##### 



UNITED STATES
 SECURITIES AND EXCHANGE
    COMMISSION
 WASHINGTON, D.C.
    20549
 FORM 10-K
  (Mark One)o

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT
    OF 1934For the fiscal year endedORþ

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the transition period from October 1, 2006 to
    August 31, 2007   Commission File Number:
    000-51748
  AVANADE INC.
 (Exact name of Registrant as
    specified in its charter)
  Washington(State or other jurisdiction of
    incorporation or organization)

91-2032865(I.R.S. Employer Identification
    No.)   2211 Elliott Avenue,
    Suite 200
 Seattle, Washington
    98121
 (Address of principal executive
    offices)
 (206) 239-5600
 (Registrants telephone
    number, including area code)
   None.
  Title of Each Class

Name of Each Exchange on Which Registered    Common stock, par value $0.0001 per
    share
  o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. þ
  Rule 12b-2
  o o þ
  Rule 12b-2 o þ
      DOCUMENTS
    INCORPORATED BY REFERENCE




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##### 



AVANADE
    INC.
  TABLE OF
    CONTENTS
  PagePart I.Item 1.


Business


2Item 1A.


Risk Factors


6Item 1B.


Unresolved Staff Comments


18Item 2.


Properties


18Item 3.


Legal Proceedings


18Item 4.


Submission of Matters to a Vote of Security Holders


19Part II.Item 5.


Market for Registrants Common Equity, Related Shareholder
    Matters and Issuer Purchases of Equity Securities


20Item 6.


Selected Financial Data


22Item 7.


Managements Discussion and Analysis of Financial Condition
    and Results of Operations


23Item 7A.


Quantitative and Qualitative Disclosures about Market Risk


38Item 8.


Financial Statements and Supplementary Data


39Item 9.


Changes in and Disagreements with Accountants on Accounting and
    Financial Disclosure


39Item 9A.


Controls and Procedures


39Item 9B.


Other Information


39Part III.Item 10.


Directors, Executive Officers and Corporate Governance


40Item 11.


Executive Compensation


40Item 12.


Security Ownership of Certain Beneficial Owners and Management
    and Related Shareholder Matters


40Item 13.


Certain Relationships and Related Transactions, and Director
    Independence


41Item 14.


Principal Accountant Fees and Services


41Part IV.Item 15.


Exhibits and Financial Statement Schedules


42Signatures


44




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##### 



PART I
  Form 10-K 11-month 12-month
  Form 10-K, ® Form 10-K
  Disclosure
    Regarding Forward-Looking Statements
  Form 10-K
  Available
    Information
  1-800-SEC-0330. (http://www.sec.gov)
  (www.avanade.com/about/invest.aspx) Form 10-K.
 1




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##### 



(206) 239-5600, (206) 239-5605,
  ITEM 1.
    BUSINESS  Overview
        Solutions
    
    Our largest area of business is driven by our clients
    demand for assistance with application development and
    integration based on the Microsoft .NET platform. Avanade uses
    Microsoft .NET technology in a cost-effective manner to design,
    develop, deploy, integrate, manage and maintain applications and
    Web services. This includes envisioning, developing, deploying,
    integrating and maintaining applications and technology-based
    systems built using the Microsoft .NET platform and Microsoft
    server products.
    Another of our significant business areas is technology
    infrastructure. This encompasses activities assisting
    clients to optimize their infrastructure investments by using
    the Microsoft Windows client and server environments and
    infrastructure server products to streamline 2




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##### 



operations and upgrade, stabilize and secure their information
    technology infrastructure systems. This includes the evaluation,
    upgrade, integration and deployment of core elements of
    enterprise networking, messaging, security and operations based
    on Microsoft technology. Examples of solutions in this area
    include desktop deployment, enterprise messaging and platform
    migrations.  
    A developing area of our business is focused on providing
    packaged and business intelligence solutions for our clients,
    including enterprise resource planning (ERP),
    Microsoft Dynamics CRM (Client Relationship Management) and
    Microsoft-based business intelligence solutions. We have built a
    global practice in providing Microsoft Dynamics-related
    services, including Microsoft Dynamics CRM and Microsoft
    Dynamics  Axapta. In addition, we assist clients with
    optimizing the performance and integration of SAP software
    systems, the development of mobile applications, and the
    development and deployment of business intelligence solutions,
    all deployed on the Microsoft platform within the enterprise
    environment.      Material
    Clients
    Geographic
    Business Areas
    
    Americas.  Our Americas geographic
    business area, which includes the United States and Canada,
    generated approximately 51%, 54% and 51% of our worldwide
    revenues before reimbursements, excluding amounts not
    attributable to the business area, for fiscal years 2007, 2006
    and 2005, respectively.
    Europe.  Our European geographic
    business area includes the United Kingdom, Spain, Italy, France,
    the Netherlands, Germany, Norway, Belgium, Sweden, Denmark,
    Switzerland and 3




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##### 



Finland. Our European area generated approximately 39%, 39% and
    42% of our worldwide revenues before reimbursements, excluding
    amounts not attributable to the business area, for fiscal years
    2007, 2006 and 2005, respectively.  
    Asia Pacific.  Our Asia Pacific
    geographic business area includes Australia, Singapore, Japan,
    Malaysia, Thailand and China. This area generated approximately
    9%, 7% and 7% of our worldwide revenues before reimbursements,
    excluding amounts not attributable to the business area, for
    fiscal years 2007, 2006 and 2005, respectively.    Global
    Delivery Network
    Contracts
    Competition
     4




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
    skills and capabilities of people;
    technical and industry expertise;
    quality of service and product offerings;
    ability to add value;
    reputation and client references;
    price;
    scope of services;
    delivery approach, including an ability to deliver results on a
    timely basis;
    availability of appropriate resources; and
    global reach and scale.    Intellectual
    Property
      Research
    and Innovation
   5




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##### 



Employees
      ITEM 1A.
    RISK
    FACTORS  and/or
  Risks
    that Relate to Our Business
  Our
    results of operations could be negatively affected if we cannot
    expand and develop our services and solutions in response to
    changes in technology and client demand.
    The
    consulting and systems integration and technology markets are
    highly competitive, and we might not be able to compete
    effectively.
    
    Off-shore service providers in lower-cost locations,
    particularly Indian providers, that offer services similar to
    those we offer, often at highly competitive prices;
    Large multinational providers, including the service arms of
    large global technology providers, that offer some or all of the
    consulting and systems integration and technology services that
    we do; 6




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
    Niche solution or service providers that compete with us in a
    specific geographic market, industry segment or service area,
    including companies that provide new or alternative products,
    services or delivery models; and
    Accounting firms that are expanding or re-emphasizing their
    provision of consulting services.        Our
    business could be adversely affected if our clients are not
    satisfied with our services.
    Our
    results of operations may be affected by the rate of growth in
    the use of technology in business and the type and level of
    technology spending by our clients.
   7




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If we
    are unable to attract, retain and motivate employees or
    efficiently utilize their skills, we might not be able to
    compete effectively and will not be able to grow our
    business.
    Our
    results of operations could be affected by economic and
    political conditions and the effects of these conditions on our
    clients businesses and levels of business
    activity.
    Our
    profitability could suffer if we are not able to maintain
    favorable pricing rates.
   8




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
    our clients perceptions of our ability to add value
    through our services;
    competition;
    introduction of new services or products by us or our
    competitors;
    our competitors pricing policies;
    our ability to charge higher prices where market demand or the
    value of our services justifies it;
    our ability to accurately estimate, attain and sustain contract
    revenues, margins and cash flows over long contract periods;
    procurement practices of clients and their use of third-party
    advisors;
    the use by our competitors and our clients of off-shore
    resources to provide lower-cost service delivery
    capabilities; and
    general economic and political conditions in the geographic
    areas in which we operate.  Our
    profitability could suffer if we are not able to maintain
    favorable utilization rates.
    
    our ability to transition employees from completed projects to
    new assignments and to hire and assimilate new employees;
    our ability to forecast demand for our services and thereby
    maintain an appropriate headcount in each of our geographies and
    workforces;
    our ability to manage attrition; and
    our need to devote time and resources to training, professional
    development and other non-chargeable activities.  Our
    profitability could suffer if we are not able to control our
    costs.
    Our
    work with government clients exposes us to additional risks
    inherent in the government contracting
    environment.
    
    Government entities typically fund projects through appropriated
    monies. While these projects are often planned and executed as
    multi-year projects, the government entities usually reserve the
    right to change the scope of or terminate these projects for
    lack of approved funding and at 9




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##### 



their convenience. Changes in government or political
    developments could result in our projects being reduced in scope
    or terminated altogether.  
    Government entities often reserve the right to audit our
    contract costs, including allocated indirect costs, and conduct
    inquiries and investigations of our business practices with
    respect to our government contracts. If the client finds that
    the costs are not reimbursable, then we will not be allowed to
    bill for them, or the cost must be refunded to the client if it
    has already been paid to us. Findings from an audit also may
    result in our being required to prospectively adjust previously
    agreed rates for our work and may affect our future margins.
    If a government client discovers improper or illegal activities
    in the course of audits or investigations, we may become subject
    to various civil and criminal penalties and administrative
    sanctions, which may include termination of contracts,
    forfeiture of profits, suspension of payments, fines and
    suspensions or debarment from doing business with other agencies
    of that government. The inherent limitations of internal
    controls may not prevent or detect all improper or illegal
    activities, regardless of their adequacy. Additionally, an
    allegation of improper activity, even if not proven, could
    result in adverse publicity and damage to our reputation and
    business.
    Government contracts, and the proceedings surrounding them, are
    often subject to more extensive scrutiny and publicity than
    contracts with commercial clients. Negative publicity related to
    our government contracts, regardless of its accuracy, may
    further damage our business by affecting our ability to compete
    for new contracts.
    Political and economic factors such as pending elections, the
    outcome of recent elections, changes in leadership among key
    executive or legislative decision makers, revisions to
    governmental tax policies and reduced tax revenues can affect
    the number and terms of new government contracts signed.
    Terms and conditions of government contracts tend to be more
    onerous and are often more difficult to negotiate than those for
    commercial contracts.    Our
    global operations are subject to complex risks, some of which
    might be beyond our control.
     10




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##### 



Our operating results may be adversely affected by
    fluctuations in foreign currency exchange
    rates.
  
    Because our consolidated financial statements are presented in
    U.S. dollars, we must translate revenues, expenses and
    income, as well as assets and liabilities, into
    U.S. dollars at exchange rates in effect during or at the
    end of each reporting period. Therefore, changes in the value of
    the U.S. dollar against other currencies will affect our
    revenues before reimbursements, operating income and the value
    of balance-sheet items originally denominated in other
    currencies. Declines in the value of other currencies against
    the U.S. dollar could cause our consolidated earnings
    stated in U.S. dollars to be lower than our consolidated
    earnings in local currency and could affect our reported results
    when compared against other periods. Conversely, increases in
    the value of other currencies against the U.S. dollar could
    cause our consolidated earnings stated in U.S. dollars to
    be higher than our consolidated earnings in local currency and
    could affect our reported results when compared against other
    periods. There is no guarantee that our financial results will
    not be adversely affected by currency exchange rate fluctuations.
    In some countries we could be subject to strict restrictions on
    the movement of cash and the exchange of foreign currencies,
    which could limit our ability to use this cash across our global
    operations.
    As we continue to leverage our global delivery model, more of
    our expenses are incurred in currencies other than those in
    which we bill for the related services. An increase in the value
    of certain currencies, such as the Indian rupee, against the
    U.S. dollar could increase costs for delivery of services
    at off-shore sites by increasing labor and other costs that are
    denominated in local currency, and there can be no assurance
    that our contractual provisions would offset this impact. This
    could result in a decrease in the profitability of our contracts
    that are utilizing delivery center resources.  International hostilities, terrorist activities, natural
    disasters and infrastructure disruptions could prevent us from
    effectively serving our clients and thus adversely affect our
    operating results.
 11




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##### 



We could have liability or our reputation could be damaged if
    we do not protect client data or information systems or if our
    information systems are breached. and/or
  Our global operations expose us to numerous and sometimes
    conflicting legal and regulatory requirements, and violation of
    these regulations could harm our
    business. and/or
    If we
    are unable to manage the organizational challenges associated
    with the expansion of our Company, we might be unable to achieve
    our business objectives.
   12




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##### 



Our
    business could be negatively affected if we incur legal
    liability in connection with providing our solutions and
    services.
    If our
    pricing structures do not accurately anticipate the cost and
    complexity of performing our work, then our contracts could be
    unprofitable.
  time-and-materials
  Our
    results of operations could be adversely affected if our clients
    terminate their contracts with us on short notice.
  project-by-project
 13




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##### 



If we
    are unable to collect our receivables or unbilled services, our
    results of operations and cash flows could be adversely
    affected.
  and/or
  We
    could be subject to liabilities if our subcontractors or the
    third parties with whom we partner cannot deliver their project
    contributions on time or at all.
    We
    have only a limited ability to protect our intellectual property
    rights, which are important to our success.
   14




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Our
    services or solutions could infringe upon the intellectual
    property rights of others or we might lose our ability to
    utilize the intellectual property of others.
      Consolidation
    in the industries that we serve could adversely affect our
    business.
    There
    will not be a consistent pattern in our financial results from
    quarter to quarter, which may result in increased volatility of
    the value of our stock.
   15




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##### 



Risks
    That Relate to Our Relationships with Accenture, Microsoft and
    Their Related Entities
  Loss
    of our significant corporate relationships could reduce our
    revenue and growth prospects.
    Because
    we are controlled by Accenture, we have limited ability to set
    our own independent strategies, and our business strategy and
    direction may be dictated by Accentures overall business
    strategy.
    
    control our management and policies; and
    determine the outcome of most corporate transactions or other
    matters submitted to the Board of Directors for approval,
    including mergers or acquisitions less than $100,000.  We
    rely on Accenture for the majority of our revenue. The loss of
    that revenue would have a significant adverse impact on our
    results of operations and may affect our ability to continue to
    operate.
    
    changes in economic conditions may decrease the demand from
    Accenture for our services;
    a lack of any contractual obligation by Accenture to continue
    using our services, which allows Accenture to decrease or stop
    its use of our services at any time without penalty;
    certain internal Accenture practices are currently in place that
    encourage the use of our services, and these practices may be
    changed or modified; and 16




---



##### 




    we may be incurring lower sales and marketing costs due to our
    relationships with Accenture and Microsoft. In the absence of
    such relationship, sales and marketing costs could be higher.  Our
    global delivery network relies on Accenture, and the loss of
    that network would increase our operating
    expenses.
    
    the termination or material modification of this relationship at
    any time on short notice by Accenture; and
    efforts to recruit and retain personnel may be compromised by
    the individuals not having a direct employment relationship with
    us.  Microsoft
    has certain minority rights, and may exercise those rights to
    protect its own interests which may not align with our
    own.
  Form 10-K,
  
    the issuance of equity in the Company to certain competitors of
    Microsoft;
    the acquisition or disposition of assets in excess of
    $100,000; and
    certain business activities identified in the Third Amended and
    Restated Contribution and Stockholders Agreement, including
    limiting our ability to enter into a line of business not
    related to Microsoft technology.  We are
    committed to using Microsoft-related technologies, and our
    inability to use those technologies would adversely impact our
    results of operations.
    
    general acceptance of competitive products may put us at a
    competitive disadvantage to other consulting companies that are
    able to focus on such non-Microsoft-based technology;
    our business is dependent, in part, upon continued growth in the
    use of Microsoft-based technology by our clients and prospective
    clients and this demand for Microsoft-based technologies may
    grow at a reduced rate or decrease, thus reducing the market for
    our services;
    we may be perceived as having a narrow focus that may limit our
    ability to attract new clients;
    Microsoft may acquire or significantly grow its own consulting
    capacity that directly competes with us; and
    we have access to certain Microsoft assets and information and
    loss of that access could negatively impact our business. 17




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Risks
    that Relate to Our Employee Put Options
  All
    stock issued pursuant to awards granted under our stock option
    plans is subject to certain put rights, which, if exercised,
    could have a materially adverse impact on our
    liquidity.
    ITEM 1B.
    UNRESOLVED
    STAFF COMMENTS    ITEM 2.
    PROPERTIES    ITEM 3.
    LEGAL
    PROCEEDINGS     18




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##### 



ITEM 4.
    SUBMISSION
    OF MATTERS TO A VOTE OF SECURITY HOLDERS    Executive
    Officers of the Registrant
  Mitchell C. Hill
  Dennis Knapp
  Ang Miah Boon
  Howard Kilman
  Ashish Kumar
  Adam Warby
  Andrew White
 19




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##### 



PART II
  ITEM 5.
    MARKET
    FOR REGISTRANTS COMMON EQUITY, RELATED SHAREHOLDER MATTERS
    AND ISSUER PURCHASES OF EQUITY SECURITIES      Recent
    Sales of Unregistered Securities
    Purchases
    of Common Shares
    Approximate DollarValue of SharesTotal Number of

that May Yet BeShares Purchased as

Purchased UnderTotal Number of

Average

Part of Publicly

PubliclyShares Purchased

Price Paid

Announced Plans or

Announced PlansPeriod(2)

(1)

per Share

Programs

or ProgramsJuly 1, 2007July 31, 2007


66,174


$
8.84







August 1, 2007August 31, 2007


29,792


$
8.84







Total


95,966


$
8.84







    (1)
    During the fourth quarter of fiscal 2007, the Company purchased
    95,966 of its common shares in transactions unrelated to
    publicly announced share plans or programs. These transactions
    included the acquisition of 61,735 shares of the Companys
    common stock via share withholding for payroll for obligations
    due from employees in connection with the delivery of shares of
    the Company common stock under the Companys various equity
    share plans in addition to 34,231 shares surrendered to the
    Company to pay the exercise price in connection with so-called
    stock-swap exercises of employee stock options.(2)
    The Companys fiscal fourth quarter includes only two
    months due to the change, effective August 31, 2007, in the
    Companys fiscal year end from September 30 to
    August 31. 20




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##### 



Performance
    Graph
    Comparision
    of Cumulative Total Return
  
  March 21,


September 29,


August 31,2006


2006


2007Avanade Inc.(1)

$
100


$
119
(2)

$
158Peer Group

$
100


$
108


$
116S&P 500 Index

$
100


$
104


$
117    (1)
    
    There is no public market for our
    common stock. The calculations of our share price reflected
    herein are prepared by a third party in accordance with the
    Boards normal procedures and then approved by the Board.
    The determination of the fair market value of our shares
    involves judgment, and is based, in part, on prospective
    financial information supported by managements estimates
    of future operating results and other information from various
    public, financial and industry sources.(2)
    
    The return on shares of our common
    stock calculated for the period from March 21, 2006 to
    September 29, 2006 assumed there was no material change in
    value between March 21, 2006 and March 31, 2006. 21




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##### 



ITEM 6.
    SELECTED
    FINANCIAL DATA    Eleven MonthsEndedAugust 31,


Year Ended September 30,2007


2006(1)


2005


2004


2003(in thousands)Income Statement Data:Revenues:Revenues before reimbursements:Related parties

$
440,552


$
354,566


$
288,368


$
186,808


$
106,528Other


152,994



129,298



98,946



90,738



65,983593,546



483,864



387,314



277,546



172,511Reimbursements:Related parties


22,465



19,747



18,064



12,383



8,135Other


17,521



14,195



16,933



9,100



8,17339,986



33,942



34,997



21,483



16,308Revenues

$
633,532


$
517,806


$
422,311


$
299,029


$
188,819Operating expenses

$
554,399


$
463,288


$
375,349


$
273,857


$
190,043Income (loss) from continuing operations before income taxes

$
82,961


$
56,598


$
43,542


$
24,226


$
(842
)(Benefit) provision for income taxes


(29,567
)


9,888



12,270



7,688



838Income (loss) from discontinued operations including tax expense
    of zero, zero, $2, $33 and $70, respectively










140



(2,085
)


(1,134
)Net income (loss)

$
112,528


$
46,710


$
31,412


$
14,453


$
(2,814
)    (1)
    
    Includes the impact of Statement of
    Financial Accounting Standards No. 123R, Share-Based
    Payment. For additional information, refer to Note 6
    (Share-Based Compensation) to our Consolidated Financial
    Statements under Financial Statements and Supplementary
    Data.  22




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##### 



As ofAugust 31,


As of September 30,2007


2006


2005


2004


2003(in thousands)Balance Sheet Data:Cash and cash equivalents

$
140,345


$
72,898


$
55,256


$
18,630


$
12,998Working capital


195,138



121,062



79,253



43,758



30,186Total assets


381,087



240,857



179,474



137,470



93,297Long-term debt, net of current portion


















9,938Shareholders equity


82,949



25,627



29,655



21,215



31,251   ITEM 7.
    MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS  The following discussion and analysis should be read in
    conjunction with our Consolidated Financial Statements and
    related Notes included elsewhere in this Transition Report on
    Form 10-K.
    This discussion and analysis also contains forward-looking
    statements and should also be read in conjunction with the
    disclosures and information contained in Disclosure
    Regarding Forward-Looking Statements and Risk
    Factors in this Transition Report on
    Form 10-K.
  We use the terms Avanade, we,
    our Company, our and us in
    this report to refer to Avanade Inc. and its subsidiaries. We
    use the term Accenture to refer to our majority
    shareholder, Accenture LLP, which is a subsidiary of Accenture
    Ltd, a Bermuda holding company, and its affiliates. We use the
    term Microsoft to refer to Microsoft Corporation, a
    Washington corporation, a minority shareholder, and its
    affiliates. All amounts expressed in dollars are in thousands of
    dollars unless otherwise indicated. For example, a reference to
    $40,800 means $40.8 million.
  Change in
    Fiscal Year
  Form 10-K 11-month 12-month
  Overview
     23




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##### 



Eleven MonthsEnded

Year EndedAugust 31,

September 30,2007

2006

2005Related-party revenues before reimbursements:Accenture


67
%


67
%


67
%Microsoft


7
%


6
%


8
%          24




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##### 



Critical
    Accounting Policies and Estimates
   25




---



##### 



Revenue
    Recognition
  81-1, Accounting for Performance of Construction-Type and Certain
    Production-Type Contracts.
  and/or No. 00-21, Accounting for Revenue Arrangements with Multiple
    Deliverables.
  No. 99-19, Reporting Revenues Gross as a Principal versus Net as an
    Agent (EITF 99-19). EITF 99-19.
        Income
    Taxes
   26




---



##### 



Share-Based
    Compensation
   27




---



##### 



Accounting for
    Stock-Based Compensation
  Share-Based Payment
  Redeemable
    Common Stock and Employee Put Rights
   28




---



##### 



Revenues
    by Segment/Geographic Business Area
      Percent of Total RevenuesEleven








Percent


Before Reimbursements forMonths Ended


Year Ended


Percent


Increase


the Fiscal Years EndedAugust 31,


September 30,


Increase


Local


August 31,


September 30,2007


2006


US$


Currency


2007


2006SEGMENTAmericas

$
304,066


$
263,473



15
%


15
%


51
%


55
%Europe


233,410



190,446



23
%


12
%


39
%


39
%Asia Pacific


53,680



33,233



62
%


45
%


9
%


7
%Corporate and eliminations(1)


2,390



(3,288
)


n/m



n/m



1
%


(1
)%Total revenues before reimbursements


593,546



483,864



23
%


17
%


100
%


100
%Reimbursements


39,986



33,942



18
%


14
%Total revenues

$
633,532


$
517,806



22
%


17
%    n/m = not meaningful
 (1)
    
    Corporate and eliminations include
    inter-company eliminations and other revenues associated with
    our GDN resources, which are not attributable to a specific
    geographic business areas.    Eleven MonthsEnded

Year EndedAugust 31,

September 30,2007

2006

2005United States


45
%


47
%


47
%United Kingdom


13
%


17
%


22
%  29




---



##### 



Eleven
    Months Ended August 31, 2007 Compared to Twelve Months
    Ended September 30, 2006
  Revenues
          Operating
    Expenses
    Cost
    of Services
   30




---



##### 



Selling,
    General and Administrative Costs
    Operating
    Income (loss)
    Eleven MonthsEnded


Year EndedAugust 31,


September 30,2007


2006


IncreaseAmericas

$
76,495


$
58,431


$
18,064Europe


31,429



29,989



1,440Asia Pacific


444



(1,127
)


1,571Corporate and eliminations


(29,235
)


(32,775
)


3,540$
79,133


$
54,518


$
24,615     
    Americas operating income increased primarily due to improved
    contract margins from our Global Delivery Network resources.
    Europe operating income increased primarily due to strong
    revenue growth, improved contract margins in Spain, Italy, and
    improved operating margins in developing markets including
    Denmark and Norway, partially offset by higher compensation
    costs and royalty and management fees.
    Asia Pacific operating income increased primarily due to strong
    revenue growth and improved contract margins in Australia and
    Japan, partially offset by higher royalty and management fees
    and compensation costs.
    Corporate and eliminations operating loss decreased primarily
    due to increased intercompany royalty and management fees and
    improved contract margins from Global Delivery Network resources
    in our business with Accenture, partially offset by higher
    compensation and marketing costs.  Interest
    Income
   31




---



##### 



Other
    Income (Expense)
    (Benefit)
    Provision for Income Taxes
    Year
    Ended September 30, 2006 Compared to Year Ended
    September 30, 2005
    Percent of TotalRevenues BeforePercent


ReimbursementsPercent


Increase


for the YearYear Ended


Increase


(Decrease)


EndedSeptember 30,


(Decrease)


Local


September 30,2006


2005


US$


Currency


2006


2005SEGMENTAmericas

$
263,473


$
199,791



32
%


31
%


55
%


52
%Europe


190,446



164,301



16
%


19
%


39
%


42
%Asia Pacific


33,233



25,707



29
%


32
%


7
%


7
%Corporate and eliminations(1)


(3,288
)


(2,485
)


n/m



n/m



(1
)%


(1
)%Total revenues before reimbursements


483,864



387,314



25
%


26
%


100
%


100
%Reimbursements


33,942



34,997



(3
)%


(3
)%Total revenues

$
517,806


$
422,311



23
%


23
%    n/m = not meaningful
 (1)
    
    Corporate and eliminations include
    inter-company eliminations and other revenues not directly
    attributable to the segments.  Revenues
       32




---



##### 



Operating
    Expenses
  Share Based Payment
  Cost
    of Services
      Selling,
    General and Administrative Costs
    Operating
    Income (loss)
   33




---



##### 



Year Ended September 30,Increase2006


2005


(Decrease)Americas

$
58,431


$
31,860


$
26,571Europe


29,989



31,552



(1,563
)Asia Pacific


(1,127
)


(1,430
)


303Corporate and eliminations


(32,775
)


(15,020
)


(17,755
)$
54,518


$
46,962


$
7,556     
    Americas operating income increased primarily due to a 32%
    increase in revenues before reimbursements, improved gross
    margins and reduction in payroll-related costs as a percentage
    of revenues before reimbursements.
    Europe operating income decreased primarily due to higher costs
    related to increased headcount, partially offset by reduced use
    of sub-contractors.
    Asia Pacific operating loss was lower primarily due to improved
    gross margins in Japan and Australia, partially offset by higher
    costs related to increased headcount in Japan.
    Corporate and eliminations increased primarily due to higher
    costs related to research and innovation activities, increased
    headcount and an increase in share-based compensation expense as
    a result of the adoption of SFAS No. 123R.  Interest
    Income
    Other
    Income (Expense)
    (Benefit)
    Provision for Income Taxes
     34




---



##### 



Liquidity
    and Capital Resources
      Eleven MonthsEnded


Year EndedAugust 31,


September 30,


2007 to 20062007


2006


2005


ChangeNet cash provided by (used in):Operating activities

$
86,449


$
29,030


$
59,364


$
57,419Investing activities


(8,716
)


(5,250
)


(11,679
)


(3,466
)Financing activities


(13,042
)


(4,857
)


(9,670
)


(8,185
)Effect of exchange rate changes on cash and cash equivalents


2,756



(1,281
)


(1,389
)


4,037Net increase in cash and cash equivalents

$
67,447


$
17,642


$
36,626


$
49,805   Operating activities:
  Investing activities:
  Financing activities:
  Borrowing
    Facilities
    Foreign
    Exchange Instruments
  Accounting for Derivative Instruments
    and Hedging Activities.
 35




---



##### 



Redeemable
    Common Stock and Employee Put Rights
  30-day
        Available
    Funds and Future Cash Flows
   36




---



##### 



Obligations
    and Commitments
    Payment due by periodLess than








More thanContractual Cash Obligations

Total


1 year


1-3 years


3-5 years


5 yearsOperating leases(1)

$
20,771


$
5,398


$
7,067


$
4,206


$
4,100Other commitments(2)


182



182











Total

$
20,953


$
5,580


$
7,067


$
4,206


$
4,100    (1)
    
    See Note 9 (Lease Commitments)
    to our Consolidated Financial Statements under Financial
    Statements and Supplementary Data.(2)
    
    Other commitments include
    information technology obligations in the ordinary course of
    business that we cannot cancel or where we would be required to
    pay a termination fee in the event of cancellation. Amounts
    shown do not include recourse that we may have to recover
    termination fees or penalties from clients.  Off-Balance
    Sheet Arrangements
  and/or
  Recently
    Adopted Accounting Pronouncements
  Considering the
    Effects of Prior Year Misstatements when Quantifying
    Misstatements in Current Year Financial Statements
  New
    Accounting Pronouncements
  No. 06-2, Accounting for Sabbatical Leave and Other Similar Benefits
    Pursuant to FASB
 37




---



##### 



Statement No. 43 (EITF 06-2). EITF 06-2 EITF 06-2 EITF 06-2 EITF 06-2 EITF 06-2
  Accounting for Uncertainty in Income Taxes  an
    Interpretation of FASB Statement No. 109
    Fair Value Measurements
  ITEM 7A.  QUANTITATIVE
    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    Foreign
    Currency Risk
  and/or
 38




---



##### 



Interest
    Rate Risk
    ITEM 8.
    FINANCIAL
    STATEMENTS AND SUPPLEMENTARY DATA  page F-1,
  ITEM 9.
    CHANGES
    IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
    FINANCIAL DISCLOSURE    ITEM 9A.
    CONTROLS
    AND PROCEDURES  Evaluation
    of Disclosure Controls and Procedures
  Form 10-K, Rule 13a-15(e) 15d-15(e)
  Changes
    in Internal Control Over Financial Reporting
    ITEM 9B.
    OTHER
    INFORMATION   39




---



##### 



PART III
  ITEM 10.
    DIRECTORS,
    EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE    Section 16(a)
    Beneficial Ownership Reporting Compliance
    Code of
    Business Ethics
    ITEM 11.
    EXECUTIVE
    COMPENSATION    ITEM 12.
    SECURITY
    OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
    RELATED SHAREHOLDER MATTERS    Securities
    Authorized for Issuance under Equity Compensation
    Plans
   40




---



##### 



Number of SharesRemaining AvailableNumber of Shares to





for Future Issuancebe Issued Upon


Weighted Average


(Excluding SharesExercise of


Exercise Price of


Reflected in
    1stPlan Category

Outstanding Options


Outstanding Options


Column)Equity compensation plans not approved by shareholders:


N/A







N/AEquity compensation plans approved by shareholders:Employee Stock Option Plan


9,759,087


$
2.98



2000 Stock Incentive Plan


5,156,463


$
2.45



7,535,799Total


14,915,550


$
2.79



7,535,799     ITEM 13.
    CERTAIN
    RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
    INDEPENDENCE      ITEM 14.
    PRINCIPAL
    ACCOUNTANT FEES AND SERVICES   41




---



##### 



PART IV
  ITEM 15.
    EXHIBITS AND
    FINANCIAL STATEMENT SCHEDULES    1.  Financial
    Statements as of August 31, 2007 and September 30,
    2006 and for the eleven months ended August 31, 2007 and
    for the two years ended September 30, 2006 and
    2005  Included in Part II of this Transition
    Report on
    Form 10-K:
            2.  Financial
    Statement Schedules:
    3.  Exhibit Index:
  ExhibitNumber

Description of Document3.1

Restated Articles of Incorporation of the Company, dated as of
    December 4, 2003(1)3.2

Amended and Restated By-laws of the Company, dated as of
    February 29, 2003(1)4.1

Employee Stockholders Agreement, dated as of August 4,
    2000, by and among Avanade, Accenture, Microsoft and those
    parties listed on Attachment A thereunder(1)4.2

Employee Stock Option Plan, as amended and restated on
    May 13, 2004(1)4.3

Form of Investment Representation Statement(1)4.4

2000 Stock Incentive Plan, as amended and restated on
    May 13, 2004(1)4.5

Third Amended and Restated Contribution and Stockholders
    Agreement among Accenture LLP, Accenture Ltd, Accenture
    International SARL, Microsoft Corporation and Avanade Inc.,
    dated February 14, 2005(1)4.6

Stock Repurchase Agreement between Microsoft Corporation,
    Microsoft AVN Holdings, Inc. and Avanade Inc., dated as of
    December 21, 2001(1)4.7

Stock Purchase Agreement between Microsoft Corporation,
    Microsoft AVN Holdings, Inc. and Accenture Ltd, dated as of
    December 21, 2001(1)4.8

Stock Purchase Agreement between Microsoft Corporation and
    Avanade Inc., dated as of February 14, 2005(1)4.9

Form of Early Exercise Notice and Stock Purchase Agreement
    (filed herewith)4.10

Specimen Stock Certificate of Avanade Inc.(2)10.1

Employment Agreement, dated as of August 4, 2000, between
    Avanade Inc. and Mitchell C. Hill(1)10.2

Employment Agreement, dated as of November 9, 2001, between
    Avanade Inc. and Dennis K. Knapp (filed herewith)10.3

Employment Agreement, effective December 11, 2006, between
    Avanade Asia Pte. Ltd and Ang Miah Boon (filed herewith)10.4

Employment Agreement, dated as of November 9, 2001, between
    Avanade Inc. and Howard Kilman(1)10.5

Employment Agreement, dated as of August 4, 2000, between
    Avanade Inc. and Ashish Kumar(1)10.6

Employment Agreement, dated as of March 5, 2001, between
    Avanade Inc. and Adam Warby(1) 42




---



##### 



ExhibitNumber

Description of Document10.7

Confidential Information, Inventions and Non-Competitive
    Agreement, dated November 1, 2003, between Avanade UK Ltd.
    and Adam Warby (filed herewith)10.8

Employment Agreement, dated May 10, 2002, between Avanade
    UK Ltd. and Andrew White(1)10.9

Confidential Information, Inventions and Non-Competitive
    Agreement, dated September 5, 2000, between Avanade UK Ltd.
    and Andrew White (filed herewith)10.10

Deferred Compensation Plan (filed herewith)10.11

Form of Avanade Inc. Financial Protection Policy(1)10.12

Form of Avanade Inc. Business Protection Agreement(1)10.13

Line of Credit Agreement, dated February 7, 2003, between
    Avanade Inc. and Accenture Finance GMBH(2)10.14

Avanade Inc. Long-Term Incentive Plan (incorporated by reference
    to Exhibit 10.1 to the Companys
    Form 8-K,
    filed June 23, 2006)10.15

Form of Avanade Valuation Unit Grant Notice (incorporated by
    reference to Exhibit 10.2 to the Companys
    Form 8-K,
    filed June 23, 2006)10.16

Form of Avanade Valuation Unit Grant Notice 
    Australia (incorporated by reference to Exhibit 10.3 to the
    Companys
    Form 8-K,
    filed June 23, 2006)10.17

Form of Avanade Valuation Unit Agreement (incorporated by
    reference to Exhibit 10.4 to the Companys
    Form 8-K,
    filed on June 23, 2006)14.1

Avanade Code of Business Ethics (incorporated by reference to
    the like-numbered exhibit to the Companys Annual Report on
    Form 10-K
    for the fiscal year ended September 30, 2006.)21.1

Subsidiaries of the Avanade Inc. (filed herewith)31.1

Certification of Chief Executive Officer pursuant to
    Rule 13a-14(a)
    or 15d-14(a) of the Securities Exchange Act of 1934, as adopted
    pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
    (filed herewith)31.2

Certification of Chief Financial Officer pursuant to
    Rule 13a-14(a)
    or 15d-14(a) of the Securities Exchange Act of 1934, as adopted
    pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
    (filed herewith)32.1

Certification of the Chief Executive Officer and the Chief
    Financial Officer pursuant to 18 U.S.C Section 1350, as
    adopted pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002 (filed herewith)    (1)
    
    Incorporated by reference to the
    like-numbered exhibit to the Companys Form 10, filed
    January 20, 2006.(2)
    
    Incorporated by reference to the
    like-numbered exhibit to the Companys Form 10/A,
    filed March 17, 2006. 43




---



##### 



SIGNATURES
    Date:  November 20, 2007

Avanade Inc.   By:
    /s/  Mitchell
    C. Hill   Title:
    Chief Executive Officer  POWER OF
    ATTORNEY
  Form 10-K Form 10-K.
    Signature

Title/s/  Robert
    N. FrerichsRobert
    N. Frerichs

Chairman of the Board/s/  Mitchell
    C. HillMitchell
    C. Hill

Chief Executive Officer and Director
    (principal executive officer)/s/  Karl-Heinz
    FlötherKarl-Heinz
    Flöther

Director/s/  Basilio
    RuedaBasilio
    Rueda

Director/s/  Simon
    WittsSimon
    Witts

Director/s/  Pamela
    J. CraigPamela
    J. Craig

Director/s/  Dennis
    K. KnappDennis
    K. Knapp

Chief Financial Officer 
    (principal financial officer and
    principal accounting officer)




---



##### 



AVANADE
    INC.
  INDEX TO
    CONSOLIDATED FINANCIAL STATEMENTS
  PageReport of Independent Registered Public Accounting Firm


F-2Consolidated Financial Statements as of August 31, 2007 and
    September 30, 2006 and for the eleven months ended
    August 31, 2007 and fiscal years ended September 30,
    2006 and 2005:Consolidated Balance Sheets


F-3Consolidated Income Statements


F-4Consolidated Shareholders Equity and Comprehensive Income
    Statements


F-5Consolidated Cash Flows Statements


F-6Notes to Consolidated Financial Statements


F-7  F-1




---



##### 



REPORT
    OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  To the Board of Directors and Shareholders
    Avanade Inc.:
          /s/  KPMG LLP
    Seattle, Washington
 November 20, 2007
 F-2




---



##### 



AVANADE
    INC.
  CONSOLIDATED BALANCE SHEETS
  August 31,
    2007 and September 30, 2006
 (In
    thousands of U.S. dollars, except share and per share
    amounts)
  August 31,


September 30,2007


2006ASSETSCURRENT ASSETS:Cash and cash equivalents

$
140,345


$
72,898Receivables from clients, net of allowances of $365 and $1,303,
    respectively


28,604



21,253Due from related parties


62,094



55,426Unbilled services to clients


19,874



21,256Unbilled services to related parties


41,551



32,101Deferred income taxes, net


24,529



1,394Other current assets


5,218



6,116Total current assets


322,215



210,444NON-CURRENT ASSETS:Property and equipment, net of accumulated depreciation of
    $40,707 and $36,487, respectively


10,675



10,004Goodwill


10,196



11,975Other intangible assets, net of accumulated amortization of
    $4,960 and $4,250, respectively


571



1,281Deferred income taxes, net


32,528



5,556Other non-current assets


4,902



1,597Total non-current assets


58,872



30,413TOTAL ASSETS

$
381,087


$
240,857LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Due to related parties

$
7,405


$
9,999Accounts payable


18,148



14,204Deferred revenues


3,771



3,009Accrued payroll and related benefits


59,500



39,890Accrued expenses


17,166



12,747Income taxes payable


13,209



8,251Other current liabilities


7,878



1,282Total current liabilities


127,077



89,382NON-CURRENT LIABILITIES


5,726



1,884COMMITMENTS AND CONTINGENCIESREDEEMABLE COMMON STOCK AND EMPLOYEE STOCK OPTIONS


165,335



123,964SHAREHOLDERS EQUITY:Convertible Series A preferred stock, par value of $0.0001
    per share (aggregate liquidation preference of $587,329 as of
    August 31, 2007 and September 30, 2006, respectively),
    105,000,000 shares authorized,74,750,903 shares issued
    and outstanding as of August 31, 2007 and
    September 30, 2006, respectively


7



7Common stock, par value $0.0001 per share,
    150,000,000 shares authorized, 4,726,363 and
    4,244,536 shares outstanding as of August 31, 2007 and
    September 30, 2006, respectively






Additional
    paid-in-capital


125,018



178,128Notes receivable from exercise of stock options






(653
)Accumulated deficit


(41,835
)


(154,363
)Accumulated other comprehensive (loss) income


(241
)


2,508Total shareholders equity


82,949



25,627TOTAL LIABILITIES AND SHAREHOLDERS EQUITY

$
381,087


$
240,857   The accompanying Notes are an
    integral part of these Consolidated Financial Statements.
 F-3




---



##### 



AVANADE
    INC.
  CONSOLIDATED INCOME STATEMENTS
  For the
    Eleven Months Ended August 31, 2007 and Years Ended
    September 30, 2006 and 2005
 (In
    thousands of U.S. dollars)
  Eleven MonthsEndedAugust 31,


Year Ended September 30,2007


2006


2005REVENUES:Revenues before reimbursements:Related parties

$
440,552


$
354,566


$
288,368Other


152,994



129,298



98,946593,546



483,864



387,314Reimbursements:Related parties


22,465



19,747



18,064Other


17,521



14,195



16,93339,986



33,942



34,997Revenues


633,532



517,806



422,311OPERATING EXPENSES:Cost of services:Cost of services before reimbursable expenses


400,415



330,957



262,436Reimbursable expenses


39,986



33,942



34,997Cost of services


440,401



364,899



297,433Selling, general and administrative costs


113,998



98,389



77,937Restructuring and asset impairment benefits










(21
)Total operating expenses


554,399



463,288



375,349OPERATING INCOME


79,133



54,518



46,962Interest income


3,541



1,996



925Interest expense


(10
)


(36
)


(560
)Other income (expense)


297



120



(3,785
)INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES


82,961



56,598



43,542(Benefit) provision for income taxes


(29,567
)


9,888



12,270NET INCOME FROM CONTINUING OPERATIONS


112,528



46,710



31,272Income from discontinued operations, including tax expense
    of $2










140NET INCOME

$
112,528


$
46,710


$
31,412   The accompanying Notes are an
    integral part of these Consolidated Financial Statements.
 F-4




---



##### 



AVANADE
    INC.
  CONSOLIDATED SHAREHOLDERS EQUITY AND
    COMPREHENSIVE INCOME STATEMENTS
  For the
    Eleven Months Ended August 31, 2007 and Years Ended
    September 30, 2006 and 2005
 (In
    thousands of U.S. dollars, except share amounts)
  NotesConvertible














ReceivableSeries A Preferred











Deferred


from





AccumulatedStock


Common Stock


Additional


Share-


Exercise of





Other


TotalNo.





No.


Paid-In


Based


Stock


Accumulated


Comprehensive


ShareholdersAmount


Shares


Amount


Shares


Capital


Compensation


Options


Deficit


(Loss) Income


EquityBalance as of September 30, 2004

$
7



73,614,776


$




2,645,264


$
248,338


$
(475
)

$



$
(232,485
)

$
5,830


$
21,215Comprehensive income:Net income






























31,412







31,412Foreign currency translation adjustments


































(35
)


(35
)Comprehensive income






































31,377Issuance of preferred stock






1,136,127











5,646



















5,646Accenture contribution


















328



















328Change in redeemable common stock and options


















(31,406
)


















(31,406
)Share-based compensation expense






















1,570















1,570Income tax benefit on share-based compensation plans


















694



















694Employee stock options granted


















3,063



(3,063
)














Employee stock options forfeited


















(240
)


240















Issuance of commons stock related to employee share programs














314,448



606



















606Repurchase of common stock














(68,399
)


(375
)


















(375
)Balance as of September 30, 2005


7



74,750,903







2,891,313



226,654



(1,728
)






(201,073
)


5,795



29,655Comprehensive income:Net income






























46,710







46,710Foreign currency translation adjustments


































(3,287
)


(3,287
)Comprehensive income






































43,423Income tax benefit on share-based compensation plans


















644



















644Accenture contribution


















5



















5Change in redeemable common stock and options


















(48,584
)


















(48,584
)Share-based compensation expense


















5,977



















5,977Effect of adoption of SFAS 123R


















(1,728
)


1,728















Issuance of commons stock related to employee share programs














3,151,359



7,093







(2,121
)










4,972Purchases of common stock














(1,798,136
)


(11,933
)






1,570











(10,363
)Repayments of employee notes receivable


























8











8Interest on notes received from exercise of stock options


























(110
)










(110
)Balance as of September 30, 2006


7



74,750,903







4,244,536



178,128







(653
)


(154,363
)


2,508



25,627Comprehensive income:Net income






























112,528







112,528Foreign currency translation adjustments


































(2,749
)


(2,749
)Comprehensive income






































109,779Income tax benefit on share-based compensation plans


















275



















275Accenture contribution


















90



















90Change in redeemable common stock and options


















(41,371
)


















(41,371
)Share-based compensation expense


















1,964



















1,964Issuance of commons stock related to employee share programs














3,136,432



8,057



















8,057Purchases of common stock














(2,654,605
)


(22,125
)






662











(21,463
)Repayments of employee notes receivable


























1











1Interest on notes received from exercise of stock options


























(10
)










(10
)Balance as of August 31, 2007

$
7



74,750,903


$




4,726,363


$
125,018


$



$



$
(41,835
)

$
(241
)

$
82,949   The accompanying Notes are an
    integral part of these Consolidated Financial Statements.
 F-5




---



##### 



AVANADE
    INC.
  CONSOLIDATED CASH FLOWS STATEMENTS
  For the
    Eleven Months Ended August 31, 2007 and Years Ended
    September 30, 2006 and 2005
 (In
    thousands of U.S. dollars)
  Eleven MonthsEnded


Year EndedAugust 31,


September 30,2007


2006


2005CASH FLOWS FROM OPERATING ACTIVITIES:Net income

$
112,528


$
46,710


$
31,412Adjustments to reconcile Net income to Net cash provided by
    (used in) operating activitiesDepreciation and amortization


6,193



7,543



6,808Unrealized foreign currency (gain) loss on intercompany notes


(8,435
)


(7,173
)


1,498Loss on disposal of property and equipment, net


99



58



6Deferred income tax (benefit) expense


(48,057
)


(6,330
)


291Non-cash related party interest expense










484Share-based compensation expense


1,964



5,977



1,570Change in assets and liabilitiesReceivables from clients, net


(5,335
)


(146
)


(6,404
)Due from related parties


(3,987
)


(9,702
)


(2,778
)Unbilled services to clients


1,901



(6,660
)


287Unbilled services to related parties


(7,804
)


(12,620
)


7,621Other current assets


1,157



(845
)


(1,312
)Other non-current assets


46



(45
)


241Due to related parties


(2,756
)


3,389



3,457Accounts payable


1,907



(313
)


3,597Deferred revenues


640



84



(982
)Accrued payroll and related benefits


15,164



7,674



8,624Accrued expenses


3,876



(1,778
)


2,355Income taxes payable


4,313



1,160



2,121Other liabilities


13,035



2,047



468Net cash provided by operating activities


86,449



29,030



59,364CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds from sales of property and equipment


14



2



10Purchases of property and equipment


(5,882
)


(5,359
)


(7,098
)Purchases of businesses, net of cash acquired










(4,614
)Deferred technology infrastructure costs


(2,474
)






Other, net


(374
)


107



23Net cash used in investing activities


(8,716
)


(5,250
)


(11,679
)CASH FLOWS FROM FINANCING ACTIVITIES:Purchases of common shares


(20,025
)


(10,273
)


(375
)Proceeds from exercise of stock options


6,619



4,882



606Repayments of employee notes receivable


1



8



Repayment of short-term borrowing from related party










(5,000
)Repayment of note payable to related party










(4,853
)Payment of capital lease obligations






(1
)


(48
)Excess tax benefits from share-based payment arrangements


273



522



Capital contribution from Accenture


90



5



Net cash used in financing activities


(13,042
)


(4,857
)


(9,670
)Effect of exchange rate changes on cash and cash equivalents


2,756



(1,281
)


(1,389
)NET INCREASE IN CASH AND CASH EQUIVALENTS


67,447



17,642



36,626CASH AND CASH EQUIVALENTS,beginning of period


72,898



55,256



18,630CASH AND CASH EQUIVALENTS,end of period

$
140,345


$
72,898


$
55,256Supplemental cash flow information:Cash paid for interest

$
11


$
36


$
104Cash paid for income taxes

$
14,149


$
13,585


$
10,378Non-cash investing and financing activities:Convertible Series A preferred stock issued to Microsoft
    for note payable









$
5,646Common stock issued from exercise of employee stock options in
    exchange for notes receivable





$
2,121



   The accompanying Notes are an
    integral part of these Consolidated Financial Statements.
 F-6




---



##### 



AVANADE
    INC.
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (In thousands of U.S. dollars, except share amounts or as
    otherwise disclosed)
  1.
    SUMMARY
    OF SIGNIFICANT ACCOUNTING POLICIES  Description
    of Business
        Change in
    Fiscal Year End
  11-month 12-month
 F-7




---



##### 



AVANADE
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (continued)
 (In thousands of U.S. dollars, except share amounts or as
    otherwise disclosed)
  11-month
  Eleven MonthsEnded August 31,2006(unaudited)REVENUES:Revenues before reimbursements:Related parties

$
318,670Other


113,729432,399Reimbursements:Related parties


17,574Other


12,54430,118Revenues

$
462,517Operating income

$
41,358Income from continuing operations before income taxes

$
43,196Provision for income taxes

$
7,559Net income

$
35,637   Principles
    of Consolidation
    Use of
    Estimates
    Reclassifications
    Revenue
    Recognition
  81-1,
 F-8




---



##### 



AVANADE
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (continued)
 (In thousands of U.S. dollars, except share amounts or as
    otherwise disclosed)
  Accounting for Performance of Construction-Type and Certain
    Production-Type Contracts.
  and/or No. 00-21, Accounting for Revenue Arrangements with Multiple
    Deliverables.
  No. 99-19, Reporting Revenues Gross as a Principal versus Net as an
    Agent (EITF 99-19). EITF 99-19.
    Operating
    Expenses
    Eleven MonthsEnded

Year EndedAugust 31,

September 30,2007

2006

2005Research and development costs

$
10,201


$
11,568


$
3,873Advertising costs


1,553



1,551



172
  F-9




---



##### 



AVANADE
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (continued)
 (In thousands of U.S. dollars, except share amounts or as
    otherwise disclosed)
  Share-Based
    Compensation Awards
  Share-Based Payment Accounting for Stock-Based
    Compensation Accounting for Stock Issued to Employees
  Income
    Taxes
    Translation
    of Non-U.S.
    Currency Amounts
  non-U.S. subsidiaries
    Foreign
    Exchange Instruments
   F-10




---



##### 



AVANADE
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (continued)
 (In thousands of U.S. dollars, except share amounts or as
    otherwise disclosed)
  Accounting for
    Derivative Instruments and Hedging Activities
    August 31,


September 30,2007


2006Included in Other current assets

$
217


$
1,476Included in Other current liabilities


7,080



53     Cash and
    Cash Equivalents
    Receivables
    from Clients, Net
    Certain
    Concentrations
  Credit
    Risk
     F-11




---



##### 



AVANADE
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (continued)
 (In thousands of U.S. dollars, except share amounts or as
    otherwise disclosed)
  Clients
    Services
    Property
    and Equipment
    Computers, related equipment and software

2 to 5 yearsFurniture and fixtures

3 to 10 yearsLeasehold improvements

Term of lease, 15 years maximum
     Long-Lived
    Assets
    Goodwill
    and Other Intangible Assets
     F-12




---



##### 



AVANADE
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (continued)
 (In thousands of U.S. dollars, except share amounts or as
    otherwise disclosed)
  Accumulated
    Other Comprehensive (Loss) Income
    Recently
    Adopted Accounting Pronouncements
  Considering the Effects of Prior Year Misstatements when
    Quantifying Misstatements in Current Year Financial Statements
  New
    Accounting Pronouncements
  No. 06-2, Accounting for Sabbatical Leave and Other Similar Benefits
    Pursuant to FASB Statement No. 43 (EITF 06-2). EITF 06-2 EITF 06-2 EITF 06-2 EITF 06-2 EITF 06-2
  Accounting for Uncertainty in Income Taxes  an
    Interpretation of FASB Statement No. 109
   F-13




---



##### 



AVANADE
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (continued)
 (In thousands of U.S. dollars, except share amounts or as
    otherwise disclosed)
  Fair Value Measurements
  2.
    PROPERTY
    AND EQUIPMENT    August 31,


September 30,2007


2006Computers, related equipment and software

$
43,145


$
38,304Furniture and fixtures


2,817



2,803Leasehold improvements


5,420



5,384Property and equipment, gross


51,382



46,491Total accumulated depreciation and amortization


(40,707
)


(36,487
)Property and equipment, net

$
10,675


$
10,004   3.
    BUSINESS
    COMBINATIONS AND GOODWILL    Goodwill and Other
    Intangible Assets
   F-14




---



##### 



AVANADE
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (continued)
 (In thousands of U.S. dollars, except share amounts or as
    otherwise disclosed)
  4.
    INCOME
    TAXES    Eleven MonthsEnded


Year EndedAugust 31,


September 30,2007


2006


2005Current:U.S. Federal

$
504


$
469


$
72U.S. state and local


571



264



80Foreign


17,415



15,485



11,827$
18,490


$
16,218


$
11,979Deferred:U.S. Federal


(39,134
)


42



U.S. state and local


(3,556
)






Foreign


(5,367
)


(6,372
)


291(48,057
)


(6,330
)


291$
(29,567
)

$
9,888


$
12,270   non-U.S. sources
  Eleven MonthsEnded


Year EndedAugust 31,


September 30,2007


2006


2005U.S. sources

$
52,622


$
29,932


$
19,906Non-U.S.
    sources


30,339



26,666



23,636Total

$
82,961


$
56,598


$
43,542  F-15




---



##### 



AVANADE
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (continued)
 (In thousands of U.S. dollars, except share amounts or as
    otherwise disclosed)
    Eleven MonthsEnded



Year EndedAugust 31,



September 30,2007



2006



2005U.S. Federal statutory income tax rate


35.0

%


35.0

%


35.0

%Change in valuation allowance


(73.9
)
%


(16.4
)
%


(14.2
)
%Tax credits


(3.1
)
%


(5.8
)
%


(2.3
)
%State and local taxes


2.4

%


(0.7
)
%


6.0

%Foreign operations


2.0

%


0.2

%


(2.1
)
%Nondeductible expenses


0.7

%


1.3

%


4.5

%Dividend from foreign subsidiaries







3.3

%


Other


1.3

%


0.6

%


1.3

%(35.6
)
%


17.5

%


28.2

%     August 31,


September 30,2007


2006


2005Deferred tax assets:Net operating loss carryforwards

$
40,355


$
63,948


$
73,731Tax credit carryforwards


7,788



5,151



2,945Property and equipment


1,802



1,543



1,116Intangible assets


757



700



469Accrued expenses


14,049



7,415



2,172Deferred revenues


1,683



465



550Other


1,485



967



2,40367,919



80,189



83,386Valuation allowance


(9,433
)


(72,676
)


(81,958
)Total deferred tax assets


58,486



7,513



1,428Deferred tax liabilities:Other


(1,429
)


(563
)


(861
)Net deferred tax assets

$
57,057


$
6,950


$
567    F-16




---



##### 



AVANADE
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (continued)
 (In thousands of U.S. dollars, except share amounts or as
    otherwise disclosed)
    non-U.S. deferred
    non-U.S. tax non-U.S. tax
     F-17




---



##### 



AVANADE
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (continued)
 (In thousands of U.S. dollars, except share amounts or as
    otherwise disclosed)
    5.
    EMPLOYEE
    BENEFIT PLANS        6.
    SHARE-BASED
    COMPENSATION     F-18




---



##### 



AVANADE
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (continued)
 (In thousands of U.S. dollars, except share amounts or as
    otherwise disclosed)
    Year EndedSeptember 30,2005Net income as reported

$
31,412Add: Share-based compensation expense already included in Net
    income as reported, net of tax


1,534Deduct: Pro forma share-based employee compensation expense
    determined under fair value based method for all awards, net of
    tax


(10,899
)Subtotal


(9,365
)Pro forma net income

$
22,047     Eleven MonthsEnded


Year EndedAugust 31,


September 30,2007


2006


2005Total share-based compensation expense included in Net income

$
9,590


$
7,361


$
1,610Income tax benefit related to share-based compensation included
    in Net income

$
6,042


$
409


$
76       Overview
    of Stock Option Plans
   F-19




---



##### 



AVANADE
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (continued)
 (In thousands of U.S. dollars, except share amounts or as
    otherwise disclosed)
      30-day
    2000
    Stock Incentive Plan
   F-20




---



##### 



AVANADE
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (continued)
 (In thousands of U.S. dollars, except share amounts or as
    otherwise disclosed)
      Employee
    Stock Option Plan
        Weighted AverageRemainingWeighted Average


Contractual Term


Aggregate IntrinsicNumber


Exercise Price


(In Years)


ValueOptions outstanding as ofSeptember 30, 2006


18,563,892


$
2.79



6.0


$
95,954Granted





$
Exercised


(3,136,432
)

$
2.57Expired


(113,375
)

$
3.46Forfeited


(398,535
)

$
4.31Options outstanding as of August 31, 2007


14,915,550


$
2.79



5.1


$
116,012Options exercisable as of August 31, 2007


13,929,327


$
2.68



5.0


$
109,935Options exercisable as of September 30, 2006


16,099,765


$
2.60



5.8


$
86,354Options exercisable as of September 30, 2005


17,047,808


$
2.40



6.2


$
63,762    F-21




---



##### 



AVANADE
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (continued)
 (In thousands of U.S. dollars, except share amounts or as
    otherwise disclosed)
    Eleven MonthsEnded

Year EndedAugust 31,

September 30,2007

2006

2005Weighted average grant-date fair value of stock options granted

$
n/a


$
n/a


$
3.01Total fair value of stock options vested

$
4,175


$
9,310


$
6,264Total intrinsic value of stock options exercised

$
19,566


$
13,913


$
1,223
       Expected life (in years)


6.0Risk-free interest rate


3.90
%Expected volatility


55
%Expected dividend yield


0
%
   Share-Based Payments.
  Avanade
    Inc. Long-Term Incentive Plan
   F-22




---



##### 



AVANADE
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (continued)
 (In thousands of U.S. dollars, except share amounts or as
    otherwise disclosed)
        Weighted AverageRemainingWeighted Average

Contractual Term

Aggregate IntrinsicNumber of AVUs

Base Price

(In Years)

ValueAVUs outstanding as of September 30, 2006


2,793,879


$
6.14



3.2


$
5,085Granted


3,253,205


$
8.04Vested and paid


(694,462
)

$
6.14Forfeited


(440,952
)

$
6.82AVUs outstanding as of August 31, 2007


4,911,670


$
7.34



2.9


$
15,877     2007


2006Expected life (in years)


1.6



1.7Risk-free interest rate


4.19
%


4.61
%Expected volatility


38
%


40
%Expected dividend yield


0
%


0
%     Stock
    and Put Rights
   F-23




---



##### 



AVANADE
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (continued)
 (In thousands of U.S. dollars, except share amounts or as
    otherwise disclosed)
        August 31,


September 30,2007


2006Vested common stock subject to put rights

$
49,956


$
33,785Intrinsic value of stock options


115,379



90,179$
165,335


$
123,964   7.
    MATERIAL
    TRANSACTIONS AFFECTING SHAREHOLDERS EQUITY  Share
    Repurchase Activity
    Shares


AmountShares acquired pursuant to exercise of put/call rights(1)(2)


2,100,373


$
17,638Other purchases(3)(4)


554,232



4,4872,654,605



22,125Less:Amounts withheld for employee loan repayments(5)






662Non-cash amounts related to stock-swaps(4)






1,438Net cash out-lay





$
20,025    (1)
    
    During the put/call period
    following the Semi-annual Valuation approved by the Board
    effective May 23, 2007, the Company exercised its call
    rights to purchase shares and certain employee holders of the
    Companys common stock exercised their put rights. This
    resulted in the repurchase, effective June 25, 2007, of an
    aggregate of 1,043,789 shares of the Companys common
    stock at a price of $8.84 per share.(2)
    
    During the Put/call period
    following the Semi-annual Valuation approved by the Board
    effective November 8, 2006, the Company exercised its call
    rights to purchase shares and certain employee holders of the
    Companys common stock exercised their put rights. This F-24




---



##### 



AVANADE
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (continued)
 (In thousands of U.S. dollars, except share amounts or as
    otherwise disclosed)
  resulted in the repurchase,
    effective December 13, 2006, of an aggregate of
    1,056,584 shares of the Companys common stock at a
    price of $7.96 per share.(3)
    
    During the eleven months ended
    August 31, 2007, as authorized under its option plans, the
    Company acquired 379,127 shares of its common stock via
    share withholdings for payroll tax obligations due from
    employees in connection with the delivery of the Companys
    common shares under the option plans.(4)
    
    During the eleven months ended
    August 31, 2007, as authorized under its option plans, the
    Company acquired 175,105 shares of its common stock as a
    result of shares surrendered to the Company to pay the exercise
    price in connection with so-called stock-swap
    exercises of employee stock options.(5)
    
    The Company withheld $662 of the
    proceeds for repayment of loans, plus accrued interest,
    previously provided to certain employee shareholders for costs
    to exercise the underlying options of employee shares held. As
    of August 31, 2007, no amounts remained outstanding for the
    Company sponsored loans and related accrued interest.    Shares


AmountShares acquired pursuant to exercise of put/call rights(1)


1,451,614


$
9,726Other purchases(2)(3)


346,522



2,2071,798,136



11,933Less:Amounts withheld for employee loan repayments(4)






1,570Non-cash amounts related to stock-swaps(3)






90Net cash out-lay





$
10,273    (1)
    
    During the put/call period
    following the Semi-annual Valuation approved by the Board
    effective May 17, 2006, the Company exercised its call
    rights to purchase shares and certain employee holders of the
    Companys common stock exercised their put rights. This
    resulted in the repurchase, effective July 3, 2006, of an
    aggregate of 1,451,614 shares of the Companys common
    stock at a price of $6.70 per share.(2)
    
    During the fiscal year ended
    September 30, 2006, as authorized under its option plans,
    the Company acquired 333,089 shares of its common stock via
    share withholdings for payroll tax obligations due from
    employees in connection with the delivery of the Companys
    common shares under the option plans.(3)
    
    During the fiscal year ended
    September 30, 2006, as authorized under its option plans,
    the Company acquired 13,433 shares of its common stock as a
    result of shares surrendered to the Company to pay the exercise
    price in connection with so-called stock-swap
    exercises of employee stock options.(4)
    
    The Company withheld $1,570 of the
    proceeds for repayment of loans, plus accrued interest,
    previously provided to certain employee shareholders for costs
    to exercise the underlying options of employee shares held.    8.
    SHAREHOLDERS
    EQUITY  Preferred
    Stock
   F-25




---



##### 



AVANADE
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (continued)
 (In thousands of U.S. dollars, except share amounts or as
    otherwise disclosed)
          Common
    Stock
  winding-up
   F-26




---



##### 



AVANADE
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (continued)
 (In thousands of U.S. dollars, except share amounts or as
    otherwise disclosed)
  Common
    Stock Reserved for Future Issuance
    Convertible Series A preferred stock


74,750,903Upon exercise of outstanding options


14,915,55089,666,453   9.
    LEASE
    COMMITMENTS    Year Ending August 31,

Office Space


Equipment2008

$
5,207


$
1912009


4,007



1482010


2,804



1082011


2,070



862012


2,038



12Thereafter


4,100



$
20,226


$
545     10.
    COMMITMENTS
    AND CONTINGENCIES  Guarantees
  and/or
 F-27




---



##### 



AVANADE
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (continued)
 (In thousands of U.S. dollars, except share amounts or as
    otherwise disclosed)
    Legal
    Contingencies
    11.
    RELATED-PARTY
    BALANCES AND TRANSACTIONS    Eleven MonthsEnded


Year EndedAugust 31,


September 30,2007


2006


2005Related-party revenues before reimbursements:Accenture

$
400,373


$
324,185


$
258,782Microsoft


40,179



30,381



29,586Total

$
440,552


$
354,566


$
288,368Related-party reimbursements:Accenture

$
16,371


$
15,124


$
14,406Microsoft


6,094



4,623



3,658Total

$
22,465


$
19,747


$
18,064Related-party expenses:Accenture

$
51,412


$
31,576


$
16,076Microsoft


3,571



3,280



2,999Total

$
54,983


$
34,856


$
19,075  F-28




---



##### 



AVANADE
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (continued)
 (In thousands of U.S. dollars, except share amounts or as
    otherwise disclosed)
    August 31,


September 30,2007


2006Due from related parties:Accenture

$
55,008


$
52,170Microsoft


7,086



3,256Total

$
62,094


$
55,426Unbilled services to related parties:Accenture

$
35,540


$
28,294Microsoft


6,011



3,807Total

$
41,551


$
32,101Due to related parties:Accenture

$
6,907


$
9,154Microsoft


498



845Total

$
7,405


$
9,999Deferred revenue:Accenture

$
590


$
1,036Microsoft


1,577



1,013Total

$
2,167


$
2,049        F-29




---



##### 



AVANADE
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (continued)
 (In thousands of U.S. dollars, except share amounts or as
    otherwise disclosed)
  12.
    SEGMENT
    REPORTING  Disclosures about Segments of an Enterprise and Related
    Information
        Eleven MonthsEnded


Year EndedAugust 31,


September 30,2007


2006


2005Revenues before reimbursements:Americas

$
304,066


$
263,473


$
199,791Europe


233,410



190,446



164,301Asia Pacific


53,680



33,233



25,707Corporate and eliminations


2,390



(3,288
)


(2,485
)Total

$
593,546


$
483,864


$
387,314Depreciation and amortization:Americas

$
2,703


$
3,035


$
3,279Europe


1,591



1,659



1,180Asia Pacific


576



530



617Corporate and eliminations


1,323



2,319



1,732Total

$
6,193


$
7,543


$
6,808Operating income (loss):Americas

$
76,495


$
58,431


$
31,860Europe


31,429



29,989



31,552Asia Pacific


444



(1,127
)


(1,430
)Corporate and eliminations


(29,235
)


(32,775
)


(15,020
)Total

$
79,133


$
54,518


$
46,962   F-30




---



##### 



AVANADE
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (continued)
 (In thousands of U.S. dollars, except share amounts or as
    otherwise disclosed)
  August 31,


September 30,2007


2006Assets:Americas

$
220,441


$
135,616Europe


150,463



102,947Asia Pacific


28,663



17,277Corporate and eliminations


(18,480
)


(14,983
)Total

$
381,087


$
240,857       Eleven MonthsEnded

Year EndedAugust 31,

September 30,2007

2006

2005United States


45
%


47
%


47
%United Kingdom


13
%


17
%


22
%     13.
    SUBSEQUENT
    EVENT  Share
    Repurchases
   F-31




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AVANADE
    INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (continued)
 (In thousands of U.S. dollars, except share amounts or as
    otherwise disclosed)
  14.
    QUARTERLY
    DATA (unaudited)  ElevenTwo Months


MonthsEnded


EndedFirst


Second


Third


August 31,


August 31,Eleven Months Ended August 31, 2007

Quarter(2)


Quarter


Quarter


2007(1)


2007Revenues before reimbursements:Related parties

$
101,998


$
117,192


$
130,199


$
91,163


$
440,552Others


35,970



44,225



41,552



31,247



152,994137,968



161,417



171,751



122,410



593,546ReimbursementsRelated parties


5,391



5,110



7,094



4,870



22,465Others


4,190



4,702



4,885



3,744



17,5219,581



9,812



11,979



8,614



39,986Revenues

$
147,549


$
171,229


$
183,730


$
131,024


$
633,532Operating income

$
13,960


$
26,425


$
22,314


$
16,434


$
79,133Net income

$
56,179


$
19,884


$
22,687


$
13,778


$
112,528    (1)
    
    The Companys fiscal fourth
    quarter includes only two months due to the change, effective
    August 31, 2007, in the Companys fiscal year end from
    September 30 to August 31.(2)
    
    During the three months ended
    December 31, 2006, the Company recognized net deferred tax
    benefits of $47,161 due to the anticipated realization of
    deferred tax assets, primarily in the United States. For
    information regarding changes in the Companys deferred tax
    assets, see Note 4 (Income Taxes) to these Consolidated
    Financial Statements.  First


Second


Third


FourthYear Ended September 30, 2006

Quarter


Quarter


Quarter


Quarter(1)


AnnualRevenues before reimbursements:Related parties

$
75,732


$
86,872


$
95,207


$
96,755


$
354,566Others


27,464



31,345



31,639



38,850



129,298103,196



118,217



126,846



135,605



483,864ReimbursementsRelated parties


4,410



4,456



5,353



5,528



19,747Others


3,071



3,472



3,430



4,222



14,1957,481



7,928



8,783



9,750



33,942Revenues

$
110,677


$
126,145


$
135,629


$
145,355


$
517,806Operating income

$
3,224


$
10,222


$
14,801


$
26,271


$
54,518Net income

$
2,471


$
7,655


$
11,063


$
25,521


$
46,710    (1)
    
    During the three months ended
    September 30, 2006, the Company recognized net deferred tax
    benefits of $6,950 due to the anticipated realization of
    deferred tax assets, primarily in France, Spain, and the United
    Kingdom. For information regarding changes in the Companys
    deferred tax assets, see Note 4 (Income Taxes) to these
    Consolidated Financial Statements. F-32