent years, we believe that enterprises continue to be concerned about sustained economic growth and they have tried to maintain or improve profitability through cost control and constrained capital spending. Because it is not certain whether enterprises will increase spending on enterprise communications technology significantly in the near term, we could experience continued pressure on our ability to increase our revenue. Our ability to grow revenue is also affected by other factors, such as competitive pricing pressures and price erosion, see Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Trends and Uncertainties Affecting Our Results—Trends and Uncertainties Affecting Our Revenue—Technology transition,” “—Competitive environment’’ and “—Pressures on services business.”

If these or other conditions limit our ability to grow revenue or cause our revenue to decline and we cannot reduce costs on a timely basis or at all, our operating results will be adversely affected.

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Risks Related To Our Operations

We rely on outsourced product manufacturers, distributors and warehousing agents for our products and various issues with respect to the delivery of our products could arise which could adversely impact both our revenue and our costs.

We have outsourced substantially all of our manufacturing operations and we may experience significant disruption to our operations by outsourcing too much of our manufacturing. Our ability to realize the intended benefits of our manufacturing outsourcing initiative depends on the willingness and ability of our contract manufacturers to produce our products. If a contract manufacturer terminates its relationship with us or is unable to fill our orders on a timely basis or in accordance with our quality requirements, we may be unable to deliver the affected products to meet our customers’ orders, which could delay or decrease our revenue or otherwise have an adverse effect on our operations. In fiscal 2006 we experienced these types of disruptions and delays and they impacted our ability to meet timelines for certain of our customer requirements. In addition, we periodically review our product manufacturing operations and consider appropriate changes as necessary. Although we endeavor to appropriately manage any disruption in transitioning from one contract manufacturer to another contract manufacturer, we may experience significant disruption to our operations during any contract manufacturer transition, and did experience such a disruption recently while making this type of transition.

As we continue to seek to optimize our end-to-end supply chain, we have outsourced various logistics functions. We rely on third-party logistics (3PL) service providers to provide certain services for our business, including warehousing, physical distribution, repairs and returns processing. If a logistics service provider does not meet our service level and quality requirements, we may be unable to fulfill our customers’ orders or meet certain customer support obligations in a timely and accurate manner, which could delay or decrease our revenue or otherwise have an adverse effect on our revenue and our costs. In the fourth quarter of fiscal 2006 and first quarter of fiscal 2007, we moved certain warehousing and physical distribution operations to a different 3PL service provider at a new facility. That provider and facility provide our 3PL needs in North America and certain 3PL needs outside of North America. There were disruptions and delays in delivery of certain products from this facility in the first quarter of fiscal 2007. Additionally, there was an adverse impact on our costs at this facility throughout the first half of fiscal 2007. We and the 3PL service provider operating this facility continue to work to promote stability in the 3PL operations there. We have been making improvements as we progress through this transition. However, we cannot assure you that this issue will not continue to have an adverse effect on our revenue and increase our costs.

We also rely on outside sources for the supply of the components of our products and for the finished products that we purchase from third parties. In some cases certain components are only available from a single source or from a limited number of suppliers. Delays or shortages associated with these components could cause significant disruption to our operations. We have in the past experienced component shortages that have affected our operations and we may in the future experience these shortages. Shortages could be a result of manufacturing or capacity issues at our outsourced manufacturers or suppliers or strong demand for certain products for which we have not made adequate forecasts. Our operating results could be adversely affected if shortages or delays persist or if the price of the necessary components increases or the components become unavailable at reasonable prices or at all.

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For more information concerning the risks associated with our contract manufacturers operating internationally, please see “—Risks Related To Our Operations—As our international business has grown significantly in the last fiscal year, changes in economic or political conditions in a specific country or region could negatively affect our revenue, costs, expenses and financial condition.”

If we are unable to integrate acquired businesses into ours effectively, our operating results may be adversely affected. Even if we are successful, the integration of these businesses has required, and will likely continue to require, significant resources and management attention.

We may not be able to successfully integrate acquired businesses into ours, and therefore we may not be able to realize the intended benefits from an acquisition. If we fail to successfully integrate these acquisitions or if they fail to perform as we anticipated, our existing businesses and our revenue and operating results could be adversely affected. If the due diligence of the operations of these acquired businesses performed by us and by third parties on our behalf were inadequate or flawed, or if we later discover unforeseen financial or business liabilities, the acquired businesses may not perform as expected. Additionally, acquisitions could result in difficulties assimilating acquired operations and products and the diversion of capital and management’s attention away from other business issues and opportunities. To the extent that the Company expands internationally through acquisitions and fails to identify and respond to cross-cultural employee issues appropriately, it may fail to retain employees acquired through those acquisitions, which may negatively impact its integration efforts. Acquisitions could also have a negative impact on our results of operations if it is subsequently determined that goodwill or other acquired intangible assets are impaired, thus resulting in an impairment charge in a future period. Finally, acquisitions often necessitate restructurings in order to optimize the operational performance of the combined entity and to control costs and expenses. These restructurings are more difficult due to labor laws and required approvals when the acquired business is a company operating in multiple and/or non-U.S. jurisdictions, which may hinder completion of restructuring actions in a timely and efficient manner and delay anticipated cost savings.

We are dependent on our intellectual property. If we are not able to protect our proprietary rights or if those rights are invalidated or circumvented, our business may be adversely affected.

We believe that developing new products and technology is critical to our success. As a leader in technology and innovation in the telecommunications services, applications and services industries, we are dependent on the maintenance of our current intellectual property rights and the establishment of new intellectual property rights. We generally protect our intellectual property through patents, trademarks, trade secrets, copyrights, confidentiality and nondisclosure agreements and other measures. We cannot assure you that patents will be issued from pending applications that we have filed or that our patents will be sufficient to protect our key technology. Although we have been granted many patents, have obtained other intellectual property rights and continue to file new patent applications and seek additional proprietary rights, there can be no assurances made that any of our patents, patent applications or our other proprietary rights will not be challenged, invalidated, or circumvented. In addition, our business is global and the level of protection of our proprietary technology will vary by country, particularly in countries that do not have well-developed judicial systems or laws that adequately protect intellectual property rights and any actions taken in these countries may have results that are different than if such actions were taken under the laws of the United States. Patent litigation and other challenges to our patents and other proprietary rights are costly and unpredictable and may result in preventing us from marketing and selling a product in a particular geographic area. Patent filings by third parties, whether made before or after the date of our filings, could render our intellectual property less valuable. Competitors and others may also misappropriate our intellectual property, disputes as to ownership of intellectual property may arise and our intellectual property may otherwise fall into the public domain. If

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we are unable to protect our proprietary rights, we may be at a disadvantage to others who did not incur the substantial time and expense required to create the products that we have created.

The failure to maintain adequate security over our information systems could adversely affect our operating results.

We rely on the security of our information systems, among other things, to protect our proprietary information and information of our customers. Information technology system failures, including a breach of our data security, could disrupt our ability to function in the normal course of business by potentially causing, among other things, delays in the fulfillment or cancellation of customer orders, disruptions in the manufacture or shipment of products, or an unintentional disclosure of customer or our information. Additionally, if we do not maintain adequate security procedures over our information systems, we may be subject to consequences such as computer hacking, cyber-terrorism or other unauthorized attempts by third parties to access our or our customers’ proprietary information. Even if we are able to maintain procedures that are adequate to address current security risks, unauthorized users may be able to develop new techniques that will enable them to successfully circumvent our current security procedures. The failure to protect our proprietary information could seriously harm our business and future prospects or expose us to claims by our customers, employees or others that we did not take the appropriate measures to adequately protect their proprietary information. We have taken steps to address these concerns for our information systems by implementing network security and internal control measures. However, an information system failure or data security breach of ours or a third-party vendor could have a material adverse effect on our operating results.

As our international business has grown significantly in the last two fiscal years, changes in economic or political conditions in a specific country or region could negatively affect our revenue, costs, expenses and financial condition.

We conduct significant sales and customer support operations in countries outside of the United States and also depend on non-U.S. operations of our contract manufacturers and our distribution partners. For the first nine months of fiscal 2007 and 2006, we derived 44% and 42% of our revenue, respectively, from sales outside the United States. Our future international operating results, including our ability to import our products to, export our products from, or sell our products in various countries, could be materially adversely affected by a variety of uncontrollable and changing factors. These factors include political conditions, economic conditions, legal and regulatory constraints, currency regulations, health or similar issues, natural disasters and other matters in any of the countries or regions in which we currently operate or intend to operate in the future. Currently, we have concerns about weakness and uncertainty in European economies, including high unemployment levels and low economic growth forecasts, particularly in Germany where we have a high concentration of our business.

Other factors which may impact our international operations include foreign trade, environmental, monetary and fiscal policies, laws, regulations and other activities of foreign governments, agencies and similar organizations, and risks associated with having facilities located in countries which have historically been less stable than the United States. For example, the EU has enacted the RoHS and WEEE directives, which are discussed in Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Trends and Uncertainties Affecting Our Results—Manufacturing and Logistics.”

Additional risks inherent in our international operations generally include, among others, the costs and difficulties of managing international operations, adverse tax consequences, including imposition of withholding or other taxes on payments by subsidiaries, and greater difficulty in enforcing intellectual property rights. Our effective tax rates in the future could be adversely affected if the geographical distribution of our earnings and losses is unfavorable, by changes in the valuation of our deferred tax assets

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or liabilities, or by changes in tax laws, regulations, accounting principles, or interpretations thereof. The various risks inherent in doing business in the United States generally also exist when doing business outside of the United States, and may be exaggerated by the difficulty of doing business in numerous sovereign jurisdictions due to differences in culture, laws and regulations.

Fluctuations in foreign currency exchange rates could negatively impact our operating results.

Since a significant portion of our business is conducted outside the United States, we face exposure to movements in currency exchange rates. Foreign currency exchange rates and fluctuations may have an impact on our revenue, costs or cash flows from our international operations, which could adversely affect our financial performance. Our primary currency exposures are to the euro, British pound, Indian rupee and Canadian dollar. These exposures may change over time as business practices evolve and as the geographic mix of our business changes. For example, as our business grows in emerging markets, we may see an increase in our exposure to emerging market currencies, which can have high volatility. An increase in the value of the U.S. dollar could increase the real cost to our customers of our products in those markets outside the United States, and a weakened U.S. dollar could increase the cost of local operating expenses and procurement of raw materials. We may from time to time enter into foreign exchange forward contracts to reduce the short-term impact of foreign currency fluctuations, however, any attempts to hedge against foreign currency fluctuation risks may be unsuccessful and result in an adverse impact to our operating results.

Risks Related to Contingent Liabilities

We may incur liabilities as a result of our obligation to indemnify, and to share certain liabilities with, Lucent in connection with our spin-off from Lucent in September 2000.

Pursuant to the Contribution and Distribution Agreement, Lucent contributed to us substantially all of the assets, liabilities and operations associated with its enterprise networking businesses and distributed all of the outstanding shares of our common stock to its stockholders. The Contribution and Distribution Agreement, among other things, provides that, in general, we will indemnify Lucent for all liabilities including certain pre-distribution tax obligations of Lucent relating to our businesses and all contingent liabilities primarily relating to our businesses or otherwise assigned to us. In addition, the Contribution and Distribution Agreement provides that certain contingent liabilities not directly identifiable with one of the parties will be shared in the proportion of 90% by Lucent and 10% by us. The Contribution and Distribution Agreement also provides that contingent liabilities in excess of $50 million that are primarily related to Lucent’s businesses shall be borne 90% by Lucent and 10% by us and contingent liabilities in excess of $50 million that are primarily related to our businesses shall be borne equally by the parties.

Please see Note 13, “Commitments and Contingencies,” to our Consolidated Financial Statements for a description of certain matters involving Lucent for which we have assumed responsibility under the Contribution and Distribution Agreement.

We cannot assure you that Lucent will not submit a claim for indemnification or cost sharing to us in connection with any future matter. In addition, our ability to assess the impact of matters for which we may have to indemnify or share the cost with Lucent is made more difficult by the fact that we do not control the defense of these matters.

We may be subject to litigation and infringement claims, which could cause us to incur significant expenses or prevent us from selling our products or services.

From time to time, we receive notices from third parties asserting that our proprietary or licensed products, systems and software infringe their intellectual property rights. We cannot assure you that the number of these notices will not increase in the future and that others will not claim that our proprietary or

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licensed products, systems and software are infringing their intellectual property rights or that we do not in fact infringe those intellectual property rights. We may be unaware of intellectual property rights of others that may cover some of our technology. Irrespective of the merits of these claims, if someone claimed that our proprietary or licensed systems and software infringed their intellectual property rights, any resulting litigation could be costly and time consuming and would divert the attention of management and key personnel from other business issues. The complexity of the technology involved and the uncertainty of intellectual property litigation increase these risks. These matters may result in any number of outcomes for us, including entering into licensing agreements, redesigning our products to avoid infringement, being enjoined from selling products that are found to infringe, paying damages if products are found to infringe, and indemnifying customers from claims as part of our contractual obligations. Royalty or license agreements may be very costly or we may be unable to obtain royalty or license agreements on terms acceptable to us or at all. We also may be subject to significant damages or an injunction against us or our proprietary or licensed systems. A successful claim of patent or other intellectual property infringement against us could materially adversely affect our operating results. We have made and will likely continue to make investments to license and/or acquire the use of third party intellectual property rights and technology as part of our strategy to manage this risk, but we cannot assure you that we will be successful. We may also be subject to additional notice and other requirements to the extent we incorporate open source software into our applications.

In addition, third parties have claimed, and may in the future claim, that a customer’s use of our products, systems or software infringes the third party’s intellectual property rights. Under certain circumstances, we may be required to indemnify our customers for some of the costs and damages related to such an infringement claim. Any indemnification requirement could have a material adverse effect on our business and our operating results.

If the distribution does not qualify for tax-free treatment, we could be required to pay Lucent or the Internal Revenue Service a substantial amount of money.

Lucent has received a private letter ruling from the Internal Revenue Service stating, based on certain assumptions and representations, that the distribution would not be taxable to Lucent. Nevertheless, Lucent could incur a significant tax liability if the distribution did not qualify for tax-free treatment because any of those assumptions or representations were not correct.

We could be liable for all or a portion of any taxes owed for the following reasons. First, as part of the distribution, we and Lucent entered into the Tax Sharing Agreement, which generally allocates between Lucent and us the taxes and liabilities relating to the failure of the distribution to be tax-free. Under the Tax Sharing Agreement, if the distribution fails to qualify as a tax-free distribution because of an issuance or an acquisition of our stock or an acquisition of our assets, or some other actions of ours, then we will be solely liable for any resulting taxes to Lucent.

Second, aside from the Tax Sharing Agreement, under U.S. Federal income tax laws, we and Lucent are jointly and severally liable for Lucent’s U.S. Federal income taxes resulting from the distribution being taxable. This means that even if we do not have to indemnify Lucent under the Tax Sharing Agreement, we may still be liable for all or part of these taxes if Lucent fails to pay them. These liabilities of Lucent could arise from actions taken by Lucent over which we have no control, including an issuance or acquisition of stock (or acquisition of assets) of Lucent.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

None.

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Item 3.Defaults Upon Senior Securities.

None.

Item 5.Other Information.

We make available free of charge, through our investor relations’ website, http://investors.Avaya.com, our Form 10-K, Form 10-Q and Form 8-K reports and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.

As disclosed in the Company’s Annual Proxy Statement on Schedule 14A filed with the SEC on December 22, 2006, Mark Leslie, one of the Company’s directors, had previously advised the Board of Directors that he received a “Wells Notice” that the SEC may commence a civil enforcement action against him in connection with his previous services while an employee of Veritas Software Corporation (now Symantec Corporation) in 2000 and 2001. The relevant transactions predated Mr. Leslie’s tenure as a Director of the Company, and the SEC’s inquiry is not directed at, and does not concern, the Company or any other member of the Board of management. On July 2, 2007, the SEC announced that is has filed civil fraud charges in the United States District Court for the Northern District of California against five former executives at Veritas, including Mr. Leslie. The SEC’s complaint alleges that Mr. Leslie, among others, artificially inflated and/or manipulated Veritas’ reported financial results and misled Veritas’ independent auditors in connection with two transactions with AOL in September 2000.

Item 6.Exhibits.

Exhibit Number
2.1	Agreement and Plan of Merger, dated as of June 4, 2007, by and among Avaya Inc., Sierra Holdings Corp. and Sierra Merger Corp.(1)
3.1	Restated Certificate of Incorporation of Avaya Inc.(2)
3.2	Amended and Restated By-laws of Avaya Inc., as amended on July 18, 2002.(3)
10.1	Form of Severance Agreement for Senior Officers.*
10.2	Form of Amendment to Severance Agreement for Senior Officers.*
10.3	Avaya Inc. Deferred Compensation Plan, as amended.*
31.1	Certification of Principal Executive Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.*
31.2	Certification of Principal Financial Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.*
32.1	Certification of Principal Executive Officer pursuant to18 U.S.C. Section 1350.*
32.2	Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350.*

*Filed herewith.

(1)Incorporated by reference from Exhibit 2.1 to Avaya’s Current Report on Form 8-K filed with the SEC on June 5, 2007.

(2)Incorporated by reference from Exhibit 3.1 to Amendment No. 1 to Avaya’s Registration Statement on Form 10 (Reg. No. 1-15951) filed with the SEC on August 9, 2000.

(3)Incorporated by reference from Exhibit 3.1 to Avaya’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002, filed with the SEC on August 14, 2002.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	AVAYA INC.
	By:	/s/ AMARNATH K. PAI
		Amarnath K. Pai Vice President Finance Operations and Corporate Controller (Principal Accounting Officer)
August 6, 2007

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EX-10.1

Exhibit 10.1

SEVERANCE AGREEMENT

THIS AGREEMENT is entered into as of the         day of                 ,        (the “Effective Date”) by and between Avaya Inc., a Delaware corporation, and                , (the “Executive”).

W I T N E S S E T H

WHEREAS, the Executive currently serves as a key employee of the Company (as defined in Section 1) and the Executive’s services and knowledge are valuable to the Company in connection with the management of one or more of the Company’s principal operating facilities, divisions, departments or subsidiaries; and

WHEREAS, the Board (as defined in Section 1) has determined that it is in the best interests of the Company and its stockholders to secure the Executive’s continued services and to ensure the Executive’s continued dedication and objectivity in the event of any threat or occurrence of, or negotiation or other action that could lead to, or create the possibility of, a Change in Control (as defined in Section 1) of the Company, without concern as to whether the Executive might be hindered or distracted by personal uncertainties and risks created by any such possible Change in Control, and to encourage the Executive’s full attention and dedication to the Company, the Board has authorized the Company to enter into this Agreement.

NOW, THEREFORE, for and in consideration of the premises and the mutual covenants and agreements herein contained, the Company and the Executive hereby agree as follows:

1.Definitions.  As used in this Agreement, the following terms shall have the respective meanings set forth below:

(a)“Board” means the Board of Directors of the Company.

(b)“Cause” means:

(1)a material breach by the Executive of those duties and responsibilities of the Executive which do not differ in any material respect from the duties and responsibilities of the Executive during the 90-day period immediately prior to a Change in Control (other than as a result of incapacity due to physical or mental illness) which is demonstrably willful and deliberate on the Executive’s part, which is committed in bad faith or without reasonable belief that such breach is in the best interests of the Company and which is not remedied in a reasonable period of time after receipt of written notice from the Company specifying such breach;

(2)the commission by the Executive of a felony involving moral turpitude;

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(3)the commission by the Executive of theft, fraud, breach of trust or any act of dishonesty involving the Company or its subsidiaries; or

(4)the significant violation by the Executive of the Company’s code of conduct or any statutory or common law duty of loyalty to the Company or its subsidiaries.

(c)“Change in Control” means:

(1)an acquisition by any individual, entity or group (within the meaning of Section 13 (d)(3) or 14 (d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), (an “Entity”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more of either (A) the then outstanding shares of common stock of the Company (the “Outstanding Company Common Stock”) or (B) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); excluding, however, the following: (1) any acquisition directly from the Company, other than an acquisition by virtue of the exercise of a conversion privilege unless the security so being converted was itself acquired directly from the Company, (2) any acquisition by the Company, (3) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (4) any acquisition by any corporation pursuant to a transaction which complies with clauses (A), (B) and (C) of subsection (3) of this Section 1(c); or

(2)a change in the composition of the Board such that the individuals who, as of the Effective Date, constitute the Board (such Board shall be hereinafter referred to as the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however, that for purposes of this definition, that any individual who becomes a member of the Board subsequent to the Effective Date, whose election, or nomination for election by the Company’s stockholders, was approved by a vote of at least a majority of those individuals who are members of the Board and who were also members of the Incumbent Board (or deemed to be such pursuant to this proviso) shall be considered as though such individual were a member of the Incumbent Board; and provided, further however, that any such individual whose initial assumption of office occurs as a result of or in connection with either an actual or threatened solicitation by an Entity other than the Board for the purpose of opposing a solicitation by any other Entity with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of an Entity other than the Board shall not be so considered as a member of the Incumbent Board; or

(3)the approval by the stockholders of the Company of a merger, reorganization or consolidation or sale or other disposition of all or substantially all of the assets of the Company (each, a “Corporate Transaction”) or, if consummation of such Corporate Transaction is subject, at the time of such approval by stockholders, to the consent of any government or governmental agency, the obtaining of such consent (either explicitly or implicitly by consummation); excluding however, such a Corporate

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Transaction pursuant to which (A) all or substantially all of the individuals and entities who are beneficial owners, respectively, of the Outstanding Company Stock and Outstanding Company Voting Securities immediately prior to such Corporate Transaction will beneficially own, directly or indirectly, more than 60% of, respectively, the outstanding shares of common stock, and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Corporate Transaction (including, without limitation, a corporation or other individual, partnership, association, joint-stock company, trust, unincorporated organization, limited liability company, other entity or government or political subdivision which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries (a “Parent Company”)) in substantially the same proportions as their ownership, immediately prior to such Corporate Transaction, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) no Entity (other than the Company, any employee benefit plan (or related trust) of the Company, such corporation resulting from such Corporate Transaction or, if reference was made to equity ownership of any Parent Company for purposes of determining whether clause (A) above is satisfied in connection with the applicable Corporate Transaction, such Parent Company) will beneficially own, directly or indirectly, 50% or more of, respectively, the outstanding shares of common stock of the corporation resulting from such Corporate Transaction or the combined voting power of the outstanding voting securities of such corporation entitled to vote generally in the election of the directors unless such ownership resulted solely from ownership of securities of the Company prior to the Corporate Transaction, and (C) individuals who were members of the Incumbent Board will immediately after the consummation of the Corporate Transaction constitute at least a majority of the members of the board of directors of the corporation resulting from such Corporate Transaction (or, if reference was made to equity ownership of any Parent Company for purposes of determining whether clause (A) above is satisfied in connection with the applicable Corporate Transaction, of the Parent Company); or

(4)the approval by the stockholders of the Company of a complete liquidation or dissolution of the Company.

(d)“Company” means Avaya Inc., a Delaware corporation.

(e)“Date of Termination” means:

(1)the effective date on which the Executive’s employment by the Company terminates as specified in a prior written notice by the Company or the Executive, as the case may be, to the other, delivered pursuant to Section 11 or

(2)if the Executive’s employment by the Company terminates by reason of death, the date of death of the Executive.

(f)“Entity” has the meaning set forth in Section 1(c)(1).

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(g)“Good Reason” means, without the Executive’s express written consent, the occurrence of any of the following events after a Change in Control:

(1)any of (i) the assignment to the Executive of additional duties inconsistent in any material respect with, or materially greater in scope than the Executive’s duties or responsibilities with the Company immediately prior to such Change in Control without an appropriate increase in targeted compensation, (ii) any material reduction in the Executive’s duties or responsibilities with the Company immediately prior to such Change in Control; (iii) a change in the Executive’s titles or offices with the Company as in effect immediately prior to such Change in Control which is adverse to the Executive or (iv) any removal or involuntary termination of the Executive from the Company otherwise than as expressly permitted by this Agreement;

(2)a reduction by the Company in the Executive’s rate of annual base salary or Target Percentage as in effect immediately prior to such Change in Control (or if a different short-term incentive compensation opportunity is then in effect, a reduction in the amount of such different short-term incentive compensation opportunity below the short-term incentive compensation opportunity which had been afforded by the Target Percentage as in effect immediately prior to such Change in Control) or as the same may be increased from time to time thereafter;

(3)any requirement of the Company that the Executive be based more than 30 miles from the facility where the Executive is located at the time of the Change in Control;

(4)the failure of the Company to continue in effect any incentive compensation plan or supplemental retirement plan, including the Supplemental Pension Plan, in which the Executive is participating immediately prior to such Change in Control, unless the Executive is permitted to participate in other plans providing the Executive with substantially comparable compensation opportunity and benefits, or the taking of any action by the Company which would adversely affect the Executive’s participation in or materially reduce the Executive’s compensation opportunity and benefits under any such plan; or

(5)the failure of the Company to obtain the assumption agreement from any successor as contemplated in Section 10(b).

For purposes of this Agreement, any good faith determination of Good Reason made by the Executive shall be conclusive; provided, however, that an isolated, insubstantial and inadvertent action taken in good faith and which is remedied by the Company promptly after receipt of written notice thereof given by the Executive shall not constitute Good Reason.

(h)“Nonqualifying Termination” means a termination of the Executive’s employment:

(1)by the Company for Cause,

(2)by the Executive for any reason other than Good Reason,

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(3)by the Executive for Good Reason more than six (6) months after the event constituting Good Reason,

(4)as a result of the Executive’s death or

(5)by the Company under circumstances where the Executive qualifies for benefits under a long-term disability pay plan.

(i)“Potential Change in Control,” for purposes of this Plan, shall mean the happening of any of the following events:

(1)the commencement of a tender or exchange offer by any third person which, if consummated, would result in a Change in Control;

(2)the execution of an agreement by the Company, the consummation of which would result in the occurrence of a Change in Control;

(3)the public announcement by any person (including the Company) of an intention to take or to consider taking actions which if consummated would constitute a Change in Control other than through a contested election for directors of the Company; or

(4)the adoption by the Board, as a result of other circumstances, including, without limitation, circumstances similar or related to the foregoing, of a resolution to the effect that a Potential Change in Control has occurred.

A Potential Change in Control shall be deemed to be pending until the earliest of (i) the first anniversary thereof, (ii) the occurrence of a Change in Control and (iii) the occurrence of a subsequent Potential Change in Control.

(j)“Supplemental Pension Plan” means the Avaya Inc. Supplemental Pension Plan or any successor plan.

(k)“Target Percentage” means the annualized percentage applied to an Executive’s annual base salary in order to calculate the target award for such Executive under the Company’s short-term incentive compensation program, prior to the application of Company or individual performance factors.

(l)“Termination Period” means the period of time beginning with a Change in Control and ending on the earlier to occur of:

(1)two years following such Change in Control and

(2)the Executive’s death.

2.Obligations of the Executive.  The Executive agrees that in the event of a Potential Change in Control, he shall not voluntarily leave the employ of the Company without Good Reason prior to the termination of such Potential Change in Control as follows:

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(a)if the Potential Change in Control terminates by reason other than the occurrence of a Change in Control, until the earlier of (1) the first anniversary of such Potential Change in Control and (2) the occurrence of a subsequent Potential Change in Control; and

(b)if the Potential Change in Control terminates by reason of the occurrence of a Change in Control, until 90 days following such Change in Control.

For purposes of clause (a) of the preceding sentence, Good Reason shall be determined as if a Change in Control had occurred when such Potential Change in Control became known to the Board.

3.Payments Upon Termination of Employment.

(a)If during the Termination Period the employment of the Executive shall terminate, other than by reason of a Nonqualifying Termination, then the Company shall pay to the Executive, within 30 days following the Date of Termination, as compensation for services rendered to the Company:

(1)a cash amount equal to the sum of (i) the Executive’s full annual base salary from the Company and its affiliated companies through the Date of Termination and any short-term incentive compensation earned by the Executive for any performance period ending prior to the Date of Termination, in each case to the extent not theretofore paid, (ii) an amount equal to the Executive’s annual base salary multiplied by the Executive’s Target Percentage applicable immediately prior to the Date of Termination (or, if greater, immediately prior to the Change in Control), multiplied by a fraction, the numerator of which is the number of days elapsed in the applicable twelve-month performance period in which the Date of Termination occurs through the Date of Termination and the denominator of which is 360 (or if a different short-term incentive compensation opportunity is then in effect, an amount equal to the target short-term incentive compensation afforded by such different short-term incentive compensation opportunity for the applicable performance period in which the Date of Termination occurs (but not less than the amount that would have been afforded by the Target Percentage as in effect immediately prior to such Change in Control), multiplied by a fraction, the numerator of which is the number of days elapsed in the applicable performance period in which the Date of Termination occurs through the Date of Termination and the denominator of which is the total number of days in such applicable performance period) and (iii) any compensation previously deferred by the Executive (together with any interest and earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid; plus

(2)a lump-sum cash amount (subject to any applicable payroll or other taxes required to be withheld pursuant to Section 5) in an amount equal to (i)          times the Executive’s highest annual base salary from the Company and its affiliated companies in effect during the 12-month period prior to the Date of Termination, plus (ii) an amount equal to the product of          times such annual base salary multiplied by the Executive’s Target Percentage as applicable immediately prior to the Date of Termination (or, if greater, immediately prior to the Change in Control) (or if a different short-term incentive

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compensation opportunity is then in effect, an amount equal to the product of          times the annual target short-term incentive compensation afforded by such different short-term incentive compensation opportunity, but not less than          times the amount that would have been afforded by the Target Percentage as in effect immediately prior to such Change in Control);  provided, however, that any amount paid pursuant to this Section 3(a)(2) shall be paid in lieu of any other amount of severance relating to salary, short-term incentive compensation or other bonus continuation to be received by the Executive upon termination of employment of the Executive under any severance plan, policy or arrangement of the Company.  Notwithstanding the foregoing, if the Company is obligated by law or contract to pay severance pay, notice pay or other similar benefits, or if the Company is obligated by law or by contract to provide advance notice of separation (“Notice Period”), then the payments made pursuant to this Section 3(a)(2) shall be reduced by the amount of any such severance, notice pay or other similar benefits, as applicable, and by the amount of any severance pay, notice pay or other similar benefits received during any Notice Period.

(b)In addition to the payments to be made pursuant to Section 3(a), the Company shall pay to the Executive at the time the payments pursuant to Section 3(a) shall be made, a lump-sum cash amount equal to the actuarial equivalent of the excess of (i) the Executive’s accrued annuity benefits as of December 31, 2003 under any qualified defined benefit pension plan and any nonqualified supplemental defined benefit pension plan of the Company in which the Executive is a participant, calculated by increasing the Executive’s age and service credit under such plans as of the Date of Termination by          year(s) over (ii) the Executive’s accrued annuity benefits under such plans as of December 31, 2003.  Such excess payment will be discounted back to the Executive’s age as of the Termination Date.  Such lump sum cash amount shall be computed using the same actuarial methods and assumptions then in use for purposes of computing benefits under such plans, provided that the interest rate used in making such computation shall not be greater than the interest rate permitted under Section 417(e) of the Internal Revenue Code of 1986, as amended (the “Code”), on the Date of Termination.

(c)Furthermore, in addition to the payments to be made pursuant to Section 3(a) and 3(b), the Company shall pay to the Executive a lump-sum cash amount equal to (i)          times the Savings Plan Amount plus (ii)          times the Savings Restoration Plan Amount.  The “Savings Plan Amount” and the “Savings Restoration Plan Amount” are the amounts that would have been credited to the Executive’s accounts as automatic company allocations and matching allocations under the Avaya Inc. Savings Plan for Salaried Employees (the “Savings Plan”) and the Avaya Inc. Savings Restoration Plan (the “Restoration Plan”), respectively, had the Executive remained employed by the Company for the twelve-month period following the Termination Date (the “Period”).  In determining the Savings Plan Amount and the Savings Restoration Plan Amount, the following shall be assumed:  (i) the Executive’s aggregate contributions to each of the Savings Plan and the Restoration Plan for the Period would have been identical to the aggregate eligible contributions made by the Executive to the Savings Plan and Restoration Plan, respectively, for the twelve-month period prior to the Termination Date (or, if contributions were made for a shorter period, then identical to the contributions made by

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the Executive for such shorter period), and (ii) the Executive’s annual base salary for the Period would have remained the same as on the Termination Date.

(d)For a period of          years commencing on the Date of Termination, the Company shall continue to keep in full force and effect all policies of medical and life insurance with respect to the Executive and his dependents with the same level of coverage, upon the same terms and otherwise to the same extent as such policies shall have been in effect immediately prior to the Date of Termination or as provided generally with respect to other peer executives of the Company and its affiliated companies, and the Company and the Executive shall share the costs of the continuation of such insurance coverage in the same proportion as such costs were shared immediately prior to the Date of Termination; provided, however, that the medical and life insurance coverage provided pursuant to this Section 3(d) shall be in lieu of any other medical and life insurance coverage to which the Executive is entitled under any plan, policy or arrangement of the Company or any law obligating the Company to provide such insurance coverage upon termination of employment of the Executive.

(e)If during the Termination Period the employment of the Executive shall terminate by reason of a Nonqualifying Termination, then the Company shall pay to the Executive, within 30 days following the Date of Termination, a cash amount equal to the sum of:

(1)the Executive’s full annual base salary from the Company through the Date of Termination, to the extent not theretofore paid, and

(2)any compensation previously deferred by the Executive (together with any interest and earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid.

4.Certain Additional Payments by the Company. 

(a)Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company or its affiliated companies to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, including, without limitation, as a result of the acceleration of the vesting of stock options, restricted stock units or other equity awards, but determined without regard to any additional payments required under this Section 4) (a “Payment”) would be subject to the excise tax imposed by Section 4999 of the Code, or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the “Excise Tax”), then the Executive shall be entitled to receive an additional payment (a “Gross-Up Payment”) in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income and employment taxes (and any interest and penalties imposed with respect thereto) and the Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments; provided, however, that the Executive shall be entitled to receive a Gross-Up Payment only if the amount of the “parachute payment” (as defined in Section 280G(b)(2) of the Code) exceeds the sum of

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(A) $50,000 plus (B) 2.99 times the Executive’s “base amount” (as defined in Section 280G(b)(3) of the Code), and provided further, that if the Executive is not entitled to receive a Gross-Up Payment, the Executive shall be entitled to receive only such amounts under Sections 3(a)(2), 3(b) and 3(c) of this Agreement that would not include any “excess parachute payment” (as defined in Section 280G(b)(1) of the Code).  The intent of the parties is that the Company shall be solely responsible for, and shall pay, any Excise Tax on any Payment and Gross-Up Payment and any income and employment taxes (including, without limitation, penalties and interest) imposed on any Gross-Up Payment, as well as bearing any loss of tax deduction caused by the Gross-Up Payment.

(b)Subject to the provisions of Section 4(c), all determinations required to be made under this Section 4, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the Company’s public accounting firm (the “Accounting Firm”) which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company.  All fees and expenses of the Accounting Firm shall be borne solely by the Company.  Any Gross-Up Payment, as determined pursuant to this Section 4, shall be paid by the Company to the Executive within five (5) days of the receipt of the Accounting Firm’s determination.  If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that failure to report the Excise Tax on the Executive’s applicable federal income tax return would not result in the imposition of a negligence or similar penalty.  The Accounting Firm shall make all determinations under the tax standard of “substantial authority” as such term is used in Section 6662 of the Code.  Any determination by the Accounting Firm shall be binding upon the Company and the Executive.  As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made (“Underpayment”), consistent with the calculations required to be made hereunder.  In the event that the Company exhausts its remedies pursuant to Section 4(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive.

(c)The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment.  Such notification shall be given as soon as practicable but no later than 10 business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid.  The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which the Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due).  If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall:

(1)give the Company any information reasonably requested by the Company relating to such claim,

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(2)take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company,

(3)cooperate with the Company in good faith in order effectively to contest such claim, and

(4)permit the Company to participate in any proceedings relating to such claim;

provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses.  Without limitation on the foregoing provisions of this Section 4(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided further, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and provided further, that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount.  Furthermore, the Company’s control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority.

(d)If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 4(c), the Executive becomes entitled to receive, and receives, any refund with respect to such claim, the Executive shall (subject to the Company’s complying with the requirements of Section 4(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto).  If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 4(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid.

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5.Withholding Taxes.  The Company may withhold from all payments due to the Executive (or his beneficiary or estate) hereunder all taxes which, by applicable federal, state, local or other law, the Company is required to withhold therefrom.

6.Reimbursement of Expenses.  If any contest or dispute shall arise under this Agreement involving termination of the Executive’s employment with the Company or involving the failure or refusal of the Company to perform fully in accordance with the terms hereof, the Company shall reimburse the Executive, on a current basis, for all reasonable legal fees and expenses, if any, incurred by the Executive in connection with such contest or dispute, together with interest thereon at a rate equal to the prime rate, as published under “Money Rates” in The Wall Street Journal from time to time, but in no event higher than the maximum legal rate permissible under applicable law, such interest to accrue from the date the Company receives the Executive’s statement for such fees and expenses through the date of payment thereof; provided, however, that in the event the resolution of any such contest or dispute includes a finding denying, in total, the Executive’s claims in such contest or dispute, the Executive shall be required to reimburse the Company, over a period of 12 months from the date of such resolution, for all sums advanced to the Executive pursuant to this Section 6.

7.Operative Event.  Notwithstanding any provision herein to the contrary, no amounts shall be payable hereunder unless and until there is a Change in Control at a time when the Executive is employed by the Company.

8.Termination of Agreement.

(a)This Agreement shall be effective on the Effective Date and shall expire on the first anniversary of the Effective Date, provided that the term of this Agreement shall be extended automatically for one additional year as of each annual anniversary of the Effective Date, commencing with the first anniversary of the Effective Date (each such date a “Renewal Date”) unless this Agreement is terminated pursuant to Section 8(b) or, if earlier, upon the earlier to occur of (i) termination of the Executive’s employment with the Company prior to a Change in Control and (ii) the Executive’s death.  Notwithstanding the foregoing, any expiration of this Agreement shall not retroactively impair or otherwise adversely affect the rights of the Executive which have arisen prior to the date of such expiration.

(b)The Company shall have the right, in its sole discretion, pursuant to action by the Board, to approve the amendment or termination of this Agreement, which amendment or termination shall not become effective until the Renewal Date coincident with or next following the date of such action, or if later, the date fixed by the Board for such amendment or termination; provided, that an amendment which is not adverse to the interests of the Executive shall take effect immediately; and provided further, that in no event shall this Agreement be amended in a manner adverse to the interests of the Executive or be terminated during any period that a Potential Change in Control is pending or in the event of a Change in Control.

9.Scope of Agreement.  Nothing in this Agreement shall be deemed to entitle the Executive to continued employment with the Company or its subsidiaries and, if the Executive’s employment with the Company shall terminate prior to a Change in Control, then the Executive shall have no further rights under this Agreement; provided, however, that any

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termination of the Executive’s employment following a Change in Control shall be subject to all of the provisions of this Agreement.

10.Successors; Binding Agreement.

(a)This Agreement shall not be terminated by any merger or consolidation of the Company whereby the Company is or is not the surviving or resulting corporation or as a result of any transfer of all or substantially all of the assets of the Company.  In the event of any such merger, consolidation or transfer of assets, the provisions of this Agreement shall be binding upon the surviving or resulting corporation or the person or entity to which such assets are transferred.

(b)The Company agrees that concurrently with any merger, consolidation or transfer of assets referred to in Section 10(a), it will cause any successor or transferee unconditionally to assume, by written instrument delivered to the Executive (or the Executive’s beneficiary or estate), all of the obligations of the Company hereunder.  Failure of the Company to obtain such assumption prior to the effectiveness of any such merger, consolidation or transfer of assets shall be a breach of this Agreement and shall entitle the Executive to compensation and other benefits from the Company in the same amount and on the same terms as the Executive would be entitled hereunder if the Executive’s employment were terminated following a Change in Control other than by reason of a Nonqualifying Termination during the Termination Period.  For purposes of implementing the foregoing, the date on which any such merger, consolidation or transfer becomes effective shall be deemed the Date of Termination.

(c)This Agreement shall inure to the benefit of and be enforceable by the Executive’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees.  If the Executive shall die while any amounts would be payable to the Executive hereunder had the Executive continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to such person or persons appointed in writing by the Executive to receive such amounts or, if no person is so appointed, to the Executive’s estate.

11.Notices.

(a)For purposes of this Agreement, all notices and other communications required or permitted hereunder shall be in writing and shall be deemed to have been duly given when delivered or five (5) days after deposit in the United States mail, certified and return receipt requested, postage prepaid, addressed

(1)if to the Executive, to the home address of the Executive on the most current Company records, and if to the Company, to Avaya Inc., attention Vice President, Human Resources with a copy to the Secretary of the Board, or

(2)to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt.

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(b)A written notice of the Executive’s Date of Termination by the Company or the Executive, as the case may be, to the other, shall (i) indicate the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive’s employment under the provision so indicated and (iii) specify the termination date (which date shall be not less than fifteen (15) days after the giving of such notice).  The failure by the Executive or the Company to set forth in such notice any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company hereunder or preclude the Executive or the Company from asserting such fact or circumstance in enforcing the Executive’s or the Company’s rights hereunder.

12.Full Settlement; Resolution of Disputes.

(a)The Company’s obligation to make any payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others.  In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced whether or not the Executive obtains other employment.

(b)If there shall be any dispute between the Company and the Executive in the event of any termination of the Executive’s employment, then, unless and until there is a final, nonappealable judgment by a court of competent jurisdiction declaring that such termination was for Cause, that the determination by the Executive of the existence of Good Reason was not made in good faith, or that the Company is not otherwise obligated to pay any amount or provide any benefit to the Executive and his dependents or other beneficiaries, as the case may be, under Sections 3(a), 3(b) and 3(c), the Company shall pay all amounts, and provide all benefits, to the Executive and his dependents or other beneficiaries, as the case may be, that the Company would be required to pay or provide pursuant to Sections 3(a), 3(b) and 3(c) as though such termination were by the Company without Cause or by the Executive with Good Reason; provided, however, that the Company shall not be required to pay any disputed amounts pursuant to this Section 12(b) except upon receipt of an undertaking by or on behalf of the Executive to repay all such amounts to which the Executive is ultimately adjudged by such court not to be entitled.

13.Employment with Subsidiaries.  Employment with the Company for purposes of this Agreement shall include employment with (i) any “subsidiary corporation” of the Company, as defined in Section 424(f) of the Code, (ii) an entity in which the Company directly or indirectly owns 50% or more of the voting interests or (iii) an entity in which the Company has a significant equity interest, as determined by the Board or by the Corporate Governance and Compensation Committee (or any successor committee) of the Board.

14.Governing Law; Validity.  The interpretation, construction and performance of this Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of Delaware without regard to the principle of conflicts of laws.  The invalidity or unenforceability of any provision of this Agreement shall not affect the

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validity or enforceability of any other provisions of this Agreement, which other provisions shall remain in full force and effect.

15.Counterparts.  This Agreement may be executed in two counterparts, each of which shall be deemed to be an original and both of which together shall constitute one and the same instrument.

16.Miscellaneous.  No provision of this Agreement may be modified or waived unless such modification or waiver is agreed to in writing and signed by the Executive and by a duly authorized officer of the Company.  No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time.  Failure by the Executive or the Company to insist upon strict compliance with any provision of this Agreement or to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement.  Except as otherwise expressly set forth in this Agreement, the rights of, and benefits payable to, the Executive, his estate or his beneficiaries pursuant to this Agreement are in addition to any rights of, or benefits payable to, the Executive, his estate or his beneficiaries under any other employee benefit plan or compensation program of the Company.  This Agreement supersedes all prior agreements between the Executive and the Company relating to the subject matter hereof.

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IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by a duly authorized officer of the Company and the Executive has executed this Agreement as of the day and year first above written.

AVAYA INC.

By:

EXECUTIVE

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Note: The Company has entered into Severance Agreements with each of the Chief Executive Officer, the Chief Financial Officer, and the other executive officers identified as Named Executive Officers in the Company’s Proxy Statement filed with the Securities and Exchange Commission.  Such Severance Agreements are substantially identical in all material respects, except that the multiple referred to throughout the agreement dated September 1, 2004 with Mr. D’Ambrosio, the Company’s Chief Executive Officer, is three (3) times and the multiple for each of the other executive officers is two (2) times.

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EX-10.2

Exhibit 10.2

Amendment to Severance Agreement

THIS AMENDMENT to the Severance Agreement dated                           (the “Agreement”) by and between Avaya Inc, a Delaware corporation, and                           (the “Executive”) is entered into as of the         day of                           2007.

WHEREAS, Section 409A of the Internal Revenue Code (the “Code”), as enacted by the American Jobs Creation Act of 2004, imposes income and excise taxes on deferred compensation for executives when such deferred compensation fails to satisfy its requirements; and

WHEREAS, the Department of Treasury and Internal Revenue Service have recently issued final regulations concerning deferred compensation arrangements under Section 409A of the Code; and

WHEREAS, Avaya Inc. and the Executive have entered into the Agreement and that Agreement may provide, directly or indirectly, for the deferral of compensation as defined in the final Code Section 409A regulations; and

WHEREAS, Avaya Inc. and the Executive desire to amend the Agreement to ensure compliance with the requirements of Code Section 409A;

NOW, THEREFORE, for and in consideration of the premises and mutual covenants and agreements contained herein, Avaya Inc. and the Executive hereby agree to amend the Agreement in the following respects:

1.             The following sentence is inserted immediately following the first sentence of paragraph 3(c):

“This lump-sum amount shall be paid at the time payments are made pursuant to Section 3(a) and (b).”

2.             The following sentence is inserted at the end of paragraph 3(d):

“To the extent any reimbursements under such medical coverage are taxable to the Executive, in no event shall such amounts be paid to the Executive after the last day of the calendar year following the calendar year in which the relevant medical expense was incurred.”

3.             The following sentence is inserted at the end of paragraph 4(a):

“In no event shall the Gross-Up Payment be paid after the last day of the calendar year following the calendar year in which the Executive pays the Excise Tax.”

4.             The following sentence is inserted after the third sentence of paragraph 4(b):

“In no event, however, shall the Gross-Up Payment be paid after the last day of the calendar year following the calendar year in which the Executive pays the Excise Tax.”

5.             The following sentence is inserted at the end of paragraph 4(b):

“In no event shall the Underpayment be paid after the last day of the calendar year following the calendar year in which the Executive pays the Excise Tax.”

6.             Paragraph 6 is amended by replacing the phrase “on a current basis” with the following phrase:  “on a current basis (but in no event after the last day of the calendar year following the calendar year in which the expense is incurred)”.

IN WITNESS WHEREOF, Avaya Inc. has caused this Amendment to be executed by one of its duly authorized officers and the Executive has executed this Amendment as of the day and year first written above.

AVAYA INC.

By:

EXECUTIVE

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EX-10.3

Exhibit 10.3

AVAYA INC. DEFERRED COMPENSATION PLAN

As Amended and Restated Effective January 1, 2005

Preamble

The Avaya Inc. Deferred Compensation Plan is intended to constitute an unfunded, deferred compensation plan maintained primarily for a select group of management or highly compensated employees and for members of the Board of Directors who are not employees of the Company.  The purpose of the Plan is to provide a means by which eligible employees and non-employee Directors may defer the receipt of certain forms of compensation while at the same time giving the Company the present use of the compensation so deferred.  The Plan is intended to be an employee pension benefit plan within the meaning of Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended.  The Plan is not a qualified plan under Section 401(a) of the Internal Revenue Code of 1986, as amended (the “Code”).  Benefits under the Plan are paid directly by the Company out of its general assets when due.  The Plan was originally effective as of October 1, 2000, and is a successor plan to the Lucent Technologies Inc. (“Lucent”) Deferred Compensation Plan for the benefit of Eligible Members whose employment was transferred from Lucent to the Company in connection with the spinoff of the Company from Lucent, and for non-employee Directors of the Company who were non-employee directors of Lucent prior to the spinoff of the Company.  The Plan is hereby amended and restated effective January 1, 2005 to comply with Code Section 409A as enacted by the American Jobs Protection Act of 2004.  The Plan, as amended and restated herein, shall apply to amounts deferred after December 31, 2004.  Amounts deferred before January 1, 2005, shall be governed by the Plan document in effect on December 31, 2004.

Section 1.Definitions.

As used in the Plan, the following terms shall have the meanings set forth below:

(a) “Account” shall mean, for each Participant, such Participant’s Deferred Cash Equivalent Account and Deferred Share Equivalent Account.

(b) “Administrator” shall mean the Senior Vice President of Human Resources of the Company.

(c) “Affiliate” shall mean (i) any Person that directly, or through one or more intermediaries, controls, or is controlled by, or is under common control with, the Company or (ii) any entity in which the Company has a significant equity interest, as determined by the Committee.

(d) “Beneficiary” shall mean the individual or individuals designated by the Participant pursuant to Section 4(g) to receive amounts credited to his or her Account at death.

(e) “Board” shall mean the Board of Directors of the Company.

(f) “Code” shall mean the Internal Revenue Code of 1986, as amended.

(g) “Committee” shall mean the Corporate Governance and Compensation Committee of the Board (or any successor committee).

(h) “Company” shall mean Avaya Inc.

(i) “Deferral Election” shall mean a written election, in a form prescribed by the Administrator, to defer receipt of Incentive Awards or Retainer Payments otherwise payable to a Participant.

(j) “Deferred Cash Equivalent Account” shall mean a book-entry account in the name of a Participant maintained in the Company’s records with entries denominated in dollars.

(k) “Deferred Share Equivalent Account” shall mean a book-entry account in the name of a Participant maintained in the Company’s records with entries denominated in Share equivalents.

(l) “Director” shall mean any non-employee member of the Board.

(m) “Disability” shall mean a medically determinable physical or mental impairment of the Participant which can be ex pected to result in death or to last for a continuous period of not less than twelve months, and for which the Participant is receiving income replacement benefits for a period of at least three months under Avaya Inc. Long-Term Disability Plan for Salaried Employees.

(n) “Distribution Change in Control” shall mean the change in ownership of the Company, the change in effective control of the Company, or the change in ownership of a substantial portion of the Company, as described below.

(1)Change in Ownership of the Company.  Any one Person, or more than one Person Acting as a Group, acquires ownership of stock of the Company that, together with stock held by such Person or Group, constitutes more than 50%  of the total fair market value or total voting power of the stock of the Company.  Notwithstanding the foregoing, for purposes of this paragraph, if any one Person, or more than one Person Acting as a Group, is considered to own more than 50% of the total fair market value or total voting power of the stock of the Company, the acquisition of additional stock by the same Person or Persons is not considered to cause a Change in Control.

(2)Change in Effective Control of the Company.

(A)any one Person, or more than one Person Acting as a Group, acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such

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Person or Persons) ownership of stock of the Company possessing 30%  or more of the total voting power of the stock of the Company; or

(B)a majority of the members of the Company’s Board of Directors is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of the Company’s Board of Directors before the date of the appointment or election.

(C)Notwithstanding the foregoing, for purposes of this paragraph, if any one Person, or more than one Person Acting as a Group, is considered to effectively control the Company, the acquisition of additional control of the Company by the same Person or Persons is not considered to cause a Change in Control.

(3)Change in Ownership of a Substantial Portion of the Company’s Assets.  Any one Person, or more than one Person Acting as a Group, acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such Person or Persons) assets from the Company that have a total gross fair market value equal to or more than 40% of the total gross fair market value of all of the assets of the Company immediately prior to such acquisition or acquisitions.  For purposes of this paragraph, “gross fair market value” means the value of the assets of the Company, or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets.  Notwithstanding the foregoing, a transfer of assets by the Company is not treated as a Change in Control if the assets are transferred to:

(A)a shareholder of the Company (immediately before the asset transfer) in exchange for or with respect to its stock;

(B)an entity, 50% or more of the total value or voting power of which is owned, directly or indirectly, by the Company;

(C)a Person, or more than one Person Acting as a Group, that owns, directly or indirectly, 50% or more of the total value or voting power of all the outstanding stock of the Company; or

(D)an entity, at least 50% of the total value or voting power of which is owned, directly or indirectly, by a Person, or more than one Person Acting as a Group, that owns, directly or

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indirectly, 50% or more of the total value or voting power of all the outstanding stock of the Company.

(4)“Person” and “Acting as a Group”.  For purposes of this Section/(m):

(A)“Person” shall have the meaning set forth in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended.

(B)Persons will be considered to be “Acting as a Group” if they are owners of a corporation that enters into a merger, consolidation, purchase or acquisition of stock or assets, or similar business transaction with the Company.  If a Person, including an entity, owns stock in both corporations that enter into a merger, consolidation, purchase or acquisition of stock or assets, or similar transaction, such shareholder is considered to be Acting as a Group with other shareholders in a corporation prior to the transaction giving rise to the change and not with respect to the ownership interest in the other corporation.  Notwithstanding the foregoing, Persons will not be considered to be Acting as a Group solely because they purchase or own stock or assets of the same corporation at the same time, or as a result of the same public offering.

(o) “Distribution Events” shall mean the events designated by a Participant pursuant to Section 4(a).

(p) “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.

(q) “Eligible Member” shall mean an Officer, a Director, Other Participant or another person or group of employees who is designated by the Administrator as an Eligible Member.

(r) Unforeseeable Emergency shall mean a severe financial hardship to the Participant resulting from a sudden or unexpected illness or accident of a Participant or his or her dependent (as defined in Code Section 152(a)), loss of the Participant’s property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant that constitute an Unforeseeable Emergency within the meaning of Code Section 409A.

(s) “Incentive Award” shall mean amounts payable in any form other than cash under the Short Term Plan, any other bonus payment, performance award, stock unit award or other award under any of the Other Avaya Plans (other than options), and any dividend equivalent payment under the Other Avaya Plans.

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(t) “NYSE” shall mean the New York Stock Exchange, Inc.

(u) “Officer” shall mean the Chief Executive Officer and any Senior Vice President or Group Vice President of the Company.

(v) “Other Avaya Plans” shall mean the Avaya Inc. Long Term Incentive Plan for Management Employees and the Avaya Inc. 2004 Long Term Incentive Plan, as those plans may be amended from time to time, and shall include any successor plans to the Other Avaya Plans.

(w) “Other Participant” shall mean any employee of the Company or any of its Affiliates, but only if the Administrator determines that such employee shall be eligible to participate in the Plan.

(x) “Participant” shall mean an Eligible Member who delivers a Deferral Election to the Company. A person shall not cease being a Participant if the person ceases being an Eligible Member, if the person has an Account with a positive balance.

(y) “Participating Company” shall mean the Company and any of its Affiliates.

(z) “Payment Election” shall mean a Participant’s election pursuant to Section 4(a).

(aa)“Performance Based Compensation” shall mean as defined in Regulation Section 1.409A-1(e).

(bb)“Person” shall mean any individual, corporation, partnership, association, joint-stock company, trust, unincorporated organization, limited liability company, other entity or government or political subdivision thereof.

(cc)“Plan” shall mean this Avaya Inc. Deferred Compensation Plan.

(dd)“Plan Year” shall mean each twelve (12) consecutive month period commencing January 1 and ending on December 31 of the same calendar year.

(ee)“Potential Change in Control” shall mean:

(1)the commencement of a tender or exchange offer by any third Person which, if consummated, would result in a Change in Control;

(2)the execution of an agreement by the Company, the consummation of which would result in the occurrence of a Change in Control;

(3)the public announcement by any Person (including the Company) of an intention to take or to consider taking actions which if consummated would constitute a Change in Control other than through a contested election for directors of the Company; or

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(4)the adoption by the Board, as a result of other circumstances, including, without limitation, circumstances similar or related to the foregoing, of a resolution to the effect that a Potential Change in Control has occurred.

A Potential Change in Control shall be deemed to be pending until the earliest of (i) the second anniversary thereof, (ii) the occurrence of a Change in Control and (iii) the occurrence of a subsequent Potential Change in Control.

(ff)“Retainer Payments” shall mean any amounts payable to a Director for service as a Director.

(gg)“Separation from Service” shall mean for a Participant who is an Employee, that he or she ceases to perform services for the Company and all Affiliates of the Company, or such services decrease to a level that is 20 percent or less than the average level of services performed by the Participant over the immediately preceding 36-month period.  However, temporary absence from employment because of vacation or approved leaves of absences, and transfers of employment among the Company and its Affiliates shall not be considered a Separation from Service or an interruption of employment.  Separation from Service shall mean for a Participant who is a Director that he or she has ceased to be a Director.

(hh)“Shares” shall mean the shares of common stock, $.01 par value, of the Company.

(ii)“Short Term Plan” shall mean the Avaya Short Term Incentive Plan.

(jj)“Vesting Change in Control” shall mean the happening of any of the following events:

(1)An acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (an “Entity”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (A) the then outstanding shares of common stock of the Company (the “Outstanding Company Common Stock”) or (B) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); excluding, however, the following:  (1) any acquisition directly from the Company, other than an acquisition by virtue of the exercise of a conversion privilege unless the security being so converted was itself acquired directly from the Company,  (2) any acquisition by the Company,  (3) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any

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corporation controlled by the Company, or (4) any acquisition by any corporation pursuant to a transaction which complies with clauses (A), (B) and (C) of subsection (3) of this Section 1(f); or

(2)A change in the composition of the Board during any two year period such that the individuals who, as of the beginning of such two year period, constitute the Board (such Board shall be hereinafter referred to as the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however, that for purposes of this definition, any individual who becomes a member of the Board subsequent to the beginning of the two year period, whose election, or nomination for election by the Company’s shareowners, was approved by a vote of at least a majority of those individuals who are members of the Board and who were also members of the Incumbent Board (or deemed to be such pursuant to this proviso) shall be considered as though such individual were a member of the Incumbent Board; and provided, further however, that any such individual whose initial assumption of office occurs as a result of or in connection with either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of an Entity other than the Board shall not be so considered as a member of the Incumbent Board; or

(3)The approval by the shareowners of the Company of a merger, reorganization or consolidation or sale or other disposition of all or substantially all of the assets of the Company (each, a “Corporate Transaction”) or, if consummation of such Corporate Transaction is subject, at the time of such approval by shareowners, to the consent of any government or governmental agency, the obtaining of such consent (either explicitly or implicitly by consummation); excluding however, such a Corporate Transaction pursuant to which (A) all or substantially all of the individuals and entities who are the beneficial owners of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Corporate Transaction will beneficially own, directly or indirectly, more than 60% of the outstanding shares of common stock, and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors of the corporation resulting from such Corporate Transaction (including, without limitation, a corporation or other Person which as a result of such transaction owns the Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries (a “Parent Company”)) in substantially the same proportions as their ownership, immediately prior to such Corporate Transaction, of the Outstanding Company Common

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Stock and Outstanding Company Voting Securities, (B) no Entity (other than the Company, any employee benefit plan (or related trust) of the Company, such corporation resulting from such Corporate Transaction or, if reference was made to equity ownership of any Parent Company for purposes of determining whether clause (A) above is satisfied in connection with the applicable Corporate Transaction, such Parent Company) will beneficially own, directly or indirectly, 20% or more of the outstanding shares of common stock of the corporation resulting from such Corporate Transaction or the combined voting power of the outstanding voting securities of such corporation entitled to vote generally in the election of directors unless such ownership resulted solely from ownership of securities of the Company prior to the Corporate Transaction, and (C) individuals who were members of the Incumbent Board will immediately after the consummation of the Corporate Transaction constitute at least a majority of the members of the board of directors of the corporation resulting from such Corporate Transaction (or, if reference was made to equity ownership of any Parent Company for purposes of determining whether clause (A) above is satisfied in connection with the applicable Corporate Transaction, of the Parent Company); or

(4)The approval by the shareowners of the Company of a complete liquidation or dissolution of the Company.

Section 2.Deferral Elections.

(a)Delivery and Effectiveness of Deferral Elections.

(i)A Participant may elect to defer receipt of any non-Performance Based Incentive Award with a performance period of at least 13 months by delivering a Deferral Election to the Administrator not later than the 30th day following the date the Incentive Award is granted.

(ii)A Participant may elect to defer receipt of any Performance Based Incentive Award by delivering a Deferral Election to the Administrator not later than six months before the end of the performance period to which such Incentive Award relates, provided, however, that the amount payable under the Performance Based Incentive Award is not readily ascertainable when such Deferral Election is made.

(iii)A Participant may elect to defer receipt of a Retainer Payment by delivering a Deferral Election to the Administrator not later than the December 31st preceding the calendar year in which the Retainer Payment is earned.  A Director’s Deferral Election may relate to all or part of the Retainer Payments otherwise payable to the Director. Notwithstanding the foregoing, a newly-elected Director may deliver a Deferral Election to the Administrator within 30 days after his or her election to the

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Board of Directors, which Deferral Election shall be effective for all Retainer Payments relating to services after the date on which the Deferral Election is delivered to the Administrator.

(b)Contents of Deferral Elections. Each Deferral Election shall specify the types of compensation covered by such Deferral Election, the effective date of the Deferral Election and shall contain the Participant’s elections under Section 4(a).

(c)Modification and Renewal of Deferral Elections. After the date specified in Section 2(a), a Deferral Election shall remain effective until the Participant terminates or modifies such election by written notice to the Administrator. Any such termination or modification shall become effective immediately following the end of the calendar year in which such notice is given. A Participant who has terminated a Deferral Election may, so long as such Participant remains an Eligible Member thereafter file a new Deferral Election in accordance with Section 2(a).

Section 3.Participant Accounts.

(a)Deferred Cash Equivalent Account. (i) The portion of a Director’s Retainer Payment deferred under Section 2 that the Participant elects to have credited to the Deferred Cash Equivalent Account shall be credited to that account.

(ii)Amounts credited to the Participant’s Deferred Cash Equivalent Account shall bear interest as is determined, from time to time, by the Board.  Such rate may be applied by the Board to a Participant’s existing balance in a Deferred Cash Equivalent Account or to amounts subsequently credited to such Participant’s Account.  The determination of the applicable interest rate by the Board pursuant to this Section 3 shall be within its sole discretion and its decision shall be conclusive, final and binding upon all parties concerned. Interest shall accrue from the date the Retainer Payment would otherwise have been paid to the Participant. Interest shall be credited to Deferred Cash Equivalent Accounts at the end of each fiscal quarter of the Company.

(b)Deferred Share Equivalent Account.  (i)  The following amounts deferred under Section 2 shall be credited to a Participant’s Deferred Share Equivalent Account:

(A)Incentive Awards;

(B)that portion of a Director’s Retainer Payment that would have been paid in Company stock if the Participant had not made a deferral election pursuant to Section 2; and

(C)that portion of a Director’s Retainer Payment that the Participant elects to have credited to such account.

(ii)Cash amounts credited to a Participant’s Deferred Share Equivalent Account shall be converted to the number of Share equivalents determined by dividing such cash amount by the Conversion Price. In addition, the Participant’s

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Deferred Share Equivalent Account shall be credited on each dividend payment date for Shares, with an amount equal to the number of Shares that could be purchased at the Conversion Price with dividends that would have been payable on the number of Shares equal to the number of Share equivalents in the Participant’s Deferred Share Equivalent Account on the record date for such dividend.  “Conversion Price” means the average of the daily high and low sale prices of Shares on the NYSE for the period of five trading days ending on the date such amount otherwise would have been paid to the Participant or, in the case of a dividend equivalent, on the dividend payment date, or the period of five trading days immediately preceding such applicable date if the NYSE is closed on such applicable date.

(ii)In the event of any change in outstanding Shares by reason of any stock dividend or stock split, recapitalization, merger, consolidation, combination or exchange of shares or other similar corporate change, the Board shall make such adjustments, if any, that it deems appropriate in the number of Share equivalents then credited to Participants’ Deferred Share Equivalent Accounts. Any and all such adjustments shall be within the sole discretion of the Board and its decision in regard to such adjustments shall be conclusive, final and binding upon all parties concerned.

Section 4.Payments.

(a)Payment Election.  When a Participant makes a Deferral Election, he or she shall also elect applicable Distributions Events and the payment form for each such Distribution Event.

(b)Distribution Events. As elected by the Participant, the distribution of a Participant’s Account shall commence on the first day of the calendar quarter next following the month in which the earlier of the following distribution dates occur:

(i)The date the Participant attains the age specified in his election, which age shall not be earlier than 55 or later than 70;

(ii)The date of the Participant’s Separation from Service;

(iii)The date of the Participant’s termination of service as a member of the Board;

(iv)The date of the Participant’s Disability; and

(v)The date of the Participant’s death.

Notwithstanding the foregoing, any distribution under the Plan to a Participant who is not a Director on account of such Participant’s Separation from Service when the Company is Publicly traded shall be made no earlier than the seventh month after such Separation from Service.

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(c)Payment Options.  (i)      The following payment options are available under the Plan: (A) one lump-sum payment or (B) approximately equal annual installments over a period not exceeding 10 years, provided, however, that the number of annual installments may not extend beyond the life expectancy of the Participant, determined as of the date the first installment is paid.

(ii)Installment payments after the first installment payment shall be paid on the first day of the applicable calendar quarter in each succeeding calendar year until the entire amount subject to the installment payment option has been paid. Prior to distribution, Accounts shall continue to receive credits under Section 3(a)(ii) and Section 3(b)(ii).

(d)Form of Distributions.  Amounts credited to a Participant’s Deferred Cash Equivalent Account shall be distributed in cash. Amounts credited to a Participant’s Deferred Share Equivalent Account shall be distributed as Shares, with fractional Shares being paid in cash.

(e)Unforeseeable Emergency Distributions.  A Participant may request that all or a portion of his or her Account balance be distributed at any time by submitting a written request to the Administrator, provided that the Participant has incurred an Unforeseeable Emergency, and the distribution is necessary to alleviate such Unforeseeable Emergency.  In determining whether the Unforeseeable Emergency distribution request should be approved, the Administrator shall be entitled to rely on the Participant’s representation that the Unforeseeable Emergency cannot be alleviated:

(i)through reimbursement or compensation by insurance or otherwise;

(ii)by reasonable liquidation of the Participant’s assets, to the extent such liquidation would not itself cause an immediate and heavy financial need; or

(iii)by cessation of contributions under the Plan and other deferred compensation arrangements.

An Unforeseeable Emergency distribution may not exceed the amount necessary to alleviate such emergency plus taxes attributable to such distribution.  The portion of the Participant’s Account that is not distributed.  Distributions to alleviate an Unforeseeable Emergency will be made as soon as administratively feasible after the Administrator has reviewed and approved the request.

(f)Beneficiary Designation.  A Participant may deliver a Beneficiary designation to the Administrator designating one or more beneficiaries for amounts credited to his or her Account at death. If a Participant fails to designate such a Beneficiary, or the designated Beneficiary(ies) predecease(s) him or her, payment following the death of the Participant shall be made to the Participant’s surviving spouse or, if there is no surviving spouse, to the Participant’s estate.  A Participant may change his or her designated Beneficiary or Beneficiaries at any time by delivering a new Beneficiary designation to the Administrator.

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Section 5.Change in Control.

Notwithstanding any provision of this Plan to the contrary, a Participant shall be 100 percent vested in his or her Account upon the occurrence of a Vesting Change in Control.  Notwithstanding any Payment Election, the aggregate amount credited to a Participant’s Account shall be paid in one lump-sum payment as soon as practicable following a Distribution Change in Control, but in no event later than 90 days after such Distribution Change in Control.

Section 6.Administration.

(a)Administration. The Administrator shall have the authority to administer and to interpret the Plan.

(b)Responsibilities and Powers of the Administrator. In administering the Plan, the Administrator shall have the following responsibilities:

(1)To administer the Plan in accordance with the terms hereof, and to exercise all powers specifically conferred upon the Administrator hereby or necessary to carry out the provisions hereof;

(2)To construe this Plan, which construction shall be conclusive, correct any defects, supply omissions, and reconcile inconsistencies to the extent necessary to effectuate the Plan;

(3)To determine in his or her sole discretion the amount of benefits payable to Participants under the Plan.  Any interpretation or determination made by the Plan Administrator pursuant to its discretionary authority shall be final and binding on the Company, any Participant, and any other affected party; and

(4)To keep all records relating to Participants and such other records as are necessary for proper operation of the Plan.

(c)Actions of the Administrator. In carrying out the responsibilities set forth in Section 6(b):

(1)The Administrator may adopt rules and regulations necessary for the administration of the Plan which are consistent with the provisions hereof.

(2)All acts and decisions of the Administrator shall apply uniformly to all Participants in like circumstances.  Written records shall be kept of all acts and decisions.

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(3)The Administrator may delegate, in writing, any of his or her responsibilities and powers with respect to the Plan to another individual or individuals.

(d)Professional Assistance.  The Administrator shall have the right to hire, at the expense of the Company, such professional assistants and consultants as he or she, in his or her sole discretion, deems necessary or advisable, including but not limited to accountants, actuaries, consultants, counsel and such clerical assistance as is necessary for proper discharge of his or her duties hereunder.

Section 7.Miscellaneous.

(a)Benefits Payable by the Company. All benefits payable under this Plan constitute an unfunded obligation of the Company. Payments shall be made, as due, from the general funds of the Company or, in the case of Share payments, from newly issued Shares, Shares purchased in the market, treasury Shares or otherwise. The Company may, at its option, maintain one or more bookkeeping reserve accounts to reflect its obligations under the Plan and may make such investments as it may deem desirable to assist it in meeting its obligations. Any such investments shall be assets of the Company subject to the claims of its general creditors. No person eligible for a benefit under this Plan shall have any right, title to, or interest in any such investments.  Nothing contained in this Section 7(a) shall limit the ability of the Company to pay benefits through one or more grantor trusts as provided in Section 7(b). Participants are general, unsecured creditors of the Company. This Plan constitutes a mere promise to pay benefits in the future.

(b)Grantor Trusts. (i) The Company shall create a grantor trust or utilize an existing grantor trust to assist it in accumulating the shares of Common Stock and cash needed to fulfill its obligations under this Plan to Directors (including former Directors), to which it shall be obligated to make contributions, no later than the date upon which any Potential Change in Control occurs, of a number of Shares and an amount of cash such that the assets of such trust are sufficient to discharge all of the Company’s obligations under this Plan to Directors (including former Directors) accrued as of the date of the Potential Change in Control. While a Potential Change in Control is pending and after any Vesting Change in Control, the Company shall be obligated to make additional contributions at least once each fiscal quarter to the extent necessary to ensure that the assets of such trust remain sufficient to discharge all such obligations accrued as of the last day of such fiscal quarter.  If a Potential Change in Control occurs but ceases to be pending without the occurrence of a Vesting Change in Control or a subsequent Potential Change in Control then the Company shall be permitted (but not required) to cause the trustee of such trust to distribute any or all of the assets of the Trust to the Company.

(ii)The Company may create a grantor trust or utilize an existing grantor trust to assist it in accumulating the Shares and cash needed to fulfill its obligations under this Plan to Participants who are not Directors (or former Directors).

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The Board shall determine whether it is necessary or desirable to create such a trust and to deposit Shares and cash in such trust to enable the Company to meets its obligations under this Plan and the extent of any such deposit to such trust.

(iii)Participants shall have no beneficial or other interest in any trust referred to in this Section 7(b) and the assets thereof, and their rights under the Plan shall be as general creditors of the Company, unaffected by the existence of any trust, except that payments to Participants from any such trust shall, to the extent thereof, be treated as satisfying the Company’s obligations under this Plan.

(c)Obligation for Payment of Benefits. The obligation to make a distribution of amounts credited to a Participant’s Account shall be borne by the Participating Company which otherwise would have paid such amounts currently.  However, the obligation to make a distribution with respect to Accounts which are related to amounts credited under a Predecessor Plan, and with respect to which no Participating Company would otherwise have paid the related award or deferred amount currently, shall be borne by the Participating Company to which the Participant was assigned on October 1, 2000.

(d)Amendment or Termination. (i) The Board may amend the Plan or terminate the Plan at any time, but such amendment or termination shall not adversely affect the rights of any Participant, without his or her consent, to any benefit under the Plan to which such Participant may have previously become entitled prior to the effective date of such amendment or termination.  Notwithstanding the foregoing, the Board may amend the Plan as necessary to address changes in applicable law in order to assure that amounts contributed to the Plan are not subject to federal income tax before distribution or withdrawal, which amendment may (among other things) limit a Participant’s ability to withdraw amounts previously credited to his or her Account before a Distribution Event and/or limit previously available methods of distribution. The Administrator with the concurrence of the General Counsel of the Company or his or her delegate shall be authorized to make minor or administrative changes to the Plan, as well as amendments required by applicable federal or state law (or authorized or made desirable by such statutes).  Any amendment to the Plan by the Board shall be made in writing, with or without a meeting, or shall be made in writing by the Administrator, to the extent of the aforementioned authorization.

(ii)If this Plan is to be terminated and liquidated, all deferred compensation plans of the same type under Regulation Section 1.409A-1(c)(2) must also be terminated and liquidated, and no deferred compensation plan of that same type may be established by the Company for three years following the termination.

(e)Entire Agreement. This Plan constitutes the entire agreement of the Company with respect to the benefits provided herein and cannot be modified orally or in any writing other than as set forth in Section 7(d).

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(f)Payments to Incompetents. If a Participant entitled to receive any benefits hereunder is adjudged to be legally incapable of giving valid receipt and discharge for such benefits, they will be paid to the duly appointed guardian of such Participant or to such other legally appointed person as the Administrator may designate. Such payment shall, to the extent made, be deemed a complete discharge of any liability for such payment under the Plan.

(g)Benefits not Transferable. The right of any person to any benefit or payment under the Plan shall not be subject to voluntary or involuntary transfer, alienation or assignment and, to the fullest extent permitted by law, shall not be subject to attachment, execution, garnishment, sequestration or other legal or equitable process.  In the event a person who is receiving or is entitled to receive benefits under the Plan attempts to assign, transfer or dispose of such right, or if an attempt is made to subject said right to such process, such assignment, transfer, or disposition shall be null and void.

(h)Tax Withholding. The Company is authorized to withhold from any Account or payment due under the Plan the amount of applicable withholding taxes in respect of such pay­ment or Account and to take such other action as may be necessary in the opinion of the Company to satisfy all obligations for the payment of such federal, state or other governmental entity tax obligation.

(i)Governing Law. The provisions of the Plan shall be construed in accordance with the laws of the State of Delaware.

IN WITNESS WHEREOF, the Company has caused this Plan, as amended, to be executed this 2nd day of August, 2007.

AVAYA INC.

By:	/s/Michael Harrison
	Michael Harrison
	Vice President – Total Rewards and HR Services
Attest:	/s/Eric Sherbet
	Eric Sherbet
	Vice President – Law, Corporate and Securities,
	and Corporate Secretary

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EX-31.1

EXHIBIT 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

I, Louis J. D’Ambrosio, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Avaya Inc.;

2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.     The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)    Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)    Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s third fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.     The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)     All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)     Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 6, 2007	/s/ LOUIS J. D’AMBROSIO
	Louis J. D’Ambrosio President and Chief Executive Officer (Principal Executive Officer)

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EX-31.2

EXHIBIT 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

I, Caroline Dorsa, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Avaya Inc.;

2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.     The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)    Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)    Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s third fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.     The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)     All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)     Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 6, 2007	/s/ CAROLINE DORSA
	Caroline Dorsa Senior Vice President and Chief Financial Officer (Principal Financial Officer)

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EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Avaya Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2007, as filed with the U.S. Securities and Exchange Commission on the date hereof (the “Report”), I, Louis J. D’Ambrosio, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:

(1)   The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)   The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ LOUIS J. D’AMBROSIO

Louis J. D’Ambrosio

President and Chief Executive Officer
(Principal Executive Officer)

August 6, 2007

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EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Avaya Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2007, as filed with the U.S. Securities and Exchange Commission on the date hereof (the “Report”), I, Caroline Dorsa, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:

(1)   The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)   The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ CAROLINE DORSA

Caroline Dorsa

Senior Vice President and Chief Financial Officer
(Principal Financial Officer)

August 6, 2007

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