##### Table of Contents



UNITED STATES
 SECURITIES AND EXCHANGE
    COMMISSION
 Washington, D.C.
    20549
      Form 10-Q
  (Mark One)þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934FOR THE QUARTERLY PERIOD ENDED
    JUNE 30, 2006ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934FOR THE TRANSITION PERIOD
    FROM          TO   Commission File Number:
    000-51748
      AVANADE INC.
 (Exact name of Registrant as
    specified in its charter)
  Washington

91-2032865(State or other jurisdiction
    of
    incorporation or organization)

(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)
   þ o
  Rule 12b-2
  o o þ
  Rule 12b-2 o þ




---



##### 



AVANADE
    INC.
  INDEX
  
  PagePart I.


Financial
    Information


3Item 1.


Financial
    Statements


3Consolidated
    Balance Sheets as of June 30, 2006 (unaudited) and
    September 30, 2005


3Consolidated Income
    Statements (unaudited) for the three and nine months ended
    June 30, 2006 and 2005


4Consolidated
    Stockholders Equity and Comprehensive Income Statements
    (unaudited) for the nine months ended June 30,
    2006


5Consolidated Cash
    Flows Statements (unaudited) for the nine months ended
    June 30, 2006 and 2005


6Notes to
    Consolidated Financial Statements (unaudited)


7Item 2.


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


18Item 3.


Quantitative and
    Qualitative Disclosures About Market Risk


28Item 4.


Controls and
    Procedures


28Part II.


Other
    Information


28Item 1.


Legal
    Proceedings


28Item 2.


Unregistered Sales
    of Equity Securities and Use of Proceeds; Issuer Purchases of
    Equity Securities


29Item 3.


Defaults upon
    Senior Securities


29Item 4.


Submission of
    Matters to a Vote of Security Holders


29Item 5.


Other
    Information


29Item 6.


Exhibits


30Signatures


31302 Certification of Chief Executive Officer302 Certification of Chief Financial Officer906 Certification of CEO and CFO   2




---



##### Table of Contents



PART I 
    FINANCIAL INFORMATION ITEM 1.
    FINANCIAL STATEMENTS  AVANADE
    INC.
 CONSOLIDATED
    BALANCE SHEETS

June 30, 2006 and September 30, 2005

(In thousands of U.S. dollars, except share and per
    share amounts) June 30,


September 30,2006


2005(Unaudited)ASSETSCURRENT ASSETS:Cash and cash equivalents

$
65,741


$
55,256Receivables from clients, net of
    allowances of $1,864 and $1,042


16,767



16,125Due from related parties


46,527



43,433Unbilled services to clients


18,965



14,421Unbilled services to related parties


36,693



18,580Deferred income taxes, net


472



450Other current assets


4,460



4,647Total current assets


189,625



152,912NON-CURRENT ASSETS:Restricted cash equivalents


277



278Property and equipment, net of
    accumulated depreciation of $35,156 and $29,917


10,439



11,084Goodwill


11,975



11,975Other intangible assets, net of
    accumulated amortization of $4,003 and $3,092


1,529



2,440Deferred income taxes, net


122



117Other non-current assets


1,568



668Total non-current assets


25,910



26,562TOTAL ASSETS

$
215,535


$
179,474LIABILITIES AND
    STOCKHOLDERS EQUITYCURRENT LIABILITIES:Due to related parties

$
9,038


$
6,654Accounts payable


10,939



12,748Deferred revenues


3,838



2,737Accrued payroll and related benefits


36,568



30,177Accrued expenses


13,665



14,259Income taxes payable


4,620



6,801Other accrued liabilities


4,480



283Total current liabilities


83,148



73,659NON-CURRENT
    LIABILITIES


1,368



780COMMITMENTS AND
    CONTINGENCIESREDEEMABLE COMMON STOCK AND
    EMPLOYEE STOCK OPTIONS


109,658



75,380STOCKHOLDERS
    EQUITY:Convertible Series A preferred
    stock, par value of $0.0001 per share (aggregate
    liquidation preference of $587,329 as of June 30, 2006 and
    September 30, 2005), 105,000,000 shares
    authorized,74,750,903 shares issued and outstanding as of
    June 30, 2006 and September 30, 2005


7



7Common stock, par value
    $0.0001 per share, 150,000,000 shares authorized,
    5,253,835 and 2,891,313 shares outstanding as of
    June 30, 2006 and September 30, 2005, respectively






Additional
    paid-in-capital


199,860



226,654Deferred share-based compensation






(1,728
)Notes receivable from exercise of
    stock options


(2,209
)


Accumulated deficit


(179,884
)


(201,073
)Accumulated other comprehensive
    income


3,587



5,795Total stockholders equity


21,361



29,655TOTAL LIABILITIES AND
    STOCKHOLDERS EQUITY

$
215,535


$
179,474    3




---



##### Table of Contents



AVANADE
    INC.
 CONSOLIDATED
    INCOME STATEMENTS

For the Three and Nine Months Ended June 30, 2006
    and 2005

(In thousands of U.S. dollars, except share and per
    share amounts)

(Unaudited) Three Months Ended June 30,


Nine Months Ended June 30,2006


2005


2006


2005REVENUES:Revenues before reimbursements:Related parties

$
95,207


$
74,707


$
257,811


$
215,109Other


31,639



27,417



90,448



67,643126,846



102,124



348,259



282,752Reimbursements:Related parties


5,353



4,869



14,219



12,831Other


3,430



6,403



9,973



13,5848,783



11,272



24,192



26,415Revenues


135,629



113,396



372,451



309,167OPERATING EXPENSES:Cost of services:Cost of services before
    reimbursable expenses


86,642



67,175



246,385



194,731Reimbursable expenses


8,783



11,272



24,192



26,415Cost of services


95,425



78,447



270,577



221,146Selling, general and
    administrative costs


25,403



20,559



73,627



58,163Restructuring and asset impairment
    costs






2







3Total operating expenses


120,828



99,008



344,204



279,312OPERATING INCOME


14,801



14,388



28,247



29,855Interest income


584



213



1,385



593Interest expense


(17
)


(29
)


(21
)


(559
)Other income (expense)


451



(664
)


323



(3,044
)INCOME BEFORE INCOME
    TAXES


15,819



13,908



29,934



26,845Provision for income taxes


4,756



3,980



8,745



7,055NET INCOME

$
11,063


$
9,928


$
21,189


$
19,790    4




---



##### Table of Contents



AVANADE
    INC.
 CONSOLIDATED
    STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME
    STATEMENTS

For the Nine Months Ended June 30, 2006

(In thousands of U.S. dollars and in thousands of share
    amounts)

(Unaudited) NotesReceivablefrom





AccumulatedConvertible Series A








Additional


Deferred


Exercise of





Other


TotalPreferred Stock


Common Stock


Paid-in


Share-Based


Stock


Accumulated


Comprehensive


StockholdersAmount


No. Shares


Amount


No. Shares


Capital


Compensation


Options


Deficit


Income


EquityBalance at September 30, 2005

$
7



74,750,903


$




2,891,313


$
226,654


$
(1,728
)

$



$
(201,073
)

$
5,795


$
29,655Comprehensive income:Net income






























21,189







21,189Foreign currency translation
    adjustments


































(2,208
)


(2,208
)Comprehensive income






































18,981Income tax benefit on share-based
    compensation plans


















168



















168Accenture contributions


















5



















5Change in redeemable common stock
    and options


















(34,278
)


















(34,278
)Share-based compensation expense


















5,074



















5,074Effect of adoption of SFAS 123R


















(1,728
)


1,728















Issuance of common stock related to
    employee share programs














2,673,658



5,931







(2,121
)










3,810Purchases of common stock














(311,136
)


(1,966
)


















(1,966
)Repayments of employee notes
    receivable


























8











8Interest on notes received from
    exercise of stock options


























(96
)










(96
)Balance at June 30, 2006

$
7



74,750,903


$




5,253,835


$
199,860


$



$
(2,209
)

$
(179,884
)

$
3,587


$
21,361    5




---



##### Table of Contents



AVANADE
    INC.
 CONSOLIDATED
    STATEMENTS OF CASH FLOWS

For the Nine Months Ended June 30, 2006 and 2005

(In thousands of U.S. dollars)

(Unaudited) Nine Months EndedJune 30,2006


2005CASH FLOWS FROM OPERATING
    ACTIVITIES:Net income

$
21,189


$
19,790Adjustments to reconcile net income
    to net cash provided by operating activities Depreciation and amortization


5,794



5,021Unrealized foreign currency gain on
    intercompany notes


(5,574
)


(196
)Loss on disposal of property and
    equipment, net


55



14Non-cash related party interest
    expense






483Share-based compensation expense


5,190



1,205Change in operating assets and
    liabilities, net of acquisitions:Receivables from clients, net


458



(7,430
)Due from related parties


(1,910
)


1,249Unbilled services to clients


(4,294
)


(1,216
)Unbilled services to related parties


(17,277
)


(2,171
)Other current assets


238



(449
)Other non-current assets


(173
)


267Due to related parties


2,339



1,680Accounts payable


(2,944
)


1,093Deferred revenue


1,012



748Accrued payroll and related benefits


5,479



4,749Accrued expenses


(1,090
)


7,368Income taxes payable


(2,532
)


(149
)Other current liabilities


4,246



2,926Net cash provided by operating
    activities


10,206



34,982CASH FLOWS FROM INVESTING
    ACTIVITIES:Proceeds from sales of property and
    equipment


1



1Purchases of property and equipment


(4,209
)


(4,707
)Purchase of business, net of cash
    acquired






(4,614
)Transfer from restricted cash
    equivalents


50



24Net cash used in investing
    activities


(4,158
)


(9,296
)CASH FLOWS FROM FINANCING
    ACTIVITIES:Purchases of common shares


(1,966
)


(376
)Proceeds from the exercise of stock
    options


3,810



66Repayments of employee notes
    receivable


8



Payment of note payable to related
    party






(9,853
)Payment of capital lease obligations


(1
)


(57
)Excess tax benefits from
    share-based payment arrangements


130



Capital contribution from Accenture


5



Net cash provided by (used in)
    financing activities


1,986



(10,220
)Effect of exchange rate changes on
    cash and cash equivalents


2,451



(889
)NET INCREASE IN CASH AND CASH
    EQUIVALENTS


10,485



14,577CASH AND CASH EQUIVALENTS,beginning of period


55,256



18,630CASH AND CASH EQUIVALENTS,end of period

$
65,741


$
33,207Supplemental cash flow information:Cash paid for interest

$
21


$
97Cash paid for income taxes

$
10,663


$
7,250Non-cash investing and financing
    activities:Convertible Series A preferred
    stock issued to Microsoft for note payable

$



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

$
2,121


$
Capital contribution from Accenture

$



$
327    6




---



##### Table of Contents



AVANADE
    INC.NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS)(In thousands of U.S. dollars, except share and per
    share amounts or as otherwise disclosed)
    (Unaudited)
  1.
    SUMMARY
    OF SIGNIFICANT ACCOUNTING POLICIES  Basis of
    Presentation
  Form 10-Q
  Financial
    Instruments
    Accounting for Derivative Instruments and
    Hedging Activities,
    June 30,

September 30,2006

2005Included in Other current assets

$



$
1,626Included in Other accrued
    liabilities

$
3,915


$
2    7




---



##### Table of Contents



AVANADE
    INC.
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS)  (Continued)
    (In thousands of U.S. dollars, except share and per share
    amounts or as otherwise disclosed)
    (Unaudited)
   Other
    Significant Accounting Policies
    Newly
    Issued Accounting Standards
  Accounting for Uncertainty in Income Taxes - An
    Interpretation of FASB Statement No. 109 Accounting for Income Taxes
  2.
    REDEEMABLE
    COMMON STOCK AND EMPLOYEE STOCK OPTIONS  Share-Based Payment Accounting for Stock-Based
    Compensation Accounting for Stock Issued to Employees
 8




---



##### Table of Contents





AVANADE
    INC.
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS)  (Continued)
    (In thousands of U.S. dollars, except share and per share
    amounts or as otherwise disclosed)
    (Unaudited)










|                                         |  |                            |        |  |                           |   |        |             |  |   |            |  |  |   |        | 
|---------------------------------------- |  | -------------------------- | ------ |  | ------------------------- | - | ------ | ----------- |  | - | ---------- |  |  | - | ------ | 
|                                         |  | For the Three Months Ended |        |  | For the Nine Months Ended |  
|                                         |  | June 30, 2006              |        |  | June 30, 2006             |  
|                                         |  |                            |        |  | Under                     |   |        |             |  |   | Under      | 
|                                         |  | As Reported                |        |  | APB No. 25                |   |        | As Reported |  |   | APB No. 25 | 
|                                        
|Income before income taxes               |  | $                          | 15,819 |  |                           | $ | 17,058 |             |  | $ | 29,934     |  |  | $ | 34,370 | 
|Net income                               |  | $                          | 11,063 |  |                           | $ | 12,240 |             |  | $ | 21,189     |  |  | $ | 25,392 | 
|Cash flows from operating
    activities |  | $                          | 12,127 |  |                           | $ | 12,140 |             |  | $ | 10,206     |  |  | $ | 10,336 | 
|Cash flows from financing
    activities |  | $                          | 1,587  |  |                           | $ | 1,574  |             |  | $ | 1,986      |  |  | $ | 1,856  | 









|                                                                                                                                    |  |               |        |   |              |   |        |  
|----------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------ | - | ------------ | - | ------ | -
|                                                                                                                                    |  | For the Three |        |   | For the Nine |  
|                                                                                                                                    |  | Months Ended  |        |   | Months Ended |  
|                                                                                                                                    |  | June 30,      |        |   | June 30,     |  
|                                                                                                                                    |  | 2005          |        |   | 2005         |  
|                                                                                                                                   
|Net income as reported                                                                                                              |  | $             | 9,928  |   |              | $ | 19,790 |  
|Add: Share-based compensation
    expense already included in Net income as reported, net of tax                                    |  |               | 436    |   |              |   | 1,146  |  
|Deduct: Total share-based employee
    compensation expense determined under fair value based method
    for all awards, net of tax |  |               | (2,465 | ) |              |   | (7,495 | )
|                                                                                                                                    |  |               |        |   |              |   |        |  
|Pro forma Net income                                                                                                                |  | $             | 7,899  |   |              | $ | 13,441 |  
|                                                                                                                                    |  |               |        |   |              |   |        |  





Stock and
    Put Rights










9



---



##### Table of Contents





AVANADE
    INC.
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS)  (Continued)
    (In thousands of U.S. dollars, except share and per share
    amounts or as otherwise disclosed)
    (Unaudited)












|                                                            |  |          |         |  |               |   |        | 
|----------------------------------------------------------- |  | -------- | ------- |  | ------------- | - | ------ | 
|                                                            |  | As of    |         |  | As of         |  
|                                                            |  | June 30, |         |  | September 30, |  
|                                                            |  | 2006     |         |  | 2005          |  
|                                                           
|Fair value of vested common stock
    subject to put rights |  | $        | 36,303  |  |               | $ | 17,752 | 
|Intrinsic value of stock options
    subject to put rights  |  |          | 73,355  |  |               |   | 57,628 | 
|                                                            |  |          |         |  |               |   |        | 
|                                                            |  | $        | 109,658 |  |               | $ | 75,380 | 
|                                                            |  |          |         |  |               |   |        | 





Overview
    of the Option Plans












30-day






10



---



##### Table of Contents



AVANADE
    INC.
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS)  (Continued)
    (In thousands of U.S. dollars, except share and per share
    amounts or as otherwise disclosed)
    (Unaudited)
      For theFor the


Nine MonthsThree Months Ended June 30,


Ended June 30,2006


2005


2006


2005Total share-based compensation
    expense included in Net income

$
1,484


$
459


$
5,190


$
1,205Income tax benefit related to
    share-based compensation included in Net income

$
74


$
23


$
272


$
59     WeightedAverageRemainingWeighted


ContractualNumber of


Average


Term


AggregateOptions


Exercise Price


(In Years)


Intrinsic ValueOptions outstanding as of
    September 30, 2005


22,789,518


$
2.74Granted





$
Exercised


(2,673,658
)

$
2.22Expired


(359,091
)

$
2.80Forfeited


(457,772
)

$
3.76Options outstanding as of
    June 30, 2006


19,298,997


$
2.79



6.2


$
79,459Options exercisable as of
    June 30, 2006


16,181,607


$
2.57



5.9


$
70,301     For the Three Months


For the Nine MonthsEnded June 30,


Ended June 30,2006


2005


2006


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


n/a


$
3.06



n/a


$
3.01Total fair value of stock options
    vested

$
1,805


$
1,083


$
7,558


$
4,848Total intrinsic value of stock
    options exercised

$
4,622


$



$
11,456


$
      11




---



##### Table of Contents



AVANADE
    INC.
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS)  (Continued)
    (In thousands of U.S. dollars, except share and per share
    amounts or as otherwise disclosed)
    (Unaudited)
         For the NineMonths EndedJune 30,2006


2005Expected life (in years)


n/a



6Risk-free interest rate


n/a



3.88
%Expected volatility


n/a



55
%Expected dividend yield


n/a



0
%         30-day
  Avanade
    Inc. Long-Term Incentive Plan
   12




---



##### Table of Contents



AVANADE
    INC.
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS)  (Continued)
    (In thousands of U.S. dollars, except share and per share
    amounts or as otherwise disclosed)
    (Unaudited)
          WeightedAverageWeighted


RemainingNumber of


Average Base


Contractual


AggregateAVUs


Value


Term (in Years)


Intrinsic ValueAVUs outstanding as of
    September 30, 2005





$
Granted


2,845,699


$
6.14Exercised





$
Forfeited


(34,210
)

$
6.14AVUs outstanding as of
    June 30, 2006


2,811,489


$
6.14



3.4


$
2,165     Expected life (in years)


3.4Risk-free interest rate


5.12
%Expected volatility


37
%Expected dividend yield


0
%  13




---



##### Table of Contents



AVANADE
    INC.
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS)  (Continued)
    (In thousands of U.S. dollars, except share and per share
    amounts or as otherwise disclosed)
    (Unaudited)
     3.
    RESTRUCTURING
    COSTS  Form 10-Q.
    Three Months Ended


Nine Months EndedJune 30,


June 30,2006


2005


2006


2005Restructuring liability balance,
    beginning of the period

$
406


$
1,480


$
887


$
1,791Utilized


(27
)


(293
)


(508
)


(604
)Restructuring liability balance,
    end of the period

$
379


$
1,187


$
379


$
1,187     4.
    ACCUMULATED
    OTHER COMPREHENSIVE INCOME      June 30,2006


2005Three months ended

$
7,775


$
13,001Nine months ended

$
18,981


$
18,379   5.
    COMMITMENTS
    AND CONTINGENCIES  Guarantees
  and/or
 14




---



##### Table of Contents



AVANADE
    INC.
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS)  (Continued)
    (In thousands of U.S. dollars, except share and per share
    amounts or as otherwise disclosed)
    (Unaudited)
    Legal
    Contingencies
    6.
    RELATED-PARTY
    BALANCES AND TRANSACTIONS      Three Months Ended


Nine Months EndedJune 30,


June 30,2006


2005


2006


2005Related-party revenues before
    reimbursements:Accenture

$
85,724


$
67,436


$
235,791


$
193,256Microsoft


9,483



7,271



22,020



21,853Total

$
95,207


$
74,707


$
257,811


$
215,109Related-party reimbursements:Accenture

$
3,436


$
4,028


$
11,042


$
10,702Microsoft


1,917



841



3,177



2,129Total

$
5,353


$
4,869


$
14,219


$
12,831Related-party expenses:Accenture

$
8,823


$
3,595


$
22,129


$
11,309Microsoft


665



616



2,169



2,360Total

$
9,488


$
4,211


$
24,298


$
13,669  15




---



##### Table of Contents



AVANADE
    INC.
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS)  (Continued)
    (In thousands of U.S. dollars, except share and per share
    amounts or as otherwise disclosed)
    (Unaudited)
     As of


As ofJune 30, 2006


September 30, 2005Due from related parties:Accenture

$
40,062


$
38,297Microsoft


6,465



5,136Total

$
46,527


$
43,433Unbilled services to related
    parties:Accenture

$
33,890


$
17,064Microsoft


2,803



1,516Total

$
36,693


$
18,580Due to related parties:Accenture

$
8,735


$
6,357Microsoft


303



297Total

$
9,038


$
6,654Deferred revenue:Accenture

$
1,006


$
386Microsoft


1,822



369Total

$
2,828


$
755   month-to-month
    7.
    SEGMENT
    REPORTING  Disclosures about Segments of an Enterprise and Related
    Information
   16




---



##### Table of Contents



AVANADE
    INC.
    NOTES TO CONSOLIDATED FINANCIAL
    STATEMENTS)  (Continued)
    (In thousands of U.S. dollars, except share and per share
    amounts or as otherwise disclosed)
    (Unaudited)
       Three Months Ended June 30,2006


2005Revenues Before


Operating


Revenues Before


OperatingReimbursements(1)


Income (Loss)(2)


Reimbursements(1)


Income (Loss)(2)Americas

$
69,613


$
16,251


$
51,962


$
9,388Europe


51,063



9,485



43,697



11,188Asia Pacific


7,929



(1,012
)


7,230



399Corporate and eliminations


(1,759
)


(9,923
)


(765
)


(6,587
)Total

$
126,846


$
14,801


$
102,124


$
14,388   Nine Months Ended June 30,2006


2005Revenues Before


Operating


Revenues Before


OperatingReimbursements(1)


Income (Loss)(2)


Reimbursements(1)


Income (Loss)(2)Americas

$
187,367


$
34,830


$
143,158


$
20,267Europe


141,649



22,090



124,326



28,070Asia Pacific


22,293



(2,996
)


17,811



(1,895
)Corporate and eliminations


(3,050
)


(25,677
)


(2,543
)


(16,587
)Total

$
348,259


$
28,247


$
282,752


$
29,855     (1)
    
    Corporate and eliminations include
    inter-company eliminations and other revenues not directly
    attributable to the segments.(2)
    
    Corporate and eliminations include
    inter-company eliminations and general corporate expenses not
    directly attributable to the segments.    Three Months Ended


Nine Months EndedJune 30,


June 30,2006


2005


2006


2005COUNTRY:United States


47
%


47
%


47
%


46
%United Kingdom


17
%


20
%


18
%


21
%  17




---



##### Table of Contents



ITEM 2.
    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 Quarterly Report on
    Form 10-Q
    and in our Form 10/A and with the information under the
    heading Managements Discussion and Analysis of
    Financial Condition and Results of Operations in our
    Form 10/A.
  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, which is a subsidiary of Accenture Ltd, and its
    affiliates. We use the term Microsoft to refer to
    Microsoft Corporation, a minority shareholder, and its
    affiliates. All references to years, unless otherwise noted,
    refer to our fiscal year, which ends on September 30. For
    example, a reference to fiscal 2005 or fiscal
    year 2005 12-month
  We do not publish copies of our SEC filings on our websites
    because our shares are not publicly traded. However, copies of
    our filings with the Securities and Exchange Commission are
    available upon written request to Shareholder Relations, Avanade
    Inc., 2211 Elliott Avenue Suite 200, Seattle WA 98121,
    206-239-5600. Copies of our filings may also be obtained
    directly from the SEC website at www.sec.gov.
  Disclosure
    Regarding Forward-Looking Statements
  Form 10-Q
  
    Our results of operations are materially affected by economic
    conditions, levels of business activity and rates of change in
    the industries we serve, as well as by the pace of technological
    change and the type and level of technology spending by our
    clients.
    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.
    Our profitability will suffer if we are not able to maintain our
    pricing and utilization rates and control our costs. A
    continuation of current pricing pressures could result in
    permanent changes in pricing policies and delivery capabilities.
    Our profitability may decline due to financial and operational
    risks inherent in our worldwide operations.
    If we are unable to attract, retain and motivate employees, we
    will not be able to compete effectively and will not be able to
    maintain or grow our business.
    We may suffer damage to our professional reputation or legal
    liability if our customers are not satisfied with our services.
    The consulting and technology markets are highly competitive and
    the pace of consolidation, as well as vertical integration,
    among our competitors continues to increase. We may not be able
    to compete effectively if we cannot efficiently respond to these
    developments in a timely manner. 18




---



##### Table of Contents




    We may lose money if we do not accurately estimate the costs of
    large fixed-price engagements.
    Our contracts can be terminated by our customers with short
    notice, or our customers may cancel or delay projects, any of
    which could result in reduced operating income.
    Our business will be negatively affected if we are not able to
    anticipate and keep pace with rapid changes in technology or if
    growth in the use of technology in business is not as rapid as
    in the past.
    We currently have only a limited ability to protect our
    important intellectual property rights, which could affect our
    ability to operate in the future.
    Our services may infringe upon the intellectual property rights
    of others, which could result in legal liability, reduced
    operating income
    and/or have
    a materially adverse affect on our ability to operate in the
    future.
    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.
    We rely on Accenture for a primary source of our liquidity, and
    the loss of that liquidity could have a material adverse impact
    on our ability to fund our cash needs.
    We rely on Accenture for the majority of our revenue. The loss
    of that revenue would have a materially adverse impact on our
    results of operations and may affect our ability to continue to
    operate.
    Our global delivery network relies on Accenture, and the loss of
    that network might increase our operating expenses.
    Microsoft has certain minority ownership rights, and may
    exercise those rights to protect its own interests which may not
    align with our own.
    We are committed to using Microsoft related technologies, and
    our inability to use those technologies would adversely impact
    our results of operations.
    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.    Overview
    out-of-pocket
   19




---



##### Table of Contents



Three Months Ended


Nine Months EndedJune 30,


June 30,2006


2005


2006


2005Revenues before reimbursements:Accenture


68
%


66
%


68
%


68
%Microsoft


7
%


7
%


6
%


8
%         Critical
    Accounting Policies and Estimates
    Newly
    Issued Accounting Standards
  Accounting for Uncertainty in
    Income Taxes  An Interpretation of FASB Statement
    No. 109, Accounting
    for Income Taxes.
 20




---



##### Table of Contents



Revenues
    by Segments/Geographic Business Areas
      Percent ofTotal RevenuesBeforePercent


ReimbursementsPercent


Increase/


for the ThreeThree Months Ended


Increase/


(Decrease)


Months EndedJune 30,


(Decrease)


Local


June 30,2006


2005


US$


Currencies


2006


2005SEGMENTAmericas

$
69,613


$
51,962



34
%


32
%


55
%


51
%Europe


51,063



43,697



17
%


15
%


40



43Asia Pacific


7,929



7,230



10
%


9
%


6



7Corporate and
    eliminations(1)


(1,759
)


(765
)


n/m



n/m



(1
)


(1
)Total revenues before
    reimbursements


126,846



102,124



24
%


22
%


100
%


100
%Reimbursements


8,783



11,272



(22
)%


(23
)%Total revenues

$
135,629


$
113,396



20
%


18
%       (1)
    
    Corporate and eliminations include
    inter-company eliminations and other revenues not directly
    attributable to the segments.    Three Months Ended


Nine Months EndedJune 30,


June 30,2006


2005


2006


2005COUNTRY:United States


47
%


47
%


47
%


46
%United Kingdom


17
%


20
%


18
%


21
%  21




---



##### Table of Contents



Three
    Months Ended June 30, 2006 Compared to Three Months Ended
    June 30, 2005
  Revenues
          Operating
    Expenses
    Cost
    of Services
     22




---



##### Table of Contents



Selling,
    General and Administrative Costs
    Operating
    Income
    Three Months Ended June 30,Increase2006


2005


(Decrease)Operating income (loss):Americas

$
16,251


$
9,388


$
6,863Europe


9,485



11,188



(1,703
)Asia Pacific


(1,012
)


399



(1,411
)Corporate and eliminations


(9,923
)


(6,587
)


(3,336
)$
14,801


$
14,388


$
413     
    Americas operating income increased primarily due to a 34%
    increase in revenues before reimbursements and improved gross
    margins.
    Europe operating income decreased primarily due to higher costs
    related to increasing headcount and increased management and
    royalty fees, partially offset by reduced use of sub-contractors.
    Asia Pacific recorded an operating loss due to increased
    operating expenses related to the expansion of our business in
    Japan.
    Corporate and eliminations increased primarily due to higher
    costs related to increasing headcount and an increase in
    share-based compensation expense as a result of the adoption of
    SFAS No. 123R.  Other
    income (expense)
    Provision
    for Income Taxes
     23




---



##### Table of Contents



Nine
    months Ended June 30, 2006 Compared to Nine months Ended
    June 30, 2005
    Percent ofTotal RevenuesPercent


Before ReimbursementsPercent


Increase/


for the NineNine Months Ended


Increase/


(Decrease)


Months EndedJune 30,


(Decrease)


Local


June 30,2006


2005


US$


Currencies


2006


2005SEGMENTAmericas

$
187,367


$
143,158



31
%


30
%


54
%


51
%Europe


141,649



124,326



14
%


20
%


41



44Asia Pacific


22,293



17,811



25
%


29
%


6



6Corporate and
    eliminations(1)


(3,050
)


(2,543
)


n/m



n/m



(1
)


(1
)Total revenues before
    reimbursements


348,259



282,752



23
%


25
%


100
%


100
%Reimbursements


24,192



26,415



(8
)%


(7
)%Total revenues

$
372,451


$
309,167



20
%


23
%       (1)
    
    Corporate and eliminations include
    inter-company eliminations and other revenues not directly
    attributable to the segments.  Revenues
      third-party
   24




---



##### Table of Contents



Operating
    Expenses
    Cost
    of Services
      Selling,
    General and Administrative Costs
    Operating
    Income
      Nine Months Ended June 30,Increase2006


2005


(Decrease)Operating income (loss):Americas

$
34,830


$
20,267


$
14,563Europe


22,090



28,070



(5,980
)Asia Pacific


(2,996
)


(1,895
)


(1,101
)Corporate and eliminations


(25,677
)


(16,587
)


(9,090
)$
28,247


$
29,855


$
(1,608
)    25




---



##### Table of Contents




    Americas operating income increased primarily due to a 31%
    increase in revenues before reimbursements and improved gross
    margins.
    Europe operating income decreased primarily due to higher costs
    related to increasing headcount and increased management and
    royalty fees, partially offset by reduced use of sub-contractors.
    Asia Pacific operating loss increased primarily due to higher
    management and royalty fees, increased payroll costs and
    expanded use of sub-contractors, partially offset by revenue
    growth.
    Corporate and eliminations increased primarily due an increase
    in share-based compensation expense as a result of the adoption
    of SFAS No. 123R and higher costs related to
    increasing headcount.  Other
    income (expense)
    Provision
    for Income Taxes
      Liquidity
    and Capital Resources
      Nine Months Ended June 30,Increase2006


2005


(Decrease)Net cash provided by (used in):Operating activities

$
10,206


$
34,982


$
(24,776
)Investing activities


(4,158
)


(9,296
)


5,138Financing activities


1,986



(10,220
)


12,206Effect of exchange rate changes on
    cash and cash equivalents


2,451



(889
)


3,340Net increase in cash and cash
    equivalents

$
10,485


$
14,577


$
(4,092
)  26




---



##### Table of Contents



Operating Activities.
  Investing Activities.
  Financing Activities.
  30-day
  Accounting for Derivative
    Instruments and Hedging Activities. Form 10-Q.
  Form 10-Q.
    Off-Balance
    Sheet Arrangements
   27




---



##### Table of Contents



and/or
  ITEM 3.
    QUANTITATIVE
    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  Foreign Currency Risk.
      ITEM 4.
    CONTROLS
    AND PROCEDURES  Evaluation
    of Disclosure Controls and Procedures
  Form 10-Q, Rule 13a-15(e) 15d-15(e)
  Changes
    in Internal Control Over Financial Reporting
   PART II 
    OTHER INFORMATION  ITEM 1.
    LEGAL
    PROCEEDINGS   28




---



##### Table of Contents



ITEM 2.
    UNREGISTERED
    SALES OF EQUITY SECURITIES AND USE OF PROCEEDS; ISSUER PURCHASES
    OF EQUITY SECURITIES      Approximate DollarTotal Number of


Value of SharesShares Purchased


that May Yet BeTotal Number of





as Part of Publicly


Purchased UnderShares


Average Price


Announced Plans


Publicly AnnouncedPeriod

Purchased(1)


Paid per Share


or Programs


Plans or ProgramsApril 1, 2006 
    April 30, 2006


7,867


$
6.32







May 1, 2006 
    May 31, 2006


7,168


$
6.57







June 1, 2006 
    June 30, 2006


89,495


$
6.70







Total


104,530


$
6.66







     (1)
    
    During the third quarter of fiscal
    2006, the Company purchased 104,530 of its common shares in
    transactions unrelated to publicly announced share plans or
    programs. These transactions included the acquisition of 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 shares
    surrendered to the Company to pay the exercise price in
    connection with so-called stock-swap exercises of
    employee stock options.  ITEM 3.
    DEFAULTS
    UPON SENIOR SECURITIES    ITEM 4.
    SUBMISSION
    OF MATTERS TO A VOTE OF SECURITY HOLDERS    ITEM 5.
    OTHER
    INFORMATION     29




---



##### Table of Contents



ITEM 6.
    EXHIBITS    ExhibitNumber

Exhibit Description3
.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 28,
    2003(1)10
.1

Avanade Inc. Long-Term Incentive
    Plan(2)10
.2

Form of Avanade Valuation Unit
    Grant
    Notice(2)10
.3

Form of Avanade Valuation Unit
    Grant Notice 
    Australia(2)10
.4

Form of Avanade Valuation Unit
    Agreement(2)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 200231
.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 200232
.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     (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 8-K,
    filed June 23, 2006. 30




---



##### Table of Contents



SIGNATURES       By:
    /s/  Dennis K. Knapp    Title:
    Chief Financial Officer   31