AVAYA INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

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FORM 10-K

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2002

OR

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

COMMISSION FILE NUMBER 001-15951

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AVAYA INC.

A DELAWARE I.R.S. EMPLOYER
CORPORATION NO. 22-3713430

211 MOUNT AIRY ROAD, BASKING RIDGE, NEW JERSEY 07920
TELEPHONE NUMBER 908-953-6000

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

None

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 / /

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /

At November 29, 2002, the aggregate market value of the voting common equity
held by non-affiliates was approximately $907 million.

At November 29, 2002, 365,801,780 common shares were outstanding.

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DOCUMENTS INCORPORATED BY REFERENCE

Portions of the 2002 Annual Report to Shareholders Parts I, II and IV
Portions of the Proxy Statement for the 2003 Annual Meeting
of Shareholders Part III

TABLE OF CONTENTS

This Annual Report on Form 10-K contains trademarks, service marks and
registered marks of Avaya and its subsidiaries and other companies, as
indicated. Unless otherwise provided in this Annual Report on Form 10-K,
trademarks identified by -Registered Trademark- and -TM- are registered
trademarks or trademarks, respectively, of Avaya Inc. or its subsidiaries. All
other trademarks are the properties of their respective owners. Liquid Yield
Option-TM- Notes is a trademark of Merrill, Lynch & Co., Inc.
Microsoft-Registered Trademark- is a registered trademark of Microsoft
Corporation.

All market share data is based on the most recently available information
from independent industry analysts.

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PART I

ITEM 1. BUSINESS.

OVERVIEW

Avaya Inc. is a leading provider of communications systems, applications and
services for enterprises, including businesses, government agencies and other
organizations. Our product and solution offerings include converged voice and
data networks, traditional voice communications systems, customer relationship
management solutions, unified communications solutions and structured cabling
products. We support our broad customer base with comprehensive global service
offerings that help our customers plan, design, implement and manage their
communications networks. We believe our global service organization is an
important consideration for customers purchasing our products and solutions and
is a source of significant revenue for us, primarily from maintenance contracts.

We were incorporated under the laws of the State of Delaware under the name
"Lucent EN Corp." on February 16, 2000, as a wholly owned subsidiary of Lucent
Technologies Inc. As of June 27, 2000, our name was changed to "Avaya Inc." On
September 30, 2000, Lucent contributed its enterprise networking business to us
and distributed all of the outstanding shares of our capital stock to its
shareowners. We refer to these transactions in this Annual Report on Form 10-K
as the "distribution." Prior to the distribution, we had no material assets or
activities as a separate corporate entity. Following the distribution, we became
an independent public company, and Lucent has no continuing stock ownership
interest in us.

OPERATING SEGMENTS

We offer a broad array of communications systems, solutions and services
that enable enterprises to communicate with their customers, suppliers, partners
and employees through voice, Web, electronic mail, facsimile, Web chat sessions
and other forms of communication, across an array of devices. These devices
include telephones, computers, cell phones and personal digital assistants. Our
broad portfolio of products includes products we have developed internally,
products we have obtained through acquisitions, products manufactured by third
parties which we resell, products and software provided to us by third parties
as components of our offerings and products we have developed through our
strategic alliances with other technology leaders. Our products range from
systems designed for multinational enterprises with multiple locations
worldwide, thousands of employees and advanced communications requirements to
systems designed for businesses with less than ten employees.

Prior to the fourth quarter of fiscal 2002, our businesses were organized
into operating segments based on product groups. In the fourth quarter of fiscal
2002, we reevaluated our business model due to the continued decline in spending
on enterprise communications technology by our customers and redesigned our
operating segments to align them with discrete customer sets and market segment
opportunities in order to optimize revenue growth and profitability. As a
result, we now report our operating results in the following four segments:
Converged Systems and Applications, Small and Medium Business Solutions,
Services and Connectivity Solutions. Please see Note 16 to our Consolidated
Financial Statements for the year ended September 30, 2002, which is
incorporated by reference from our 2002 Annual Report to Shareholders, for
financial information regarding our operating segments.

CONVERGED SYSTEMS AND APPLICATIONS SEGMENT

Our Converged Systems and Applications segment is focused on the sale of
communications solutions to our large enterprise customers. Our primary
offerings for this segment include converged voice and data networks and
traditional voice communications systems, customer relationship management
offerings and unified communications solutions. A critical component of our
strategy is

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our focus on the migration of our customers' circuit-switched voice
communications systems, which we refer to as traditional voice communications
systems, to a converged packet-based network that provides for the integration
of voice, data, video and other application traffic on a single unified network.
Internet Protocol, or IP, telephony systems integrate voice and data
communications traffic for transmission across a single network infrastructure
based on IP technology. Internet protocol is a type of protocol, or set of
standardized procedures, for the formatting and timing of transmission of
communications traffic between two pieces of equipment.

We believe the implementation of a converged network can provide significant
benefits to an enterprise in a number of ways. These benefits include:

- reduced costs through the use of a single unified network;

- simplified administration and least cost routing techniques for call
processing;

- increased worker productivity resulting from enhanced network access to
all communication channels, such as voice, e-mail and fax, from any
device, including computer, telephone, cell phone, fax machine and
personal digital assistant.; and

- enhanced business performance through the integration of IP telephony with
other applications.

In particular, we believe the evolution of converged networks is leading to
converged communications, which is characterized by the integration of real time
communication applications, such as telephony operations and administration,
call processing and call routing, and store and forward communications
applications, such as voice messaging, email and unified communication, with
business applications, such as customer relationship management and supply chain
management, to increase productivity and support end-user needs more
efficiently.

CONVERGED SYSTEMS. We are the U.S. leader in traditional voice telephony
and enterprise telephony, which we define as the market for traditional voice
telephony and IP telephony in the aggregate. We have the third largest share of
each of the U.S. IP telephony market, the global enterprise market and the
global IP telephony markets.

In February 2002, we announced the next generation of our Enterprise Class
Internet Protocol Solutions, or ECLIPS which includes:

- Avaya MultiVantage-TM- Software, our voice application software that
includes call processing and contact center functions and an
application-programming interface that supports a range of Avaya and
third-party applications;

- our media servers, which put voice applications such as call processing on
the customer's local area network;

- our media gateways, which support traffic routing between packet-switched
and circuit-switched networks, providing enterprises with the flexibility
to implement a new IP telephony system or to "IP-enable" their existing
voice communications system, thereby helping to preserve existing
communications technology investments;

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

- our IP softphones, which provide the functionality of a digital telephone
on a personal computer or a handheld device and our IP screenphones, which
offer a personal computer's graphic screen in an IP telephone; and

- our Avaya-TM- Extension to Cellular solution, which transparently bridges
any cell phone to any Avaya communications server.

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We also offer a portfolio of products to support converged network
infrastructures which carry voice, video and data traffic over any of the
protocols supported by the Internet on local area, wide area and wireless
networks including gigabit Ethernet, which facilitates the integration of the
enterprise network, the service provider network and next generation switching
systems such as optical networking. These products, which include switches,
virtual private networks and policy management software are offered on a
stand-alone basis, but are used primarily to support our converged systems
offerings. Our family of converged network infrastructure products help provide
a secure, reliable network infrastructure that enables deployment of IP-based
communications applications.

Our most advanced enterprise voice communications system is our
DEFINITY-Registered Trademark- Enterprise Communications Server, which is
offered worldwide in a variety of configurations,. Our DEFINITY product line is
a family of products that provides for a reliable enterprise network for voice
communication that integrates seamlessly with the public subscriber telephony
network, or PSTN, the global collection of voice-oriented public telephone
networks. It also offers integration with an enterprise's data network. Our
DEFINITY servers support a variety of voice and data applications such as call
and customer contact centers, messaging and interactive voice response, or IVR,
systems. IVR systems allow an individual to access information in the
enterprise's computer databases or conduct transactions by voice or using a
touch-tone telephone. IVR systems are often used in conjunction with an
automated attendant service to determine how the call should be routed given the
caller's needs. Our DEFINITY servers support open and standard interfaces for
computer telephony integration applications, which are advanced applications
that assist in the making, receiving and managing of telephone calls. Our
DEFINITY servers facilitate the ongoing transition at many enterprises from
traditional voice telephony systems to advanced systems that integrate voice and
data traffic and deploy increasingly sophisticated communications applications.

CUSTOMER RELATIONSHIP MANAGEMENT. Our customer relationship management
organization is focused on solutions that:

- facilitate interactions between an enterprise and its internal and
external customers across different types of access including voice
communications, email, Internet chat and facsimile;

- manage business and customer information to help ensure consistent
delivery of customer service throughout the enterprise;

- collect, integrate and analyze valuable customer and transaction
information to help the enterprise better meet customer needs; and

- provides reporting and analysis tools that help manage the overall
administration and efficiency of cost center operations.

Our offerings are essential components of many customer relationship
management solutions, including:

- call and customer contact center solutions;

- customer self-service applications, such as IVR systems and software;

- predicative dialing software and systems that manage inbound and outbound
calls, improving the efficiency of an enterprise's agents; and

- agent performance suites, such as call logging and monitoring, workforce
management software and agent analytic tools.

Our core customer relationship management, or CRM, product offerings are
software and hardware systems and software applications for customer contact
centers (including call centers) which are the foundation of many CRM solutions.
We use the term call centers to refer to applications that primarily manage an
enterprise's interactions with customers via the telephone, and the term contact

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centers to refer to applications that allow customers to interact with an
enterprise using multiple mediums of communication, including electronic mail,
access from a Web site, Web chat and collaboration, voice self-service,
telephone calls and facsimiles. We are the leading provider of call center
systems in North America and have the second largest share of the U.S. call
center market. Our strategy is to leverage this leadership position to market a
broader suite of CRM solutions.

Our Avaya-TM- Call Center Solutions for MultiVantage-Registered Trademark-
offer a suite of intelligent call routing alternatives that can accommodate
single call centers or multiple call centers through "virtual" routing over a
converged network. Calls can be routed to customer care agents or self-service
applications based on a variety of criteria, or business rules, including call
volume, workload, agent language or other expertise or across time zones or
countries and in each case, routing is transparent to the customer. Our contact
center solutions include Avaya-TM- Interaction Center, which manages
interactions across a variety of communication channels--including Web, e-mail
and advanced telephony systems. Avaya-TM- Interaction Center allows customers to
contact the enterprise through their preferred mode of communication and,
together with our other contact center components, helps enhance the customer's
experience with the enterprise. Our Operational Analyst solution provides
detailed and summary reporting to assist in efficiently and effectively managing
the contact center's operations. Operational Analyst also provides business
relevant analytical reporting that help facilitate business decisions relevant
to contact center operations.

Avaya CRM is supported by a professional services team of consultants who
are dedicated to assisting enterprises in improving their customer relationship
management, technology and execution. Our services range from designing and
implementing an enterprise's customer relationship management technology
strategy to setting up and integrating software applications that an enterprise
purchases from us as part of its customer contact center. Our consultants also
work with our sales force in selling our customer relationship management
solutions. Typically, a customer that purchases our customer relationship
management solutions purchases consulting services from us. We also provide
subject matter advice to systems integrators as part of an overall customer
relationship management strategy, as well as to provide guidance to achieve the
integration of multi-vendor solutions.

UNIFIED COMMUNICATION. We define Unified Communication as a family of
solutions that allow individuals to collaborate and communicate more effectively
and to move more quickly in a networked infrastructure through a variety of
communications devices, including telephones, computers or personal digital
assistants. Our Unified Communication solutions include our voice messaging and
unified messaging products, our IP-based unified communication solution and
other multimedia collaboration tools. Unified messaging is an advanced messaging
solution that delivers the convenience and benefits of combining the storage of
more than one type of message, including voice, facsimile and email.

We are the worldwide leader in sales of voice messaging, unified messaging
and unified communication solutions. Our messaging systems are configured both
as stand-alone servers or as embedded software or hardware in communications
servers. Many of our messaging systems are compatible with the voice
communications systems of other vendors so that an enterprise may choose our
messaging system as the standard for all its locations.

We offer a wide variety of voice messaging and unified messaging solutions
designed to serve the telephone call answering, facsimile, voice and unified
messaging communications needs of enterprises. Unified messaging facilitates
access to messages through the most convenient device, including Internet
browsers, LAN-based personal computers and wireline or wireless telephones,
using text-to-speech technology for telephonic e-mail retrieval. These products
are marketed under a number of brands, including our primary brands,
Octel-Registered Trademark- Messaging and INTUITY-TM-
AUDIX-Registered Trademark- Messaging. The ease and speed of our voice and
facsimile messaging can improve an enterprise's efficiency by allowing messages
to be sent instantly to teams, groups or an entire workforce across multiple
locations. All of our

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messaging servers can be networked, over the Internet or public or private voice
networks, to provide enterprise-wide voice and facsimile messaging through a
single system.

Our unified messaging capability, which accommodates voice, facsimile and
email messages, is available for our Octel Messaging and INTUITY AUDIX systems
and is also provided by our innovative Avaya Unified Messenger for
Microsoft-Registered Trademark- Exchange, developed in cooperation with
Microsoft Corporation. The Avaya Unified Messenger system is a unified messaging
system software solution that stores voice and facsimile messages directly in a
user's Microsoft Exchange electronic mailbox and enables user access to this
mailbox by telephone or fax machine or a Microsoft Exchange interface on the
user's personal computer.

Our unified communication offering, Avaya-TM- Unified Communication Center,
includes the following features:

- message management--provides access to voice, fax and e-mail messages from
an array of communication devices;

- calling and conferencing management--allows users to initiate calls or
conferences from any phone, including through the use of a voice
recognition application, while leveraging the enterprise's communication
system;

- contact management--connects users to enterprise databases, providing the
dialing capability of an office telephone to a computer or personal
digital assistant; and

- personal efficiency management--allows users to utilize personalized
information filtering to prioritize communication interactions and screen
calls or route them to voice mail.

SMALL AND MEDIUM BUSINESS SOLUTIONS SEGMENT

Our Small and Medium Business Solutions segment develops, markets and sells
communications solutions, including IP telephony, traditional voice systems,
unified communication and contact center solutions, for small and medium-sized
businesses as well as the branch offices of large enterprises. Traditional voice
communications systems designed for small and medium-sized businesses are also
known as key and hybrid telephony systems. We have the second largest market
share in the U.S. key/ hybrid voice market, although the market leader's share
in this market is less than 1% greater than our current share. We have only
recently introduced an IP telephony solution designed to serve the needs of
small and medium-sized businesses.

We launched Avaya-TM- IP Office, our IP telephony solution for small and
medium-sized enterprises, in Europe in January 2002 and in North America in
May 2002. IP Office can be deployed for enterprises with 2 to 256 stations and
features full voice and data remote access, call distribution and alternate call
routing for low cost and highest voice quality. In addition, the IP Office
applications suite offer voice mail, unified messaging, wireless capability and
an array of contact center management tools designed for the small and
medium-sized enterprise.

Our key and hybrid voice communications systems are our Merlin MAGIX system,
which offers telephony, messaging, wireless and call center capability to
enterprises with up to 200 stations and our Partner ACS system, which offers
telephony, messaging and wireless to smaller enterprises with up to 40 stations.
Our Avaya INDeX system is marketed primarily in Europe, Australia and Japan and
can accommodate up to 1,088 stations. All of these systems can be IP enabled.

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SERVICES SEGMENT

Our Services organization provides standard and customized solutions to
enterprises in the following areas:

- network planning and design--including planning, design and assessment of
an enterprise's data network, its readiness for the implementation of IP
telephony and a comprehensive suite of security services for separate
voice and data networks as well as converged networks;

- network implementation--including solution preparation, design, deployment
and installation;

- management and operations--offering enterprises and service providers an
opportunity to outsource their communications systems; and

- maintenance and support--providing maintenance of our customer's networks.

We are the leading U.S. provider of maintenance services for enterprise
voice communications systems.

We deliver our service offerings through our Network Consulting Services,
Managed Services, Data Services, Technical Services and Field Services
organizations. Our Network Consulting team offers network planning and design
services. Our Managed Services organization helps enterprises focus on core
competencies by managing their internal voice communications systems and helps
service providers grow revenues by providing end-to-end messaging and unified
communication solutions. Our Data Services team can assist the enterprise with
the design, implementation, installation, maintenance and management of its data
network. Installation and repair of our products are performed primarily by our
Field Services organization. Technical support and maintenance under contracts
for our voice communications products are provided by our Technical Services and
Field Services organizations.

CONNECTIVITY SOLUTIONS SEGMENT

We market our SYSTIMAX-Registered Trademark- SCS product line of structured
cabling systems primarily to enterprises of various sizes for wiring phones,
workstations, personal computers, local area networks and other communications
devices through their buildings or across their campuses and our
ExchangeMAX-Registered Trademark- product line primarily to central offices of
service providers, such as telephone companies or Internet service providers. We
also offer electronic cabinets to enclose and protect an enterprise's electronic
devices and equipment.

SYSTIMAX STRUCTURED CABLING SYSTEMS. We are the worldwide leader in sales
of structured cabling systems to enterprises. We primarily market these products
under the brand name SYSTIMAX. Our SYSTIMAX cabling systems provide a single
cabling solution for a network that integrates voice, video, data and building
controls on one network through an infrastructure of copper or fiber cabling and
associated connecting apparatus. The SYSTIMAX copper and fiber apparatus
solutions can be customized to fit a customer's needs.

EXCHANGEMAX STRUCTURED CABLING SYSTEMS. We sell our ExchangeMAX structured
cabling systems primarily to central offices of service providers such as
telephone companies, original equipment manufacturers and third-party
"engineering, furnish and install vendors. Central offices are locations that
house switches to serve the subscribers of a service provider. Our ExchangeMAX
systems are used to connect transmission and switching and other service
provider topologies to the Public Switched Telephone Network, or PSTN and
include coaxial and fiber cable used for voice frequency and digital and fiber
distribution networks. Equipment includes main distributing frames, digital
signal cross-connect frames, fiber distribution frames and surge protectors.

ELECTRONIC CABINETS. An electronic cabinet is a sturdy environmental
enclosure designed to house electronics devices and passive equipment, both in
the outside plant and inside buildings. Such

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enclosures are designed to meet the specific needs of each equipment
manufacturer's equipment and devices, including thermal characteristics, and are
used mostly by service providers to protect wireless access equipment, switching
equipment and broadband electronic equipment.

CUSTOMERS, SALES AND DISTRIBUTION

CUSTOMERS

Our customers include a broad set of enterprises ranging from large,
multinational enterprises to small and mid-sized enterprises to governments and
schools. We have thousands of customers, and no single end user customer
represented more than 10% of our revenue for fiscal 2002 and 2001 although sales
to our largest dealer, Expanets Inc., were approximately 10% of revenue for the
fiscal year ended September 30, 2001.

SALES AND DISTRIBUTION

Our distribution strategy is to serve our customers through our direct sales
forces and our indirect sales channel, which consists of our global network of
distributors, dealers, value-added resellers and system integrators.

CONVERGED SYSTEMS AND APPLICATIONS. We sell our Converged Systems and
Applications solutions to enterprise customers through our direct sales channel
and our global network of distributors, dealers, solutions providers and systems
integrators. Outside the U.S., we employ a direct sales force in major areas
with large enterprises while customers and geographic areas are served through
our indirect sales channel.

SMALL AND MEDIUM BUSINESS SOLUTIONS. We serve our Small and Medium Business
Solutions customers primarily through our network of dealers and value-added
resellers as well as through service providers. We also sell our solutions for
this segment to other providers of communications solutions to be incorporated
into their offerings. We will utilize a direct sales presence in support of the
smaller offices of our larger enterprise customers and for our largest dealers
and service providers.

SERVICES. Our Services segment serves customers through our direct sales
force and indirect channel partners, including alliance partners, service
providers, distributors and resellers. In addition, sales opportunities for our
Services segment will often arise from sales of our solutions through our
Converged Systems and Applications and Small and Medium Business Solutions
segments.

CONNECTIVITY SOLUTIONS. Our SYSTIMAX structured cabling systems are sold
primarily indirectly through a worldwide network of distributors. Our
ExchangeMAX structured cabling systems and electronic cabinets are sold to
service providers, original equipment manufacturers and distributors.

RESEARCH AND DEVELOPMENT

We invested $459 million, or approximately 9.3% of our total revenue, in
fiscal 2002 and $536 million, or approximately 7.9% of our total revenue, in
fiscal 2001, in research and development. Each of our operating segments has an
independent research and development organization. In addition, the research and
development efforts of our operating segments are supported by Avaya Labs
Research, a world-class basic research organization of approximately 80
professionals focused on technologies that will result in innovative products
and services. The primary focus of Avaya Labs Research is the development of
technologies and products for our Converged Systems and Applications segment
and, to a lesser extent, our Services segment.

We plan on using our substantial investment in research and development to
develop new systems and software related to business communications
applications, customer relationship management innovations, messaging solutions,
personalized information portals, business infrastructure and

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architectures, Web centers, hosted solutions, data networks and services for
Avaya's customers. These new systems and software will augment our current
product offerings so that, together with our strategic alliances and services,
we can offer our customers comprehensive advanced communications solutions. We
are also developing self-service interfaces and tools for use by our customers
and indirect channel partners. Avaya Labs Research will continue to seek
opportunities to work with technology leaders from other companies and
educational and research institutions to develop uniform technological standards
as the building blocks for future communications and related enterprise systems.

MANUFACTURING AND SUPPLIES

In fiscal 2001, we outsourced substantially all of our manufacturing,
including assembly and testing, other than the manufacturing of our Connectivity
Solutions product offerings, to Celestica Inc.. Currently, we are engaged in the
manufacturing of our Connectivity Solutions product offerings in three
facilities located in the United States, Australia and Ireland as well as in a
facility in China operated by a joint venture in which we own a 60% interest.

The success of our manufacturing initiative depends on the willingness and
ability of contract manufacturers to produce our products. We may experience
significant disruption to our operations by outsourcing so much of our
manufacturing. If our contract manufacturers terminate their relationships with
us or are unable to fill our orders on a timely basis, we may be unable to
deliver our products to meet our customers' orders, which could delay or
decrease our revenue.

We believe we have adequate sources for the supply of the components of our
products and for the finished products that we purchase from third parties.

COMPETITION

The market for communications systems, applications and services is quickly
evolving, highly competitive and subject to rapid technological change. Because
we offer a wide range of systems, applications and services for several types of
enterprises, we have a broad range of competitors. Many of our competitors are
substantially larger than we are and have significantly greater financial,
sales, marketing, distribution, technical, manufacturing and other resources.
Competition for our Converged Systems and Applications offerings include
products manufactured or marketed by a number of large communications equipment
suppliers, including Nortel Networks Corporation, Cisco Systems, Inc., Siemens
Aktiengesellschaft, Alcatel S.A. and NEC Corporation, as well as by a number of
other companies, some of which focus on particular segments of the market such
as customer relationship management. Some of the other competitors for our
Converged Systems and Applications offerings include Aspect Communication
Corporation and Captaris Inc. Our Small and Medium Business Solutions segments
has many competitors, including Cisco, Nortel, Alcatel, NEC, Matsushita Electric
Corporation of America, Inter-Tel, Incorporate and 3Com Corp., although the
market for these solutions is fragmented. Our structured cabling systems'
primary competitors are ADC Telecommunications, Inc., Telect Corporation, Siecor
Corporation, Marconi plc, Nordx/CDT, Commscope, Inc. and Belden Inc. Our
Services segment competes with Cisco Systems, Inc., NextiraOne, LLC,
Norstan, Inc., Nortel Networks Corporation, Siemens Aktengesellschaft, Ericsson,
Ameritech Corporation and Verizon Communications Inc as well as many consulting
firms. We expect to face increasing competitive pressures from both current and
future competitors in the markets we serve.

Technological developments and consolidation within the communications
industry result in frequent changes to our group of competitors. The principal
competitive factors applicable to our products and solutions include:

- product features and reliability;

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- customer service and technical support.

- relationships with distributors, value-added resellers and systems
integrators;

- an installed base of similar or related products;

- relationships with buyers and decision makers;

- price;

- the financial condition of the communications technology provider;

- brand recognition;

- the ability to integrate various products into a customer's existing
networsk, including the ability of a provider's products to interoperate
with other providers communications product; and

- the ability to be among the first to introduce new products.

PATENTS, TRADEMARKS AND OTHER INTELLECTUAL PROPERTY

In connection with the distribution, Lucent assigned to us its rights to a
number of patents, trademarks, copyrights, trade secrets and other intellectual
property directly related to and important to our business. In addition, Lucent
and its subsidiaries have also granted rights and licenses to those of their
patents, trademarks, copyrights, trade secrets and other intellectual property
which enable us to manufacture, market and sell all our products. Further,
Lucent has conveyed to us numerous sublicenses under patents of third parties.

We currently hold more than 1,700 U.S. patents and patent applications as a
result of patents and patent applications assigned to us by Lucent in connection
with the distribution, together with patents issued and patent applications we
have filed since the distribution and have obtained through acquisitions. In
addition, we hold corresponding non-US patents and patent applications, as well
as numerous trademarks, both in the United States and in foreign countries.
There are no time restrictions applicable to the patents assigned to us by
Lucent. We have entered into a cross license with Lucent in connection with
these patents.

Our intellectual property policy is to protect our products and processes by
asserting our intellectual property rights where appropriate and prudent. We
will also obtain patents, copyrights, and other intellectual property rights
used in connection with our business when practicable and appropriate.

EMPLOYEES

As of September 30, 2002, we employed approximately 18,800 full-time
employees, of which approximately 11,900 are management and
non-union-represented employees and approximately 6,700 are U.S.
union-represented employees covered by collective bargaining agreements. On
May 31, 1998 Lucent entered into collective bargaining agreements with the
Communications Workers of America and the International Brotherhood of
Electrical Workers. In connection with the distribution, we assumed the
obligations under the agreements with respect to our union-represented
employees. Each agreement is effective until May 31, 2003 unless the parties
reach a mutual agreement to amend its term. We believe that we generally have a
good relationship with our employees and the unions that represent them.

In October 2000, we entered into an agreement with the unions representing
our U.S. Services employees to offer eligible employees the ability to retire
from Lucent as of September 30, 2000 and continue working as on-call support
service technicians at Avaya. The agreement was intended to give us the
flexibility to match our workforce needs with our customers' cyclical service
demands for the design, installation and maintenance of their communications
systems. This agreement is effective until May 31, 2003.

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BACKLOG

Our backlog, which represents the aggregate of the sales price of orders
received from customers, but not yet recognized as revenue, was approximately
$270 million and $320 million on September 30, 2002 and September 30, 2001,
respectively. The majority of these orders are fulfilled within two months.
However, all orders are subject to possible rescheduling by customers. Although
we believe that the orders included in the backlog are firm, some orders may be
cancelled by the customer without penalty, and we may elect to permit
cancellation of orders without penalty where management believes it is in our
best interests to do so.

ENVIRONMENTAL, HEALTH AND SAFETY MATTERS

We are 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 our operations. We are subject to certain
provisions of environmental laws, particularly in the United States, governing
the cleanup of soil and groundwater contamination. Such provisions impose
liability for the costs of investigating and remediating releases of hazardous
materials at our 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 us. We are currently
conducting investigation and/or cleanup of known contamination at approximately
seven of our facilities either voluntarily or pursuant to government directives.

It is often difficult to estimate the future impact of environmental
matters, including potential liabilities. We have established financial reserves
to cover environmental liabilities where they are probable and reasonably
estimable. Reserves for estimated losses from environmental matters 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. Although we believe that our reserves are adequate to cover known
environmental liabilities, there can be no assurance that the actual amount of
environmental liabilities will not exceed the amount of reserves for such
matters or will not have a material adverse effect on our consolidated financial
position, results of operations or cash flows.

RELATIONSHIP BETWEEN LUCENT AND OUR COMPANY AFTER THE DISTRIBUTION

In connection with the distribution, we entered into a Contribution and
Distribution Agreement and a number of ancillary agreements with Lucent for the
purpose of accomplishing the contribution to us of Lucent's enterprise
networking business and the distribution. These agreements govern the
relationship between Lucent and us subsequent to the distribution and provide
for the allocation of employee benefit, tax and other liabilities and
obligations attributable to periods prior to the distribution.

In addition, the current Federal Tax Allocation Agreement and the current
State and Local Income Tax Allocation Agreement by and among Lucent and its
subsidiaries governing the allocation of income taxes among Lucent and its
subsidiaries continues to apply to us for taxable periods prior to and including
the distribution. The material agreements related to the distribution are
incorporated by reference as exhibits to this Annual Report on Form 10-K and the
summaries of any such agreements set forth below are qualified in their entirety
by reference to the full text of such agreements.

CONTRIBUTION AND DISTRIBUTION AGREEMENT

The Contribution and Distribution Agreement sets forth the agreements
between us and Lucent with respect to the principal corporate transactions
required to effect the distribution, and other agreements governing the
relationship between Lucent and us.

13

THE CONTRIBUTION AND THE DISTRIBUTION

To effect the contribution, Lucent transferred, or agreed to transfer, or to
cause its subsidiaries to transfer, the assets of its enterprise networking
businesses. In general, we assumed, or agreed to assume, and perform and fulfill
all of the liabilities of the contributed businesses in accordance with their
respective terms. Pursuant to the Contribution and Distribution Agreement, the
distribution was effected as of 11:59 p.m. on September 30, 2000.

RELEASES AND INDEMNIFICATION

The Contribution and Distribution Agreement provides for a full and complete
release and discharge of all liabilities existing or arising from all acts and
events occurring or failing to occur or alleged to have occurred or to have
failed to occur and all conditions existing or alleged to have existed on or
before the date of the Contribution and Distribution Agreement, between or among
us or any of our subsidiaries or affiliates, on the one hand, and Lucent or any
of its subsidiaries or affiliates other than us, on the other hand, except as
expressly set forth in the Contribution and Distribution Agreement.

We have agreed to indemnify, hold harmless and defend Lucent, each of its
affiliates and each of their respective directors, officers and employees, from
and against certain liabilities relating to, arising out of or resulting from
the contribution and the distribution or any material breach by us of the
Contribution and Distribution Agreement or any of the ancillary agreements.
Lucent has agreed to indemnify, hold harmless and defend us, each of our
affiliates and each of our respective directors, officers and employees from and
against all liabilities related to Lucent's businesses other than the
contributed businesses and any material breach by Lucent of the agreement or any
of the ancillary agreements. Also, each party has indemnified the other party
and its affiliates, subject to limited exceptions, against any claims of patent,
copyright or trademark infringement or trade secret misappropriation with
respect to any product, software or other material provided by or ordered from
such party.

CONTINGENT LIABILITIES AND CONTINGENT GAINS

The Contribution and Distribution Agreement provides for liability sharing
by us and Lucent with respect to contingenciesprimarily relating to our
respective businesses or otherwise assigned to each of us. The Contribution and
Distribution Agreement requires Lucent to bear 50% of all losses in excess of
$50 million incurred by us in connection with a contingent liability primarily
related to our businesses. In addition, we are required to bear 10% of all
losses in excess of $50 million incurred by Lucent in connection with a
contingent liability primarily related to Lucent's businesses.

The Contribution and Distribution Agreement also provides that we will bear
10% and Lucent will bear 90% of all losses incurred in connection with shared
contingent liabilities, which are defined as:

- any contingent liabilities that are not primarily contingent liabilities
of Lucent or contingent liabilities associated with the contributed
businesses;

- some specifically identified liabilities, including liabilities relating
to terminated, divested or discontinued businesses or operations; and

- shared contingent liabilities within the meaning of the 1996 separation
and distribution agreement among Lucent, AT&T Corp. and NCR Corporation.

Lucent will assume the defense of, and may seek to settle or compromise, any
third party claim that is a shared contingent liability, and those costs and
expenses will be included in the amount to be shared by us and Lucent.

14

The Contribution and Distribution Agreement provides that we and Lucent will
have the exclusive right to any benefit received with respect to any contingent
gain that primarily relates to the business of, or that is expressly assigned
to, us or Lucent, respectively.

Please see "Legal Proceedings" for a description of certain matters
involving Lucent for which we have assumed responsibility under the Contribution
and Distribution Agreement.

RESTRICTIONS ON BUSINESS TRANSACTIONS

Subject to Lucent's ability to terminate some of the rights, including
important intellectual property rights granted to us and our affiliates under
the ancillary agreements, the Contribution and Distribution Agreement provides
that none of Lucent, us, or our respective subsidiaries or affiliates will have
any duty to refrain from engaging in similar activities or lines of business, or
from doing business with any potential or actual supplier or customer of any
other person.

PROVISIONS RELATING TO THIRD-PARTY INTELLECTUAL PROPERTY LICENSE AGREEMENTS

The Contribution and Distribution Agreement provides, generally, for the
grant by Lucent to us of a sublicense under numerous third-party intellectual
property license agreements. The Patent and Technology License agreement
provides similar grants to us from Lucent's subsidiary, Lucent Technologies GRL
Corporation, with respect to third party patent license agreements executed by
that subsidiary.

CHANGE OF CONTROL

In the event that, at any time prior to the third anniversary of the
distribution, there is a change of control of us as defined in the Contribution
and Distribution Agreement, then Lucent could terminate or cause us to reconvey
some of the rights, including important intellectual property rights, granted to
us under the Intellectual Property Agreements.

COMMERCIAL AGREEMENTS

We and Lucent entered into a Global Purchase and Service Agreement, a
General Sales Agreement, a Microelectronics Product Purchase Agreement, two
Reseller Agreements, a Master Subcontracting Agreement, a Master Services
Agreement and an Original Equipment Manufacturing and Value Added Reseller
Agreement. The pricing terms for the products and services covered by the Global
Purchase and Service Agreement and all other ancillary commercial agreements
reflected current market prices at the time of the transaction. Each of these
agreements commenced October 1, 2000 and has a three-year term, subject to
extension.

INTELLECTUAL PROPERTY AGREEMENTS

We entered into a series of agreements with Lucent pursuant to which Lucent
transferred to us the primary trademarks used in the sale of our products and
services, except for Lucent's name and logo and the Bell Laboratories name; we
and Lucent divided ownership of technology, patents, patent applications and
non-U.S. counterparts between us and Lucent; and we and Lucent granted cross-
licenses to each other with respect to patents and technology.

TAX SHARING AGREEMENT

We and Lucent entered into a Tax Sharing Agreement which governs Lucent's
and our 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 that are clearly attributable to
the business of one party will be borne solely by that party, and other
pre-distribution taxes will be shared

15

by the parties based on a formula set forth in the Tax Sharing Agreement. In
addition, the Tax Sharing Agreement addresses the allocation of liability for
taxes that are incurred as a result of restructuring activities undertaken to
implement the distribution. If the distribution fails to qualify as a tax-free
distribution under Section 355 of the Internal Revenue Code because of an
acquisition of our stock or assets, or some other actions of ours, then we will
be solely liable for any resulting corporate taxes.

FORWARD LOOKING STATEMENTS

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

Our disclosure and analysis in this report and in our 2002 Annual Report to
Shareholders contain some forward-looking statements. 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, in the 2002
Annual Report to Shareholders 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. Many factors mentioned in
the discussion below will be important in determining future results.
Consequently, no forward-looking statement can be guaranteed. 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 Form 10-Q and
8-K reports to the SEC. Also note that we provide the following cautionary
discussion of risks, uncertainties and possibly inaccurate assumptions relevant
to our businesses. These are factors that we think could cause our actual
results to differ materially from expected and historical results. Other factors
besides those listed here could also adversely affect us. This discussion is
provided as permitted by the Private Securities Litigation Reform Act of 1995.

The risks and uncertainties referred to above include, but are not limited
to, price and product competition, rapid technological development, dependence
on new product development, the mix of our products and services, customer
demand for our products and services, the ability to successfully integrate
acquired companies, control of costs and expenses, the ability to form and
implement alliances, the ability to implement in a timely manner our
restructuring plan, the economic, political and other risks associated with
international sales and operations, U.S. and non-U.S. government regulation,
general industry and market conditions and growth rates and general domestic and
international economic conditions including interest rate and currency exchange
rate fluctuations. In addition, set forth below is a more detailed discussion of
the risks and uncertainties we face.

The categorization of risks set forth below is meant to help you better
understand the risks facing our business and are 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.

16

RISKS RELATED TO OUR REVENUE AND BUSINESS STRATEGY

OUR REVENUE HAS DECLINED SIGNIFICANTLY DURING THE PAST SEVERAL QUARTERS AND
IF BUSINESS CAPITAL SPENDING, PARTICULARLY FOR ENTERPRISE COMMUNICATIONS
PRODUCTS AND SERVICES, DOES NOT IMPROVE OR DETERIORATES, OUR REVENUE MAY
CONTINUE TO DECLINE AND OUR OPERATING RESULTS MAY BE ADVERSELY AFFECTED.

Our revenue for the quarter ended September 30, 2002 was $1,152 million, a
decrease of 20.1%, or $290 million, from $1,442 million for the quarter ended
September 30, 2001, a sequential decrease of 5.5%, or $67 million, from
$1,219 million for the quarter ended June 30, 2002, and a decrease of 9.9%, or
$127 million, from $1,279 for the quarter ended March 31, 2002.

Our operating results are significantly affected by 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 shown some signs of improvement
recently, we have seen a continued decline in spending on enterprise
communications technology and services by our customers. We believe that
enterprises continue to be concerned about their ability to increase revenues
and thereby increase their profitability. Accordingly, they have tried to
maintain or improve profitability through cost reduction and reduced capital
spending. Because we do not believe that enterprise communications spending will
improve significantly in the near term, we expect there to be continued pressure
on our ability to generate revenue.

To the extent that enterprise communications spending does not improve or
deteriorates, our revenue and operating results will continue to be adversely
affected and we may not be able to comply with the financial covenants included
in our credit facility.

REVENUE GENERATED BY OUR TRADITIONAL BUSINESS, ENTERPRISE VOICE
COMMUNICATIONS PRODUCTS, HAS BEEN DECLINING FOR THE LAST SEVERAL YEARS AND IF WE
DO NOT SUCCESSFULLY IMPLEMENT OUR STRATEGY TO EXPAND OUR SALES IN MARKET
SEGMENTS WITH HIGHER GROWTH RATES, OUR REVENUE AND OPERATING RESULTS MAY
CONTINUE TO BE ADVERSELY AFFECTED.

We have been experiencing declines in revenue from our traditional business,
enterprise voice communications products. We expect, based on various industry
reports, a low growth rate or no growth in the future in the market segments for
these traditional products. We are implementing a strategy to capitalize on the
higher growth opportunities in our market, including converged voice and data
network products, customer relationship management solutions and unified
communication applications. This strategy requires us to make a significant
change in the direction and operations of our company to focus on the
development and sales of these products. The success of this strategy, however,
is subject to many risks, including the risks that:

- we do not develop new products or enhancements to our current products on
a timely basis to meet the changing needs of our customers;

- customers do not accept our products or new technology, or industry
standards develop that make our products obsolete;

- our competitors introduce new products before we do and achieve a
competitive advantage by being among the first to market;

- capital spending by our customers on communications products and services
continues to decline.

Our traditional enterprise voice communications products and the advanced
communications solutions described above are a part of our Converged Systems and
Applications and Small and Medium Business Solutions segments. If we are
unsuccessful in implementing our strategy, the contribution to our results from
these segments may decline, reducing our overall operating results and thereby
requiring a greater need for external capital resources and our Services segment
may be adversely affected to the extent that Services revenues are related to
sales of these products and solutions.

17

WE ARE SIGNIFICANTLY CHANGING THE FOCUS OF OUR COMPANY IN ORDER TO
CONCENTRATE ON THE DEVELOPMENT AND MARKETING OF ADVANCED COMMUNICATIONS
SOLUTIONS, INCLUDING CONVERGED VOICE AND DATA NETWORK PRODUCTS, AND THIS CHANGE
IN FOCUS MAY NOT BE SUCCESSFUL OR MAY ADVERSELY AFFECT OUR BUSINESS.

We are making a significant change in the direction and strategy of our
company to focus on the development and sales of converged voice and data
networks and other advanced communications solutions. In order to implement this
change, we must:

- retrain our sales staff to sell new types of products and services and
improve our marketing of such products and services;

- retrain our Services employees to service the new products and solutions;

- develop relationships with new types of distribution partners;

- research and develop more converged voice and data products and products
using communications media other than voice traffic, which has
historically been our core area of expertise; and

- build credibility among customers that we are capable of delivering
advanced communications solutions beyond our historic product lines; and

- expand our current customer base by selling our advanced communications
solutions to enterprises who have not previously purchased our products.

If we do not successfully implement this change in focus, our operating
results may be adversely affected. However, even if we successfully address
these challenges, our operating results may still be adversely affected if the
market opportunity for advanced communications solutions, including converged
voice and data network products, does not develop in the ways that we
anticipate. Because this market opportunity is in its early stages, we cannot
predict whether:

- the demand for advanced communications solutions and converged voice and
data products will grow as fast as we anticipate;

- new technologies will cause the market to evolve in a manner different
than we expect; or

- we will be able to obtain a leadership or profitable position as this
opportunity develops.

The recent introduction of new IP telephony products demonstrates some of
the risks associated with entering new markets or introducing new technologies.
According to a recent industry study, shipments of IP telephony products dropped
sequentially for the first time in the first calendar quarter of 2002. Some
industry analysts have indicated that the recent introduction of the next
generation of our ECLIPS portfolio of IP hardware and software may have caused
many enterprises who were considering implementing IP telephony systems to
reconsider their deployment plans while they evaluate our ECLIPS announcement as
well a subsequent product announcement from a key competitor.

In addition, as a part of the change in our focus from traditional voice
communications to move advanced communications solutions, we realigned our
operating segments twice during fiscal 2002. Effective January 1, 2002, we
implemented an internal reorganization designed to enable us to understand and
manage our product groups with greater precision. As a result of that
reorganization, our Communications Solutions segments was divided into two
separate segments--Systems and Applications. In the fourth quarter of fiscal
2002, we reevaluated our business model in light of the continued decline in
spending on enterprise communications technology by our customers. This
reevaluation resulted in moving forward in the design of our then existing
operating segments to focus more firmly on aligning them with discrete customer
sets and market segment opportunities in order to optimize revenue growth and
profitability. Accordingly, we reorganized the Systems and Applications segments
to form the Converged Systems and Applications segments and the Small and Medium
Business Solutions segment. We cannot assure that the reorganization of our
businesses will yield the

18

desired benefits or that the implementation of the reorganization will not
disrupt our operations and adversely affect our operating results.

WE MAY NOT BE ABLE TO DISPOSE OF OUR CONNECTIVITY SOLUTIONS BUSINESS ON
TERMS SATISFACTORY TO US OR AT ALL.

In February 2002, we engaged Salomon Smith Barney Inc. to explore
alternatives for our Connectivity Solutions segment, including the possible sale
of the business. Our goal in exploring alternatives for our Connectivity
Solutions segment is to strengthen our focus on higher growth opportunities by
emphasizing our Converged Systems and Applications, Small and Medium Sized
Business Solutions and Services offerings, such as converged voice and data
network products and unified communication and customer relationship management
solutions. In addition, we believe that the proceeds from any sale of our
Connectivity Solutions segment would help enhance our liquidity. We have had
discussions with interested parties concerning a possible sale of Connectivity
Solutions, however, current market conditions make it difficult for us to
realize fair value for this business. Accordingly, we may not be able to dispose
of our Connectivity Solutions segment on terms satisfactory to us or at all. If
we are unable to dispose of our Connectivity Solutions segment on terms
satisfactory to us or at all, our operating results and liquidity may suffer and
we may not be able to focus our business on our Converged Systems and
Applications, Small and Medium Sized Business Solutions and Services offerings,
which also may adversely affect our business.

IF WE DISPOSE OF OUR CONNECTIVITY SOLUTIONS BUSINESS, OUR OPERATING RESULTS
MAY BE ADVERSELY AFFECTED.

Prior to fiscal 2001, our Connectivity Solutions segment provided a
significant contribution to our operating results. Any disposition of our
Connectivity Solutions segment could result in the loss of a historically
significant contributor to our operating results, which could adversely affect
our consolidated operating results. See the segment information included in
Note 16--Operating Segments included in our accompanying Notes to our
Consolidated Financial Statements included elsewhere in this report for further
information regarding the contribution of Connectivity Solutions to our
consolidated operating results.

RISKS RELATED TO OUR LIQUIDITY AND CAPITAL RESOURCES

WE MAY NOT HAVE ADEQUATE OR COST-EFFECTIVE LIQUIDITY OR CAPITAL RESOURCES.

Our cash needs include making payments on and refinancing our indebtedness
and funding working capital, capital expenditures, strategic acquisitions,
business restructuring charges related expenses, employee benefit obligations
and for general corporate purposes. In addition, holders of our Liquid Yield
Option Notes due 2021, or LYONs, may require us to purchase all or a portion of
their LYONs on October 31, 2004, 2006 and 2011 at a price equal to the sum of
the issue price and accrued original issue discount on the LYONs as of the
applicable purchase date. Under the terms of the indenture governing the LYONs,
we may, at our option, elect to pay the purchase price in cash or shares of
common stock or any combination of cash and shares of common stock, although our
credit facility prohibits us from using more than $100 million in cash to redeem
or repurchase the LYONs. Further, upon the occurrence of specific kinds of
change in control events, we may have substantial repayment obligations under
existing debt agreements. Our ability to satisfy our cash needs depends on our
ability to generate cash from operations and access the financial markets, both
of which are subject to general economic, financial, competitive, legislative,
regulatory and other factors that are beyond our control.

Our ability to generate cash from operations is affected by the terms of our
credit agreement, the indenture governing our LYONs, and the indenture governing
our Senior Secured Notes. These instruments impose, and any future indebtedness
may impose, various restrictions and covenants, including financial covenants,
that may limit our ability to respond to market conditions, provide for

19

unanticipated capital investments, make strategic acquisitions or take advantage
of business opportunities.

If we do not generate sufficient cash from operations, we will need to
access the financial markets. External financing may not be available to us on
acceptable terms or at all. Under the terms of any external financing, we may
incur higher than expected financing expenses, and become subject to additional
restrictions and covenants. In addition, our ability to obtain external
financing is affected by the terms of our debt agreements. Our existing debt
agreements include covenants that limit our ability to incur additional
indebtedness. In addition, our credit facility requires us to comply with
certain financial covenants. We have in the past been required to seek
amendments of our credit facilities in order to ensure our compliance with the
financial covenants. If we are unable to comply with our financial covenants and
cannot amend or waive those covenants, an event of default under the credit
facility would occur. If a default occurs, the lenders under our credit facility
could accelerate the maturity of our debt obligations and terminate their
commitments to lend to us. If such a default occurs when our debt obligations
under the credit facility exceed $100 million, our debt obligations in respect
of the $200 million interest rate swaps, the LYONs and the Senior Secured Notes
could be accelerated. In addition, although we currently have a $561 million
five-year credit facility, the terms of the facility require mandatory
commitment reductions over the remaining term of the facility and additional
commitment reductions upon the issuance of debt, sales of assets or repurchase
or redemption of the LYONs, thereby reducing our available liquidity. Currently
there are no funds drawn under our credit facility.

Our ability to obtain external financing and, in particular, debt financing,
is also affected by our debt ratings, which are periodically reviewed by the
major credit rating agencies. Our corporate credit is rated BB- and our
long-term senior unsecured debt is rated B by Standard & Poor's, each with a
negative outlook, and our long-term senior unsecured debt is rated B3 by Moody's
with a negative outlook. Any increase in our level of indebtedness or
deterioration of our operating results may cause a further reduction in our
current debt ratings. These downgrades, among other factors, could impair our
ability to secure additional financing on acceptable terms, and we cannot assure
you that we will be successful in raising any of the new financing on acceptable
terms.

Our ability to obtain equity financing is dependent upon the performance of
our stock price. The market for technology stocks, including our common stock,
has been extremely volatile recently. As of November 29, 2002, the closing price
of our common stock on the New York Stock Exchange was $2.90 per share and the
52-week low trading price for our common stock as of that date was $1.12 per
share. The current trading price of our common stock may hinder our ability in
the near term to obtain equity financing on cost-effective terms or at all.

HOLDERS OF OUR COMMON STOCK COULD EXPERIENCE SUBSTANTIAL DILUTION IF HOLDERS
OF OUR LYONS REQUIRE US TO REPURCHASE A SIGNIFICANT PORTION OF OUR LYONS IN
OCTOBER 2004.

Holders of our LYONs may require us to purchase all or a portion of their
LYONs on October 31, 2004, 2006 and 2011 at a price equal to the sum of the
issue price and accrued original issue discount on the LYONs as of the
applicable purchase date. Under the terms of the indenture governing the LYONs,
we may, at our option, elect to pay the purchase price in cash or, subject to
certain conditions, in shares of common stock or any combination of cash and
common stock, although our existing credit facility prohibits us from using more
than $100 million to redeem or repurchase the LYONs. If the trading price of our
common stock does not improve or deteriorates and we pay a substantial portion
of the purchase price of any LYONs we are required to purchase in October 2004
in shares of our common stock, our stockholders could may suffer significant
dilution.

THE VALUE OF THE ASSETS IN OUR PENSION PLANS HAS DECREASED SIGNIFICANTLY IN
FISCAL 2002 AND AS A RESULT, WE WILL LIKELY INCUR ADDITIONAL EXPENSE AND FUNDING
OBLIGATIONS THAT MAY HAVE AN ADVERSE EFFECT ON OUR FINANCIAL POSITION, RESULTS
OF OPERATIONS AND CASH FLOWS.

20

The recent decline in the global equity markets has resulted in a decrease
in the value of the assets in our pension plans. This decline will likely
adversely affect our related accounting results in future periods through higher
pension expense, additional minimum liabilities with corresponding reductions in
stockholders' equity, and increased cash funding requirements. Based on the
value of the assets in our pension plans as of January 1, 2002, we will be
required to fund approximately $45 million to the plans in fiscal 2003. We
estimate that for fiscal 2004, we will be required to fund more than
$45 million to our pension plans.

OUR LARGEST DEALER MAY NOT BE ABLE TO SATISFY IN FULL ITS OBLIGATIONS TO US
UNDER A SHORT-TERM LINE OF CREDIT.

As of September 30, 2002, Expanets Inc., currently our largest dealer, owed
us approximately $35 million under a short-term line of credit we provided to
Expanets in 2001. The remaining balance under the line of credit was originally
due on December 31, 2002 and under the terms of the related credit agreement,
may be offset by certain obligations we have to Expanets related to the
March 2000 sale of our primary distribution function for voice communications
systems for small and medium-sized enterprises to Expanets. We have had, and
continue to have, discussions with Expanets regarding operational issues related
to the March 2000 sale. Although these issues are unrelated to Expanets' and
Northwestern's obligations under the credit agreement, because of the importance
to us of our relationship with Expanets and the customer base served by
Expanets, in December 2002, we agreed to extend the term of the credit agreement
to February 2003.

Outstanding amounts under the line of credit are secured by Expanets'
accounts receivable and inventory. In addition, Expanets' parent company,
NorthWestern Corporation, has guaranteed up to $50 million of Expanets'
obligations under the credit agreement. A default by NorthWestern of its
guarantee obligations under the credit agreement would constitute a default
under Expanets' dealer agreement with Avaya, resulting in a termination of the
non-competition provisions contained in such agreement and permitting us to sell
products to Expanets' customers.

There can be no assurance that Expanets will be able to comply with the
remaining terms of the credit agreement. In the event Expanets is unable to
comply with the terms of the credit agreement and a default occurs, it may be
costly and time consuming to exercise the remedies available to us. We cannot
assure you that the exercise of such remedies will yield an amount sufficient to
satisfy in full all of Expanets' obligations to us.

RISKS RELATED TO OUR OPERATING RESULTS

DISRUPTION OF, OR CHANGES IN THE MIX OF, OUR PRODUCT DISTRIBUTION MODEL OR
CUSTOMER BASE COULD AFFECT OUR REVENUES AND GROSS MARGINS.

If we fail to manage distribution of our products and services properly, or
if our distributors' financial condition or operations weaken, our revenues and
gross margins could be adversely affected. Furthermore, a change in mix of
direct sales and indirect sales could adversely affect our revenues and gross
margins.

We use a variety of channels to bring our products to customers, including
direct sales, distributors, dealers, value-added resellers and system
integrators. Since each distribution channel has a distinct profile, the failure
to achieve the most advantageous balance in the delivery model for our products
and services could adversely affect our gross margins and operating results.

For example:

- As we respond to demand from certain categories of customers to sell
directly to them, we could risk alienating channel partners and adversely
affecting our distribution model.

- Some of our system integrators may demand that we absorb a greater share
of the risks that their customers may ask them to bear, affecting our
gross margins.

21

- Some of our channel partners may have insufficient financial resources and
may not be able to withstand changes in business conditions, including the
recent economic slowdown. Revenues from indirect sales could suffer if our
distributors' financial condition or operations weaken.

We must manage inventory effectively, particularly with respect to sales to
distributors. Distributors may increase orders during periods of product
shortages, cancel orders if their inventory is too high, or delay orders in
anticipation of new products. Distributors also may adjust their orders in
response to the supply of our products and the products of our competitors that
are available to the distributor and to seasonal fluctuations in end-user
demand. If we have excess inventory, we may have to reduce our prices and write
down inventory, which in turn could result in lower gross margins. In addition,
if sales through indirect channels increase, this may lead to greater difficulty
in forecasting the mix of our products, and to a certain degree, the timing of
orders from our customers.

OUR GROSS MARGINS MAY BE NEGATIVELY AFFECTED, WHICH IN TURN COULD NEGATIVELY
AFFECT OUR OPERATING RESULTS.

Our gross margins have been decreasing recently and may be negatively
affected as result of a number of factors, including:

- increased price competition;

- excess capacity;

- higher material or labor costs;

- warranty costs;

- obsolescence charges;

- loss of cost savings on future inventory purchases as a result of high
inventory levels;

- introductions of new products and costs of entering new markets;

- increased levels of customer services;

- changes in distribution channels; and

- changes in product and geographic mix.

CHANGES IN EFFECTIVE TAX RATES OR THE RECORDING OF INCREASED DEFERRED TAX
ASSET VALUATION ALLOWANCES IN THE FUTURE COULD AFFECT OUR OPERATING RESULTS.

Our effective tax rates in the future could be adversely affected by
earnings being lower or losses being higher than anticipated in countries where
we have tax rates that are lower than the U.S. statutory rate and earnings being
higher or losses lower than anticipated in countries where we have tax rates
that are higher than the U.S. statutory tax rate, changes in our net deferred
tax assets valuation allowance, or by changes in tax laws or interpretations
thereof.

For example, during fiscal 2002 our effective tax rate was adversely
effected by an unfavorable geographic distribution of earnings and losses and we
recorded an increase in our net deferred tax assets valuation allowance of
$364 million. If the geographic distribution of our earnings and losses
continues to be unfavorable in the future, our effective tax rate could be
adversely affected. In addition, based on our assessment of our deferred tax
assets, we determined, based on certain available tax planning strategies, that
$532 million of our deferred tax assets will more likely than not be realized in
the future and no valuation allowance is currently required for this portion of
our deferred tax assets. Should we determine in the future that it is no longer
more likely than not that these assets will be realized, we will be required to
record an additional valuation allowance in connection with these deferred tax
assets and our operating results would be adversely affected in the period such
determination is made.

22

RISKS RELATED TO OUR OPERATIONS

WE PLAN TO EXPAND OUR INTERNATIONAL SALES, WHICH WILL SUBJECT US TO
ADDITIONAL BUSINESS RISKS THAT MAY ADVERSELY AFFECT OUR OPERATING RESULTS DUE TO
INCREASED COSTS.

We intend to continue to pursue growth opportunities internationally. In
many countries outside the United States, long-standing relationships between
our potential customers and their local providers and protective regulations,
including local content requirements and type approvals, create barriers to
entry. In addition, pursuit of such international growth opportunities may
require us to make significant investments for an extended period before returns
on such investments, if any, are realized. International operations are subject
to a number of risks and potential costs, including:

- expenditure of significant amounts of time and money to build a brand
identity in locations where our new brand is not recognized currently
without certainty that we will be successful;

- unexpected changes in regulatory requirements;

- the need to customize marketing and product capabilities to reach
localized customer requirements;

- inadequate protection of intellectual property in certain countries
outside the U.S;

- adverse tax consequences;

- dependence on developing relationships with qualified local distributors,
dealers, value-added resellers and systems integrators; and

- political and economic instability.

Any of these factors could prevent us from increasing our revenue and
otherwise adversely affect our operating results in international markets. We
may not be able to overcome some of these barriers and may incur significant
costs in addressing others. Sales to our international customers are denominated
in either local currency or U.S. dollars, depending on the country or channel
used to fulfill the customers' order. We manage our net currency exposure
through currency forward contracts and currency options which requires us to
incur additional cost for this protection, although we did recognize a loss on
foreign currency transactions of $12 million for the quarter ended June 30, 2002
due to the decline in the U.S. dollar as compared to several other currencies.
In addition to the foreign currency risk for our receivables, there is
additional risk associated with the fact that most of our products or components
are manufactured or sourced from the United States. Should the U.S. dollar
strengthen against a local currency, the impact may hamper our ability to
compete with other competitors, preventing us from increasing our revenue and
otherwise adversely affect our operating results in international markets.

WE HAVE RESTRUCTURED OUR BUSINESS TO RESPOND TO INDUSTRY AND MARKET
CONDITIONS, HOWEVER, THE ASSUMPTIONS UNDERLYING OUR RESTRUCTURING EFFORTS MAY
PROVE TO BE INACCURATE AND WE MAY HAVE TO RESTRUCTURE OUR BUSINESS AGAIN IN THE
FUTURE.

In response to changes in industry and market conditions, we have
restructured our business in the past, are currently restructuring our business
and may again restructure our business in the future to achieve certain cost
savings and to strategically realign our resources. We have based our
restructuring plans on certain assumptions regarding the cost structure of our
business and the nature, severity and duration of the current slowdown in
enterprise communications technology spending which may not prove to be
accurate. We will continue to assess our cost structure and restructuring
efforts based on an ongoing assessment of industry conditions.

Our restructuring initiatives may not be sufficient to meet the changes in
industry and market conditions, and such conditions may continue to deteriorate
or last longer than we expect. In addition, we may not be able to successfully
implement our restructuring initiatives and may be required to refine, expand or
extend our restructuring initiatives, which may require the recording of
additional

23

charges. Furthermore, our workforce reductions may impair our ability to realize
our current or future business objectives. Lastly, costs incurred in connection
with restructuring actions may be higher than the estimated costs of such
actions and/or may not lead to the anticipated cost savings. As a result, our
restructuring efforts may not result in our return to profitability within the
currently expected timeframe.

OUR COLLECTIVE BARGAINING AGREEMENTS EXPIRE DURING FISCAL 2003 AND THE
RENEGOTIATION OF THESE AGREEMENTS MAY ADVERSELY AFFECT OUR OPERATING RESULTS.

Our collective bargaining agreements with the Communications Workers of
America and the International Brotherhood of Electrical Workers and the labor
agreement related to our variable Services workforce each expire on May 31,
2003. If we are unsuccessful in renegotiating new labor agreements, our
operations may be disrupted and our operating results may be adversely affected.
Even if we successfully renegotiate these agreements, the terms of any new
agreements may be less favorable than our current labor agreements, thereby
adversely affecting our operating results.

WE DEPEND ON CONTRACT MANUFACTURERS TO PRODUCE MOST OF OUR PRODUCTS AND IF
THESE MANUFACTURERS ARE UNABLE TO FILL OUR ORDERS ON A TIMELY AND RELIABLE
BASIS, WE WILL LIKELY BE UNABLE TO DELIVER OUR PRODUCTS TO MEET CUSTOMER ORDERS
OR SATISFY THEIR REQUIREMENTS.

We have outsourced substantially all of our manufacturing operations related
to our Converged Systems and Applications and Small and Medium Business
Solutions segments. Our ability to realize the intended benefits of our
manufacturing outsourcing initiative will depend on the willingness and ability
of contract manufacturers to produce our products. We may experience significant
disruption to our operations by outsourcing so much of our manufacturing. If our
contract manufacturers terminate their relationships with us or are unable to
fill our orders on a timely basis, we may be unable to deliver our products to
meet our customers' orders, which could delay or decrease our revenue or
otherwise have an adverse effect on our operations.

THE TERMINATION OF STRATEGIC ALLIANCES OR THE FAILURE TO FORM ADDITIONAL
STRATEGIC ALLIANCES COULD LIMIT OUR ACCESS TO CUSTOMERS AND HARM OUR REPUTATION
WITH CUSTOMERS.

Our strategic alliances are important to our success because they provide us
the ability to offer comprehensive advanced communications solutions, reach a
broader customer base and strengthen brand awareness. We may not be successful
in creating new strategic alliances on acceptable terms or at all. In addition,
most of our current strategic alliances can be terminated under various
circumstances, some of which may be beyond our control. Further, our alliances
are generally non-exclusive, which means our partners may develop alliances with
some of our competitors. We may rely more on strategic alliances in the future,
which would increase the risk to our business of losing these alliances.

IF WE ARE UNABLE TO PROTECT OUR PROPRIETARY RIGHTS, OUR BUSINESS AND FUTURE
PROSPECTS MAY BE HARMED.

Although we attempt to protect our intellectual property through patents,
trademarks, trade secrets, copyrights, confidentiality and nondisclosure
agreements and other measures, intellectual property is difficult to protect and
these measures may not provide adequate protection for our proprietary rights.
Patent filings by third parties, whether made before or after the date of our
filings, could render our intellectual property less valuable. Competitors may
misappropriate our intellectual property, disputes as to ownership of
intellectual property may arise and our intellectual property may otherwise
become known or independently developed by competitors. The failure to protect
our intellectual property could seriously harm our business and future prospects
because we believe that developing new products and technology that are unique
to us is critical to our success. If we do not obtain sufficient international
protection for our intellectual property, our competitiveness in international
markets could be significantly impaired, which would limit our growth and future
revenue.

24

WE MAY ACQUIRE OTHER BUSINESSES OR FORM JOINT VENTURES THAT COULD NEGATIVELY
AFFECT OUR OPERATING RESULTS.

The pursuit of additional technology, services or distribution channels
through acquisitions or joint ventures is a component of our business strategy.
We may not identify or complete these transactions in a timely manner, on a cost
effective basis or at all. Even if we do identify and complete these
transactions, we may not be able to successfully integrate such technology,
services or distribution channels into our existing operations and we may not
realize the benefits of any such acquisition or joint venture. We have limited
experience with acquisition activities and may have to devote substantial time
and resources in order to complete acquisitions. There may also be risks of
entering markets in which we have no or limited experience. In addition, by
making acquisitions, we could assume unknown or contingent liabilities.

WE MAY NOT BE ABLE TO HIRE AND RETAIN HIGHLY SKILLED EMPLOYEES, WHICH COULD
AFFECT OUR ABILITY TO COMPETE EFFECTIVELY AND MAY ADVERSELY AFFECT OUR OPERATING
RESULTS.

We depend on highly skilled technical personnel to research and develop,
market and service new products. To succeed, we must hire and retain employees
who are highly skilled in rapidly changing communications technologies In
particular, as we implement our strategy of focusing on advanced communications
solutions and the convergence of voice and data networks, we will need to:

- retain our researchers in order to maintain a group sufficiently large to
support our strategy to continue to introduce innovative products and to
offer comprehensive advanced communications solutions;

- hire more employees with experience developing and providing advanced
communications products and services; and

- retrain our existing sales force to sell converged and advanced
communications products and services and maintain a workforce for our
Services group with the requisite skills to service these products.

Individuals who have these skills and can perform the services we need to
provide our products and services are scarce. Because the competition for
qualified employees in our industry is intense, hiring and retaining employees
with the skills we need is both time-consuming and expensive. We might not be
able to hire enough of them or to retain the employees we currently employ. Our
inability to hire and retain the individuals we need could hinder our ability to
sell our existing products, systems, software or services or to develop and sell
new products, systems, software or services. If we are not able to attract and
retain qualified individuals, we will not be able to successfully implement many
of our strategies and our business will be harmed.

OUR INDUSTRY IS HIGHLY COMPETITIVE AND IF WE CANNOT EFFECTIVELY COMPETE, OUR
REVENUE MAY DECLINE.

The market for our products and services is very competitive and subject to
rapid technological advances. We expect the intensity of competition to continue
to increase in the future as existing competitors enhance and expand their
product and service offerings and as new participants enter the market.
Increased competition also may result in price reductions, reduced gross margins
and loss of market share. Our failure to maintain and enhance our competitive
position would adversely affect our business and prospects.

We compete with a number of equipment manufacturers and software companies
in selling our communications systems and software. Further, our customer
relationship management professional services consultants compete against a
number of professional services firms. Some of our customers and strategic
partners are also competitors of ours. We expect to face increasing competitive
pressures from both existing and future competitors in the markets we serve and
we may not be able to compete successfully against these competitors.

25

The sizes of our competitors vary across our market segments, Many of our
competitors have greater financial, personnel, capacity and other resources than
we have in each of our market segments or overall. As a result, our competitors
may be in a stronger position to respond quickly to potential acquisitions and
other market opportunities, new or emerging technologies and changes in client
requirements. Competitors with greater financial resources also may be able to
offer lower prices, additional products or services or other incentives that we
cannot match or do not offer. These competitors may be in a stronger position to
respond quickly to new or emerging technologies and may be able to undertake
more extensive marketing campaigns, adopt more aggressive pricing policies and
make more attractive offers to potential customers, employees and strategic
partners.

RISKS RELATED TO CONTINGENT LIABILITIES

WE MAY INCUR LIABILITIES AS A RESULT OF OUR OBLIGATION TO INDEMNIFY, AND TO
SHARE CERTAIN LIABILITIES WITH, LUCENT TECHNOLOGIES INC. IN CONNECTION WITH OUR
SPIN-OFF FROM LUCENT IN SEPTEMBER 2000.

Pursuant to the contribution and distribution agreement we entered into with
Lucent in connection with our spin-off from Lucent on September 30, 2000, 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 "Legal Proceedings" for a description of certain matters
involving Lucent for which we have assumed responsibility under the contribution
and distribution agreement and a description of other matters for which we may
be obligated to indemnify or share the cost with Lucent. We cannot assure you we
will not have to make indemnification or other cost sharing payments to Lucent
in connection with these matters or 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.

We cannot assure you that others will not claim that our proprietary or
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. 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. Claims of intellectual property
infringement also might require us to enter into costly royalty or license
agreements. However, 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 use of our proprietary or licensed systems. A
successful claim of patent or other intellectual property infringement against
us could materially adversely affect our operating results.

26

In addition, third parties may claim that a customer's use of our product's,
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.

Please see "--Legal Proceedings" for a description of patent infringement
indemnification claims made by three customers of our managed services business.

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
significant tax liability if the distribution did not qualify for tax-free
treatment because any of those assumptions or representations were not correct.

Although any U.S. federal income taxes imposed in connection with the
distribution generally would be imposed on Lucent, we could be liable for all or
a portion of any taxes owed for the reasons described below. First, as part of
the distribution, we and Lucent entered into a tax sharing agreement. This
agreement 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 to Lucent under Section 355 of the Internal Revenue Code 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 to the Internal Revenue Service 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. PROPERTIES.

As of September 30, 2002, we operated three manufacturing facilities and one
warehouse location in the United States and three other countries. We also have
557 offices located in 52 countries and twelve research and development
facilities located in Australia, India, Israel, France, Singapore, the United
Kingdom and the United States. Our principal manufacturing facilities are
located in Australia, Ireland and the United States. We also have a 25.5%
interest in a joint venture located in Gandhinagar, India and a 60% interest in
a joint venture in China. Both of these joint ventures are predominantly used as
manufacturing sites and are mostly on owned property. Our facilities have
aggregate floor space of approximately 11.5 million square feet, of which
approximately 4.5 million square feet is owned and approximately 7.0 million
square feet is leased. Our lease terms range from monthly leases to 17 years. We
believe that all of our facilities and equipment are in good condition and are
well maintained and able to operate at present levels.

ITEM 3. LEGAL PROCEEDINGS.

From time to time we are involved in legal proceedings arising in the
ordinary course of business. Other than as described below, we believe there is
no litigation pending against us that could have, individually or in the
aggregate, a material adverse effect on our financial position, results of
operations or cash flows.

27

YEAR 2000 ACTIONS

Three separate purported class action lawsuits are pending against Lucent,
one in state court in West Virginia, one in federal court in the Southern
District of New York and another in federal court in the Southern District of
California. The case in New York was filed in January 1999 and, after being
dismissed, was refiled in September 2000. The case in West Virginia was filed in
April 1999 and the case in California was filed in June 1999, and amended in
2000 to include Avaya as a defendant. We may also be named a party to the other
actions and, in any event, have assumed the obligations of Lucent for all of
these cases under the Contribution and Distribution Agreement. All three actions
are based upon claims that Lucent sold products that were not Year 2000
compliant, meaning that the products were designed and developed without
considering the possible impact of the change in the calendar from December 31,
1999 to January 1, 2000. The complaints allege that the sale of these products
violated statutory consumer protection laws and constituted breaches of implied
warranties.

A class has recently been certified in the West Virginia state court matter.
The certified class in the West Virginia action includes those persons or
entities that purchased, leased or financed the products in question. In
addition, the court also certified as a subclass all class members who had
service protection plans or other service or extended warranty contracts with
Lucent in effect as of April 1, 1998, as to which Lucent failed to offer a Year
2000-compliant solution. The federal court in the New York action has issued a
decision and order denying class certification, dismissing all but certain fraud
claims by one representative plaintiff. No class claims remain in the case at
this time. The federal court in the California action has issued an opinion and
order granting class certification on a provisional basis, pending submission by
plaintiffs of certain proof requirements mandated by the Y2K Act. The class
includes any entities that purchased or leased certain products on or after
January 1, 1990, excluding those entities who did not have a New Jersey choice
of law provision in their contracts and those who did not purchase equipment
directly from the defendants. The complaints seek, among other remedies,
compensatory damages, punitive damages and counsel fees in amounts that have not
yet been specified. At this time, we cannot determine whether that the outcome
of these actions will have a material adverse effect on our financial position,
results of operations or cash flows. In addition, if these cases are not
resolved in a timely manner, they will require expenditure of significant legal
costs related to their defense.

LUCENT SECURITIES LITIGATION

In November 2000, three purported class actions were filed against Lucent in
the Federal District Court for the District of New Jersey alleging violations of
the federal securities laws as a result of the facts disclosed in Lucent's
announcement on November 21, 2000 that it had identified a revenue recognition
issue affecting its financial results for the fourth quarter of fiscal 2000. The
actions purport to be filed on behalf of purchasers of Lucent common stock
during the period from October 10, 2000 (the date Lucent originally reported
these financial results) through November 21, 2000.

The above actions have been consolidated with other purported class actions
filed against Lucent on behalf of its stockholders in January 2000 and are
pending in the Federal District Court for the District of New Jersey. We
understand that Lucent's motion to dismiss the Fifth Consolidated Amended and
Supplemental Class Action Complaint in the consolidated action was denied by the
court in June 2002. As a result of the denial of its motion to dismiss, we
understand that Lucent has filed a motion for partial summary judgment, seeking
a dismissal of a portion of the Fifth Consolidated Amended and Supplemental
Class Action Complaint. The plaintiffs allege that they were injured by reason
of certain alleged false and misleading statements made by Lucent in violation
of the federal securities laws. The consolidated cases were initially filed on
behalf of stockholders of Lucent who bought Lucent common stock between
October 26, 1999 and January 6, 2000, but the consolidated complaint was amended
to include purported class members who purchased Lucent common stock up

28

to November 21, 2000. A class has not yet been certified in the consolidated
actions. The plaintiffs in all these stockholder class actions seek compensatory
damages plus interest and attorneys' fees.

We understand that the federal district court in New Jersey has issued
orders staying all securities actions, as well as those related to the
securities cases, so the parties may discuss a potential global settlement of
claims. We also understand that the parties have had preliminary meetings to
discuss settlement of these cases.

Any liability incurred by Lucent in connection with these stockholder class
action lawsuits may be deemed a shared contingent liability under the
Contribution and Distribution Agreement and, as a result, we would be
responsible for 10% of any such liability. All of these actions are still in the
relatively early stages of litigation and an outcome cannot be predicted and, as
a result, we cannot assure you that these cases will not have a material adverse
effect on our financial position, results of operations or cash flows.

LICENSING ARBITRATION

In March 2001, a third party licensor made formal demand for alleged royalty
payments which it claims we owe as a result of a contract between the licensor
and our predecessors, initially entered into in 1995, and renewed in 1997. The
contract provides for mediation of disputes followed by binding arbitration if
the mediation does not resolve the dispute. The licensor claims that we owe
royalty payments for software integrated into certain of our products. The
licensor also alleges that we have breached the governing contract by not
honoring a right of first refusal related to development of fax software for
next generation products. This matter is currently in arbitration. At this
point, an outcome in the arbitration proceeding cannot be predicted and, as a
result, there can be no assurance that this case will not have a material
adverse effect on our financial position, results of operations or cash flows.

REVERSE/FORWARD STOCK SPLIT COMPLAINTS

In January 2002, a complaint was filed in the Court of Chancery of the State
of Delaware against us seeking to enjoin us from effectuating a reverse stock
split followed by a forward stock split described in our proxy statement for our
2002 Annual Meeting of Shareholders held on February 26, 2002. At the annual
meeting, we obtained the approval of our shareholders of each of three
alternative transactions:

- a reverse 1-for-30 stock split followed immediately by a forward 30-for-1
stock split of our common stock;

- a reverse 1-for-40 stock split followed immediately by a forward 40-for-1
stock split of our common stock;

- a reverse 1-for-50 stock split followed immediately by a forward 50-for-1
stock split of our common stock.

The complaint alleges, among other things, that the manner in which we plan
to implement the transactions, as described in our proxy statement, violates
certain aspects of Delaware law with regard to the treatment of fractional
shares and the proposed method of valuing the fractional interests, and further,
that the description of the proposed transactions in the proxy statement is
misleading to the extent it reflects such violations. The action purports to be
a class action on behalf of all holders of less than 50 shares of our common
stock. The plaintiff is seeking, among other things, damages as well as
injunctive relief enjoining us from effecting the transactions and requiring us
to make corrective, supplemental disclosure. In June 2002, the court denied the
plaintiff's motion for summary judgment and granted our cross-motion for summary
judgment. The plaintiff has appealed the Chancery Court's decision to the
Delaware Supreme Court and, in November 2002, the Delaware Supreme Court

29

affirmed the lower court's ruling in our favor. Subsequently, the plaintiff
filed a motion for re-hearing by the Delaware Supreme Court, arguing that the
court misapplied the law concerning fractional "shares" versus fractional
"interests" to the facts of the case. We have filed our response to the
plaintiff's motion with the Delaware Supreme Court and await its ruling. We
cannot provide assurance that this lawsuit will not impair our ability to
implement any of the transactions.

In April 2002, a complaint was filed against us in the Superior Court of New
Jersey, Somerset County, in connection with the reverse/forward stock splits
described above. The action purports to be a class action on behalf of all
holders of less than 50 shares of our common stock. The plaintiff is seeking,
among other things, injunctive relief enjoining us from effecting the
transactions. In recognition of the then pending action in the Delaware Court of
Chancery, the plaintiff voluntarily dismissed his complaint without prejudice,
pending the outcome of the Delaware action.

COMMISSION ARBITRATION DEMAND

In July 2002, a third party representative made formal demand for
arbitration for alleged unpaid commissions in an amount in excess of
$10 million, stemming from the sale of products from our businesses that were
formerly owned by Lucent involving the Ministry of Russian Railways. As the
sales of products continue, the third party representative may likely increase
its commission demand. The viability of this asserted claim is based on the
applicability and interpretation of a representation agreement and an amendment
thereto, which provides for binding arbitration. This matter is currently
proceeding to arbitration. The matter is in the early stages and an outcome in
the arbitration proceeding cannot be predicted. As a result, there can be no
assurance that this case will not have a material adverse effect on our
financial position, results of operations or cash flows.

LUCENT CONSUMER PRODUCTS CLASS ACTIONS

In several class action cases (the first of which was filed on June 24,
1996), plaintiffs claim that AT&T and Lucent engaged in fraud and deceit in
continuing to lease residential telephones to consumers without adequate notice
that the consumers would pay well in excess of the purchase price of a telephone
by continuing to lease. The cases were removed and consolidated in federal court
in Alabama, and were subsequently remanded to their respective state courts
(Illinois, Alabama, New Jersey, New York and California). In July 2001, the
Illinois state court certified a nationwide class of plaintiffs. The case in
Illinois was scheduled for trial on August 5, 2002. Prior to commencement of
trial, however, we had been advised that the parties agreed to a settlement of
the claims on a class-wide basis. The settlement was approved by the court on
November 4, 2002. Claims from class members must be filed on or about
January 15, 2003.

Any liability incurred by Lucent in connection with these class action cases
will be considered an exclusive Lucent liability under the Contribution and
Distribution Agreement between Lucent and us and, as a result, we are
responsible for 10% of any such liability in excess of $50 million. The amount
for which we may be responsible will not be finally determined until the class
claims period expires.

PATENT INFRINGEMENT INDEMNIFICATION CLAIMS

A patent owner has sued three customers of our managed services business for
alleged infringement of a single patent based on the customers' voicemail
service. These customers' voicemail service offerings are partially or wholly
provided by our managed services business. As a consequence, these customers are
requesting defense and indemnification from us in the lawsuits under their
managed services contracts. This matter is in the early stages and we cannot yet
determine whether the outcome of this matter will have a material adverse effect
on its financial position, results of operations and cash flows.

30

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.

During the fourth quarter of the fiscal year covered by this Annual Report
on Form 10-K, no matter was submitted to a vote of security-holders.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

Information required by this item is incorporated by reference from Note 19
to the Consolidated Financial Statements on page 74 of our 2002 Annual Report.

ITEM 6. SELECTED FINANCIAL DATA.

Information required by this item is incorporated by reference from SELECTED
FINANCIAL DATA on page 17 of our 2002 Annual Report.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

Information required by this item is incorporated by reference from
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS on pages 18 through 41 of our 2002 Annual Report.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Information required by this item is incorporated by reference from the
discussion under the heading "FINANCIAL INSTRUMENTS" in MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS on pages 37
through 39 of our 2002 Annual Report.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Information required by this item is incorporated by reference from the
REPORT OF INDEPENDENT ACCOUNTANTS on page 42 of our 2002 Annual Report and from
our consolidated financial statements and related notes on pages 43 through 75
of our 2002 Annual Report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The following table sets forth information as to persons who serve as our
executive officers.

Information about our Directors, including Mr. Peterson, is incorporated by
reference from the discussion under Proposal 1 set forth in our Proxy Statement
for the 2003 Annual Meeting of Shareholders.

STEPHAN CLARK has been our Group Vice President, Connectivity Solutions
since August 1, 2002. From September 30, 2000 until July 31, 2002, Mr. Clark was
our Vice President, Connectivity Solutions. From January 2000 until
September 30, 2000, he was responsible for global management of Lucent
Technologies Inc.'s ("Lucent") Connectivity Solutions business. From 1994 to
1999, Mr. Clark served as Sales and Marketing Vice President for Lucent's Power
Systems business.

PAMELA F. CRAVEN has been our Senior Vice President, General Counsel and
Secretary since August 1, 2002. From September 30, 2000 until July 31, 2002,
Mrs. Craven was our Vice President, General Counsel and Secretary. Mrs. Craven
was a director of Avaya from its inception until September 30, 2000 and was Vice
President, General Counsel and Secretary of Lucent Technologies Inc.'s
("Lucent") Enterprise Networks Group from March 2000 until September 30, 2000.
Mrs. Craven served as Vice President, Law for Lucent from November 1995 to
April 2000 and was also Secretary of Lucent from February 1, 1999 until
April 2000.

LOUIS J. D'AMBROSIO has been our Group Vice President, Worldwide Services,
since December 19, 2002. Prior to December 19, 2002, Mr. D'Ambrosio served in a
number of executive positions with International Business Machines Corporation,
including most recently as Vice President of Worldwide, Sales and Global
Operations-Software Business. Mr. D'Ambrosio joined IBM in 1985.

MICHAEL A. DENNIS has been our Senior Vice President, Services Strategy and
Business Development since December 19, 2002. From August 1, 2002 through
December 18, 2002, Mr. Dennis was our Group Vice President, Worldwide Services.
Mr. Dennis was our Vice President of Worldwide Operations and Services from
September 30, 2000 until July 31, 2002. Mr. Dennis was Vice President of U.S.
Services for Lucent Technologies Inc.'s ("Lucent") Enterprise Networks Group
from April 2000 until September 30, 2000. He joined AT&T Corp. in July 1981 and
moved to Lucent following its spin-off in 1996. Mr. Dennis has held various
positions at Lucent including Sales Vice President and Field Services Vice
President.

MARYANNE DIMARZO has been our Senior Vice President, Human Resources since
August 1, 2002. Ms. DiMarzo was our Vice President, Human Resources from
September 30, 2000 until June 30, 2002. Ms. DiMarzo was Vice President, Human
Resources, for Lucent Technologies Inc.'s ("Lucent") Enterprise Networks Group
from April 2000 until September 30, 2000. From 1997 until March 200,
Ms. DiMarzo was Human Resources Vice Presidentof the Corporate Centers at
Lucent.

DAVID P. JOHNSON has been our Group Vice President, Small and Medium
Business Solutions since August 1, 2002. Mr. Johnson was our Vice President of
Worldwide Sales from September 30, 2000 until July 31, 2002. Mr. Johnson was
Vice President of Worldwide Sales for Lucent Technologies Inc.'s ("Lucent")
Enterprise Networks Group from April 2000 until September 30, 2000. He joined
AT&T Corp. in 1982 and moved to Lucent following its spin-off in 1996.
Mr. Johnson has held various positions at Lucent, including International
President of Enterprise Networks and Regional President of Asia/Pacific Region.

GARRY K. MCGUIRE, SR. has been our Chief Financial Officer since
September 30, 2000 and our Senior Vice President, Operations, since January 1,
2002. Mr. McGuire was Chief Financial Officer for Lucent Technologies Inc.'s
("Lucent") Enterprise Networks Group from May 2000 until September 30, 2000.
Mr. McGuire was a consultant to Kleiner, Perkins, Caufield and Byers/Broadband
Office from August 1999 to December 1999. He was President and Chief Executive
Officer of Williams

32

Communications Solutions, LLC, from April 1997 to July 1999, and was President
of Nortel Communications Systems, LLC ("Nortel"), from September 1995 until
April 1997.

MICHAEL THURK has been our Group Vice President, Converged Systems and
Applications since August 1, 2002. Mr. Thurk was our GroupVice President,
Systems, from January 2002 until July 31, 2002. From June 1998 until
December 2001, Mr. Thurk held various positions at Ericsson Datacom Inc.,
including President and Executive Vice President, Division Data Backbone and
Optical Networks. Mr. Thurk was President of Xyplex Networks from June 1996
until June 1998.

ITEM 11. EXECUTIVE COMPENSATION

Information required by this item is incorporated by reference from the
discussion under the heading EXECUTIVE COMPENSATION AND OTHER INFORMATION in our
Proxy Statement for the 2003 Annual Meeting of Shareholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

Information required by this item is incorporated by reference from the
discussion under the heading SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT and under the heading EXECUTIVE COMPENSATION AND OTHER INFORMATION-
EQUITY COMPENSATION PLAN INFORMATION AS OF SEPTEMBER 30, 2002 in our Proxy
Statement for the 2003 Annual Meeting of Shareholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Information required by this item is incorporated by reference from the
discussion under the heading CORPORATE GOVERNANCE AND RELATED MATTERS, CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS in our Proxy Statement for the 2003
Annual Meeting of Shareholders.

ITEM 14. CONTROLS AND PROCEDURES.

We have established disclosure controls and procedures to ensure that
material information relating to the Company, including its consolidated
subsidiaries, is made known to the officers who certify the Company's financial
reports and to other members of senior management and the Board of Directors.

Based on their evaluation as of a date within 90 days of the filing date of
this Annual Report on Form 10-K, the principal executive officer and principal
financial officer of Avaya Inc. have concluded that Avaya Inc.'s disclosure
controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934) are effective to ensure that the information
required to be disclosed by Avaya Inc. in reports that it files or submits under
the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in SEC rules and forms.

There were no significant changes in Avaya Inc.'s internal controls or in
other factors that could significantly affect those controls subsequent to the
date of their most recent evaluation.

33

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a) Documents filed as a part of this Annual Report on Form 10-K:

(1) Financial Statements:

(2) Financial Statement Schedules:

(i) Schedule II--Valuation and Qualifying Accounts.............. Page 38 of
this Annual
Report on
Form 10-K

34

REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE

To the Board of Directors of Avaya Inc.:

Our audits of the consolidated financial statements referred to in our
report dated November 27, 2002 appearing in the 2002 Annual Report to
Shareholders of Avaya Inc. (which report and consolidated financial statements
are incorporated by reference in this Annual Report on Form 10-K) also included
an audit of the financial statement schedule listed in Item 15(a)(2) of this
Form 10-K. In our opinion, this financial statement schedule presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.

/s/ PRICEWATERHOUSECOOPERS LLP

PricewaterhouseCoopers LLP
New York, New York
November 27, 2002

Separate financial statements of subsidiaries not consolidated and
50 percent or less owned persons are omitted since no such entity constitutes a
"significant subsidiary" pursuant to the provisions of Regulation S-X,
Article 3-09.

(3) Exhibits:

The following documents are filed as Exhibits to this Annual Report on
Form 10-K or incorporated by reference herein:

- ------------------------

+ Incorporated by reference from Avaya's Registration Statement on Form 10
(Reg. No. 1-15951), declared effective by the Securities and Exchange
Commission on September 15, 2000.

* Filed herewith

(1) Incorporated by reference from Avaya's Registration Statement on Form S-3
(Reg. No. 333-57962), declared effective by the Commission on May 24, 2001.

(2) Incorporated by reference from Avaya's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2001.

(3) Incorporated by reference from Avaya's Registration Statement on Form 8-A
dated October 30, 2001.

(4) Incorporated by reference from Avaya's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002.

(5) Incorporated by reference from Avaya's Current Report on Form 8-K dated
February 27, 2002.

37

(6) Incorporated by reference from Avaya's Current Report on Form 8-K dated
March 28, 2002.

(7) Incorporated by reference from Avaya's Annual Report on Form 10-K for the
year ended September 30, 2001.

(8) Incorporated by reference from Avaya's Annual Report on Form 10-K for the
year ended September 30, 2000.

(9) Incorporated by referemce from Avaya's Quarterly Report on Form 10-Q for the
quarter ended December 31, 2001.

(10) Incorporated by reference from Avaya's Current Report on Form 8-K dated
March 11, 2002.

(11) Incorporated by referemce from Avaya's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2002.

(12) Incorporated by reference from Avaya's Quarterly Report on Form 8-K dated
September 4, 2002.

(13) Incorporated by reference from Avaya's Registration Statement on Form S-4
filed on December 23, 2002.

(b) Reports on Form 8-K during the last quarter of the fiscal year covered by
this Report:

1. August 12, 2002--Item 9. Regulation FD Disclosure--Avaya furnished
information regarding adjustments to its previously announced
financial results for the fiscal quarter ended June 30, 2002.

2. August 14, 2002--Item 9. Regulation FD Disclosure--Avaya furnished
copies of the sworn statements of its principal executive officer and
principal financial officer pursuant to SEC Order No. 4-460.

3. September 3, 2002--Item 5. Other Events--Avaya disclosed amendments
to its five-year credit facility.

38

AVAYA INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN MILLIONS)

39

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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/ GARRY K MCGUIRE SR
--------------------------------------------
Garry K. McGuire
CHIEF FINANCIAL OFFICER AND SENIOR VICE
PRESIDENT, OPERATIONS

December 23, 2002

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the date indicated.

41

CERTIFICATION

I, Donald K. Peterson, certify that:

1. I have reviewed this annual report on Form 10-K of Avaya Inc.

2. Based on my knowledge, this annual 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 annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures 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 annual report is being
prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;

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

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

Date: December 23, 2002

42

CERTIFICATION

I, Garry K. McGuire Sr., certify that:

1. I have reviewed this annual report on Form 10-K of Avaya Inc;

2. Based on my knowledge, this annual 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 annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures 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 annual report is being
prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;

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

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

Date: December 23, 2002

43

EXHIBIT INDEX

- ------------------------

+ Incorporated by reference from Avaya's Registration
Statement on Form 10 (Reg. No. 1-15951), declared effective
by the Securities and Exchange Commission on September 15,
2000.

* Filed herewith

(1) Incorporated by reference from Avaya's Registration
Statement on Form S-3 (Reg. No. 333-57962), declared
effective by the Commission on May 24, 2001.

(2) Incorporated by reference from Avaya's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2001.

(3) Incorporated by reference from Avaya's Registration
Statement on Form 8-A dated October 30, 2001.

(4) Incorporated by reference from Avaya's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2002.

(5) Incorporated by reference from Avaya's Current Report on
Form 8-K dated February 27, 2002.

(6) Incorporated by reference from Avaya's Current Report on
Form 8-K dated March 28, 2002.

(7) Incorporated by reference from Avaya's Annual Report on Form
10-K for the year ended September 30, 2001.

(8) Incorporated by reference from Avaya's Annual Report on Form
10-K for the year ended September 30, 2000.

(9) Incorporated by referemce from Avaya's Quarterly Report on
Form 10-Q for the quarter ended December 31, 2001.

(10) Incorporated by reference from Avaya's Current Report on
Form 8-K dated March 11, 2002.

(11) Incorporated by referemce from Avaya's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2002.

(12) Incorporated by reference from Avaya's Quarterly Report on
Form 8-K dated September 4, 2002.

(13) Incorporated by reference from Avaya's Registration
Statement on Form S-4 filed on December 23, 2002.