<Page>
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                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

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

                                   FORM 10-Q

<Table>
<C>        <S>
   /X/     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
           SECURITIES EXCHANGE ACT OF 1934
</Table>

                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
                                       OR

<Table>
<C>        <S>
   / /     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
           SECURITIES EXCHANGE ACT OF 1934
</Table>

                        COMMISSION FILE NUMBER 001-15951

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

                                   AVAYA INC.

<Table>
<S>                                  <C>
            A DELAWARE                         I.R.S. EMPLOYER
            CORPORATION                        NO. 22-3713430
</Table>

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

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

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

    At June 30, 2002, 361,935,272 common shares were outstanding.

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<Page>
                               TABLE OF CONTENTS

<Table>
<Caption>
ITEM                                            DESCRIPTION                             PAGE
----                    ------------------------------------------------------------  --------
<C>                     <S>                                                           <C>
                                PART I--FINANCIAL INFORMATION

         1.             Financial Statements........................................      2

         2.             Management's Discussion and Analysis of Financial Condition
                        and Results of Operations...................................     34

         3.             Quantitative and Qualitative Disclosures About Market
                        Risk........................................................     72

                                  PART II--OTHER INFORMATION

         1.             Legal Proceedings...........................................     73

         2.             Changes in Securities and Use of Proceeds...................     73

         3.             Defaults Upon Senior Securities.............................     73

         4.             Submission of Matters to a Vote of Security Holders.........     73

         5.             Other Information...........................................     73

         6.             Exhibits and Reports on Form 8-K............................     73

                        Signatures..................................................     74
</Table>

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

                                       1
<Page>
                                     PART I

ITEM 1. FINANCIAL STATEMENTS.

                          AVAYA INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)

<Table>
<Caption>
                                                      THREE MONTHS ENDED     NINE MONTHS ENDED
                                                           JUNE 30,              JUNE 30,
                                                      -------------------   -------------------
                                                        2002       2001       2002       2001
                                                      --------   --------   --------   --------
<S>                                                   <C>        <C>        <C>        <C>
REVENUE
  Products..........................................  $   708     $1,130     $2,204     $3,618
  Services..........................................      511        584      1,600      1,733
                                                      -------     ------     ------     ------
                                                        1,219      1,714      3,804      5,351
                                                      -------     ------     ------     ------
COSTS
  Products..........................................      423        583      1,348      1,866
  Services..........................................      315        400        952      1,178
                                                      -------     ------     ------     ------
                                                          738        983      2,300      3,044
                                                      -------     ------     ------     ------
GROSS MARGIN........................................      481        731      1,504      2,307
                                                      -------     ------     ------     ------
OPERATING EXPENSES
  Selling, general and administrative...............      377        482      1,202      1,606
  Business restructuring charges and related
    expenses........................................        9         66        103        271
  Research and development..........................      115        135        354        428
  Purchased in-process research and development.....       --          1         --         32
                                                      -------     ------     ------     ------
  TOTAL OPERATING EXPENSES..........................      501        684      1,659      2,337
                                                      -------     ------     ------     ------
OPERATING INCOME (LOSS).............................      (20)        47       (155)       (30)
  Other income (expense), net.......................      (10)         4          8         31
  Interest expense..................................      (16)       (10)       (33)       (30)
                                                      -------     ------     ------     ------
INCOME (LOSS) BEFORE INCOME TAXES...................      (46)        41       (180)       (29)
  Provision (benefit) for income taxes..............       (7)        17        (58)        (5)
                                                      -------     ------     ------     ------
NET INCOME (LOSS)...................................  $   (39)    $   24     $ (122)    $  (24)
                                                      =======     ======     ======     ======
Net Income (Loss) Available to Common Stockholders:
Net income (loss)...................................  $   (39)    $   24     $ (122)    $  (24)
Accretion of Series B preferred stock...............       --         (7)       (12)       (20)
Conversion charge related to Series B preferred
  stock.............................................       --         --       (125)        --
                                                      -------     ------     ------     ------
Net income (loss) available to common
  stockholders......................................  $   (39)    $   17     $ (259)    $  (44)
                                                      =======     ======     ======     ======
Earnings (Loss) Per Common Share:
  Basic.............................................  $ (0.11)    $ 0.06     $(0.81)    $(0.16)
                                                      =======     ======     ======     ======
  Diluted...........................................  $ (0.11)    $ 0.06     $(0.81)    $(0.16)
                                                      =======     ======     ======     ======
</Table>

                See Notes to Consolidated Financial Statements.

                                       2
<Page>
                          AVAYA INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)

<Table>
<Caption>
                                                                  AS OF             AS OF
                                                              JUNE 30, 2002   SEPTEMBER 30, 2001
                                                              -------------   ------------------
<S>                                                           <C>             <C>
ASSETS
Current Assets:
  Cash and cash equivalents.................................      $  406            $  250
  Receivables, less allowances of $121 at June 30, 2002
    and $105 at September 30, 2001..........................       1,116             1,163
  Inventory.................................................         527               649
  Deferred income taxes, net................................         226               246
  Other current assets......................................         244               461
                                                                  ------            ------
TOTAL CURRENT ASSETS........................................       2,519             2,769
                                                                  ------            ------
  Property, plant and equipment, net........................         941               988
  Deferred income taxes, net................................         626               529
  Goodwill..................................................         187               175
  Intangible assets, net....................................          53                78
  Other assets..............................................         146               109
                                                                  ------            ------
TOTAL ASSETS................................................      $4,472            $4,648
                                                                  ======            ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Accounts payable..........................................      $  375            $  624
  Short-term borrowings.....................................          --               145
  Business restructuring reserve............................         109               179
  Payroll and benefit liabilities...........................         277               333
  Deferred revenue..........................................         148               206
  Other current liabilities.................................         480               604
                                                                  ------            ------
TOTAL CURRENT LIABILITIES...................................       1,389             2,091
                                                                  ------            ------
  Long-term debt............................................         914               500
  Benefit obligations.......................................         629               637
  Other liabilities.........................................         525               544
                                                                  ------            ------
TOTAL NONCURRENT LIABILITIES................................       2,068             1,681
                                                                  ------            ------
Commitments and contingencies
Series B convertible participating preferred stock, par
  value $1.00 per share, 4 million shares authorized, issued
  and outstanding as of September 30, 2001..................          --               395
                                                                  ------            ------
STOCKHOLDERS' EQUITY
  Series A junior participating preferred stock, par value
    $1.00 per share, 7.5 million shares authorized; none
    issued and outstanding..................................          --                --
  Common stock, par value $0.01 per share, 1.5 billion
    shares authorized, 362,234,272 and 286,851,934 issued
    (including 299,000 and 147,653 treasury shares) as of
    June 30, 2002 and September 30, 2001, respectively......           4                 3
  Additional paid-in capital................................       1,684               905
  Accumulated deficit.......................................        (638)             (379)
  Accumulated other comprehensive loss......................         (32)              (46)
  Less treasury stock at cost...............................          (3)               (2)
                                                                  ------            ------
TOTAL STOCKHOLDERS' EQUITY..................................       1,015               481
                                                                  ------            ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................      $4,472            $4,648
                                                                  ======            ======
</Table>

                See Notes to Consolidated Financial Statements.

                                       3
<Page>
                          AVAYA INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                             (DOLLARS IN MILLIONS)
                                  (UNAUDITED)

<Table>
<Caption>
                                                               NINE MONTHS ENDED
                                                                   JUNE 30,
                                                              -------------------
                                                                2002       2001
                                                              --------   --------
<S>                                                           <C>        <C>
OPERATING ACTIVITIES:
  Net loss..................................................   $(122)     $ (24)
    Adjustments to reconcile net loss to net cash used for
      operating activities:
      Business restructuring charges........................      87        154
      Depreciation and amortization.........................     174        198
      Provision for receivables.............................     110         35
      Deferred income taxes.................................     (78)        68
      Purchased in-process research and development.........      --         32
      Gain on assets sold...................................      --         (6)
      Adjustments for other non-cash items, net.............      61          6
      Changes in operating assets and liabilities, net of
        effects of acquired businesses:
        Receivables.........................................     265        193
        Inventory...........................................      78        (45)
        Accounts payable....................................    (257)      (272)
        Business restructuring reserve......................    (148)      (268)
        Payroll and benefits, net...........................     (66)         6
        Deferred revenue....................................       7        (93)
        Other assets and liabilities........................    (114)      (203)
                                                               -----      -----
NET CASH USED FOR OPERATING ACTIVITIES......................      (3)      (219)
                                                               -----      -----
INVESTING ACTIVITIES:
  Capital expenditures......................................     (96)      (214)
  Proceeds from the sale of property, plant and equipment...       5         72
  Acquisitions of businesses, net of cash acquired..........      (6)      (120)
  Purchases of equity investments...........................      --        (27)
  Other investing activities, net...........................       1         (3)
                                                               -----      -----
NET CASH USED FOR INVESTING ACTIVITIES......................     (96)      (292)
                                                               -----      -----
FINANCING ACTIVITIES:
  Issuance of Series B preferred stock......................      --        368
  Issuance of warrants......................................      --         32
  Issuance of common stock..................................     232         36
  Net decrease in commercial paper..........................    (432)      (140)
  Repayment of other short-term borrowings..................     (13)        --
  Issuance (repayment) of long-term debt....................     895         (9)
  Payment of issuance costs related to debt and equity
    offerings...............................................     (29)        --
  Net decrease in credit facility borrowings................    (200)        --
  Proceeds from (termination of) accounts receivable
    securitization..........................................    (200)       200
  Other financing activities, net...........................      (1)        --
                                                               -----      -----
NET CASH PROVIDED BY FINANCING ACTIVITIES...................     252        487
                                                               -----      -----
Effect of exchange rate changes on cash and cash
  equivalents...............................................       3         (4)
                                                               -----      -----
Net increase (decrease) in cash and cash equivalents........     156        (28)
Cash and cash equivalents at beginning of fiscal year.......     250        271
                                                               -----      -----
Cash and cash equivalents at end of period..................   $ 406      $ 243
                                                               =====      =====
</Table>

                See Notes to Consolidated Financial Statements.

                                       4
<Page>
                          AVAYA INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  (UNAUDITED)

1. BACKGROUND AND BASIS OF PRESENTATION

BACKGROUND

    On September 30, 2000, Avaya Inc. (the "Company" or "Avaya") was spun off
from Lucent Technologies Inc. ("Lucent") pursuant to a contribution by Lucent of
its enterprise networking businesses to the Company (the "Contribution") and a
distribution of the outstanding shares of the Company's common stock to Lucent
stockholders (the "Distribution"). The Company provides communication systems
and software for enterprises, including businesses, government agencies and
other organizations. The Company offers a broad range of voice, converged voice
and data, customer relationship management, messaging, multi-service networking
and structured cabling products and services.

BASIS OF PRESENTATION

    The accompanying unaudited consolidated financial statements of the Company
as of June 30, 2002 and for the three and nine months ended June 30, 2002 and
2001, have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial statements and
the rules and regulations of the Securities and Exchange Commission for interim
financial statements, and should be read in conjunction with the Company's
Annual Report on Form 10-K for the fiscal year ended September 30, 2001. In the
Company's opinion, the unaudited interim consolidated financial statements
reflect all adjustments, consisting of normal and recurring adjustments,
necessary for a fair presentation of the financial condition, results of
operations and cash flows for the periods indicated. Certain prior year amounts
have been reclassified to conform to the current interim period presentation.
The consolidated results of operations for the interim periods reported are not
necessarily indicative of the results to be experienced for the entire fiscal
year.

2. RECENT ACCOUNTING PRONOUNCEMENTS AND CHANGE IN ACCOUNTING ESTIMATE

SFAS 143

    In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for
Asset Retirement Obligations" ("SFAS 143"), which provides the accounting
requirements for retirement obligations associated with tangible long-lived
assets. This Statement requires entities to record the fair value of a liability
for an asset retirement obligation in the period in which it is incurred. This
Statement is effective for the Company's 2003 fiscal year, and early adoption is
permitted. The adoption of SFAS 143 is not expected to have a material impact on
the Company's consolidated results of operations, financial position or cash
flows.

SFAS 144

    In October 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which requires that
long-lived assets to be disposed of by sale be measured at the lower of carrying
amount or fair value less cost to sell, whether reported in continuing
operations or in discontinued operations. SFAS 144 also expands the reporting of
discontinued operations to include components of an entity that have been or
will be disposed of rather than limiting such discontinuance to a segment of a
business. This Statement excludes from the definition of

                                       5
<Page>
                          AVAYA INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                  (UNAUDITED)

2. RECENT ACCOUNTING PRONOUNCEMENTS AND CHANGE IN ACCOUNTING ESTIMATE
(CONTINUED)
long-lived assets goodwill and other intangibles that are not amortized in
accordance with Statement No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142") noted below. SFAS 144 is effective for the Company's 2003 fiscal
year, and early adoption is permitted. The Company is currently evaluating the
impact of SFAS 144 to determine the effect, if any, it may have on the Company's
consolidated results of operations, financial position or cash flows.

SFAS 145

    In May 2001, the FASB issued Statement No. 145, which rescinds SFAS No. 4,
"Reporting Gains and Losses from Extinguishment of Debt," SFAS No. 44,
"Accounting for Intangible Assets of Motor Carriers," and SFAS No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements"
("SFAS 145"). This Statement also amends SFAS No. 13, "Accounting for Leases,"
to eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. As a
result of the rescission of SFAS 4 and SFAS 64, the criteria in Accounting
Principles Board Opinion No. 30 will be used to classify gains and losses from
debt extinguishment. This Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. SFAS 145 is effective for
the Company's 2003 fiscal year, and early adoption is permitted. The Company is
currently evaluating the impact of SFAS 145 to determine the effect, if any, it
may have on the Company's consolidated results of operations, financial position
or cash flows.

SFAS 146

    In July 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"), which addresses
financial accounting and reporting for costs associated with exit or disposal
activities, and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)" which
previously governed the accounting treatment for restructuring activities.
SFAS 146 applies to costs associated with an exit activity that does not involve
an entity newly acquired in a business combination or with a disposal activity
covered by SFAS 144. Those costs include, but are not limited to, the following:
(1) termination benefits provided to current employees that are involuntarily
terminated under the terms of a benefit arrangement that, in substance, is not
an ongoing benefit arrangement or an individual deferred-compensation contract,
(2) costs to terminate a contract that is not a capital lease, and (3) costs to
consolidate facilities or relocate employees. This Statement does not apply to
costs associated with the retirement of long-lived assets covered by SFAS 143.
SFAS 146 is effective for exit or disposal activities initiated after
December 31, 2002, and early adoption is permitted. The Company is currently
evaluating the impact of SFAS 146 to determine the effect, if any, it may have
on the Company's consolidated results of operations, financial position or cash
flows.

INTERNAL USE SOFTWARE

    In the second quarter of fiscal 2002, the Company changed the estimated
useful life of certain internal use software to reflect actual experience as a
stand-alone company on the utilization of such

                                       6
<Page>
                          AVAYA INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                  (UNAUDITED)

2. RECENT ACCOUNTING PRONOUNCEMENTS AND CHANGE IN ACCOUNTING ESTIMATE
(CONTINUED)
software and extended the useful life of these assets from three to seven years.
This change lowered depreciation expense by approximately $5 million and
$9 million, equivalent to $0.01 and $0.02 per diluted share, for the three and
nine months ended June 30, 2002, respectively.

3. GOODWILL AND INTANGIBLE ASSETS

    Effective October 1, 2001, the Company adopted SFAS 142, which requires that
goodwill and certain other intangible assets having indefinite lives no longer
be amortized to earnings, but instead be subject to periodic testing for
impairment. Intangible assets determined to have definitive lives will continue
to be amortized over their remaining useful lives. In connection with the
adoption of SFAS 142, the Company reviewed the classification of its existing
goodwill and other intangible assets, reassessed the useful lives previously
assigned to other intangible assets, and discontinued amortization of goodwill.
The Company also tested goodwill for impairment by comparing the fair value of
the Company's reporting units to their carrying value as of October 1, 2001 and
determined that there was no goodwill impairment.

    The provisions of SFAS 142 require that goodwill of a reporting unit be
tested for impairment on an annual basis or between annual tests if an event
occurs or circumstances change that would more likely than not reduce the fair
value of a reporting unit below its carrying amount. The Company intends to
conduct the required impairment review for fiscal 2002 during the fourth quarter
of fiscal 2002, at which time, if an impairment is identified, it will be
recorded as an operating expense in the Statement of Operations.

    For the three and nine months ended June 30, 2001, goodwill amortization,
net of tax, amounted to $10 million and $28 million, respectively. If the
Company had adopted SFAS 142 as of the beginning of the first quarter of fiscal
2001 and discontinued goodwill amortization, net income and earnings (loss) per
common share on a pro forma basis would have been as follows:

<Table>
<Caption>
                                                                  PRO FORMA
                                               ------------------------------------------------
                                                THREE MONTHS ENDED           NINE MONTHS ENDED
                                                  JUNE 30, 2001                JUNE 30, 2001
                                               --------------------         -------------------
                                               (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S>                                            <C>                          <C>
Net income...................................          $  34                        $    4
Earnings (Loss) per common share:
  Basic......................................          $0.09                        $(0.06)
  Diluted....................................          $0.09                        $(0.06)
</Table>

    The carrying value of goodwill of $187 million as of June 30, 2002 consists
of $141 million related to the Systems segment and $46 million related to the
Applications segment. The $12 million increase in the carrying value of goodwill
from September 30, 2001 is attributable to the Company's acquisition of Conita
Technologies in May 2002, a purchase accounting adjustment related to the
Quintus Corporation acquisition, and the impact of foreign currency exchange
rate fluctuations.

                                       7
<Page>
                          AVAYA INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                  (UNAUDITED)

3. GOODWILL AND INTANGIBLE ASSETS (CONTINUED)
    The following table presents the components of the Company's intangible
assets:

<Table>
<Caption>
                                                 AS OF JUNE 30, 2002                AS OF SEPTEMBER 30, 2001
                                          ----------------------------------   ----------------------------------
                                           GROSS                                GROSS
                                          CARRYING   ACCUMULATED               CARRYING   ACCUMULATED
                                           AMOUNT    AMORTIZATION     NET       AMOUNT    AMORTIZATION     NET
                                          --------   ------------   --------   --------   ------------   --------
                                                                   (DOLLARS IN MILLIONS)
<S>                                       <C>        <C>            <C>        <C>        <C>            <C>
Existing technology.....................    $160         $115         $45        $160         $92          $68
Other intangibles.......................      13            5           8          12           2           10
                                            ----         ----         ---        ----         ---          ---
Total intangible assets.................    $173         $120         $53        $172         $94          $78
                                            ====         ====         ===        ====         ===          ===
</Table>

    Intangible assets with definitive lives are amortized over a period of three
to six years. Amortization expense for such intangible assets was $9 million for
each of the three month periods ended June 30, 2002 and 2001, and $26 million
and $23 million for the nine months ended June 30, 2002 and 2001, respectively.

    Estimated amortization expense for the remainder of fiscal 2002 and the five
succeeding fiscal years is as follows:

<Table>
<Caption>
FISCAL YEAR                                                         AMOUNT
-----------                                                  ---------------------
                                                             (DOLLARS IN MILLIONS)
<S>                                                          <C>
2002 (remaining three months)..............................           $ 9
2003.......................................................            21
2004.......................................................            12
2005.......................................................             8
2006.......................................................             3
                                                                      ---
Total......................................................           $53
                                                                      ===
</Table>

4. COMPREHENSIVE INCOME (LOSS)

    Other comprehensive income is recorded directly to a separate section of
stockholders' equity in accumulated other comprehensive loss and includes
unrealized gains and losses excluded from the Consolidated Statements of
Operations. These unrealized gains and losses consist of primarily foreign
currency translation adjustments, which are not adjusted for income taxes since
they primarily relate to indefinite investments in non-U.S. subsidiaries.

<Table>
<Caption>
                                                 THREE MONTHS ENDED     NINE MONTHS ENDED
                                                      JUNE 30,              JUNE 30,
                                                 -------------------   -------------------
                                                   2002       2001       2002       2001
                                                 --------   --------   --------   --------
                                                           (DOLLARS IN MILLIONS)
<S>                                              <C>        <C>        <C>        <C>
Net income (loss)..............................    $(39)      $24       $(122)      $(24)
Other comprehensive income.....................      39         5          14         16
                                                   ----       ---       -----       ----
Total comprehensive income (loss)..............    $ --       $29       $(108)      $ (8)
                                                   ====       ===       =====       ====
</Table>

                                       8
<Page>
                          AVAYA INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                  (UNAUDITED)

5. SUPPLEMENTARY FINANCIAL INFORMATION AND OTHER TRANSACTIONS

STATEMENT OF OPERATIONS INFORMATION

<Table>
<Caption>
                                                 THREE MONTHS ENDED     NINE MONTHS ENDED
                                                      JUNE 30,              JUNE 30,
                                                 -------------------   -------------------
                                                   2002       2001       2002       2001
                                                 --------   --------   --------   --------
                                                           (DOLLARS IN MILLIONS)
<S>                                              <C>        <C>        <C>        <C>
OTHER INCOME (EXPENSE), NET
Loss on foreign currency transactions..........    $(12)      $--        $(3)       $(1)
Gain on assets sold............................      --        --         --          6
Interest income................................       5         7         16         22
Miscellaneous, net.............................      (3)       (3)        (5)         4
                                                   ----       ---        ---        ---
    Total other income (expense), net..........    $(10)      $ 4        $ 8        $31
                                                   ====       ===        ===        ===
</Table>

BALANCE SHEET INFORMATION

<Table>
<Caption>
                                                              AS OF             AS OF
                                                          JUNE 30, 2002   SEPTEMBER 30, 2001
                                                          -------------   ------------------
                                                                (DOLLARS IN MILLIONS)
<S>                                                       <C>             <C>
INVENTORY
Completed goods.........................................      $386               $420
Work in process and raw materials.......................       141                229
                                                              ----               ----
    Total inventory.....................................      $527               $649
                                                              ====               ====
</Table>

RECEIVABLES, LESS ALLOWANCES

    The receivables allowance as of September 30, 2001, which previously
represented a reserve for uncollectible accounts, has been restated to also
include an estimate of $37 million for the resolution of potential issues such
as disputed invoices, customer satisfaction claims and pricing discrepancies.
The reclassified amount, which had previously been included as a direct
reduction to receivables, was recorded to conform to the June 30, 2002
presentation.

SUPPLEMENTAL CASH FLOW INFORMATION

    Acquisition of businesses:

<Table>
<Caption>
                                                                 NINE MONTHS ENDED
                                                                     JUNE 30,
                                                              -----------------------
                                                                 2002         2001
                                                              ----------   ----------
                                                               (DOLLARS IN MILLIONS)
<S>                                                           <C>          <C>
Fair value of assets acquired, net of cash acquired.........     $ 8          $192
Less: Fair value of liabilities assumed.....................      (2)          (72)
                                                                 ---          ----
Acquisition of businesses, net of cash acquired.............     $ 6          $120
                                                                 ===          ====
</Table>

    In the second quarter of fiscal 2001, the Company paid off $9 million of
debt assumed from its acquisition of VPNet Technologies, Inc.

                                       9
<Page>
                          AVAYA INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                  (UNAUDITED)

5. SUPPLEMENTARY FINANCIAL INFORMATION AND OTHER TRANSACTIONS (CONTINUED)
    Non-cash transactions:

<Table>
<Caption>
                                                                 NINE MONTHS ENDED
                                                                     JUNE 30,
                                                              -----------------------
                                                                 2002         2001
                                                              ----------   ----------
                                                               (DOLLARS IN MILLIONS)
<S>                                                           <C>          <C>
Accretion of Series B preferred stock (Note 9)..............    $  12         $20
Book value of converted Series B preferred stock
  (Note 9)..................................................      395          --
Conversion charge related to Series B preferred stock
  (Note 9)..................................................      125          --
Issuance of common stock in connection with the Warburg
  transactions (Note 9).....................................     (532)         --
Deferred taxes on stock options.............................        4          --
Fair market value of stock options issued in connection with
  acquisition...............................................       --          16
Adjustments to Contribution by Lucent:
  Accounts receivable.......................................       --           8
  Property, plant and equipment, net........................       --           7
                                                                -----         ---
Total non-cash transactions.................................    $   4         $51
                                                                =====         ===
</Table>

AIRCRAFT SALE-LEASEBACK

    In March 2002, the Company elected to terminate early an aircraft
sale-leaseback agreement and, pursuant to the terms of the agreement, the
Company agreed to purchase the aircraft from the lessor for a purchase price
equal to the unamortized lease balance of approximately $33 million. The closing
of the purchase was completed in April 2002.

6. SECURITIZATION OF ACCOUNTS RECEIVABLE

    In June 2001, the Company entered into a receivables purchase agreement and
transferred a designated pool of qualified trade accounts receivable to a
special purpose entity ("SPE"), which in turn sold an undivided ownership
interest in the pool of receivables to an unaffiliated financial institution for
cash proceeds of $200 million. The receivables purchase agreement was terminated
in March 2002 as described below. The financial institution is an affiliate of
Citibank, N.A., a lender and the agent for the other lenders under the Credit
Facilities described in Note 8 and the counterparty to the $150 million interest
rate swap described in Note 8. The designated pool of qualified receivables held
by the SPE was pledged as collateral to secure the obligations to the financial
institution. During the term of the receivables purchase agreement, the Company
had a retained interest in the designated pool of receivables to the extent the
value of the receivables exceeded the outstanding amount of the financial
institution's investment. The carrying amount of the Company's retained
interest, which approximated fair value because of the short-term nature of the
receivables, was recorded in other current assets. Collections of receivables
were used by the SPE to repay the financial institution's investment in
accordance with the receivables purchase agreement, and the financial
institution in turn purchased, from time to time, new interests in receivables
up to an aggregate investment at any time of $200 million.

    Effective March 15, 2002, the Company elected to terminate the receivables
purchase agreement, which was scheduled to expire in June 2002. As a result of
the early termination, purchases of interests

                                       10
<Page>
                          AVAYA INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                  (UNAUDITED)

6. SECURITIZATION OF ACCOUNTS RECEIVABLE (CONTINUED)
in receivables by the financial institution ceased, and collections on
receivables that constituted the designated pool of trade accounts receivable
were used to liquidate the financial institution's $200 million investment under
the agreement. As of June 30, 2002, the entire $200 million investment had been
liquidated using collections of such receivables. No portion of the retained
interest was utilized to liquidate the financial institution's remaining
$126 million investment that had been outstanding at the beginning of the third
quarter of fiscal 2002. Upon liquidation in full of the financial institution's
investment on April 5, 2002, the remaining $109 million in retained interest was
reclassified to receivables. As of September 30, 2001, the Company had a
retained interest of $153 million in the SPE's designated pool of qualified
accounts receivable.

7. BUSINESS RESTRUCTURING CHARGES AND RELATED EXPENSES

    The Company recorded business restructuring charges and related expenses of
$9 million and $103 million for the three and nine months ended June 30, 2002,
respectively. Included in the nine month amount is an $84 million pretax charge
taken in the second quarter of fiscal 2002 associated with the Company's efforts
to improve its business performance in response to the continued industry-wide
economic slowdown. The components of this charge include $73 million of employee
separation costs, $10 million of lease termination costs, and $1 million of
other exit costs. The charge for employee separation costs is comprised of
$67 million for severance and other employee separation costs, and $6 million
primarily related to the cost of curtailment in accordance with SFAS No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits." The employee separation costs were
incurred in connection with the elimination of approximately 2,000 employee
positions. Lease termination costs are comprised primarily of information
technology lease termination payments.

    The September 30, 2001 business restructuring reserve reflects the remaining
balance associated with the Company's pretax business restructuring charges of
$520 million in fiscal 2000 related to its separation from Lucent, $134 million
in the second quarter of fiscal 2001 related to the outsourcing of certain
manufacturing operations, and $540 million in the fourth quarter of fiscal 2001
for the acceleration of the Company's restructuring plan.

                                       11
<Page>
                          AVAYA INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                  (UNAUDITED)

7. BUSINESS RESTRUCTURING CHARGES AND RELATED EXPENSES (CONTINUED)

    The following table summarizes the status of the Company's business
restructuring reserve and other related expenses as of and for the nine months
ended June 30, 2002:

<Table>
<Caption>
                                   BUSINESS RESTRUCTURING RESERVE                OTHER RELATED EXPENSES
                         ---------------------------------------------------   --------------------------        TOTAL
                                                                   TOTAL                                        BUSINESS
                          EMPLOYEE       LEASE       OTHER       BUSINESS                                    RESTRUCTURING
                         SEPARATION   TERMINATION     EXIT     RESTRUCTURING      ASSET      INCREMENTAL      RESERVE AND
                           COSTS      OBLIGATIONS    COSTS        RESERVE      IMPAIRMENTS   PERIOD COSTS   RELATED EXPENSES
                         ----------   -----------   --------   -------------   -----------   ------------   ----------------
                                                                (DOLLARS IN MILLIONS)
<S>                      <C>          <C>           <C>        <C>             <C>           <C>            <C>
Balance as of
  September 30, 2001...      $96          $78          $5          $179         $      --     $      --           $179
Charges................       73           10           1            84                 3            16            103
Increase in benefit
  obligations..........       (6)          --          --            (6)               --            --             (6)
Cash payments..........      (99)         (46)         (3)         (148)               --           (16)          (164)
Asset impairments......       --           --          --            --                (3)           --             (3)
                             ---          ---          --          ----         ---------     ---------           ----
Balance as of June 30,
  2002.................      $64          $42          $3          $109         $      --     $      --           $109
                             ===          ===          ==          ====         =========     =========           ====
</Table>

    Employee separation costs included in the business restructuring reserve
were made through lump sum payments, although certain union-represented
employees elected to receive a series of payments extending over a period of up
to two years from the date of departure. Payments to employees who elected to
receive severance through a series of payments will extend through fiscal 2004.
The workforce reductions related to the Company's separation from Lucent, the
outsourcing of certain manufacturing operations and the acceleration of its
restructuring plan were substantially complete at the end of fiscal 2001. In
connection with the workforce reduction charge taken in the second quarter of
fiscal 2002, approximately 1,600 of the 2,000 employees had departed the Company
as of June 30, 2002. The charges for lease termination obligations, which
consisted of real estate and equipment leases, included approximately
2.8 million square feet of excess space which has been entirely vacated as of
June 30, 2002. Payments on lease termination obligations will be substantially
completed by 2003 because, in certain circumstances, the remaining lease
payments were less than the termination fees.

    For the three and nine months ended June 30, 2002, the Company recorded
$9 million and $19 million, respectively, of other related expenses, including
relocation and consolidation costs, computer transition expenditures, and an
asset impairment, associated with the Company's ongoing restructuring
initiatives. For the three and nine months ended June 30, 2001, the Company
recorded $46 million and $117 million, respectively, of other related expenses
associated with the Company's separation from Lucent related primarily to
computer system transition costs such as data conversion activities, asset
transfers, and training. In addition, during the third quarter of fiscal 2001,
the Company recorded a $20 million asset impairment charge related to its
Shreveport, Louisiana manufacturing facility, which was closed in conjunction
with its initiative to outsource certain manufacturing operations. The Company
also recorded $42 million in selling, general and administrative expenses for
additional start-up activities during the nine months ended June 30, 2001,
largely resulting from marketing costs associated with continuing to establish
the Avaya brand.

    See Note 14--Subsequent Events "Business Restructuring Charge" for related
disclosures.

                                       12
<Page>
                          AVAYA INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                  (UNAUDITED)

8. SHORT-TERM BORROWINGS AND LONG-TERM DEBT

<Table>
<Caption>
                                                                  AS OF             AS OF
                                                              JUNE 30, 2002   SEPTEMBER 30, 2001
                                                              -------------   ------------------
                                                                    (DOLLARS IN MILLIONS)
<S>                                                           <C>             <C>
Short-term borrowings:
  Five-year revolving credit facility.......................      $ --               $132
  Other short-term borrowings...............................        --                 13
                                                                  ----               ----
    Total short-term borrowings, including current
      maturities............................................        --                145
                                                                  ----               ----
Long-term debt:
  Commercial paper..........................................        --                432
  Five-year revolving credit facility.......................        --                 68
  LYONs convertible debt, net of discount...................       471                 --
  Senior Secured Notes, net of discount.....................       443                 --
                                                                  ----               ----
    Total long-term debt....................................       914                500
                                                                  ----               ----
    Total short-term borrowings and long-term debt..........      $914               $645
                                                                  ====               ====
</Table>

DEBT RATINGS

    The Company's ability to obtain external financing is affected by the
Company's debt ratings, which are periodically reviewed by the major credit
rating agencies. During the second quarter of fiscal 2002, the Company's
commercial paper and long-term debt ratings were downgraded. Ratings as of
June 30, 2002 are as follows (all ratings include a negative outlook):

<Table>
<S>                                                           <C>
Moody's:
  Commercial paper..........................................  No Rating
  Long-term senior unsecured debt...........................  Ba3
  Senior secured notes......................................  Ba2

Standard & Poor's:
  Commercial paper..........................................  No Rating
  Long-term senior unsecured debt...........................  BB-
  Senior secured notes......................................  BB-
  Corporate credit..........................................  BB+
</Table>

    On July 31, 2002, Standard & Poor's placed the Company's corporate credit
rating on CreditWatch with negative implications.

COMMERCIAL PAPER PROGRAM

    During the second quarter of fiscal 2002, Standard & Poor's and Moody's
downgraded the Company's commercial paper rating several times and eventually
withdrew their rating of the Company's commercial paper at the Company's
request. This recent withdrawal of the Company's commercial paper rating makes
it impossible for the Company to access the commercial paper market, which until
recently was the Company's primary source of liquidity.

                                       13
<Page>
                          AVAYA INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                  (UNAUDITED)

8. SHORT-TERM BORROWINGS AND LONG-TERM DEBT (CONTINUED)
    As a result of the impact of the ratings downgrades on the Company's ability
to issue commercial paper, in February 2002, the Company borrowed $300 million
under its five-year Credit Facility to repay commercial paper obligations. As of
June 30, 2002, all remaining commercial paper obligations and the borrowing
under the five-year credit facility had been repaid using proceeds from the
offering of the Senior Secured Notes discussed below.

REVOLVING CREDIT FACILITIES

    The Company has two revolving credit facilities (the "Credit Facilities")
with third party financial institutions. As of September 30, 2001, these Credit
Facilities consisted of a $400 million 364-day Credit Facility that expires in
August 2002 and an $850 million five-year Credit Facility that expires in
September 2005. As required by the terms of the Credit Facilities, upon the
closing of the offering of the Senior Secured Notes in March 2002, the Credit
Facilities were reduced proportionately by an amount equal to the $425 million
of proceeds, net of certain deferred financing costs, realized from the offering
of the Senior Secured Notes. Accordingly, as of June 30, 2002, the Credit
Facilities consisted of a $561 million five-year Credit Facility and a
$264 million 364-day Credit Facility. No amounts were outstanding under either
Credit Facility as of June 30, 2002.

    Funds are available under the Credit Facilities for general corporate
purpose and for acquisitions up to $150 million. Based on the Company's current
debt ratings, any borrowings under the Credit Facilities are secured, subject to
certain exceptions, by security interests in the equipment, accounts receivable,
inventory, and U.S. intellectual property rights of the Company and that of any
of its subsidiaries guaranteeing its obligations under the Credit Facilities as
described below. Borrowings are also secured by a pledge of the stock of most of
the Company's domestic subsidiaries and 65% of the stock of a foreign subsidiary
that, together with its subsidiaries, holds the beneficial and economic right to
utilize certain of the Company's domestic intellectual property rights outside
North America. The security interests would be suspended in the event the
Company's corporate credit rating was at least BBB by Standard & Poor's and its
long-term senior unsecured debt rating was at least Baa2 by Moody's, in each
case with a stable outlook. The Company's long-term senior unsecured debt is
currently rated Ba3 by Moody's, and the Company's corporate credit is currently
on CreditWatch and rated BB+ by Standard & Poor's, each with a negative outlook.

    Any current or future domestic subsidiaries (other than certain excluded
subsidiaries) whose revenues constitute 5% or greater of the Company's
consolidated revenues or whose assets constitute 5% or greater of the Company's
consolidated total assets will be required to guarantee its obligations under
the Credit Facilities. There are no Avaya subsidiaries that currently meet these
criteria.

    The Credit Facilities also include negative covenants, including limitations
on affiliate transactions, restricted payments and investments and advances. The
Credit Facilities also restrict the Company's ability and that of its
subsidiaries to incur debt, subject to certain exceptions. The Company is
permitted to use the Credit Facilities to fund acquisitions in an aggregate
amount not to exceed $150 million and can make larger acquisitions so long as
the Credit Facilities are not used to fund the purchase price. In addition, the
Credit Facilities require that in connection with any acquisition, no default
under the Credit Facilities shall have occurred and be continuing or would
result from such acquisition, and the Company shall be in compliance with the
financial ratio test described below after giving pro forma effect to such
acquisition.

                                       14
<Page>
                          AVAYA INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                  (UNAUDITED)

8. SHORT-TERM BORROWINGS AND LONG-TERM DEBT (CONTINUED)
    The Credit Facilities require the Company to maintain a ratio of
consolidated Earnings Before Interest, Taxes, Depreciation and Amortization
("EBITDA") to interest expense consisting of the previous four consecutive
fiscal quarters of not less than three to one for each quarter beginning with
the period ending March 31, 2002 until September 30, 2002 and a ratio of not
less than four to one at all times thereafter. The Company is also required to
maintain consolidated EBITDA in the following amounts for each of the periods
noted below:

    - $20 million for the quarter ended March 31, 2002;

    - $80 million for the two-quarter period ended June 30, 2002;

    - $180 million for the three-quarter period ended September 30, 2002;

    - $300 million for the four-quarter period ended December 31, 2002; and

    - $400 million for each four-quarter period thereafter.

    For purposes of these calculations, the Company is permitted to exclude from
the computation of consolidated EBITDA up to $163 million of restructuring
charges, including asset impairment and other one time expenses to be taken no
later than the fourth quarter of fiscal 2002 and any write down of intangibles
associated with the adoption of SFAS 142. In addition, the Company may exclude
certain business restructuring charges and related expenses taken in fiscal
2001. During the second and third quarters of fiscal 2002, the Company incurred
$97 million of such business restructuring charges and related expenses. As of
June 30, 2002, the Company was in compliance with all required covenants.

    See Note 14--Subsequent Events "Revolving Credit Facilities" for related
disclosures.

UNCOMMITTED CREDIT FACILITIES

    The Company, through its foreign operations, has entered into several
uncommitted credit facilities totaling $82 million and $118 million, of which
letters of credit of $27 million and $10 million were issued and outstanding as
of June 30, 2002 and September 30, 2001, respectively. Letters of credit are
purchased guarantees that ensure the Company's performance or payment to third
parties in accordance with specified terms and conditions.

LYONS CONVERTIBLE DEBT

    In the first quarter of fiscal 2002, the Company sold through an
underwritten public offering under a shelf registration statement an aggregate
principal amount at maturity of approximately $944 million of Liquid Yield
Option-TM- Notes due 2021 ("LYONs"). The proceeds of approximately
$448 million, net of a $484 million discount and $12 million of underwriting
fees, were used to refinance a portion of the Company's outstanding commercial
paper. The underwriting fees of $12 million were recorded as deferred financing
costs and are being amortized to interest expense over a three-year period
through October 31, 2004, which represents the first date holders may require
the Company to purchase all or a portion of their LYONs. For the three and nine
months ended June 30, 2002, $1 million and $3 million, respectively, of deferred
financing costs were recorded as interest expense.

    The original issue discount of $484 million accretes daily at a rate of
3.625% per year calculated on a semiannual bond equivalent basis. The Company
will not make periodic cash payments of interest

                                       15
<Page>
                          AVAYA INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                  (UNAUDITED)

8. SHORT-TERM BORROWINGS AND LONG-TERM DEBT (CONTINUED)
on the LYONs. Instead, the amortization of the discount is recorded as interest
expense and represents the accretion of the LYONs issue price to their maturity
value. For the three and nine months ended June 30, 2002, $4 million and
$11 million, respectively, of interest expense on the LYONs was recorded
resulting in an accreted value of $471 million as of June 30, 2002. The discount
will cease to accrete on the LYONs upon maturity, conversion, purchase by the
Company at the option of the holder, or redemption by Avaya. The LYONs are
unsecured obligations that rank equally in right of payment with all existing
and future unsecured and unsubordinated indebtedness of Avaya.

    The LYONs are convertible into 35,333,073 shares of Avaya common stock at
any time on or before the maturity date. The conversion rate may be adjusted for
certain reasons, but will not be adjusted for accrued original issue discount.
Upon conversion, the holder will not receive any cash payment representing
accrued original issue discount. Accrued original issue discount will be
considered paid by the shares of common stock received by the holder of the
LYONs upon conversion.

    Avaya may redeem all or a portion of the LYONs for cash at any time on or
after October 31, 2004 at a price equal to the sum of the issue price and
accrued original issue discount on the LYONs as of the applicable redemption
date. Conversely, holders may require the Company to purchase all or a portion
of their LYONs on October 31, 2004, 2006 and 2011 at a price equal to the sum of
the issue price and accrued original issue discount on the LYONs as of the
applicable purchase date. The Company may, at its option, elect to pay the
purchase price in cash or shares of common stock, or any combination thereof.

    The indenture governing the LYONs includes certain covenants, including a
limitation on the Company's ability to grant liens on significant domestic real
estate properties or the stock of its subsidiaries holding such properties.

SENIOR SECURED NOTES

    In March 2002, the Company issued through an underwritten public offering
under a shelf registration statement $440 million aggregate principal amount of
11 1/8% Senior Secured Notes due April 2009 (the "Senior Secured Notes") and
received net proceeds of approximately $425 million, net of a $5 million
discount and $10 million of issuance costs. Interest on the Senior Secured Notes
is payable on April 1 and October 1 of each year beginning on October 1, 2002.
The Company recorded interest expense related to the Senior Secured Notes of
$12 million and $13 million for the three and nine months ended June 30, 2002,
respectively. The $5 million discount is being amortized to interest expense
over the seven-year term to maturity. The $10 million of issuance costs were
recorded as deferred financing costs and are also being amortized to interest
expense over the term of the Notes. The proceeds from the issuance were used to
repay amounts outstanding under the five-year Credit Facility and for general
corporate purposes.

    The Company may redeem the Senior Secured Notes, in whole or from time to
time in part, at the redemption prices expressed as a percentage of principal
amount noted below plus accrued and unpaid

                                       16
<Page>
                          AVAYA INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                  (UNAUDITED)

8. SHORT-TERM BORROWINGS AND LONG-TERM DEBT (CONTINUED)
interest to the applicable redemption date, if redeemed during the twelve-month
period beginning on April 1 of the following years:

<Table>
<Caption>
YEARS                                                          PERCENTAGES
-----                                                          -----------
<S>                                                            <C>
2006........................................................    105.563%
2007........................................................    102.781%
2008........................................................    100.000%
</Table>

    The Senior Secured Notes are secured by a second priority security interest
in the collateral securing the Company's obligations under the Credit Facilities
and its obligations under the interest rate swap agreements described below. In
the event that (i) the Company's corporate credit is rated at least BBB by
Standard & Poor's and its long-term senior unsecured debt is rated at least Baa2
by Moody's, each without a negative outlook or its equivalent, or (ii) subject
to certain conditions, at least $400 million of unsecured indebtedness is
outstanding or available under the Credit Facilities or a bona fide successor
credit facility, the security interest in the collateral securing the Senior
Secured Notes will terminate. The indenture governing the Senior Secured Notes
includes negative covenants that limit the Company's ability to incur secured
debt and enter into sale/leaseback transactions. In addition, the indenture also
includes conditional covenants that limit the Company's ability to incur debt,
enter into affiliate transactions, or make restricted payments or investments
and advances. These conditional covenants will apply to the Company until such
time that the Senior Secured Notes are rated at least BBB- by Standard & Poor's
and Baa3 by Moody's, in each case without a negative outlook or its equivalent.

INTEREST RATE SWAP AGREEMENTS

    In April 2002, the Company entered into two interest rate swap agreements
with a total notional amount of $200 million that qualify and are designated as
fair value hedges in accordance with SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." The swap agreements mature in April 2009
and were executed in order to:

    - convert a portion of the Senior Secured Notes fixed-rate debt into
      floating-rate debt;

    - maintain a capital structure containing appropriate amounts of fixed and
      floating-rate debt; and

    - reduce net interest payments and expense in the near-term.

                                       17
<Page>
                          AVAYA INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                  (UNAUDITED)

8. SHORT-TERM BORROWINGS AND LONG-TERM DEBT (CONTINUED)
    Under these agreements, the Company receives a fixed interest rate of
11.125% and pays a floating interest rate based on LIBOR plus an agreed-upon
spread, which was equal to a weighted average interest rate of 7.25% as of
June 30, 2002. The amount paid and the amount received are calculated based on
the total notional amount of $200 million. Since the relevant terms of the swap
agreements match the corresponding terms of the Senior Secured Notes, there is
no hedge ineffectiveness. Accordingly, gains and losses on the swap agreements
will fully offset the losses and gains on the hedged portion of the Senior
Secured Notes, which are marked to market at each reporting date. As of
June 30, 2002, the Company recorded the fair market value of the swaps of
$8 million as other assets along with a corresponding increase to the hedged
debt, both of which were recorded through other income (expense), net.

    Interest payments are recognized through interest expense and are made and
received on the first day of each April and October, commencing on October 1,
2002 and ending on the maturity date. On the last day of each semi-annual
interest payment period, the interest payment for the previous six months will
be made based upon the six month LIBOR rate (in arrears) on that day, plus the
applicable margin, as shown in the table below. Since the interest rate is not
known until the end of each semi-annual interest period, estimates are used
during such period based upon published forward-looking LIBOR rates. Any
differences between the estimated interest expense and the actual interest
payment are recorded to interest expense at the end of each semi-annual interest
period. These interest rate swaps resulted in actual interest expense for the
three and nine months ended June 30, 2002 of $4 million as compared with
interest expense of $6 million had the Company not entered into these
agreements.

    The following table outlines the terms of the swap agreements:

<Table>
<Caption>
                                                RECEIVE FIXED
MATURITY DATE              NOTIONAL AMOUNT      INTEREST RATE               PAY VARIABLE INTEREST RATE
-------------           ---------------------   -------------   ---------------------------------------------------
                        (DOLLARS IN MILLIONS)
<S>                     <C>                     <C>             <C>
 April 2009                      $150              11.125%      Six month LIBOR (in arrears) plus 5.055% spread
 April 2009                        50              11.125%      Six month LIBOR (in arrears) plus 5.098% spread
                                 ----
    Total                        $200
                                 ====
</Table>

    Each counterparty to the swap agreements is a lender under the Credit
Facilities. The Company's obligations under these swap agreements are secured on
the same basis as its obligations under the Credit Facilities.

9. CONVERTIBLE PARTICIPATING PREFERRED STOCK AND OTHER RELATED EQUITY
TRANSACTIONS

WARBURG TRANSACTIONS

    In October 2000, the Company sold to Warburg Pincus Equity Partners, L.P.
and certain of its investment funds (the "Warburg Entities") four million shares
of the Company's Series B convertible participating preferred stock and warrants
to purchase the Company's common stock for an aggregate purchase price of
$400 million. On March 21, 2002, the Company completed a series of transactions
pursuant to which the Warburg Entities (i) converted all four million shares of
the Series B preferred stock into 38,329,365 shares of Avaya's common stock
based on a conversion price of $11.31 per share,

                                       18
<Page>
                          AVAYA INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                  (UNAUDITED)

9. CONVERTIBLE PARTICIPATING PREFERRED STOCK AND OTHER RELATED EQUITY
TRANSACTIONS (CONTINUED)
which was reduced from the original conversion price of $26.71 per share,
(ii) purchased an additional 286,682 shares of common stock by exercising a
portion of the warrants at an exercise price of $34.73 per share resulting in
gross proceeds of approximately $10 million, and (iii) purchased 14,383,953
shares of the Company's common stock for $6.26 per share (the reported closing
price of Avaya's common stock on the New York Stock Exchange on March 8, 2002),
resulting in gross proceeds of approximately $90 million. In connection with
these transactions, the Company incurred approximately $4 million of financing
costs which were recorded as a reduction to additional paid-in capital. As of
June 30, 2002, there were no shares of Series B preferred stock outstanding and,
accordingly, the Series B preferred stock has ceased accruing dividends.

    As a result of these transactions, the Warburg entities hold approximately
53 million shares of the Company's common stock, which represents approximately
15% of the Company's outstanding common stock, and warrants to purchase
approximately 12 million additional shares of common stock. These warrants have
an exercise price of $34.73 of which warrants exercisable for 6,724,665 shares
of common stock expire on October 2, 2004, and warrants exercisable for
5,379,732 shares of common stock expire on October 2, 2005.

    The conversion of the Series B preferred stock and the exercise of the
warrants resulted in a charge to accumulated deficit of approximately
$125 million, in addition to the $5 million accretion of the Series B preferred
stock from January 1, 2002 through the date of conversion. This charge primarily
represents the impact of reducing the preferred stock conversion price from
$26.71 per share as originally calculated under the certificate of designations
for the Series B preferred stock to $11.31 per share, as permitted under the
certificate of designations. The Company recorded a total of $12 million of
accretion for the period from October 1, 2001 through the date of conversion.

PUBLIC OFFERING OF COMMON STOCK

    On March 15, 2002, the Company sold 19.55 million shares of common stock for
$5.90 per share in a public offering. The Company received proceeds of
approximately $112 million, which is net of approximately $3 million of
underwriting fees reflected as a reduction to additional paid-in capital.

10. EARNINGS (LOSS) PER SHARE OF COMMON STOCK

    Basic earnings (loss) per common share was calculated by dividing net income
(loss) available to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted earnings (loss) per common share
was calculated by adjusting net income (loss) available to common stockholders
and weighted average outstanding shares, assuming conversion of all potentially
dilutive securities including stock options, warrants, convertible participating
preferred stock and convertible debt.

                                       19
<Page>
                          AVAYA INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                  (UNAUDITED)

10. EARNINGS (LOSS) PER SHARE OF COMMON STOCK (CONTINUED)

    Net loss available to common stockholders for both the basic and diluted
loss per common share calculations for the nine months ended June 30, 2002
includes the $125 million conversion charge related to the Series B preferred
stock (see Note 9).

<Table>
<Caption>
                                                  THREE MONTHS ENDED         NINE MONTHS ENDED
                                                       JUNE 30,                  JUNE 30,
                                                -----------------------   -----------------------
                                                   2002         2001         2002         2001
                                                ----------   ----------   ----------   ----------
                                                (DOLLARS AND SHARES IN MILLIONS, EXCEPT PER SHARE
                                                                    AMOUNTS)
<S>                                             <C>          <C>          <C>          <C>
Net income (loss) available to common
  stockholders................................    $  (39)      $   17       $ (259)      $  (44)
                                                  ======       ======       ======       ======
SHARES USED IN COMPUTING EARNINGS (LOSS) PER
  COMMON SHARE:
  Basic.......................................       362          285          318          283
                                                  ======       ======       ======       ======
  Diluted.....................................       362          286          318          283
                                                  ======       ======       ======       ======
EARNINGS (LOSS) PER COMMON SHARE:
  Basic.......................................    $(0.11)      $ 0.06       $(0.81)      $(0.16)
                                                  ======       ======       ======       ======
  Diluted.....................................    $(0.11)      $ 0.06       $(0.81)      $(0.16)
                                                  ======       ======       ======       ======
SECURITIES EXCLUDED FROM THE COMPUTATION OF
  DILUTED EARNINGS (LOSS) PER COMMON SHARE:
  Options(1)..................................        52           66           46           66
  Series B preferred stock(2).................        --           16           38           16
  Warrants(1).................................        12           12           12           12
  Convertible debt(1).........................        82           --           54           --
                                                  ------       ------       ------       ------
  Total.......................................       146           94          150           94
                                                  ======       ======       ======       ======
</Table>

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

(1) These securities have been excluded from the diluted earnings (loss) per
    common share calculation since the effect of their inclusion would have been
    antidilutive.

(2) When applying the "if-converted" method, the Series B convertible
    participating preferred stock is assumed to have been converted as of
    October 1, 2001. However, in applying the "if-converted" method, the
    Series B convertible participating preferred stock was excluded from the
    diluted earnings (loss) per common share calculation since the effect of its
    inclusion would have been antidilutive.

11. OPERATING SEGMENTS

    Effective January 1, 2002, the Company implemented an internal
reorganization and as a result, the Company currently assesses its performance
and allocates its resources among four rather than three operating segments. The
Company divided its Communications Solutions segment into two reportable
segments: Systems and Applications. The objective of the reorganization was to
enable the

                                       20
<Page>
                          AVAYA INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                  (UNAUDITED)

11. OPERATING SEGMENTS (CONTINUED)
Company to manage its product groups with greater precision. The Systems segment
includes sales to small to midsized enterprises, which includes data switches
and small to midsized telephony products, and sales to large customers, referred
to as Enterprise Systems, which include sales of all enterprise telephony
products, virtual private networks, and data Local Area Network and Wide Area
Network equipment. The Applications segment consists of customer relationship
management, voice and unified messaging, and unified communication products and
related professional services. In addition, the Company shifted installation and
the network consulting portion of professional services previously reported in
Communications Solutions to the Services segment. The Services segment continues
to include maintenance, value-added and data services. The Connectivity
Solutions segment represents structured cabling systems and electronic cabinets.

    As part of the changes made in the second quarter of fiscal 2002, the
Company also redirected a larger portion of corporate operating expenses,
consisting mostly of marketing and selling expenses, to each of the operating
segments. The costs of shared services and other corporate center operations
that (i) are managed on a common basis, (ii) are not identified with the
operating segments, and (iii) represent business activities that do not qualify
for separate operating segment reporting are aggregated in the Corporate and
other category. Such costs include primarily business restructuring charges and
related expenses, research and development, information technology, corporate
finance and real estate costs.

    As a result of the changes discussed above, fiscal 2001 amounts set forth in
the table below have been restated to conform to the Company's current operating
segment presentation. In addition, Avaya's consolidated financial statements for
the three and nine months ended June 30, 2001 have been restated to reflect
these changes. Intersegment sales approximate fair market value and are not
significant.

    See Note 14--Subsequent Events "Segment Business Model Evolution" for
subsequent changes to our operating segments.

                                       21
<Page>
                          AVAYA INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                  (UNAUDITED)

11. OPERATING SEGMENTS (CONTINUED)
OPERATING SEGMENTS

<Table>
<Caption>
                                       THREE MONTHS ENDED     NINE MONTHS ENDED
                                            JUNE 30,              JUNE 30,
                                       -------------------   -------------------
                                         2002       2001       2002       2001
                                       --------   --------   --------   --------
                                                 (DOLLARS IN MILLIONS)
<S>                                    <C>        <C>        <C>        <C>
SYSTEMS:
  Total revenue......................   $  384     $  541     $1,240     $1,799
  Operating income...................        3         47         39        240
APPLICATIONS:
  Total revenue......................   $  160     $  217     $  521     $  702
  Operating income (loss)............       (2)       (10)       (11)        32
SERVICES:
  Total revenue......................   $  511     $  584     $1,600     $1,733
  Operating income...................      133         96        433        290
CONNECTIVITY SOLUTIONS:
  Total revenue......................   $  164     $  372     $  443     $1,117
  Operating income (loss)............        9        134        (41)       360
</Table>

RECONCILING ITEMS

    A reconciliation of the totals reported for the operating segments to the
corresponding line items in the consolidated financial statements is presented
below:

<Table>
<Caption>
                                               THREE MONTHS ENDED     NINE MONTHS ENDED
                                                    JUNE 30,              JUNE 30,
                                               -------------------   -------------------
                                                 2002       2001       2002       2001
                                               --------   --------   --------   --------
                                                         (DOLLARS IN MILLIONS)
<S>                                            <C>        <C>        <C>        <C>
REVENUE
  Total operating segments...................   $1,219     $1,714     $3,804     $5,351
OPERATING INCOME (LOSS)
  Total operating segments...................      143        267        420        922
  Corporate and other:
    Business restructuring charges, related
      expenses and start-up expenses.........       (9)       (66)      (103)      (313)
    Purchased in-process research and
      development............................       --         (1)        --        (32)
    Corporate and unallocated shared
      expenses...............................     (154)      (153)      (472)      (607)
                                                ------     ------     ------     ------
      Total operating income (loss)..........   $  (20)    $   47     $ (155)    $  (30)
                                                ======     ======     ======     ======
</Table>

                                       22
<Page>
                          AVAYA INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                  (UNAUDITED)

11. OPERATING SEGMENTS (CONTINUED)
GEOGRAPHIC INFORMATION

<Table>
<Caption>
                                                       THREE MONTHS ENDED     NINE MONTHS ENDED
                                                            JUNE 30,              JUNE 30,
                                                       -------------------   -------------------
                                                         2002       2001       2002       2001
                                                       --------   --------   --------   --------
                                                                 (DOLLARS IN MILLIONS)
<S>                                                    <C>        <C>        <C>        <C>
REVENUE(1)
  U.S................................................   $  908     $1,280     $2,780     $4,021
  International......................................      311        434      1,024      1,330
                                                        ------     ------     ------     ------
    Total............................................   $1,219     $1,714     $3,804     $5,351
                                                        ======     ======     ======     ======
</Table>

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

(1) Revenue is attributed to geographic areas based on the location of
    customers.

CONCENTRATIONS

    No single customer accounted for more than 10% of the Company's revenue for
the nine months ended June 30, 2002.

    In March 2000, as part of its strategy to strengthen its distribution
network, Avaya sold its primary distribution function for voice communications
systems for small and mid-sized enterprises to Expanets, Inc., currently the
Company's largest dealer. The terms of the sale provided that the Company would
provide billing, collection and maintenance services for Expanets for a
transitional period. In May 2001, the dealer agreement was restructured to more
precisely define the customer base to be serviced by each party, including small
or branch offices of larger enterprises.

    At the time the dealer agreement was restructured, Expanets' efforts to
obtain a commercial credit facility were hampered by the fact that its billing
and collection function had not yet been migrated to its information systems.
Because of the importance to Avaya of the Expanets relationship and the customer
base served by Expanets, the Company agreed to provide a $125 million short-term
line of credit (as amended as described below, the "Dealer Credit Agreement").
The Dealer Credit Agreement applies to certain unpaid and outstanding
receivables for amounts due to Avaya by Expanets. A delay in the migration of
the billing and collection function until December 2001 affected Expanets'
ability to obtain a collateralized commercial credit facility by the original
March 31, 2002 expiration date of the Dealer Credit Agreement.

    Accordingly, in March 2002, the Company entered into an amendment to the
Dealer Credit Agreement with Expanets and its parent company, NorthWestern
Corporation. The Dealer Credit Agreement provides for installment payments under
the credit line in the amounts of $25 million in March 2002, $20 million in
April 2002, and $25 million in August 2002 with the remaining balance due on
December 31, 2002. As of June 30, 2002, the Company had received the first two
installment payments. The Dealer Credit Agreement provides that the borrowing
limit shall be reduced by the amount of each installment payment upon the
receipt of such payment and may also be offset by certain obligations of the
Company to Expanets related to the March 2000 sale of the distribution function
to Expanets. As of June 30, 2002 and September 30, 2001, the borrowing limit was
$69 million

                                       23
<Page>
                          AVAYA INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                  (UNAUDITED)

11. OPERATING SEGMENTS (CONTINUED)
and $121 million, respectively. The interest rate on the line of credit will
accrue at an annual rate of 12% through August 31, 2002, and increase to 15% on
September 1, 2002.

    The following table summarizes the amounts receivable from Expanets,
including amounts outstanding under the line of credit, as of June 30, 2002 and
September 30, 2001:

<Table>
<Caption>
                                                            AS OF             AS OF
                                                        JUNE 30, 2002   SEPTEMBER 30, 2001
                                                        -------------   ------------------
                                                              (DOLLARS IN MILLIONS)
<S>                                                     <C>             <C>
Receivables...........................................       $ 50              $117
Other current assets..................................         47                81
                                                             ----              ----
  Total amounts receivable from Expanets..............       $ 97              $198
                                                             ====              ====
Secured and unsecured components of the amounts
  receivable are as follows:
  Secured line of credit (included in receivables)....       $ 47              $ 71
  Secured line of credit (included in other current
    assets)...........................................         22                50
                                                             ----              ----
    Total secured line of credit......................         69               121
    Unsecured (included in receivables)...............         28                77
                                                             ----              ----
  Total amounts receivable from Expanets..............       $ 97              $198
                                                             ====              ====
</Table>

    Amounts recorded in receivables represent trade receivables due from
Expanets on sales of products and maintenance services. Amounts recorded in
other current assets represent receivables due from Expanets for transitional
services provided under a transition services agreement.

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

    There can be no assurance that Expanets will be able to comply with the
remaining terms of the Dealer Credit Agreement. In the event Expanets is unable
to comply with the terms of the Dealer Credit Agreement and a default occurs,
the remedies available to Avaya under such agreement may be insufficient to
satisfy in full all of Expanets' obligations to the Company.

    For the nine months ended June 30, 2001, sales to Expanets, which are
included in the Systems and Applications segments, were approximately 10% of the
Company's revenue.

CONNECTIVITY SOLUTIONS

    In February 2002, the Company engaged Salomon Smith Barney Inc. to explore
alternatives for the Company's Connectivity Solutions segment, including the
possible sale of the business. The Connectivity Solutions segment consists of
the Company's structured cabling systems and electronic cabinets and markets
products including (i) the SYSTIMAX-Registered Trademark- product line of
structured cabling systems primarily to

                                       24
<Page>
                          AVAYA INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                  (UNAUDITED)

11. OPERATING SEGMENTS (CONTINUED)
enterprises of various sizes for wiring phones, workstations, personal
computers, local area networks and other communications devices through their
buildings or across their campuses, (ii) the ExchangeMAX-Registered Trademark-
product line of structured cabling systems primarily to central offices of
service providers, such as telephone companies or Internet service providers,
and (iii) electronic cabinets to enclose electronic devices and equipment
primarily to service providers.

    The Company's goal in exploring alternatives for the Connectivity Solutions
segment is to strengthen its focus on higher growth opportunities by emphasizing
the Systems, Applications and Services offerings, such as converged voice and
data network products and unified communication and customer relationship
management solutions. These offerings, unlike the Connectivity Solutions
offerings, are targeted exclusively at enterprises and the Company believes that
they offer increased growth potential. In addition, management believes that the
proceeds from any sale of the Connectivity Solutions segment would help enhance
the Company's liquidity. Connectivity Solutions revenue comprised $164 million,
or 13.5%, and $443 million, or 11.6%, for the three and nine months ended
June 30, 2002, respectively, and $1,322 million, or 19.5%, of the Company's
total revenue in the fiscal year ended September 30, 2001.

12. TRANSACTIONS WITH LUCENT AND OTHER RELATED PARTY TRANSACTIONS

CONTRIBUTION AND DISTRIBUTION AGREEMENT

    In connection with the Contribution and Distribution, the Company and Lucent
executed and delivered the Contribution and Distribution Agreement and certain
related agreements.

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

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

OTHER RELATED PARTY TRANSACTIONS

    Jeffrey A. Harris, a senior managing director of Warburg Pincus LLC and a
general partner of Warburg, Pincus & Co. each of which is an affiliate of
Warburg Pincus Equity Partners L.P., resigned from the Company's board of
directors prior to the approval by the board of the transactions disclosed

                                       25
<Page>
                          AVAYA INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                  (UNAUDITED)

12. TRANSACTIONS WITH LUCENT AND OTHER RELATED PARTY TRANSACTIONS (CONTINUED)
under "Warburg Transactions" in Note 9. Mr. Harris had served as the chairman of
Avaya's audit and finance committee. The board has appointed Mark Leslie, a
member of the audit and finance committee, to succeed Mr. Harris as chairman of
that committee. In April 2002, the Warburg Entities exercised their contractual
right to designate for election to the board a director unaffiliated with the
Warburg Entities reasonably acceptable to the Company's board of directors.
Accordingly, Anthony P. Terraciano was appointed to the Company's board as the
Warburg Entities' nominee.

    Henry B. Schacht has been a director of Avaya since September 2000.
Mr. Schacht is currently on a leave of absence as a managing director and senior
advisor of Warburg Pincus LLC.

    Each of Mr. Schacht and Mr. Terracciano may be entitled to indemnification
by affiliates of Warburg Pincus LLC and Warburg, Pincus & Co. against certain
liabilities that each may incur as a result of serving as a director of the
Company.

13. COMMITMENTS AND CONTINGENCIES

LEGAL PROCEEDINGS

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

YEAR 2000 ACTIONS

    Three separate purported class action lawsuits are pending against Lucent,
one in state court in West Virginia, one in federal court in the Southern
District of New York and another in federal court in the Southern District of
California. The case in New York was filed in January 1999 and, after being
dismissed, was refiled in September 2000. The case in West Virginia was filed in
April 1999 and the case in California was filed in June 1999, and amended in
2000 to include Avaya as a defendant. The Company may also be named a party to
the other actions and, in any event, has assumed the obligations of Lucent for
all of these cases under the Contribution and Distribution Agreement. All three
actions are based upon claims that Lucent sold products that were not Year 2000
compliant, meaning that the products were designed and developed without
considering the possible impact of the change in the calendar from December 31,
1999 to January 1, 2000. The complaints allege that the sale of these products
violated statutory consumer protection laws and constituted breaches of implied
warranties. A class has recently been certified in the West Virginia state court
matter, but the other matters have not been so certified. The certified class
includes those persons or entities that purchased, leased or financed the
products in question. In addition, the court also certified as a subclass all
class members who had service protection plans or other service or extended
warranty contracts with Lucent in effect as of April 1, 1998, as to which Lucent
failed to offer a free Year 2000-compliant solution. The complaints seek, among
other remedies, compensatory damages, punitive damages and counsel fees in
amounts that have not yet been specified. At this time, the Company cannot
determine whether the outcome of these actions will have a material adverse
effect on its financial position, results of operations or cash flows. In
addition, if these cases are not resolved in a timely manner, they will require
expenditure of significant legal costs related to their defense.

                                       26
<Page>
                          AVAYA INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                  (UNAUDITED)

13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
COUPON PROGRAM CLASS ACTION

    In April 1998, a class action was filed against Lucent in state court in New
Jersey, alleging that Lucent improperly administered a coupon program resulting
from the settlement of a prior class action. The plaintiffs allege that Lucent
improperly limited the redemption of the coupons from dealers by not allowing
them to be combined with other volume discount offers, thus limiting the market
for the coupons. The Company has assumed the obligations of Lucent for these
cases under the Contribution and Distribution Agreement. The complaint alleges
breach of contract, fraud and other claims and the plaintiffs seek compensatory
and consequential damages, interest and attorneys' fees. The parties have
entered into a settlement agreement that has been approved by the court pursuant
to a written order. The period for submitting a claim notification expired
July 15, 2002. The Company is in the process of winding up the administration of
the resolution of this matter.

    See Note 14--Subsequent Events "Developments in Legal Proceedings" for
related disclosure.

LUCENT SECURITIES LITIGATION

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

    The above actions have been consolidated with other purported class actions
filed against Lucent on behalf of its stockholders in January 2000 and are
pending in the Federal District Court for the District of New Jersey. The
Company understands that Lucent's motion to dismiss the Fifth Consolidated
Amended and Supplemental Class Action Complaint in the consolidated action was
denied by the court in June 2002. As a result of the denial of its motion to
dismiss, the Company understands that Lucent has filed a motion for partial
summary judgment, seeking a dismissal of a portion of the Fifth Consolidated
Amended and Supplemental Class Action Complaint. The plaintiffs allege that they
were injured by reason of certain alleged false and misleading statements made
by Lucent in violation of the federal securities laws. The consolidated cases
were initially filed on behalf of stockholders of Lucent who bought Lucent
common stock between October 26, 1999 and January 6, 2000, but the consolidated
complaint was amended to include purported class members who purchased Lucent
common stock up to November 21, 2000. A class has not yet been certified in the
consolidated actions. The plaintiffs in all these stockholder class actions seek
compensatory damages plus interest and attorneys' fees.

    Any liability incurred by Lucent in connection with these stockholder class
action lawsuits may be deemed a shared contingent liability under the
Contribution and Distribution Agreement and, as a result, the Company would be
responsible for 10% of any such liability. All of these actions are in the early
stages of litigation and an outcome cannot be predicted and, as a result, there
can be no assurance that these cases will not have a material adverse effect on
the Company's financial position, results of operations or cash flows.

                                       27
<Page>
                          AVAYA INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                  (UNAUDITED)

13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
LICENSING ARBITRATION

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

REVERSE/FORWARD STOCK SPLIT COMPLAINTS

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

    - a reverse 1-for-30 stock split followed immediately by a forward 30-for-1
      stock split of the Company's common stock;

    - a reverse 1-for-40 stock split followed immediately by a forward 40-for-1
      stock split of the Company's common stock;

    - a reverse 1-for-50 stock split followed immediately by a forward 50-for-1
      stock split of the Company's common stock.

    The complaint alleges, among other things, that the manner in which the
Company plans to implement the transactions, as described in its proxy
statement, violates certain aspects of Delaware law with regard to the treatment
of fractional shares and that the description of the proposed transactions in
the proxy statement is misleading to the extent it reflects such violations. The
action purports to be a class action on behalf of all holders of less than 50
shares of the Company's common stock. The plaintiff is seeking, among other
things, damages as well as injunctive relief enjoining the Company from
effecting the transactions and requiring the Company to make corrective,
supplemental disclosure. In June 2002, the court denied the plaintiff's motion
for summary judgment and granted the Company's cross-motion for summary
judgment. The plaintiff has since appealed the court's decision to the Delaware
Supreme Court. Briefs are expected to be filed with the Delaware Supreme Court
by the end of September 2002. The Company cannot provide assurance that this
lawsuit will not impair its ability to implement any of the transactions.

    In April 2002, a complaint was filed against the Company in the Superior
Court of New Jersey, Somerset County, in connection with the reverse/forward
stock splits described above. The action purports to be a class action on behalf
of all holders of less than 50 shares of the Company's common

                                       28
<Page>
                          AVAYA INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                  (UNAUDITED)

13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
stock. The plaintiff is seeking, among other things, injunctive relief enjoining
the Company from effecting the transactions. In recognition of the then pending
action in the Delaware Court of Chancery, the plaintiff voluntarily dismissed
his complaint without prejudice.

COMMISSION ARBITRATION DEMAND

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

LUCENT CONSUMER PRODUCTS CLASS ACTIONS

    In several class action cases (the first of which was filed on June 24,
1996), plaintiffs claim that AT&T and Lucent engaged in fraud and deceit in
continuing to lease residential telephones to consumers without adequate notice
that the consumers would pay well in excess of the purchase price of a telephone
by continuing to lease. The cases were removed and consolidated in federal court
in Alabama, and were subsequently remanded to their respective state courts
(Illinois, Alabama, New Jersey, New York and California). In July 2001, the
Illinois state court certified a nationwide class of plaintiffs. The case in
Illinois was scheduled for trial on August 5, 2002. Prior to commencement of
trial, however, the Company has been advised that the parties agreed to a
settlement of the claims on a class-wide basis. The proposed settlement has been
preliminarily approved by the court. A notice and hearing will occur (within two
to three months) to obtain a final approval of the settlement.

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

    See Note 14--Subsequent Events "Developments in Legal Proceedings" for
related disclosure.

PATENT INFRINGEMENT INDEMNIFICATION CLAIMS

    A patent owner has sued three customers of the Company's managed services
business for alleged infringement of a single patent based on the customers'
voicemail service. These customers' voicemail service offerings are partially or
wholly provided by the Company's managed services business. As a consequence,
these customers are requesting defense and indemnification from the Company in
the lawsuits under their managed services contracts. This matter is in the early
stages and the Company

                                       29
<Page>
                          AVAYA INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                  (UNAUDITED)

13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
cannot yet determine whether the outcome of this matter will have a material
adverse effect on its financial position, results of operations or cash flows.

ENVIRONMENTAL MATTERS

    The Company is subject to a wide range of governmental requirements relating
to employee safety and health and to the handling and emission into the
environment of various substances used in its operations. The Company is subject
to certain provisions of environmental laws, particularly in the U.S., governing
the cleanup of soil and groundwater contamination. Such provisions impose
liability for the costs of investigating and remediating releases of hazardous
materials at currently or formerly owned or operated sites. In certain
circumstances, this liability may also include the cost of cleaning up
historical contamination, whether or not caused by the Company. The Company is
currently conducting investigation and/or cleanup of known contamination at
seven of its facilities either voluntarily or pursuant to government directives.

    It is often difficult to estimate the future impact of environmental
matters, including potential liabilities. The Company has established financial
reserves to cover environmental liabilities where they are probable and
reasonably estimable. Reserves for estimated losses from environmental matters
are, depending on the site, based primarily upon internal or third party
environmental studies and the extent of contamination and the type of required
cleanup. Although the Company believes that its reserves are adequate to cover
known environmental liabilities, there can be no assurance that the actual
amount of environmental liabilities will not exceed the amount of reserves for
such matters or will not have a material adverse effect on the Company's
financial position, results of operations or cash flows.

CONDITIONAL REPURCHASE OBLIGATIONS

    Avaya sells products to various distributors that may obtain financing from
unaffiliated third party lending institutions. In the event the lending
institution repossesses the distributor's inventory of Avaya products, Avaya is
obligated under certain circumstances to repurchase such inventory from the
lending institution. The Company's obligation to repurchase inventory from the
lending institution terminates 180 days from the date of invoicing by Avaya to
the distributor. The repurchase amount is equal to the price originally paid to
Avaya by the lending institution for the inventory. The amount reported to the
Company from the two distributors who participate in these arrangements as their
inventory on-hand was approximately $74 million as of June 30, 2002. The Company
is unable to determine how much of this inventory was financed and, if so,
whether any amounts have been paid to the lending institutions. Therefore, the
Company's repurchase obligation could be less than the amount of inventory
on-hand. While there have not been any repurchases made by Avaya under such
agreements, there can be no assurance that the Company will not be obligated to
repurchase inventory under these arrangements in the future.

                                       30
<Page>
                          AVAYA INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                  (UNAUDITED)

14. SUBSEQUENT EVENTS

BUSINESS RESTRUCTURING CHARGE

    The Company has been experiencing a decline in its revenue as a result of
the continued deferment by customers of information technology investments,
specifically for enterprise communications products and services. Despite the
unpredictability of the current business environment, the Company remains
focused on its strategy to return to profitability by focusing on sustainable
cost and expense reduction, among other things. To achieve that goal, the
Company announced in July 2002 that it has begun to implement a company-wide
restructuring to enable it to reduce costs and expenses further in order to
lower the amount of revenue needed to reach the Company's profitability
break-even point.

    In the fourth quarter of fiscal 2002, the Company expects to record a
business restructuring charge and related expenses in connection with this plan
of approximately $150 million. Based on the Company's initial assessment, the
components of this charge are estimated to include $70 million related to a
reduction of about 2,500 employee positions, up to $65 million for real estate
consolidations and lease terminations, and $15 million for certain asset
impairments. Because the Company is currently finalizing its restructuring plan,
the actual components of this charge may vary.

REVOLVING CREDIT FACILITIES

    In August 2002, the Company received consents from the requisite lenders
under the five-year Credit Facility to amend the terms of the facility. The
Company does not intend to renew the 364-day Credit Facility expiring in
August 2002. The amended five-year Credit Facility will require the Company to
maintain a ratio of EBITDA to interest expense of:

    - 1.70 to 1 for each of the four quarter periods ending September 30, 2002,
      December 31, 2002 and March 31, 2003;

    - 2.25 to 1 for the four quarter period ending June 30, 2003;

    - 3.50 to 1 for the four quarter period ending September 30, 2003; and

    - 4.00 to 1 for the four quarter period ending December 31, 2003 and each
      four quarter period thereafter.

In addition, the amended five-year Credit Facility will require the Company to
maintain minimum EBITDA of:

    - $70 million for the three quarter period ending September 30, 2002;

    - $100 million for the four quarter period ending December 31, 2002;

    - $115 million for the four quarter period ending March 31, 2003;

    - $150 million for the four quarter period ending June 30, 2003;

    - $250 million for the four quarter period ending September 30, 2003;

                                       31
<Page>
                          AVAYA INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                  (UNAUDITED)

14. SUBSEQUENT EVENTS (CONTINUED)
    - $350 million for the four quarter period ending December 31, 2003; and

    - $400 million for each of the four quarter periods thereafter.

    The definition of EBITDA in the amended five-year Credit Facility will
exclude an additional $100 million of business restructuring charges and related
expenses to be taken no later than the third quarter of fiscal 2003. The total
business restructuring related excludable amount of $166 million, which is made
up of the additional $100 million under the amended credit facility plus
$66 million remaining under the existing Credit Facilities, will enable us to
exclude from the definition of EBITDA the $150 million business restructuring
charge announced in July 2002 plus $15 million of period costs related to our
prior restructuring initiatives. A substantial portion of these costs are
expected to be incurred in the fourth quarter of fiscal 2002 and the first
quarter of fiscal 2003.

    The initial aggregate commitments under the amended five-year Credit
Facility will equal $561 million, but will be subject to mandatory reduction as
follows:

    - reduced to $500 million on December 1, 2003;

    - reduced to $425 million on March 1, 2004;

    - reduced to $350 million on June 1, 2004; and

    - reduced to $250 million on September 1, 2004.

    The Company will also be required to reduce the commitments by an amount
equal to 100% of the net cash proceeds realized from the sale of any assets
(other than the sale of our Connectivity Solutions business or the sale of the
Company's aircraft) and by an amount equal to 50% of the net cash proceeds
realized from the issuance of debt, other than refinancing debt; provided,
however, that in each case, the Company shall not be required to reduce the
commitments below an amount equal to $250 million less the amount of any cash
used to redeem or repurchase the LYONs as described below.

    The amended five-year Credit Facility will provide that the Company may use
up to $100 million of cash to redeem or repurchase the LYONs at any time as long
as no default or event of default exists under the facility, no amounts are
outstanding under the facility, the commitments are reduced in an amount equal
to the cash amount used to redeem or repurchase the LYONs, and the Company's
cash balance is not less than $300 million after giving pro forma effect to the
redemption or repurchase of the LYONs.

    The amendment will provide that the existing $150 million limitation on use
of the facility for acquisitions or other investments will be reduced to
$75 million.

    The terms of the amended five-year Credit Facility are subject to the
execution of definitive amendments. The Company expects to complete execution of
the required amendments shortly.

SEGMENT BUSINESS MODEL EVOLUTION

    In the fourth quarter of fiscal 2002, the Company reevaluated its business
model in light of the continued deferment by customers of enterprise
communications technology investments. This reevaluation has resulted in moving
forward in the design of the existing operating segments to focus

                                       32
<Page>
                          AVAYA INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                                  (UNAUDITED)

14. SUBSEQUENT EVENTS (CONTINUED)
more firmly on aligning them with discrete customer sets and market segment
opportunities in order to optimize revenue growth and profitability.
Accordingly, effective for the fourth quarter of fiscal 2002, the Company will
reorganize the Systems and Applications segments to form the Converged
Systems & Applications segment and the Small & Medium Business Solutions
segment. The Converged Systems & Applications segment will focus on large
enterprise customers and the Small & Medium Business Solutions segment will
reflect sales of product designed specifically for small to mid-sized
enterprises. The products and services offered by the Connectivity Solutions and
Services segments will remain relatively unchanged. The segments will be
operated as four fully functional businesses and, as a result, this structure
may cause the operating segments' results to contain certain additional costs
and expenses including amounts that have been historically reported in the
corporate and other category.

DEVELOPMENTS IN LEGAL PROCEEDINGS

    Subsequent to the issuance of the Company's earnings press release for the
third quarter of fiscal 2002 on July 22, 2002, the Company recorded adjustments
to its financial statements as of and for the three and nine months ended
June 30, 2002 in connection with certain developments in two litigation matters
that occurred after the issuance of its earnings press release. In connection
with the matter described under the caption "--Legal Proceedings--Coupon Program
Class Action" in Note 13 Commitments and Contingencies, the period for
submitting a claim in that action expired on July 15, 2002. In late July, the
Company made a final determination of its obligations in this matter by
aggregating all claim notifications received with a postmark dated on or before
the July 15, 2002 deadline. Based on this review, the Company determined that
the estimated reserve for this matter recorded in the other liabilities section
of the Balance Sheet as of June 30, 2002 exceeded the amount of actual aggregate
claims received by approximately $4 million and, accordingly, the Company
reversed this amount to other income (expense), net in the Statements of
Operations for the three and nine months ended June 30, 2002.

    In addition, in August 2002, the Company was advised that a settlement had
been reached in the matters involving Lucent and AT&T described under the
caption "--Legal Proceedings--Lucent Consumer Products Class Actions" in
Note 13 Commitments and Contingencies. The proposed settlement has been
preliminarily approved by the Illinois state court. Any liability borne by
Lucent in connection with these class action cases will be considered an
exclusive Lucent liability under the Contribution and Distribution Agreement
between Lucent and the Company and, as a result, the Company is responsible for
10% of any such liability in excess of $50 million. The Company recorded an
estimated liability in the other liabilities section of the Balance Sheet as of
June 30, 2002 of approximately $6 million in connection with this settlement.
The expense for such liability was recorded to other income (expense), net in
the Statement of Operations for the three and nine months ended June 30, 2002.
The $6 million represents the Company's current estimate of its liability in
this matter, although the amount for which Avaya may ultimately be responsible
will not be finally determined until the claims period expires.

                                       33
<Page>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
  OF OPERATIONS

    The following section should be read in conjunction with the consolidated
financial statements and the notes thereto included elsewhere in this Quarterly
Report on Form 10-Q.

    Our accompanying unaudited consolidated financial statements as of June 30,
2002 and for the three and nine months ended June 30, 2002 and 2001, have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial statements and the rules and
regulations of the Securities and Exchange Commission for interim financial
statements, and should be read in conjunction with our Annual Report on
Form 10-K for the fiscal year ended September 30, 2001. In our opinion, the
unaudited interim consolidated financial statements reflect all adjustments,
consisting of normal and recurring adjustments, necessary for a fair
presentation of the financial condition, results of operations and cash flows
for the periods indicated. Certain prior year amounts have been reclassified to
conform to the current interim period presentation. The consolidated results of
operations for the interim periods reported are not necessarily indicative of
the results to be experienced for the entire fiscal year.

RISKS AND UNCERTAINTIES

    The matters discussed in Management's Discussion and Analysis of Financial
Condition and Results of Operations contain forward looking statements that are
based on current expectations, estimates, forecasts and projections about the
industries in which we operate, management's beliefs and assumptions made by
management. Such statements include, in particular, statements about our plans,
strategies and prospects. Words such as "expects," "anticipates," "intends,"
"plans," "believes," "seeks," "estimates," variations of such words and similar
expressions are intended to identify such forward looking statements. These
statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions, which are difficult to predict. Therefore, actual
outcomes and results may differ materially from what is expressed or forecasted
in such forward looking statements. Except as required under the federal
securities laws and the rules and regulations of the Securities and Exchange
Commission, we do not have any intention or obligation to update publicly any
forward looking statements after they are made, whether as a result of new
information, future events or otherwise.

    Important factors that could cause actual outcomes and results to differ
materially from the forward looking statements we make in Management's
Discussion and Analysis of Financial Condition and Results of Operations include
the factors described in our most recent Annual Report on Form 10-K and those
described below:

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

    Our revenue for the quarter ended June 30, 2002 was $1,219 million, a
decrease of 28.9%, or $495 million, from $1,714 million for the quarter ended
June 30, 2001, a sequential decrease of 4.7%, or $60 million, from
$1,279 million for the quarter ended March 31, 2002, and a sequential decrease
of 6.7%, or $87 million, from $1,306 for the quarter ended December 31, 2001.

    Our operating results are significantly affected by the impact of economic
conditions on the willingness of enterprises to make capital investments,
particularly in enterprise communications technology. Although general economic
conditions have shown some signs of improvement recently, we have seen a
continued deferment by our customers of enterprise communications technology
investments. We believe that enterprises continue to be concerned about their
ability to increase revenues and thereby increase their profitability.
Accordingly, they have tried to maintain or improve profitability through cost
reduction and delayed capital spending. Because we do not believe that
enterprise communications spending will improve significantly until some time in
calendar 2003, we expect there to be continued pressure on our ability to
generate revenue.

                                       34
<Page>
    To the extent that enterprise communications spending does not improve or
deteriorates, our revenue and operating results will continue to be adversely
affected and we may not be able to comply with the financial covenants included
in our credit facilities, as described in "--Liquidity and Capital Resources."

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

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

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

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

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

    Our traditional enterprise voice communications products and the advanced
communications solutions described above are a part of our Systems and
Applications segments. If we are unsuccessful in implementing our strategy, the
contribution to our results from our Systems and Applications segments may
decline, reducing our overall operating results and thereby requiring a greater
need for external capital resources.

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

    We are making a significant change in the direction and strategy of our
company to focus on the development and sales of products to be incorporated in
advanced communications solutions, including products that facilitate the
convergence of voice and data networks. In order to implement this change, we
must:

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

    - develop relationships with new types of distribution partners;

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

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

    Most of these challenges have required, and will continue to require, that
we increase costs substantially without any certainty of success. If we are not
successful, our operating results may be adversely affected. However, even if we
successfully address these challenges, our operating results may still be
adversely affected if the market opportunity for advanced communications
solutions, including

                                       35
<Page>
converged voice and data network products, does not develop in the ways that we
anticipate. Because this market opportunity is in its early stages, we cannot
predict whether:

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

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

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

    The recent introduction of new Internet Protocol, or "IP", telephony
products demonstrates some of the risks associated with entering new markets or
introducing new technologies. IP telephony products enable enterprises to
utilize internet protocol standards to digitize and compress voice signals and
transmit them over their data networks. According to a recent industry study,
shipments of IP telephony products dropped sequentially for the first time in
the first calendar quarter of 2002. Some industry analysts have indicated that
the recent introduction of the next generation of our ECLIPS portfolio of IP
hardware and software may have caused many enterprises who were considering
implementing IP telephony systems to reconsider their deployment plans while
they evaluate our ECLIPS announcement as well a subsequent product announcement
from Nortel Networks Corporation.

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

    Our cash needs include making payments on and refinancing our indebtedness
and funding working capital, capital expenditures, strategic acquisitions,
business restructuring and related expenses, any future pension funding
obligation and for general corporate purposes. Our ability to satisfy our cash
needs depends on our ability to generate cash from operations and access the
financial markets, both of which are subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control.

    Our ability to generate cash from operations and obtain external financing
is affected by the terms of our credit agreements, the indenture governing our
LYONs, and the indenture governing our Senior Secured Notes. These instruments
impose, and any future indebtedness may impose, various restrictions and
covenants that limit our ability to, among other things, incur additional
indebtedness. In particular, the terms of our credit agreements do not allow us
to issue more than $500 million of debt in the capital markets, including the
$440 million of Senior Secured Notes we issued in March 2002. As a result of
those restrictions, it may be difficult for us to respond to market conditions,
provide for unanticipated capital investments or take advantage of business
opportunities. In addition, holders may require us to purchase all or a portion
of their LYONs on October 31, 2004, 2006 and 2011 at a price equal to the sum of
the issue price and accrued original issue discount on the LYONs as of the
applicable purchase date. We may, at our option, elect to pay the purchase price
in cash or shares of common stock, or any combination thereof. If we are unable
to repurchase the LYONs with common stock and do not have sufficient cash to
make such purchase, we could be in default on our obligation on the LYONs. In
addition, the terms of the amendment to our five-year Credit Facility described
under "--Liquidity and Capital Resources" places certain restrictions on our
ability to repurchase or redeem the LYONs with cash. In addition, upon the
occurrence of specific kinds of change in control events, we may have
substantial repayment obligations under our existing debt agreements.

    If we do not generate sufficient cash from operations, we will need to
access the financial markets. External financing may not be available to us on
acceptable terms or at all. Under the terms of any external financing, we may
incur higher than expected financing expenses, and become subject to additional
restrictions and covenants. Our existing Credit Facilities require us to comply
with certain financial covenants. Although we were in compliance with these
covenants as of June 30, 2002, our continued revenue decline and the expected
recording of the $150 million restructuring charge and related expenses
described under "--Business Restructuring Charges and Related Expenses" would
likely have prevented us from complying with these covenants as of
September 30, 2002. Accordingly,

                                       36
<Page>
as more fully described under "--Liquidity and Capital Resources," we recently
received consents from the requisite lenders under our Credit Facilities to
amend, among other things, the financial covenants included in our five-year
credit facility. If we are unable to comply with our financial covenants and
cannot amend or waive those covenants, an event of default under the Credit
Facilities would occur. If a default occurs, the lenders under our Credit
Facilities could accelerate the maturity of our debt obligations and terminate
their commitments to lend to us. If such a default occurs when our debt
obligations under the Credit Facilities exceed $100 million, our debt
obligations in respect of the $50 million interest rate swap, the LYONs and the
Senior Secured Notes could be accelerated. In addition, although we currently
have a $264 million 364-day credit facility and a $561 million five-year credit
facility, we do not intend to renew the 364-day facility expiring in
August 2002 and the amendments to the five-year credit facility require
mandatory commitment reductions over the remaining term of the facility and
additional commitment reductions upon the issuance of debt, sales of assets or
repurchase or redemption of the LYONs, thereby reducing our available liquidity.

    The recent slump in the U.S. equities market and, in particular, in
technology stocks has adversely affected our stock price. As of August 12, 2002,
the closing price of our common stock on the New York Stock Exchange was $1.34
per share. The current trading price of our common stock may hinder our ability
in the near term to obtain equity financing on cost-effective terms or at all.

    Our ability to obtain external financing is affected by our debt ratings,
which are periodically reviewed by the major credit rating agencies. Our
commercial paper is no longer rated by Moody's or Standard & Poor's. These
recent ratings withdrawals mean that we can no longer access the commercial
paper market, which until recently has been our primary source of liquidity. Our
corporate credit is on CreditWatch and rated BB+ and our long-term senior
unsecured debt is rated BB- by Standard & Poor's, each with a negative outlook,
and our long-term senior unsecured debt is rated Ba3 by Moody's with a negative
outlook. Any increase in our level of indebtedness or deterioration of our
operating results may cause a further reduction in our current debt ratings.
These downgrades, among other factors, could impair our ability to secure
additional financing on acceptable terms, and we cannot assure you that we will
be successful in raising any of the new financing on acceptable terms.

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

    In February 2002, we engaged Salomon Smith Barney Inc. to explore
alternatives for our Connectivity Solutions segment, including the possible sale
of the business. Our goal in exploring alternatives for our Connectivity
Solutions segment is to strengthen our focus on higher growth opportunities by
emphasizing our Systems, Applications and Services offerings, such as converged
voice and data network products and unified communication and customer
relationship management solutions. These offerings, unlike our Connectivity
Solutions offerings, are targeted exclusively at enterprises and we believe
offer increased growth potential. In addition, we believe that the proceeds from
any sale of our Connectivity Solutions segment would help enhance our liquidity.
However, we may not be able to dispose of our Connectivity Solutions segment on
terms satisfactory to us or at all. If we are unable to dispose of our
Connectivity Solutions segment on terms satisfactory to us or at all, our
operating results and liquidity may suffer and we may not be able to focus our
business on our Systems, Applications and Services offerings, which also may
adversely affect our business.

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

    Historically, our Connectivity Solutions segment has provided a significant
contribution to our operating results. Any disposition of our Connectivity
Solutions segment could result in the loss of a historically significant
contributor to our operating results, which could adversely affect our
consolidated operating results. See the segment information included in
Note 11--Operating Segments included in our accompanying Notes to our
Consolidated Financial Statements included elsewhere in

                                       37
<Page>
this report for further information regarding the contribution of Connectivity
Solutions to our consolidated operating results.

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

    In March 2000, as part of our strategy to strengthen our distribution
network, we sold our primary distribution function for voice communications
systems for small and mid-sized enterprises to Expanets, Inc., currently our
largest dealer. The terms of the sale provided that we would provide billing,
collection and maintenance services to Expanets for a transitional period. In
May 2001, the dealer agreement was restructured to more precisely define the
customer base to be serviced by each party, including small or branch offices of
larger enterprises.

    At the time the dealer agreement was restructured, Expanets' efforts to
obtain a commercial credit facility were hampered by the fact that its billing
and collection function had not yet been migrated to its information systems.
Because of the importance to Avaya of the Expanets relationship and the customer
base served by Expanets, we agreed to provide a $125 million short-term line of
credit (as amended as described below, the "Dealer Credit Agreement"). The
Dealer Credit Agreement applies to certain unpaid and outstanding receivables
for amounts due us by Expanets. A delay in the migration of the billing and
collection function until December 2001 affected Expanets' ability to obtain a
collateralized commercial credit facility by the original March 31, 2002
expiration date of the Dealer Credit Agreement.

    Accordingly, in March 2002, we entered into an amendment to the Dealer
Credit Agreement with Expanets and its parent company, NorthWestern Corporation.
The Dealer Credit Agreement provides for installment payments under the credit
line in the amounts of $25 million in March 2002, $20 million in April 2002, and
$25 million in August 2002 with the remaining balance due on December 31, 2002.
As of June 30, 2002, we have received the first two installment payments. The
Dealer Credit Agreement provides that the borrowing limit shall be reduced by
the amount of each installment payment upon the receipt of such payment and may
also be offset by certain obligations we have to Expanets related to the
March 2000 sale of the distribution function to Expanets. As of June 30, 2002
and September 30, 2001, the borrowing limit was $69 million and $121 million,
respectively. The interest rate on the line of credit will accrue at an annual
rate of 12% through August 31, 2002, and increase to 15% on September 1, 2002.

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

    There can be no assurance that Expanets will be able to comply with the
remaining terms of the Dealer Credit Agreement. In the event Expanets is unable
to comply with the terms of the Dealer Credit Agreement and a default occurs,
the remedies available to Avaya under such agreement may be insufficient to
satisfy in full all of Expanets' obligations to us.

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

    We intend to continue to pursue growth opportunities internationally. In
many countries outside the United States, long-standing relationships between
our potential customers and their local providers and protective regulations,
including local content requirements and type approvals, create barriers to
entry. In addition, pursuit of such international growth opportunities may
require us to make significant investments for an extended period before returns
on such investments, if any, are realized. For example, to execute our strategy
to expand internationally we are incurring additional costs to enter

                                       38
<Page>
into strategic alliances focused on international sales and expanding our
presence in key markets. International operations are subject to a number of
other risks and potential costs, including:

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

    - unexpected changes in regulatory requirements;

    - inadequate protection of intellectual property in foreign countries;

    - adverse tax consequences;

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

    - political and economic instability.

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

    IF WE DO NOT SUCCESSFULLY IMPLEMENT OUR RESTRUCTURING PLAN, WE MAY
EXPERIENCE DISRUPTIONS IN OUR OPERATIONS AND INCUR HIGHER ONGOING COSTS OR THE
IMPLEMENTATION OF OUR RESTRUCTURING PLAN MAY NOT RESULT IN THE COST SAVINGS WE
EXPECT, IN WHICH CASE OUR OPERATING RESULTS MAY BE ADVERSELY AFFECTED.

    We are in the process of implementing a company-wide restructuring designed
to enable our company to reduce costs and expenses in order to reduce the amount
of revenue needed to reach our profitability break-even point. The primary
components of the plan are workforce reductions, real estate consolidations and
lease terminations. As a result of these actions, we expect to record a business
restructuring charge in the fourth quarter of fiscal 2002 of approximately
$150 million.

    If we are unsuccessful in implementing this restructuring plan, we may
experience disruptions in our operations and incur higher ongoing costs, which
may adversely affect our operating results. In addition, we cannot assure you
that we will realize the cost savings we expect from this restructuring plan or
any of our prior restructuring initiatives.

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

    Pursuant to the contribution and distribution agreement we entered into with
Lucent in connection with our spin-off from Lucent on September 30, 2000, Lucent
contributed to us substantially all of the assets, liabilities and operations
associated with its enterprise networking businesses and distributed all of the
outstanding shares of our common stock to its stockholders. The contribution and
distribution agreement, among other things, provides that, in general, we will
indemnify Lucent for all liabilities including certain pre-distribution tax
obligations of Lucent relating to our businesses and all contingent liabilities
primarily relating to our businesses or otherwise assigned to us. In addition,
the contribution and distribution agreement provides that certain contingent
liabilities not directly identifiable with one of the parties will be shared in
the proportion of 90% by Lucent and 10% by us. The contribution and distribution
agreement also provides that contingent liabilities in excess of $50 million
that are

                                       39
<Page>
primarily related to Lucent's businesses shall be borne 90% by Lucent and 10% by
us and contingent liabilities in excess of $50 million that are primarily
related to our businesses shall be borne equally by the parties.

    Please see "--Legal Proceedings" for a description of certain matters
involving Lucent for which we have assumed responsibility under the contribution
and distribution agreement and a description of other matters for which we may
be obligated to indemnify Lucent. We cannot assure you we will not have to make
indemnification payments to Lucent in connection with these matters or that
Lucent will not submit a claim for indemnification to us in connection with any
future matter. In addition, our ability to assess the impact of matters for
which we may have to indemnify Lucent is made more difficult by the fact that we
do not control the defense of these matters.

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

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

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

    Our strategic alliances are important to our success because they provide us
the ability to offer comprehensive advanced communications solutions, reach a
broader customer base and strengthen brand awareness. We may not be successful
in creating new strategic alliances on acceptable terms or at all. In addition,
most of our current strategic alliances can be terminated under various
circumstances, some of which may be beyond our control. Further, our alliances
are generally non-exclusive, which means our partners may develop alliances with
some of our competitors. We may become more reliant on strategic alliances in
the future, which would increase the risk to our business of losing these
alliances. Because we have announced publicly our strategy to form alliances, as
well as announced the alliances we have entered into, early termination of our
alliances may harm our reputation with our customers and cause our revenue to
decline to the extent we are unable to deliver new products or our customer base
is reduced.

    IF THE DOWNWARD TREND IN PENSION ASSET VALUES AND HIGHER RETIREE HEALTH CARE
COSTS CONTINUES, WE MAY INCUR ADDITIONAL EXPENSE AND FUNDING OBLIGATIONS THAT
WILL HAVE AN ADVERSE EFFECT ON OUR FINANCIAL POSITION, RESULTS OF OPERATIONS AND
CASH FLOWS.

    The recent decline in the global equity markets has resulted in a decrease
in the value of the assets in our pension plan. This decline will likely
adversely affect our related accounting results in future periods through higher
pension expense, additional minimum liabilities with corresponding reductions in
stockholders' equity, and increased cash funding requirements. In addition, we
may incur higher expense related to our postretirement health plans as a result
of higher health care cost trends.

    We currently estimate that we will be required to record a minimum pension
liability of approximately $160 million with corresponding reductions in
stockholders' equity on September 30, 2002. In addition, based on the value of
the assets in our pension plan as of January 1, 2002, we will be required to
fund approximately $30 million to the plan in September 2003 for the 2002 plan
year and will likely be required to make quarterly funding payments in an
aggregate amount not to exceed $30 million during calendar 2003 for the 2003
plan year.

                                       40
<Page>
    IF THE VALUE OF OUR LONG-LIVED ASSETS DECREASES, WE MAY INCUR IMPAIRMENT
LOSSES.

    The provisions of SFAS 142 require us to test goodwill for impairment at
least annually. We intend to conduct the required impairment review for fiscal
2002 during the fourth quarter of fiscal 2002, at which time, if an impairment
is identified, it will be recognized as a non-cash charge to the Statement of
Operations. Further non-cash charges to other long-lived assets may result if
triggered by a goodwill impairment loss. Please see "--The Application of
Critical Accounting Policies" for further discussion of this requirement.

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

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

    WE MAY BE SUBJECT TO LITIGATION AND INFRINGEMENT CLAIMS, WHICH COULD CAUSE
US TO INCUR SIGNIFICANT EXPENSES OR PREVENT US FROM SELLING OUR PRODUCTS OR
SERVICES.

    We cannot assure you that others will not claim that our proprietary or
licensed products, systems and software are infringing their intellectual
property rights or that we do not in fact infringe those intellectual property
rights. We may be unaware of intellectual property rights of others that may
cover some of our technology. If someone claimed that our proprietary or
licensed systems and software infringed their intellectual property rights, any
resulting litigation could be costly and time consuming and would divert the
attention of management and key personnel from other business issues. The
complexity of the technology involved and the uncertainty of intellectual
property litigation increase these risks. Claims of intellectual property
infringement also might require us to enter into costly royalty or license
agreements. However, we may be unable to obtain royalty or license agreements on
terms acceptable to us or at all. We also may be subject to significant damages
or an injunction against use of our proprietary or licensed systems. A
successful claim of patent or other intellectual property infringement against
us could materially adversely affect our operating results.

    Although we generally exclude coverage where infringement arises out of the
combination of our products with products of others, we may be required to
indemnify our customers for some of the costs and damages of patent infringement
in circumstances where our product is the factor creating the customer's
infringement exposure. Any indemnification requirement could have a material
adverse effect on our business and our operating results.

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

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

    The pursuit of additional technology, services or distribution channels
through acquisitions or joint ventures is a component of our business strategy.
We may not identify or complete these transactions in a timely manner, on a cost
effective basis or at all. Even if we do identify and complete these
transactions, we may not be able to successfully integrate such technology,
services or distribution channels into our existing operations and we may not
realize the benefits of any such acquisition or

                                       41
<Page>
joint venture. We have limited experience with acquisition activities and may
have to devote substantial time and resources in order to complete acquisitions.
There may also be risks of entering markets in which we have no or limited
experience. In addition, by making acquisitions, we could assume unknown or
contingent liabilities.

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

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

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

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

    - hire and train a customer service organization to service our
      multi-service networking products; and

    - retrain our existing sales force to sell converged and advanced
      communications products and services.

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

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

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

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

    The sizes of our competitors vary across our market segments, as do the
resources we have allocated to the segments we target. Therefore, many of our
competitors have greater financial, personnel, capacity and other resources than
we have in each of our market segments or overall. As a result, our competitors
may be in a stronger position to respond quickly to potential acquisitions and
other market opportunities, new or emerging technologies and changes in client
requirements. Competitors with greater financial resources also may be able to
offer lower prices, additional products or services or other incentives that we
cannot match or do not offer. These competitors may be in a stronger position to
respond quickly to new or emerging technologies and may be able to undertake

                                       42
<Page>
more extensive marketing campaigns, adopt more aggressive pricing policies and
make more attractive offers to potential customers, employees and strategic
partners.

    IF THE DISTRIBUTION DOES NOT QUALIFY FOR TAX-FREE TREATMENT, WE COULD BE
REQUIRED TO PAY LUCENT OR THE INTERNAL REVENUE SERVICE A SUBSTANTIAL AMOUNT OF
MONEY.

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

    Although any U.S. federal income taxes imposed in connection with the
distribution generally would be imposed on Lucent, we could be liable for all or
a portion of any taxes owed for the reasons described below. First, as part of
the distribution, we and Lucent entered into a tax sharing agreement. This
agreement generally allocates between Lucent and us the taxes and liabilities
relating to the failure of the distribution to be tax-free. Under the tax
sharing agreement, if the distribution fails to qualify as a tax-free
distribution to Lucent under Section 355 of the Internal Revenue Code because of
an issuance or an acquisition of our stock or an acquisition of our assets, or
some other actions of ours, then we will be solely liable for any resulting
taxes to Lucent.

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

OVERVIEW

    We are a leading provider of communications systems and software for
enterprises, including businesses, government agencies and other organizations.
We offer voice, converged voice and data, customer relationship management,
messaging, multi-service networking and structured cabling products and
services. Multi-service networking products are those products that support
network infrastructures which carry voice, video and data traffic over any of
the protocols, or set of procedures, supported by the Internet on local area and
wide area data networks. A structured cabling system is a flexible cabling
system designed to connect phones, workstations, personal computers, local area
networks and other communications devices through a building or across one or
more campuses. We are a worldwide leader in sales of messaging and structured
cabling systems and a U.S. leader in sales of enterprise voice communications
and call center systems. We are not a leader in multi-service networking
products, and our product portfolio in this area is less complete than the
portfolios of some of our competitors. In addition, we are not a leader in sales
of certain converged voice and data products, including server-based Internet
Protocol telephony systems. We are implementing a strategy focused on these and
other advanced communications solutions.

OPERATING SEGMENTS

    Effective January 1, 2002, we implemented an internal reorganization and as
a result, we currently assess our performance and allocate our resources among
four rather than three operating segments. We divided our Communications
Solutions segment into two reportable segments: Systems and Applications. Our
objective of the reorganization was to enable us to understand and manage our
product groups with greater precision. The Systems segment includes sales to
small to midsized enterprises, which includes data switches and small to
midsized telephony products, and sales to our large customers, referred to as
Enterprise Systems, which include sales of all enterprise telephony products,
virtual private networks, and data Local Area Network and Wide Area Network
equipment. The Applications segment consists of customer relationship
management, voice and unified messaging,

                                       43
<Page>
and unified communication products and related professional services. In
addition, we shifted installation and the network consulting portion of
professional services previously reported in Communications Solutions to the
Services segment. The Services segment continues to include maintenance,
value-added and data services. The Connectivity Solutions segment represents
structured cabling systems and electronic cabinets.

    As part of the changes made in the second quarter of fiscal 2002, we also
redirected a larger portion of corporate operating expenses, consisting mostly
of marketing and selling expenses, to each of the operating segments. The costs
of shared services and other corporate center operations that (i) are managed on
a common basis, (ii) are not identified with the operating segments, and
(iii) represent business activities that do not qualify for separate operating
segment reporting are aggregated in the Corporate and other category. Such costs
include primarily business restructuring charges and related expenses, research
and development, information technology, corporate finance and real estate
costs.

    As a result of the changes discussed above, fiscal 2001 amounts have been
restated to conform to the current operating segment presentation. Intersegment
sales approximate fair market value and are not significant.

SEGMENT BUSINESS MODEL EVOLUTION

    In the fourth quarter of fiscal 2002, we reevaluated our business model in
light of the continued deferment by customers of enterprise communications
technology investments. This reevaluation has resulted in moving forward in the
design of the existing operating segments to focus more firmly on aligning them
with discrete customer sets and market segment opportunities in order to
optimize revenue growth and profitability. Accordingly, effective for the fourth
quarter of fiscal 2002, we will reorganize the Systems and Applications segments
to form the Converged Systems & Applications segment and the Small & Medium
Business Solutions segment. The Converged Systems & Applications segment will
focus on large enterprise customers and the Small & Medium Business Solutions
segment will reflect sales of product designed specifically for small to
mid-sized enterprises. The products and services offered by the Connectivity
Solutions and Services segments will remain relatively unchanged. The segments
will be operated as four fully functional businesses and, as a result, this
structure may cause the operating segments' results to contain certain
additional costs and expenses including amounts that have been historically
reported in the existing corporate and other category.

REVENUE BY OPERATING SEGMENT

    The following table sets forth the allocation of our revenue among our
operating segments, expressed as a percentage of total revenue:

<Table>
<Caption>
                                               THREE MONTHS ENDED     NINE MONTHS ENDED
                                                    JUNE 30,              JUNE 30,
                                               -------------------   -------------------
                                                 2002       2001       2002       2001
                                               --------   --------   --------   --------
<S>                                            <C>        <C>        <C>        <C>
OPERATING SEGMENTS:
  Systems....................................    31.5%      31.5%      32.6%      33.6%
  Applications...............................    13.1       12.7       13.7       13.1
  Services...................................    41.9       34.1       42.1       32.4
  Connectivity Solutions.....................    13.5       21.7       11.6       20.9
                                                -----      -----      -----      -----
  Total......................................   100.0%     100.0%     100.0%     100.0%
                                                =====      =====      =====      =====
</Table>

                                       44
<Page>
SFAS 142

    Effective October 1, 2001, we adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which
requires that goodwill and certain other intangible assets having indefinite
lives no longer be amortized to earnings, but instead be subject to periodic
testing for impairment. Intangible assets determined to have definitive lives
will continue to be amortized over their remaining useful lives. In connection
with the adoption of SFAS 142, we reviewed the classification of our existing
goodwill and other intangible assets, reassessed the useful lives previously
assigned to other intangible assets, and discontinued amortization of goodwill.
We also tested goodwill for impairment by comparing the fair value of our
reporting units to their carrying value as of October 1, 2001 and determined
that there was no goodwill impairment. See our "Results of Operations"
discussion noted below for the impact of the adoption of SFAS 142 on selling,
general and administrative expense.

    The provisions of SFAS 142 require that goodwill of a reporting unit be
tested for impairment on an annual basis or between annual tests if an event
occurs or circumstances change that would more likely than not reduce the fair
value of a reporting unit below its carrying amount. We intend to conduct the
required impairment review for fiscal 2002 during the fourth quarter of fiscal
2002, at which time, if an impairment is identified, it will be recorded as an
operating expense in the Statement of Operations.

    For the three and nine months ended June 30, 2001, goodwill amortization,
net of tax, amounted to $10 million and $28 million, respectively. If we had
adopted SFAS 142 as of the beginning of the first quarter of fiscal 2001 and
discontinued goodwill amortization, net income and earnings (loss) per common
share on a pro forma basis would have been as follows:

<Table>
<Caption>
                                                                   PRO FORMA
                                                ------------------------------------------------
                                                  THREE MONTHS ENDED        NINE MONTHS ENDED
                                                     JUNE 30, 2001            JUNE 30, 2001
                                                -----------------------   ----------------------
                                                (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S>                                             <C>                       <C>
Net income....................................           $  34                    $    4
Earnings (Loss) Per Common Share:
  Basic.......................................           $0.09                    $(0.06)
  Diluted.....................................           $0.09                    $(0.06)
</Table>

INTERNAL USE SOFTWARE

    In the second quarter of fiscal 2002, we changed the estimated useful life
of certain internal use software to reflect actual experience as a stand-alone
company on the utilization of such software and extended the useful life of
these assets from three to seven years. This change lowered depreciation expense
by approximately $5 million and $9 million, equivalent to $0.01 and $0.02 per
diluted share, for the three and nine months ended June 30, 2002, respectively.

BUSINESS RESTRUCTURING CHARGES AND RELATED EXPENSES

    We recorded business restructuring charges and related expenses of
$9 million and $103 million for the three and nine months ended June 30, 2002,
respectively. Included in the nine month amount is an $84 million pretax charge
taken in the second quarter of fiscal 2002, of which $78 million will result in
the usage of cash, associated with our efforts to improve our business
performance in response to the continued industry-wide economic slowdown. The
components of this charge include $73 million of employee separation costs,
$10 million of lease termination costs, and $1 million of other exit costs. The
charge for employee separation costs is comprised of $67 million for severance
and other

                                       45
<Page>
employee separation costs, and $6 million primarily related to the cost of
curtailment in accordance with SFAS No. 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits." The employee separation costs were incurred in connection
with the elimination of approximately 2,000 employee positions. Lease
termination costs are comprised primarily of information technology lease
termination payments. We expect to fund the remaining obligations associated
with the charges taken during the second quarter of fiscal 2002 with available
cash or cash from operations.

    The September 30, 2001 business restructuring reserve reflects the remaining
balance associated with our pretax business restructuring charges of
$520 million in fiscal 2000 related to our separation from Lucent, $134 million
in the second quarter of fiscal 2001 related to our outsourcing of certain
manufacturing operations, and $540 million in the fourth quarter of fiscal 2001
for the acceleration of our restructuring plan.

    The following table summarizes the status of our business restructuring
reserve and other related expenses as of and for the nine months ended June 30,
2002:

<Table>
<Caption>
                                   BUSINESS RESTRUCTURING RESERVE                OTHER RELATED EXPENSES
                         ---------------------------------------------------   --------------------------        TOTAL
                                                                   TOTAL                                        BUSINESS
                          EMPLOYEE       LEASE       OTHER       BUSINESS                                    RESTRUCTURING
                         SEPARATION   TERMINATION     EXIT     RESTRUCTURING      ASSET      INCREMENTAL      RESERVE AND
                           COSTS      OBLIGATIONS    COSTS        RESERVE      IMPAIRMENTS   PERIOD COSTS   RELATED EXPENSES
                         ----------   -----------   --------   -------------   -----------   ------------   ----------------
                                                                (DOLLARS IN MILLIONS)
<S>                      <C>          <C>           <C>        <C>             <C>           <C>            <C>
Balance as of September
  30, 2001.............     $ 96          $78          $5          $ 179        $      --     $      --          $ 179
Charges................       73           10           1             84                3            16            103
Increase in benefit
  obligations..........       (6)          --          --             (6)              --            --             (6)
Cash payments..........      (99)         (46)         (3)          (148)              --           (16)          (164)
Asset impairments......       --           --          --             --               (3)           --             (3)
                            ----          ---          --          -----        ---------     ---------          -----
Balance as of June 30,
  2002.................     $ 64          $42          $3          $ 109        $      --     $      --          $ 109
                            ====          ===          ==          =====        =========     =========          =====
</Table>

    Employee separation costs included in the business restructuring reserve
were made through lump sum payments, although certain union-represented
employees elected to receive a series of payments extending over a period of up
to two years from the date of departure. Payments to employees who elected to
receive severance through a series of payments will extend through 2004. The
workforce reductions related to our separation from Lucent, the outsourcing of
certain manufacturing operations and the acceleration of our restructuring plan
were substantially complete at the end of fiscal 2001. In connection with the
workforce reduction charge taken in the second quarter of fiscal 2002,
approximately 1,600 of the 2,000 employees had departed as of June 30, 2002. The
charges for lease termination obligations, which consisted of real estate and
equipment leases, included approximately 2.8 million square feet of excess space
which has been entirely vacated as of June 30, 2002. Payments on lease
termination obligations will be substantially completed by 2003 because, in
certain circumstances, the remaining lease payments were less than the
termination fees.

    For the three and nine months ended June 30, 2002, we recorded $9 million
and $19 million, respectively, of other related expenses, including relocation
and consolidation costs, computer transition expenditures, and an asset
impairment, associated with our ongoing restructuring initiatives. For the three
and nine months ended June 30, 2001, we recorded $46 million and $117 million,
respectively, of other related expenses associated with our separation from
Lucent related primarily to computer system transition costs such as data
conversion activities, asset transfers, and training. In addition,

                                       46
<Page>
during the third quarter of fiscal 2001, we recorded a $20 million asset
impairment charge related to the Shreveport, Louisiana manufacturing facility,
which was closed in conjunction with our initiative to outsource certain
manufacturing operations. We also recorded $42 million in selling, general and
administrative expenses for additional start-up activities during the nine
months ended June 30, 2001, largely resulting from marketing costs associated
with continuing to establish the Avaya brand.

    During the fourth quarter of fiscal 2002, we expect to incur additional
period costs of approximately $15 million related to our prior restructuring
initiatives.

    We have been experiencing a decline in our revenue as a result of the
continued deferment by customers of information technology investments,
specifically for enterprise communications products and services. Despite the
unpredictability of the current business environment, we remain focused on our
strategy to return to profitability by focusing on sustainable cost and expense
reduction, among other things. To achieve that goal, we announced in July 2002
that we have begun to implement a company-wide restructuring to enable us to
reduce costs and expenses further in order to lower the amount of revenue needed
to reach our profitability break-even point.

    In the fourth quarter of fiscal 2002, we expect to record a business
restructuring charge and related expenses in connection with this plan of
approximately $150 million. Based on our initial assessment, the components of
this charge are estimated to include $70 million related to a reduction of about
2,500 employee positions, up to $65 million for real estate consolidations and
lease terminations, and $15 million for certain asset impairments. Because we
are currently finalizing our restructuring plan, the actual components of this
charge may vary.

OUTSOURCING OF CERTAIN MANUFACTURING OPERATIONS

    As a result of our contract manufacturing initiative, Celestica exclusively
manufactures a significant portion of our Systems and Applications products at
various facilities in the U.S. and Mexico. We believe that outsourcing our
manufacturing operations will allow us to improve our cash flow over the next
few years through a reduction of inventory and reduced capital expenditures.

    We are not obligated to purchase products from Celestica in any specific
quantity, except as we outline in forecasts or orders for products required to
be manufactured by Celestica. In addition, we may be obligated to purchase
certain excess inventory levels from Celestica that could result from our actual
sales of product varying from forecast. Our outsourcing agreement with Celestica
results in a concentration that, if suddenly eliminated, could have an adverse
effect on our operations. While we believe that alternative sources of supply
would be available, disruption of our primary source of supply could create a
temporary, adverse effect on product shipments. There is no other significant
concentration of business transacted with a particular supplier that could, if
suddenly eliminated, have a material adverse affect on our financial position,
results of operations or cash flows.

                                       47
<Page>
RESULTS OF OPERATIONS

    The following table sets forth line items from our Consolidated Statements
of Operations as a percentage of revenue for the periods indicated:

<Table>
<Caption>
                                        THREE MONTHS ENDED          NINE MONTHS ENDED
                                             JUNE 30,                    JUNE 30,
                                      ----------------------      ----------------------
                                        2002          2001          2002          2001
                                      --------      --------      --------      --------
<S>                                   <C>           <C>           <C>           <C>
Revenue.........................       100.0%        100.0%        100.0%        100.0%
Costs...........................        60.5          57.4          60.5          56.9
                                       -----         -----         -----         -----
Gross margin....................        39.5          42.6          39.5          43.1
                                       -----         -----         -----         -----
Operating expenses:
  Selling, general and
    administrative..............        31.0          28.1          31.6          30.0
  Business restructuring charges
    and related expenses........         0.7           3.8           2.7           5.1
  Research and development......         9.4           7.9           9.3           8.0
  Purchased in-process research
    and development.............          --           0.1            --           0.6
                                       -----         -----         -----         -----
Total operating expenses........        41.1          39.9          43.6          43.7
                                       -----         -----         -----         -----
Operating income (loss).........        (1.6)          2.7          (4.1)         (0.6)
Other income (expense), net.....        (0.9)          0.2           0.3           0.6
Interest expense................        (1.3)         (0.5)         (0.9)         (0.6)
Provision (benefit) for income
  taxes.........................        (0.6)          1.0          (1.5)         (0.1)
                                       -----         -----         -----         -----
Net income (loss)...............        (3.2)%         1.4%         (3.2)%        (0.5)%
                                       =====         =====         =====         =====
</Table>

THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001

    The following table shows the change in revenue, both in dollars and in
percentage terms:

<Table>
<Caption>
                                             THREE MONTHS ENDED
                                                  JUNE 30,                     CHANGE
                                           ----------------------      ----------------------
                                             2002          2001           $             %
                                           --------      --------      --------      --------
                                                         (DOLLARS IN MILLIONS)
<S>                                        <C>           <C>           <C>           <C>
Systems..............................       $  384        $  541        $(157)        (29.0)%
Applications.........................          160           217          (57)        (26.3)
Services.............................          511           584          (73)        (12.5)
Connectivity Solutions...............          164           372         (208)        (55.9)
                                            ------        ------        -----
    Total operating segments.........       $1,219        $1,714        $(495)        (28.9)%
                                            ======        ======        =====
</Table>

    REVENUE.  Revenue decreased 28.9%, or $495 million, from $1,714 million for
the third quarter of fiscal 2001, to $1,219 million for the same period in
fiscal 2002 due to decreases across each of our operating segments. Revenues in
our core business, which is made up of Systems, Applications and Services, were
affected largely due to customers' continued deferment of investments in
enterprise communications technology and partially due to customers' hesitation
to commit to spending on IP telephony solutions in the near term in light of
several recent product announcements. The continued economic and business
uncertainty has led to reluctance by our customers to resume capital spending
for telephony equipment and related products. Widespread layoffs, high vacancy
rates in commercial real estate and minimal business start-ups have each had a
detrimental impact on our revenues. Sales

                                       48
<Page>
through our indirect channel, which represent sales to distributors that are
typically less profitable for us as compared with sales made in the direct
channel to end-user customers, decreased to 42% of total revenue in the third
quarter of fiscal 2002 from 45% in the prior year quarter.

    Systems revenue includes sales to small and midsized enterprises, which
includes data switches and small to midsized telephony products, and sales to
our large customers, referred to as Enterprise Systems, which include sales of
all enterprise telephony products, virtual private networks, and data Local Area
Network and Wide Area Network equipment. Systems revenue declined by
$157 million due to a decline of $139 million attributed to Enterprise Systems
customers and $18 million attributed to sales to small to midsized enterprises,
with both declines experienced primarily within the U.S. Within Enterprise
Systems, the decline was attributable mainly to sales of our traditional voice
communications systems, which declined by $102 million, while declines in our
data equipment sales accounted for the remainder of the revenue reduction in
this customer group. Sales volumes continue to be adversely affected by the lack
of information technology spending by our customers. Sales through our indirect
channel increased to 58% of total Systems revenue in the third quarter of fiscal
2002 from 55% in the prior year quarter.

    Applications revenue, which closely follows the trend of our Systems revenue
because it has the same economic drivers and serves many of the same customers,
declined by $57 million due to a decrease in sales volumes. This decline was the
result of reductions of $28 million in customer relationship management
solutions, $18 million in professional services and $11 million in messaging
revenues. Sales through our indirect channel increased to 47% of total
Applications revenue in the third quarter of fiscal 2002 from 35% in the prior
year quarter.

    Services revenue decreased by $73 million due to a decline of $55 million
mainly as a result of the renegotiation of a maintenance contract in March of
2002 with a major distributor which extended the term of the agreement, but
lowered the monthly revenues, a depressed demand for maintenance billed on a
time and materials basis due to the economic constraint on discretionary
spending, and the loss of a major services contract in our Europe/Middle
East/Africa region. In addition, lower product sales resulted in less training
and consulting services delivered to our customers. The remainder of the decline
of $18 million was due to lower demand for equipment adds, moves and changes.
Sales through our indirect channel decreased to 16% of total Services revenue in
the third quarter of fiscal 2002 from 19% in the prior year quarter.

    Connectivity Solutions revenue decreased by $208 million driven mainly by a
decline of $104 million in sales of SYSTIMAX(-Registered Trademark-) structured
cabling systems for enterprises. In addition, revenues from our
ExchangeMAX(-Registered Trademark-) cabling for service providers declined by
$57 million and electronic cabinets revenues declined by $47 million. Sales of
our SYSTIMAX structured cabling systems dropped significantly as our customers
continue to delay planned capital projects. In response to excess manufacturing
capacity particularly in the cable industry, we implemented price reductions in
the first half of the current fiscal year that contributed to a decline in
revenues. In addition, distributors have scaled back purchases in an effort to
reduce their inventory levels by filling sales orders with inventory from their
existing stock balances. ExchangeMAX sales dropped significantly due to a lack
of sales volumes caused by reductions in capital spending by service providers
combined with heavy discounting in the third quarter of fiscal 2002.   In
response to a decline in DSL (Digital Subscriber Line) and wireless site
installations, which are the two main drivers behind sales of electronic
cabinets, service providers have pulled back on spending related to electronic
cabinets. Sales through our indirect channel increased to 82% of total
Connectivity revenue in the third quarter of fiscal 2002 from 75% in the prior
year quarter.

    Revenue within the U.S. decreased 29.1%, or $372 million, from
$1,280 million for the third quarter of fiscal 2001 to $908 million for the same
period in fiscal 2002. This decrease resulted from

                                       49
<Page>
declines of $165 million in Connectivity Solutions, $102 million in Systems,
$62 million in Services and $43 million in Applications. Outside the U.S.,
revenue decreased 28.3%, or $123 million, from $434 million for the third
quarter of fiscal 2001 to $311 million for the same period in fiscal 2002. This
decrease is due to declines of $55 million in Systems, $43 million in
Connectivity Solutions, $14 million in Applications and $11 million in Services.
Revenue outside the U.S. in the third quarter of fiscal 2002 represented 25.5%
of revenue compared with 25.3% in the same period of fiscal 2001.

    COSTS AND GROSS MARGIN.  Total costs decreased 24.9%, or $245 million, from
$983 million for the third quarter of fiscal 2001 to $738 million for the same
period in fiscal 2002. Gross margin percentage decreased from 42.6% in the third
quarter of fiscal 2001 as compared with 39.5% in the same period of fiscal 2002.
The decrease in gross margin percentage was attributed mainly to the
Connectivity Solutions segment, which experienced a sharp decline in sales
volumes while factory costs remained relatively fixed with the exception of
several cost cutting initiatives including headcount reductions. The decrease in
gross margin percentage was also somewhat impacted by a decline in the Systems
segment. These decreases were partially offset by increases in the Applications
and Services segments due mostly to headcount reductions. The Services segment
benefited from improved efficiencies gained from relying more heavily upon a
variable workforce during periods of peak demand and reducing headcount to
levels consistent with lower periods of demand. Gross margin was also negatively
impacted due to a higher amount of sales generated from our indirect channel in
the current period as compared with the prior year period.

    SELLING, GENERAL AND ADMINISTRATIVE.  Selling, general and administrative
("SG&A") expenses decreased 21.8%, or $105 million, from $482 million for the
third quarter of fiscal 2001 to $377 million for the same period of fiscal 2002.
The decrease was primarily due to savings associated with our business
restructuring initiatives, including lower staffing levels and terminated real
estate lease obligations. In addition, we incurred lower marketing and
promotional expenses in the current period.

    The decrease in SG&A is also attributable to our adoption of SFAS 142.
Accordingly, we did not record any goodwill amortization in the third quarter of
fiscal 2002 as compared with $11 million of goodwill amortization included in
SG&A for the third quarter of fiscal 2001. Furthermore, the decline in SG&A is
also due to the change in the estimated useful life of certain internal use
software, which lowered depreciation expense by approximately $5 million in the
third quarter of fiscal 2002.

    BUSINESS RESTRUCTURING CHARGES AND RELATED EXPENSES.  Business restructuring
expenses of $9 million in the third quarter of fiscal 2002 include $6 million of
incremental period costs, such as relocation and consolidation costs, computer
transition expenditures, and a $3 million asset impairment each associated with
our prior restructuring initiatives. The $66 million of business restructuring
charges and related expenses in the third quarter of fiscal 2001 included
$46 million of incremental period costs associated with our separation from
Lucent related primarily to computer system transition costs such as data
conversion activities, asset transfers and training, and a $20 million asset
impairment charge for the Shreveport facility in connection with our outsourcing
of certain manufacturing operations to Celestica.

    RESEARCH AND DEVELOPMENT.  Research and development ("R&D") expenses
decreased 14.8%, or $20 million, from $135 million in the third quarter of
fiscal 2001 to $115 million in the same quarter of fiscal 2002. Although R&D
spending decreased, our investment in R&D as a percentage of revenue increased
from 7.9% to 9.4% and represents our shift in spending on high growth areas of
our business and reduced spending on more mature product lines.

    PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT.  In the third quarter of
fiscal 2001, we acquired substantially all of the assets of Quintus Corporation.
The purchase price for this acquisition included certain technologies that had
not reached technological feasibility and had no future alternative use

                                       50
<Page>
and, accordingly, were charged to expense immediately upon consummation of the
acquisition. There was no charge in the three months ended June 30, 2002 for
purchased in-process research and development.

    OTHER INCOME (EXPENSE), NET.  Other income (expense), net decreased from
$4 million of income in the third quarter of fiscal 2001 to $10 million of
expense in the same period of fiscal 2002. The decrease of $14 million is
primarily attributed to losses recognized on foreign currency transactions in
the current period due to the decline in value of the U.S. dollar as compared
with several foreign currencies, as well as higher interest income earned on
cash balances in the prior year attributed to higher interest rates, and expense
related to developments in legal proceedings. These decreases were offset by an
increase in interest income earned on the Expanets line of credit during the
entire current quarter while the prior period reflects interest income earned
beginning in May 2001.

    INTEREST EXPENSE.  Interest expense increased $6 million, from $10 million
in the third quarter of fiscal 2001 to $16 million in the same quarter of fiscal
2002. The increase in interest expense is primarily due to a greater amount of
debt outstanding at higher weighed average interest rates as compared with the
third quarter of fiscal 2001. The increase in interest expense is also
attributed to the amortization of discount and deferred financing costs related
to the issuance of debt in fiscal 2002. This increase was partially offset by a
$2 million reduction in interest expense resulting from a favorable impact from
our interest rate swap agreements.

    PROVISION (BENEFIT) FOR INCOME TAXES.  The effective tax benefit rate of
15.8% for the three months ended June 30, 2002 was lower than the U.S. statutory
rate of 35% primarily due to changes in the geographical distribution of taxable
income and losses. The effective tax provision rate of 42.2% for the three
months ended June 30, 2001 was higher than the U.S. statutory rate of 35%
primarily due to acquisition related costs.

NINE MONTHS ENDED JUNE 30, 2002 COMPARED TO NINE MONTHS ENDED JUNE 30, 2001

    The following table shows the change in revenue, both in dollars and in
percentage terms:

<Table>
<Caption>
                                             NINE MONTHS ENDED
                                                 JUNE 30,                   CHANGE
                                          -----------------------   -----------------------
                                            2002           2001        $              %
                                          --------       --------   --------       --------
                                                        (DOLLARS IN MILLIONS)
<S>                                       <C>            <C>        <C>            <C>
Systems.................................   $1,240         $1,799    $  (559)        (31.1)%
Applications............................      521            702       (181)        (25.8)
Services................................    1,600          1,733       (133)         (7.7)
Connectivity............................      443          1,117       (674)        (60.3)
                                           ------         ------    -------
    Total operating segments............   $3,804         $5,351    $(1,547)        (28.9)%
                                           ======         ======    =======
</Table>

                                       51
<Page>
    REVENUE.  Revenue decreased 28.9%, or $1,547 million, from $5,351 million
for the nine months ended June 30, 2001, to $3,804 million for the same period
in fiscal 2002 due to sharp declines in revenue from our Connectivity Solutions
and Systems segments, followed by lesser declines in our Applications and
Services segments. Revenue declines in our core business, which is made up of
Systems, Applications and Services, reflects a sharp decline in our customers'
investments of capital in IT infrastructure, as well as a hesitation by our
customers to commit to spending on IP telephony solutions in the near term in
light of several recent product announcements. The protracted deterioration of
the business and economic environments has been a major factor contributing to
our customers' lack of spending on telephony equipment and related products.
Widespread layoffs, high vacancy rates in commercial real estate and minimal
business start-ups have each had a detrimental impact on our revenues. Sales
through our indirect channel, which represent sales to distributors that are
typically less profitable than sales made directly to our end-user customers
through the direct channel, decreased to 40% of total revenue for the nine
months ended June 30, 2002 from 43% in the prior year period.

    Systems revenue includes sales to small and midsized enterprises, which are
made up of data switches and small to midsized telephony products, and sales to
our large customers, referred to as Enterprise systems, which includes all
enterprise telephony products, virtual private networks, and data LAN and WAN
equipment. The Systems revenue decline of $559 million, which was experienced
largely within the U.S., is composed of declines of $461 million in Enterprise
Systems and $98 million in small to midsized enterprises. The decline in
Enterprise Systems was due mainly to enterprise voice systems and, to a lesser
extent, data equipment. Sales through our indirect channel, which represent
sales to distributors that are typically less profitable for us as compared with
sales made in the direct channel to end-use customers, increased to 56% of total
Systems revenue for the nine months ended June 30, 2002 from 55% in the prior
year period.

    Applications revenue declined by $181 million resulting from declines in
sales volumes and is driven by the same economic factors and serves many of the
same customers as the Systems segment. The uncertain economic climate has led
our customers to defer their expansion and relocation plans. This reduction in
revenue is attributed mainly to declines of $60 million in messaging revenues,
$57 million in customer relationship management solutions, and $58 million in
professional services. Sales through our indirect channel increased to 42% of
total Applications revenue for the nine months ended June 30, 2002 from 36% in
the prior year period.

    Services revenue decreased by $133 million resulting from the renegotiation
of a maintenance contract in March 2002 with a major distributor which extended
the term of the agreement, but lowered the monthly revenues. In addition, the
economic constraint on discretionary spending resulted in a depressed demand for
maintenance billed on a time and materials basis, and cuts in capital
expenditures resulted in lower demand for equipment adds, moves and changes.
Lower product sales resulted in fewer installations as well as less training and
consulting services delivered to our customers. Sales through our indirect
channel decreased to 17% of total Services revenue for the nine months ended
June 30, 2002 from 21% in the prior year period.

    Connectivity Solutions revenue decreased by $674 million as a result of
declines of $286 million in sales of ExchangeMAX-Registered Trademark- cabling
for service providers, $251 million in sales of SYSTIMAX-Registered Trademark-
structured cabling systems for enterprises, and $137 million related to
electronic cabinets. ExchangeMAX sales dropped significantly due to a decline in
sales volumes caused by a lack of capital spending by service providers combined
with heavy discounting in the third quarter of fiscal 2002. The main
contributors to the decline in SYSTIMAX revenues were a constraint on spending
by our customers on large infrastructure projects, and the implementation, which
began in the first half of fiscal 2002, of a strategic initiative to lower cable
prices. Other contributing factors include pricing pressures resulting from
excess cable manufacturing capacity and the concerted effort on the part of our
distributors to reduce their inventory levels by filling sales orders with
inventory from their existing

                                       52
<Page>
stock balances. In response to a decline in DSL (Digital Subscriber Line) and
wireless site installations, which are the two main drivers behind sales of
electronic cabinets, service providers have pulled back on spending related to
electronic cabinets. Sales through our indirect channel increased to 77% of
total Connectivity revenue for the nine months ended June 30, 2002 from 60% in
the prior year period.

    Revenue within the U.S. decreased 30.9%, or $1,241 million, from
$4,021 million for the nine months ended June 30, 2001 to $2,780 million for the
same period in fiscal 2002. This decrease was primarily from declines of
$575 million in Connectivity Solutions, $384 million in Systems, $151 million in
Applications, and $131 million in Services. Outside the U.S., revenue decreased
23.0%, or $306 million, from $1,330 million for the nine months ended June 30,
2001 to $1,024 million for the same period in fiscal 2002. This decrease is
primarily due to declines of $175 million in Systems, $99 million in
Connectivity Solutions, $30 million in Applications and $2 million in Services.
Revenue outside the U.S. for the nine months ended June 30, 2002 represented
26.9% of revenue compared with 24.9% in the same period of fiscal 2001.

    COSTS AND GROSS MARGIN.  Total costs decreased 24.4%, or $744 million, from
$3,044 million for the nine months ended June 30, 2001 to $2,300 million for the
same period in fiscal 2002. Gross margin percentage decreased from 43.1% for the
nine months ended June 30, 2001 as compared with 39.5% in the same period of
fiscal 2002. The decrease in gross margin percentage was due almost entirely to
the decline in Connectivity Solutions, which experienced a sharp decline in
sales volumes while factory costs remained relatively fixed with the exception
of several cost reduction initiatives including headcount reductions. The
Systems segment also experienced a more moderate decline in gross margin
percentage while Applications' gross margin percentage remained relatively flat.
The decreases were partially offset by an increase in the Services segment gross
margin percentage due to improved efficiencies gained from reducing headcount
and employing a variable workforce approach to meet periods of high demand. In
addition, a larger percentage of sales was generated through our indirect sales
channel during the current year as compared with the prior year, which has
negatively impacted gross margin.

    SELLING, GENERAL AND ADMINISTRATIVE.  Selling, general and administrative
("SG&A") expenses decreased 25.2%, or $404 million, from $1,606 million for the
nine months ended June 30, 2001 to $1,202 million for the same period of fiscal
2002. The decrease was primarily due to savings associated with our business
restructuring initiatives, including lower staffing levels and terminated real
estate lease obligations. In addition, during the nine months ended June 30,
2001, we incurred higher incentive compensation expense related to performance
bonuses and higher marketing and promotional costs. Start-up expenses of
$42 million were also incurred in the nine months ended June 30, 2001 related to
establishing our brand in the marketplace.

    The decrease in SG&A is also attributable to our adoption of SFAS 142.
Accordingly, we did not record any goodwill amortization in the nine months
ended June 30, 2002 as compared with $29 million of goodwill amortization
included in SG&A for the same period in fiscal 2001. The decline in SG&A is also
due to the change in the estimated useful life of certain internal use software,
which lowered depreciation expense by approximately $9 million in the nine
months ended June 30, 2002.

    BUSINESS RESTRUCTURING CHARGES AND RELATED EXPENSES.  Business restructuring
charges and related expenses of $103 million for the nine months ended June 30,
2002 include a $84 million charge attributed to headcount reductions,
$16 million for incremental period costs and $3 million for an asset impairment
each associated with our prior restructuring initiatives. The $271 million of
business restructuring charges and related expenses for the nine months ended
June 30, 2001, included a $134 million business restructuring charge primarily
for employee separation costs associated with the outsourcing of certain
manufacturing operations to Celestica in the second quarter of fiscal 2001. In
addition, we incurred $117 million of incremental period costs associated with
our separation from Lucent related primarily to computer system transition costs
such as data conversion activities, asset

                                       53
<Page>
transfers and training, and a $20 million asset impairment charge for the
Shreveport facility in connection with our outsourcing to Celestica.

    RESEARCH AND DEVELOPMENT.  Research and development ("R&D") expenses
decreased 17.3%, or $74 million, from $428 million for the nine months ended
June 30, 2001 to $354 million in the same period of fiscal 2002. Although R&D
spending decreased, our investment in R&D as a percentage of revenue increased
from 8.0% to 9.3% and represents our shift in spending on high growth areas of
our business and reduced spending on more mature product lines.

    PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT.  The $32 million expense
reflects charges associated with our acquisitions of VPNet Technologies in
February 2001, and substantially all of the assets of Quintus Corporation in
April 2001. The purchase price for this acquisition included certain
technologies that had not reached technological feasibility and had no future
alternative use and, accordingly, were charged to expense immediately upon
consummation of the acquisition. There was no charge in the nine months ended
June 30, 2002 for purchased in-process research and development.

    OTHER INCOME (EXPENSE), NET.  Other income, net decreased from $31 million
of income for the nine months ended June 30, 2001 to $8 million of income in the
same period of fiscal 2002. The decrease of $23 million is attributable to
higher interest income earned on cash balances in the prior year attributed to
higher interest rates as well as gains on assets sold in the first and second
quarters of fiscal 2001, in addition to banking fees incurred in the current
period. Higher losses recognized on foreign currency transactions in the current
period due to the decline in value of the U.S. dollar as compared with several
foreign currencies as well as expense related to developments in legal
proceedings also contributed to the decrease in other income. These decreases
were offset by an increase in interest income earned on the Expanets line of
credit for the entire nine months ended June 30, 2002, while the prior year
reflects interest income earned beginning in May 2001.

    INTEREST EXPENSE.  Interest expense increased 10%, or $3 million, from
$30 million for the nine months ended June 30, 2001 to $33 million for the same
period in fiscal 2002. The increase in interest expense is largely attributed to
a higher amount of weighted average debt outstanding as well as the amortization
of discount and deferred financing costs related to the issuance of debt in the
first and second quarters of fiscal 2002. This increase was partially offset by
a lower weighted average interest rate during the nine months ended June 30,
2002 as compared with the same period last year and a $2 million favorable
impact resulting from our interest rate swap agreements.

    PROVISION (BENEFIT) FOR INCOME TAXES.  The effective tax benefit rate of
32.3% for the nine months ended June 30, 2002 was lower than the U.S. statutory
rate of 35% primarily due to changes in the geographical distribution of taxable
income and losses. The effective tax benefit rate of 16.3% for the nine months
ended June 30, 2001 was lower than the U.S. statutory rate of 35% primarily due
to acquisition related costs.

LIQUIDITY AND CAPITAL RESOURCES

STATEMENT OF CASH FLOWS DISCUSSION

    Avaya's cash and cash equivalents increased to $406 million at June 30, 2002
from $250 million at September 30, 2001. The increase resulted from
$252 million of net cash provided by financing activities, partially offset by
$96 million and $3 million of net cash used for investing and operating
activities, respectively.

    Our net cash used for operating activities was $3 million for the nine
months ended June 30, 2002 compared with $219 million for the same period in
fiscal 2001. Net cash used for operating activities for the nine months ended
June 30, 2002 was comprised of a net loss of $122 million adjusted for non-cash
items of $354 million, and net cash used for changes in operating assets and
liabilities of

                                       54
<Page>
$235 million. Net cash used for operating activities is mainly attributed to
cash payments made on our accounts payable and other short term liabilities. In
addition, usage of cash also resulted from payments made for our business
restructuring related activities associated with employee separation costs,
lease termination obligations and other exit costs. Furthermore, we reduced our
payroll related liabilities. These changes were partially offset by receipts of
cash on amounts due from our customers and a decrease in our inventory balance.
Net cash used for operating activities for the nine months ended June 30, 2001
was comprised of a net loss of $24 million adjusted for non-cash items of
$487 million, and net cash used for changes in operating assets and liabilities
of $682 million. Net cash used for operating activities is primarily attributed
to cash payments made on our accounts payable and for our business restructuring
related activities. During the period, we also reduced our deferred revenue, and
increased our inventory levels. The usage of cash was offset by cash receipts on
our trade accounts receivable.

    Days sales outstanding in accounts receivable for the third quarter of
fiscal 2002, excluding the effect of the securitization transaction discussed
below, was 86 days versus 88 days for the second quarter of fiscal 2002. The
improvement in the level of days sales outstanding is primarily attributable to
the implementation of process improvements that resulted in increased
collections on past due amounts and lower sales. Days sales of inventory on-hand
for the third quarter of fiscal 2002 were 68 days versus 71 days for the second
quarter of fiscal 2002. This decrease is primarily due to improved inventory
management, decreased unit costs and adjustments to reflect inventory at market
value.

    Our net cash used for investing activities was $96 million for the nine
months ended June 30, 2002 compared with $292 million for the same period in
fiscal 2001. The usage of cash in both periods resulted primarily from capital
expenditures. Capital expenditures in fiscal 2002 included payments made for the
renovation of our corporate headquarters facility, purchase of a corporate
aircraft as a result of the termination of the aircraft sale-leaseback agreement
as described below in "AIRCRAFT SALE-LEASEBACK", and upgrades of our information
technology systems, including the purchase of internal use software. Capital
expenditures in fiscal 2001 were due mainly to Avaya establishing itself as a
stand-alone entity, including information technology upgrades and corporate
infrastructure expenditures. In addition, in the current period, we used
$6 million of cash for our acquisition of Conita Technologies, a leading
supplier of voice-driven software applications for business, which occurred in
the third quarter of fiscal 2002. In the prior period, we used $120 million of
cash for our acquisitions of VPNet Technologies, Inc., a privately held
developer of virtual private network solutions and devices, and substantially
all of the assets of Quintus Corporation, a provider of comprehensive electronic
customer relationship management solutions, which occurred in the second and
third quarters of fiscal 2001, respectively.

    Net cash provided by financing activities was $252 million for the nine
months ended June 30, 2002 compared with $487 million for the same period in
fiscal 2001. Cash flows from financing activities in the current period were
mainly due to $460 million and $435 million in gross proceeds from the issuance
of the LYONs and the Senior Secured Notes, respectively. In addition, we
received cash proceeds of $232 million from the issuance of our common stock,
related to (i) the sale of 19.55 million shares of our common stock for $5.90
per share in a public offering, resulting in gross proceeds of approximately
$115 million, (ii) the equity transactions entered into with the Warburg
Entities described below, resulting in gross proceeds of $100 million, and
(iii) purchases under our employee stock purchase plan. These receipts of cash
were partially offset by $29 million of payments related to the issuance of
these debt and equity offerings. In addition, we made net payments of
$432 million for the retirement of commercial paper, $200 million towards the
repayment of borrowings under our five-year credit facility, and $13 million for
the repayment of other short-term borrowings. In connection with our election to
terminate the accounts receivable securitization in March 2002, $200 million of
collections of qualified trade accounts receivable were used to liquidate the
financial institution's investment as described below in "Securitization of
Accounts Receivable." Net cash

                                       55
<Page>
provided by financing activities for the nine months ended June 30, 2001 was
mainly due to the receipt of $400 million in proceeds from the sale of our
Series B convertible participating preferred stock and warrants to purchase our
common stock, as well as $200 million of proceeds from the securitization of
certain trade receivables and $36 million in proceeds resulting from the
issuance of our common stock, primarily through our employee stock purchase
plan. The receipt of proceeds in fiscal 2001 was partially offset by
$140 million in net payments for the retirement of commercial paper and
$9 million of debt assumed from our acquisition of VPNet.

DEBT RATINGS

    Our ability to obtain external financing is affected by our debt ratings,
which are periodically reviewed by the major credit rating agencies. During the
second quarter of fiscal 2002, our commercial paper and long-term debt ratings
were downgraded. Ratings as of June 30, 2002 are as follows (all ratings include
a negative outlook):

<Table>
<Caption>

<S>                                                           <C>
Moody's:
  Commercial paper..........................................  No Rating
  Long-term senior unsecured debt...........................  Ba3
  Senior secured notes......................................  Ba2

Standard & Poor's:
  Commercial paper..........................................  No Rating
  Long-term senior unsecured debt...........................  BB-
  Senior secured notes......................................  BB-
  Corporate credit..........................................  BB+
</Table>

    Any increase in our level of indebtedness or deterioration of our operating
results may cause a further reduction in our current debt ratings. A further
reduction in our current long-term debt rating by Moody's or Standard & Poor's
could affect our ability to access the long-term debt markets, significantly
increase our cost of external financing, and result in additional restrictions
on the way we operate and finance our business.

    On July 31, 2002, Standard & Poor's placed our corporate credit rating on
CreditWatch with negative implications. Standard & Poor's stated that their
action is based on our continuing weak operating performance and concerns about
our financial flexibility stemming from ongoing cash-based special charges and
potential covenant amendments. Standard & Poor's noted that they intend to meet
with us to discuss industry conditions as well as our operating cost structure,
cash requirements and liquidity before reviewing the rating. There can be no
assurance as to the outcome of this meeting.

    A security rating by the major credit rating agencies is not a
recommendation to buy, sell or hold securities and may be subject to revision or
withdrawal at any time by the rating agencies. Each rating should be evaluated
independently of any other rating.

COMMERCIAL PAPER PROGRAM

    During the second quarter of fiscal 2002, Standard & Poor's and Moody's
downgraded our commercial paper rating several times and eventually withdrew
their rating of our commercial paper at our request. This recent withdrawal of
our commercial paper rating makes it impossible for us to access the commercial
paper market, which until recently was our primary source of liquidity.

    As a result of the impact of the ratings downgrades on our ability to issue
commercial paper, in February 2002, we borrowed $300 million under our five-year
credit facility to repay commercial paper obligations. As of June 30, 2002, all
remaining commercial paper obligations and the borrowing under the five-year
credit facility had been repaid using proceeds from the offering of the Senior
Secured Notes discussed below.

                                       56
<Page>
REVOLVING CREDIT FACILITIES

    We have two revolving credit facilities (the "Credit Facilities") with third
party financial institutions. As of September 30, 2001, these Credit Facilities
consisted of a $400 million 364-day Credit Facility that expires in August 2002
and an $850 million five-year Credit Facility that expires in September 2005. As
required by the terms of the Credit Facilities, upon the closing of the offering
of the Senior Secured Notes in March 2002, the Credit Facilities were reduced
proportionately by an amount equal to the $425 million of proceeds, net of
certain deferred financing costs, realized from the offering of the Senior
Secured Notes. Accordingly, as of June 30, 2002, the Credit Facilities consist
of a $561 million five-year Credit Facility and a $264 million 364-day Credit
Facility. No amounts were outstanding under either Credit Facility as of
June 30, 2002.

    Funds are available under our Credit Facilities for general corporate
purposes and for acquisitions up to $150 million. Based on our current debt
ratings, any borrowings under the Credit Facilities are secured, subject to
certain exceptions, by security interests in our equipment, accounts receivable,
inventory, and U.S. intellectual property rights and that of any of our
subsidiaries guaranteeing our obligations under the Credit Facilities as
described below. Borrowings are also secured by a pledge of the stock of most of
our domestic subsidiaries and 65% of the stock of a foreign subsidiary that,
together with its subsidiaries, holds the beneficial and economic right to
utilize certain of our domestic intellectual property rights outside North
America. The security interests would be suspended in the event our corporate
credit rating was at least BBB by Standard & Poor's and our long-term senior
unsecured debt rating was at least Baa2 by Moody's, in each case with a stable
outlook. Our long-term senior unsecured debt is currently rated Ba3 by Moody's,
and our corporate credit is currently on CreditWatch and rated BB+ by
Standard & Poor's, each with a negative outlook.

    Any current or future domestic subsidiaries (other than certain excluded
subsidiaries) whose revenues constitute 5% or greater of our consolidated
revenues or whose assets constitute 5% or greater of our consolidated total
assets will be required to guarantee our obligations under the Credit
Facilities. We have no subsidiaries that currently meet these criteria.

    The Credit Facilities also include negative covenants, including limitations
on affiliate transactions, restricted payments and investments and advances. The
Credit Facilities also restrict our ability and that of our subsidiaries to
incur debt, subject to certain exceptions. We are permitted to use the Credit
Facilities to fund acquisitions in an aggregate amount not to exceed
$150 million and can make larger acquisitions so long as the Credit Facilities
are not used to fund the purchase price. In addition, the Credit Facilities
require that in connection with any acquisition, no default under the Credit
Facilities shall have occurred and be continuing or would result from such
acquisition, and we shall be in compliance with the financial ratio test
described below after giving pro forma effect to such acquisition.

    The Credit Facilities require us to maintain a ratio of consolidated
Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") to
interest expense consisting of the previous four consecutive fiscal quarters of
not less than three to one for each quarter beginning with the period ending
March 31, 2002 until September 30, 2002 and a ratio of not less than four to one
at all times thereafter. We are also required to maintain consolidated EBITDA in
the following amounts for each of the periods noted below:

    - $20 million for the quarter ended March 31, 2002;

    - $80 million for the two-quarter period ended June 30, 2002;

    - $180 million for the three-quarter period ended September 30, 2002;

    - $300 million for the four-quarter period ended December 31, 2002; and

    - $400 million for each four-quarter period thereafter.

                                       57
<Page>
    For purposes of these calculations, we are permitted to exclude from the
computation of consolidated EBITDA up to $163 million of restructuring charges,
including asset impairment and other one time expenses to be taken no later than
the fourth quarter of fiscal 2002 and any write down of intangibles associated
with the adoption of SFAS 142. In addition, we may exclude certain business
restructuring charges and related expenses taken in fiscal 2001. During the
second and third quarters of fiscal 2002, we incurred $97 million of such
business restructuring charges and related expenses. As of June 30, 2002, we
were in compliance with all required covenants.

    Although we were in compliance with these covenants as of June 30, 2002, our
continued revenue decline and the expected recording of the $150 million
restructuring charge and related expenses described under "--Business
Restructuring Charges and Related Expenses" would likely have prevented us from
complying with these covenants as of September 30, 2002. Accordingly, we have
recently received consents from the requisite lenders under the five-year credit
facility to amend the terms of the facility. We do not intend to renew the
364-day credit facility expiring in August 2002. The amended five-year credit
facility will require us to maintain a ratio of EBITDA to interest expense of:

    - 1.70 to 1 for each of the four quarter periods ending September 30, 2002,
      December 31, 2002 and March 31, 2003;

    - 2.25 to 1 for the four quarter period ending June 30, 2003;

    - 3.50 to 1 for the four quarter period ending September 30, 2003; and

    - 4.00 to 1 for the four quarter period ending December 31, 2003 and each
      four quarter period thereafter.

In addition, the amended five-year credit facility will require us to maintain
minimum EBITDA of:

    - $70 million for the three quarter period ending September 30, 2002;

    - $100 million for the four quarter period ending December 31, 2002;

    - $115 million for the four quarter period ending March 31, 2003;

    - $150 million for the four quarter period ending June 30, 2003;

    - $250 million for the four quarter period ending September 30, 2003;

    - $350 million for the four quarter period ending December 31, 2003; and

    - $400 million for each of the four quarter periods thereafter.

    The definition of EBITDA in the amended five-year credit facility will
exclude an additional $100 million of business restructuring charges and related
expenses to be taken no later than the third quarter of fiscal 2003. The total
business restructuring related excludable amount of $166 million, which is made
up of the additional $100 million under the amended credit facility plus
$66 million remaining under the existing Credit Facilities, will enable us to
exclude from the definition of EBITDA the $150 million business restructuring
charge announced in July 2002 plus $15 million of period costs related to our
prior restructuring initiatives. A substantial portion of these costs are
expected to be incurred in the fourth quarter of fiscal 2002 and the first
quarter of fiscal 2003.

    The initial aggregate commitments under the amended five-year credit
facility will equal $561 million, but will be subject to mandatory reduction as
follows:

    - reduced to $500 million on December 1, 2003;

    - reduced to $425 million on March 1, 2004;

                                       58
<Page>
    - reduced to $350 million on June 1, 2004; and

    - reduced to $250 million on September 1, 2004.

    We will also be required to reduce the commitments by an amount equal to
100% of the net cash proceeds realized from the sale of any assets (other than
the sale of our Connectivity Solutions business or the sale of our aircraft) and
by an amount equal to 50% of the net cash proceeds realized from the issuance of
debt, other than refinancing debt; provided, however, that in each case, we will
not be required to reduce the commitments below an amount equal to $250 million
less the amount of any cash used to redeem or repurchase the LYONs as described
below.

    The amended five-year credit facility will provide that we may use up to
$100 million of cash to redeem or repurchase the LYONs at any time as long as no
default or event of default exists under the facility, no amounts are
outstanding under the facility, the commitments are reduced in an amount equal
to the cash amount used to redeem or repurchase the LYONs, and our cash balance
is not less than $300 million after giving pro forma effect to the redemption or
repurchase of the LYONs.

    The amendment will provide that the existing $150 million limitation on use
of the facility for acquisitions or other investments will be reduced to
$75 million.

    While we believe we will be able to meet these amended financial covenants,
our revenue has been declining and any further decline in revenue may affect our
ability to meet these financial covenants in the future.

    The terms of the amended five-year credit facility are subject to the
execution of definitive amendments. We expect to complete the execution of the
required amendments shortly.

UNCOMMITTED CREDIT FACILITIES

    Through our foreign operations, we have entered into several uncommitted
credit facilities totaling $82 million and $118 million, of which letters of
credit of $27 million and $10 million were issued and outstanding as of
June 30, 2002 and September 30, 2001, respectively. Letters of credit are
purchased guarantees that ensure our performance or payment to third parties in
accordance with specified terms and conditions.

LYONS CONVERTIBLE DEBT

    In the first quarter of fiscal 2002, we sold through an underwritten public
offering under a shelf registration statement an aggregate principal amount at
maturity of approximately $944 million of LYONs due 2021. The proceeds of
approximately $448 million, net of a $484 million discount and $12 million of
underwriting fees, were used to refinance a portion of our outstanding
commercial paper. The underwriting fees of $12 million were recorded as deferred
financing costs and are being amortized to interest expense over a three-year
period through October 31, 2004, which represents the first date holders may
require us to purchase all or a portion of their LYONs. For the three and nine
months ended June 30, 2002, $1 million and $3 million, respectively, of deferred
financing costs were recorded as interest expense.

    The original issue discount of $484 million accretes daily at a rate of
3.625% per year calculated on a semiannual bond equivalent basis. We will not
make periodic cash payments of interest on the LYONs. Instead, the amortization
of the discount is recorded as interest expense and represents the accretion of
the LYONs issue price to their maturity value. For the three and nine months
ended June 30, 2002, $4 million and $11 million, respectively, of interest
expense on the LYONs was recorded, resulting in an accreted value of
$471 million as of June 30, 2002. The discount will cease to accrete on the
LYONs upon maturity, conversion, purchase by us at the option of the holder, or
redemption by

                                       59
<Page>
Avaya. The LYONs are unsecured obligations that rank equally in right of payment
with all existing and future unsecured and unsubordinated indebtedness of Avaya.

    The LYONs are convertible into 35,333,073 shares of Avaya common stock at
any time on or before the maturity date. The conversion rate may be adjusted for
certain reasons, but will not be adjusted for accrued original issue discount.
Upon conversion, the holder will not receive any cash payment representing
accrued original issue discount. Accrued original issue discount will be
considered paid by the shares of common stock received by the holder of the
LYONs upon conversion.

    We may redeem all or a portion of the LYONs for cash at any time on or after
October 31, 2004 at a price equal to the sum of the issue price and accrued
original issue discount on the LYONs as of the applicable redemption date.
Conversely, holders may require us to purchase all or a portion of their LYONs
on October 31, 2004, 2006 and 2011 at a price equal to the sum of the issue
price and accrued original issue discount on the LYONs as of the applicable
purchase date. We may, at our option, elect to pay the purchase price in cash or
shares of common stock, or any combination thereof.

    The fair value of the LYONs as of June 30, 2002 is estimated to be
$350 million and is based on using quoted market prices and yields obtained
through independent pricing sources for the same or similar types of borrowing
arrangements taking into consideration the underlying terms of the debt.

    The indenture governing the LYONs includes certain covenants, including a
limitation on our ability to grant liens on significant domestic real estate
properties or the stock of our subsidiaries holding such properties.

SENIOR SECURED NOTES

    In March 2002, we issued through an underwritten public offering under a
shelf registration statement $440 million aggregate principal amount of 11 1/8%
Senior Secured Notes due April 2009 (the "Senior Secured Notes") and received
net proceeds of approximately $425 million, net of a $5 million discount and
$10 million of issuance costs. Interest on the Senior Secured Notes is payable
on April 1 and October 1 of each year beginning on October 1, 2002. We recorded
interest expense related to the Senior Secured Notes of $12 million and
$13 million for the three and nine months ended June 30, 2002, respectively. The
$5 million discount is being amortized to interest expense over the seven-year
term to maturity. The $10 million of issuance costs were recorded as deferred
financing costs and are also being amortized to interest expense over the term
of the Notes. The proceeds from the issuance were used to repay amounts
outstanding under the five-year Credit Facility and for general corporate
purposes.

    The Company may redeem the Senior Secured Notes, in whole or from time to
time in part, at the redemption prices expressed as a percentage of principal
amount noted below plus accrued and unpaid interest to the applicable redemption
date, if redeemed during the twelve-month period beginning on April 1 of the
following years:

<Table>
<Caption>
YEARS                                                          PERCENTAGES
-----                                                          -----------
<S>                                                            <C>
2006........................................................     105.563%
2007........................................................     102.781%
2008........................................................     100.000%
</Table>

    The Senior Secured Notes are secured by a second priority security interest
in the collateral securing our obligations under the Credit Facilities and our
obligations under the interest rate swap agreements described below. In the
event that (i) our corporate credit is rated at least BBB by Standard & Poor's
and our long-term senior unsecured debt is rated at least Baa2 by Moody's, each
without a negative outlook or its equivalent, or (ii) subject to certain
conditions, at least $400 million of unsecured indebtedness is outstanding or
available under the Credit Facilities or a bona fide successor credit facility,
the security interest in the collateral securing the Senior Secured Notes will
terminate.

                                       60
<Page>
The indenture governing the Senior Secured Notes includes negative covenants
that limit our ability to incur secured debt and enter into sale/leaseback
transactions. In addition, the indenture also includes conditional covenants
that limit our ability to incur debt, enter into affiliate transactions, or make
restricted payments or investments and advances. These conditional covenants
will apply to us until such time that the Senior Secured Notes are rated at
least BBB- by Standard & Poor's and Baa3 by Moody's, in each case without a
negative outlook or its equivalent.

    The fair value of the Senior Secured Notes as of June 30, 2002 is estimated
to be $407 million and is based on using quoted market prices and yields
obtained through independent pricing sources for the same or similar types of
borrowing arrangements taking into consideration the underlying terms of the
debt.

INTEREST RATE SWAP AGREEMENTS

    In April 2002, we entered into two interest rate swap agreements with a
total notional amount of $200 million that qualify and are designated as fair
value hedges in accordance with SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities." The swap agreements mature in April 2009 and were
executed in order to:

    - convert a portion of the Senior Secured Notes fixed-rate debt into
      floating-rate debt;

    - maintain a capital structure containing appropriate amounts of fixed and
      floating-rate debt; and

    - reduce net interest payments and expense in the near-term.

    Under these agreements, we receive a fixed interest rate of 11.125% and pay
a floating interest rate based on LIBOR plus an agreed-upon spread, which was
equal to a weighed average interest rate of 7.25% as of June 30, 2002. The
amount paid and the amount received is calculated based on the total notional
amount of $200 million. Since the relevant terms of the swap agreements match
the corresponding terms of the Senior Secured Notes, there is no hedge
ineffectiveness. Accordingly, gains and losses on the swap agreements will fully
offset the losses and gains on the hedged portion of the Senior Secured Notes,
which are marked to market at each reporting date. As of June 30, 2002, we
recorded the fair market value of the swaps of $8 million as other assets along
with a corresponding increase to the hedged debt, both of which were recorded
through other income (expense), net.

    Interest payments are recognized through interest expense and are made and
received on the first day of each April and October, commencing on October 1,
2002 and ending on the maturity date. On the last day of each semi-annual
interest payment period, the interest rate payment for the previous six months
will be made based upon the six month LIBOR rate (in arrears) on that day, plus
the applicable margin, as shown in the table below. Since the interest rate is
not known until the end of each semi-annual interest period, estimates are used
during such period based upon published forward-looking LIBOR rates. Any
differences between the estimated interest expense and the actual interest
payment are recorded to interest expense at the end of each semi-annual interest
period. These interest rate swaps resulted in actual interest expense for the
three and nine months ended June 30, 2002 of $4 million as compared with
interest expense of $6 million had we not entered into the agreements.

    The following table outlines the terms of the swap agreements:

<Table>
<Caption>
                                      RECEIVE FIXED
MATURITY DATE     NOTIONAL AMOUNT     INTEREST RATE      PAY VARIABLE INTEREST RATE
-------------  ---------------------  -------------  -----------------------------------
               (DOLLARS IN MILLIONS)
<S>            <C>                    <C>            <C>
                                                     Six month LIBOR (in arrears) plus
 April 2009            $150              11.125%     5.055% spread
                                                     Six month LIBOR (in arrears) plus
 April 2009              50              11.125%     5.098% spread
                       ----
  Total                $200
                       ====
</Table>

                                       61
<Page>
    Each counterparty to the swap agreements is a lender under the Credit
Facilities. Our obligations under these swap agreements are secured on the same
basis as our obligations under the Credit Facilities.

WARBURG TRANSACTIONS

    In October 2000, we sold to Warburg Pincus Equity Partners, L.P. and certain
of its investment funds (the "Warburg Entities") four million shares of our
Series B convertible participating preferred stock and warrants to purchase our
common stock for an aggregate purchase price of $400 million. On March 21, 2002,
we completed a series of transactions pursuant to which the Warburg Entities
(i) converted all four million shares of the Series B preferred stock into
38,329,365 shares of our common stock based on a conversion price of $11.31 per
share, which was reduced from the original conversion price of $26.71 per share,
(ii) purchased an additional 286,682 shares of common stock by exercising a
portion of the warrants at an exercise price of $34.73 per share resulting in
gross proceeds of approximately $10 million, and (iii) purchased 14,383,953
shares of our common stock for $6.26 per share (the reported closing price of
our common stock on the New York Stock Exchange on March 8, 2002), resulting in
gross proceeds of approximately $90 million. In connection with these
transactions, we incurred approximately $4 million of financing costs which were
recorded as a reduction to additional paid-in capital. As of June 30, 2002,
there were no shares of Series B preferred stock outstanding and, accordingly,
the Series B preferred stock has ceased accruing dividends.

    As a result of these transactions, the Warburg entities hold approximately
53 million shares of our common stock, which represents approximately 15% of our
outstanding common stock, and warrants to purchase approximately 12 million
additional shares of common stock. These warrants have an exercise price of
$34.73 of which warrants exercisable for 6,724,665 shares of common stock expire
on October 2, 2004, and warrants exercisable for 5,379,732 shares of common
stock expire on October 2, 2005.

    The conversion of the Series B preferred stock and the exercise of the
warrants resulted in a charge to accumulated deficit of approximately
$125 million, in addition to the $5 million accretion of the Series B preferred
stock from January 1, 2002 through the date of conversion. This charge primarily
represents the impact of reducing the preferred stock conversion price from
$26.71 per share as originally calculated under the certificate of designations
for the Series B preferred stock to $11.31 per share, as permitted under the
certificate of designations. We recorded a total of $12 million of accretion for
the period from October 1, 2001 through the date of conversion.

PUBLIC OFFERING OF COMMON STOCK

    On March 15, 2002, we sold 19.55 million shares of common stock for $5.90
per share in a public offering. We received proceeds of approximately
$112 million, which is net of approximately $3 million of underwriting fees
reflected as a reduction to additional paid-in capital.

SHELF REGISTRATION STATEMENT

    In May 2001, the Securities and Exchange Commission ("SEC") declared
effective our shelf registration statement on Form S-3 registering
$1.44 billion of common stock, preferred stock, debt securities or warrants to
purchase debt securities, or any combination of these securities, in one or more
offerings through May 2003. We have $430 million remaining as of June 30, 2002
under this registration statement for additional offerings and intend to use the
proceeds from any sale of such securities for general corporate purposes, debt
repayment and refinancing, capital expenditures and acquisitions. Our ability to
issue debt securities may be constrained by the terms of our existing and future
financing agreements, including the Credit Facilities and the indentures
governing the LYONs and the Senior Secured Notes. In addition, our ability to
issue debt or equity securities is dependent upon market conditions.

                                       62
<Page>
DEALER LINE OF CREDIT

    As discussed in "--Risks and Uncertainties," we have provided a short-term
line of credit to our largest dealer, Expanets. The following table summarizes
the amounts receivable from Expanets, including amounts outstanding under the
line of credit, as of June 30, 2002 and September 30, 2001:

<Table>
<Caption>
                                                                 AS OF             AS OF
                                                             JUNE 30, 2002   SEPTEMBER 30, 2001
                                                             -------------   ------------------
                                                                   (DOLLARS IN MILLIONS)
<S>                                                          <C>             <C>
Receivables................................................       $ 50              $117
Other current assets.......................................         47                81
                                                                  ----              ----
Total amounts receivable from Expanets.....................       $ 97              $198
                                                                  ====              ====
Secured and unsecured components of the amounts receivable
  are as follows:
Secured line of credit (included in receivables)...........       $ 47              $ 71
Secured line of credit (included in other current
  assets)..................................................         22                50
                                                                  ----              ----
  Total secured line of credit.............................         69               121
  Unsecured (included in receivables)......................         28                77
                                                                  ----              ----
  Total amounts receivable from Expanets...................       $ 97              $198
                                                                  ====              ====
</Table>

    Amounts recorded in receivables represent trade receivables due from
Expanets on sales of products and maintenance services. Amounts recorded in
other current assets represent receivables due from Expanets for transitional
services provided under a transitional services agreement.

SECURITIZATION OF ACCOUNTS RECEIVABLE

    In June 2001, we entered into a receivables purchase agreement and
transferred a designated pool of qualified trade accounts receivable to a
special purpose entity ("SPE"), which in turn sold an undivided ownership
interest in the pool of receivables to an unaffiliated financial institution for
cash proceeds of $200 million. The receivables purchase agreement was terminated
in March 2002 as described below. The financial institution is an affiliate of
Citibank, N.A., a lender and the agent for the other lenders under the Credit
Facilities and the counterparty to the $150 million interest rate swap. The
designated pool of qualified receivables held by the SPE was pledged as
collateral to secure the obligations to the financial institution. During the
term of the receivables purchase agreement, we had a retained interest in the
designated pool of receivables to the extent the value of the receivables
exceeded the outstanding amount of the financial institution's investment. The
carrying amount of our retained interest, which approximates fair value because
of the short-term nature of the receivables, was recorded in other current
assets. Collections of receivables were used by the SPE to repay the financial
institution's investment in accordance with the receivables purchase agreement,
and the financial institution in turn purchased, from time to time, new
interests in receivables up to an aggregate investment at any time of
$200 million.

    Effective March 15, 2002, we elected to terminate the receivables purchase
agreement, which was scheduled to expire in June 2002. As a result of the early
termination, purchases of interests in receivables by the financial institution
ceased, and collections on receivables that constituted the designated pool of
trade accounts receivable were used to liquidate the financial institution's
$200 million investment under the agreement. As of June 30, 2002, the entire
$200 million investment had been liquidated using collections of such
receivables. No portion of the retained interest was utilized to liquidate the
financial institution's remaining $126 million investment that had been
outstanding at the beginning of the third quarter of fiscal 2002. Upon
liquidation in full of the financial institution's investment on April 5, 2002,
the remaining $109 million in retained interest was reclassified to receivables.
As of September 30, 2001, we had a retained interest of $153 million in the
SPE's designated pool of qualified accounts receivable.

                                       63
<Page>
AIRCRAFT SALE-LEASEBACK

    In March 2002, we elected to early terminate an aircraft sale-leaseback
agreement and, pursuant to the terms of the agreement, we agreed to purchase the
aircraft from the lessor for a purchase price equal to the unamortized lease
balance of approximately $33 million. The closing of the purchase was completed
in April 2002.

CROSS ACCELERATION/CROSS DEFAULT PROVISIONS

    The agreement governing our $50 million interest rate swap and the
indentures governing the LYONs and the Senior Secured Notes provide generally
that an event of default under such agreements would result (i) if we fail to
pay any obligation in respect of debt in excess of $100 million in the aggregate
when such obligation becomes due and payable or (ii) if any such debt is
declared to be due and payable prior to its stated maturity.

    The Credit Facilities provide generally that an event of default under such
agreements would result (i) if we fail to pay any obligation in respect of any
debt in excess of $100 million in the aggregate when such obligation becomes due
and payable or (ii) if any event occurs or condition exists that would result in
the acceleration, or permit the acceleration, of the maturity of such debt prior
to the stated term.

CONDITIONAL REPURCHASE OBLIGATIONS

    We sell products to various distributors that may obtain financing from
unaffiliated third party lending institutions. In the event the lending
institution repossesses the distributor's inventory of our products, we are
obligated under certain circumstances to repurchase such inventory from the
lending institution. Our obligation to repurchase inventory from the lending
institution terminates 180 days from our date of invoicing to the distributor.
The repurchase amount is equal to the price originally paid to us by the lending
institution for the inventory. The amount reported to us from the two
distributors who participate in these arrangements as their inventory on-hand
was approximately $74 million as of June 30, 2002. We are unable to determine
how much of this inventory was financed and, if so, whether any amounts have
been paid to the lending institutions. Therefore, our repurchase obligation
could be less than the amount of inventory on-hand. While there have not been
any repurchases made by us under such agreements, we cannot assure you that we
will not be obligated to repurchase inventory under these arrangements in the
future.

                                       64
<Page>
FUTURE CASH NEEDS

    Our primary future cash needs will be to fund working capital, capital
expenditures, debt service, pension obligations and our business restructuring
charges and related expenses. We believe that our existing cash and cash flows
from operations will be sufficient to meet these needs. If we do not generate
sufficient cash from operations, we may need to incur additional debt. We
currently anticipate making additional cash payments of approximately $78
million during the remainder of fiscal 2002 and $49 million in fiscal 2003
related to our past business restructuring initiatives. These total cash
payments of $127 million are expected to be comprised of $71 million for
employee separation costs, $42 million for lease obligations, $3 million for
other exit costs and $11 million for incremental period costs, including
computer transition expenditures, relocation and consolidation costs. In
addition, the business restructuring charge we plan to record in the fourth
quarter of fiscal 2002 is expected to result in the usage of cash of
approximately $135 million which will be paid in the amounts of $34 million in
the fourth quarter of fiscal 2002, $54 million in the first quarter of fiscal
2003, and the remaining $47 million largely by the end of fiscal 2003. The
actual components of the fourth quarter fiscal 2002 charge, however, may vary
because we are currently finalizing our restructuring plan.

    In order to meet our cash needs, we may from time to time, borrow under our
credit facilities or issue other long or short-term debt, if the market permits
such borrowings. We cannot assure you that any such financings will be available
to us on acceptable terms or at all. Our ability to make payments on and to
refinance our indebtedness, and to fund working capital, capital expenditures,
strategic acquisitions, and our business restructuring will depend on our
ability to generate cash in the future, which is subject to general economic,
financial, competitive, legislative, regulatory and other factors that are
beyond our control. Our credit facilities and the indentures governing the LYONs
and the Senior Secured Notes impose and any future indebtedness may impose,
various restrictions and covenants which could limit our ability to respond to
market conditions, to provide for unanticipated capital investments or to take
advantage of business opportunities. See also "--Risks and Uncertainties-- We
may not have adequate or cost-effective liquidity or capital resources."

    We may from time to time seek to retire our outstanding debt through cash
purchases and/or exchanges for equity securities, in open market purchases,
privately negotiated transactions or otherwise. Such repurchases or exchanges,
if any, will depend on the prevailing market conditions, our liquidity
requirements, contractual restrictions and other factors. The amounts involved
may be material.

ENVIRONMENTAL, HEALTH AND SAFETY MATTERS

    We are subject to a wide range of governmental requirements relating to
employee safety and health and to the handling and emission into the environment
of various substances used in our operations. We are subject to certain
provisions of environmental laws, particularly in the U.S., governing the
cleanup of soil and groundwater contamination. Such provisions impose liability
for the costs of investigating and remediating releases of hazardous materials
at currently or formerly owned or operated sites. In certain circumstances, this
liability may also include the cost of cleaning up historical contamination,
whether or not caused by us. We are currently conducting investigation and/or
cleanup of known contamination at seven of our facilities either voluntarily or
pursuant to government directives.

    It is often difficult to estimate the future impact of environmental
matters, including potential liabilities. We have established financial reserves
to cover environmental liabilities where they are probable and reasonably
estimable. Reserves for estimated losses from environmental matters are,
depending on the site, based primarily upon internal or third party
environmental studies and the extent of contamination and the type of required
cleanup. Although we believe that our reserves are adequate to cover known
environmental liabilities, there can be no assurance that the actual amount of

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environmental liabilities will not exceed the amount of reserves for such
matters or will not have a material adverse effect on our financial position,
results of operations or cash flows.

LEGAL PROCEEDINGS

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

YEAR 2000 ACTIONS

    Three separate purported class action lawsuits are pending against Lucent,
one in state court in West Virginia, one in federal court in the Southern
District of New York and another in federal court in the Southern District of
California. The case in New York was filed in January 1999 and, after being
dismissed, was refiled in September 2000. The case in West Virginia was filed in
April 1999 and the case in California was filed in June 1999, and amended in
2000 to include Avaya as a defendant. We may also be named a party to the other
actions and, in any event, have assumed the obligations of Lucent for all of
these cases under the Contribution and Distribution Agreement. All three actions
are based upon claims that Lucent sold products that were not Year 2000
compliant, meaning that the products were designed and developed without
considering the possible impact of the change in the calendar from December 31,
1999 to January 1, 2000. The complaints allege that the sale of these products
violated statutory consumer protection laws and constituted breaches of implied
warranties. A class has recently been certified in the West Virginia state court
matter, but the other matters have not been so certified. The certified class
includes those persons or entities that purchased, leased or financed the
products in question. In addition, the court also certified as a subclass all
class members who had service protection plans or other service or extended
warranty contracts with Lucent in effect as of April 1, 1998, as to which Lucent
failed to offer a Year 2000-compliant solution. The complaints seek, among other
remedies, compensatory damages, punitive damages and counsel fees in amounts
that have not yet been specified. At this time, we cannot determine whether that
the outcome of these actions will have a material adverse effect on our
financial position, results of operations or cash flows. In addition, if these
cases are not resolved in a timely manner, they will require expenditure of
significant legal costs related to their defense.

COUPON PROGRAM CLASS ACTION

    In April 1998, a class action was filed against Lucent in state court in New
Jersey, alleging that Lucent improperly administered a coupon program resulting
from the settlement of a prior class action. The plaintiffs allege that Lucent
improperly limited the redemption of the coupons from dealers by not allowing
them to be combined with other volume discount offers, thus limiting the market
for the coupons. We have assumed the obligations of Lucent for these cases under
the Contribution and Distribution Agreement. The complaint alleges breach of
contract, fraud and other claims and the plaintiffs seek compensatory and
consequential damages, interest and attorneys' fees. The parties have entered
into a settlement agreement that has been approved by the court pursuant to a
written order. The period for submitting a claim notification expired July 15,
2002. We are in the process of winding up the administration of the resolution
of this matter.

    See "Developments in Legal Proceedings" below for related disclosure.

LUCENT SECURITIES LITIGATION

    In November 2000, three purported class actions were filed against Lucent in
the Federal District Court for the District of New Jersey alleging violations of
the federal securities laws as a result of the

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facts disclosed in Lucent's announcement on November 21, 2000 that it had
identified a revenue recognition issue affecting its financial results for the
fourth quarter of fiscal 2000. The actions purport to be filed on behalf of
purchasers of Lucent common stock during the period from October 10, 2000 (the
date Lucent originally reported these financial results) through November 21,
2000.

    The above actions have been consolidated with other purported class actions
filed against Lucent on behalf of its stockholders in January 2000 and are
pending in the Federal District Court for the District of New Jersey. We
understand that Lucent's motion to dismiss the Fifth Consolidated Amended and
Supplemental Class Action Complaint in the consolidated action was denied by the
court in June 2002. As a result of the denial of its motion to dismiss, we
understand that Lucent has filed a motion for partial summary judgment, seeking
a dismissal of a portion of the Fifth Consolidated Amended and Supplemental
Class Action Complaint. The plaintiffs allege that they were injured by reason
of certain alleged false and misleading statements made by Lucent in violation
of the federal securities laws. The consolidated cases were initially filed on
behalf of stockholders of Lucent who bought Lucent common stock between October
26, 1999 and January 6, 2000, but the consolidated complaint was amended to
include purported class members who purchased Lucent common stock up to November
21, 2000. A class has not yet been certified in the consolidated actions. The
plaintiffs in all these stockholder class actions seek compensatory damages plus
interest and attorneys' fees.

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

LICENSING ARBITRATION

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

REVERSE/FORWARD STOCK SPLIT COMPLAINTS

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

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

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

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

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    The complaint alleges, among other things, that the manner in which we plan
to implement the transactions, as described in our proxy statement, violates
certain aspects of Delaware law with regard to the treatment of fractional
shares and that the description of the proposed transactions in the proxy
statement is misleading to the extent it reflects such violations. The action
purports to be a class action on behalf of all holders of less than 50 shares of
our common stock. The plaintiff is seeking, among other things, damages as well
as injunctive relief enjoining us from effecting the transactions and requiring
us to make corrective, supplemental disclosure. In June 2002, the court denied
the plaintiff's motion for summary judgment and granted our cross-motion for
summary judgment. The plaintiff has since appealed the court's decision to the
Delaware Supreme Court. Briefs are expected to be filed with the Delaware
Supreme Court by the end of September 2002. We cannot provide assurance that
this lawsuit will not impair our ability to implement any of the transactions.

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

COMMISSION ARBITRATION DEMAND

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

LUCENT CONSUMER PRODUCTS CLASS ACTIONS

    In several class action cases (the first of which was filed on June 24,
1996), plaintiffs claim that AT&T and Lucent engaged in fraud and deceit in
continuing to lease residential telephones to consumers without adequate notice
that the consumers would pay well in excess of the purchase price of a telephone
by continuing to lease. The cases were removed and consolidated in federal court
in Alabama, and were subsequently remanded to their respective state courts
(Illinois, Alabama, New Jersey, New York and California). In July 2001, the
Illinois state court certified a nationwide class of plaintiffs. The case in
Illinois was scheduled for trial on August 5, 2002. Prior to commencement of
trial, however, we had been advised that the parties agreed to a settlement of
the claims on a class-wide basis. The proposed settlement has been preliminarily
approved by the court. A notice and hearing will occur (within two to three
months) to obtain a final approval of the settlement.

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

    See "Developments in Legal Proceedings" below for related disclosure.

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PATENT INFRINGEMENT INDEMNIFICATION CLAIMS

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

DEVELOPMENTS IN LEGAL PROCEEDINGS

    Subsequent to the issuance of our earnings press release for the third
quarter of fiscal 2002 on July 22, 2002, we recorded adjustments to our
financial statements as of and for the three and nine months ended June 30, 2002
in connection with certain developments in two litigation matters that occurred
after the issuance of our earnings press release. In connection with the matter
described under the caption "Coupon Program Class Action" above, the period for
submitting a claim in that action expired on July 15, 2002. In late July, we
made a final determination of our obligations in this matter by aggregating all
claim notifications received with a postmark dated on or before the July 15,
2002 deadline. Based on this review, we determined that the estimated reserve
for this matter recorded in the other liabilities section of our Balance Sheet
as of June 30, 2002 exceeded the amount of actual aggregate claims received by
approximately $4 million and, accordingly, we reversed this amount to other
income (expense), net in our Statement of Operations for the three and nine
months ended June 30, 2002.

    In addition, in August 2002, we were advised that a settlement had been
reached in the matters involving Lucent and AT&T described under the caption
"Lucent Consumer Products Class Actions" above. The proposed settlement has been
preliminarily approved by the Illinois state court. Any liability borne by
Lucent in connection with these class action cases will be considered an
exclusive Lucent liability under the Contribution and Distribution Agreement
between Lucent and us and, as a result, we are responsible for 10% of any such
liability in excess of $50 million. We recorded an estimated liability in the
other liabilities section of our Balance Sheet as of June 30, 2002 of
approximately $6 million in connection with this settlement. The expense for
such liability was recorded to other income (expense), net in our Statement of
Operations for the three and nine months ended June 30, 2002. The $6 million
represents our current estimate of our liability in this matter, although the
amount for which we may ultimately be responsible will not be finally determined
until the claims period expires.

EUROPEAN MONETARY UNIT ("EURO")

    In 1999, most member countries of the European Union established fixed
conversion rates between their existing sovereign currencies and the European
Union's new currency, the euro. This conversion permitted transactions to be
conducted in either the euro or the participating countries' national currencies
through December 31, 2001. In January 2002, the new currency was issued, and
legacy currencies are currently being withdrawn from circulation. By February
28, 2002, all member countries were expected to have permanently withdrawn their
national currencies as legal tender and replaced their currencies with euro
notes and coins. As of December 31, 2001, all of the member countries of the
European Union in which we conduct business had converted to the euro. The
conversion has not had, and we do not expect it to have, a material adverse
effect on our consolidated financial position, results of operations or cash
flows.

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THE APPLICATION OF CRITICAL ACCOUNTING POLICIES

    Our consolidated financial statements are based on the selection and
application of accounting principles generally accepted in the United States of
America, which require us to make estimates and assumptions about future events
that affect the amounts reported in our financial statements and the
accompanying notes. Future events and their effects cannot be determined with
absolute certainty. Therefore, the determination of estimates requires the
exercise of judgment. Actual results could differ from those estimates, and any
such differences may be material to the financial statements. A description of
all of our significant accounting policies used are described in Note 2 of the
Notes to Consolidated Financial Statements included in our Annual Report on Form
10-K for the fiscal year ended September 30, 2001 filed with the SEC. We believe
that the following policies may involve a higher degree of judgment and
complexity in their application and represent the critical accounting policies
used in the preparation of our financial statements. If different assumptions or
conditions were to prevail, the results could be materially different from our
reported results.

REVENUE RECOGNITION--Most of our sales require judgments principally in the
areas of customer acceptance, returns assessments and collectibility. The
assessment of collectibility is particularly critical in determining whether or
not revenue should be recognized in the current market environment. In addition,
a significant amount of our revenue is generated from sales of product to
distributors. As such, our provision for estimated sales returns and other
allowances and deferrals requires significant judgment.

COLLECTIBILITY OF ACCOUNTS RECEIVABLE--In order to record our accounts
receivable at their net realizable value, we must assess their collectibility. A
considerable amount of judgment is required in order to make this assessment
including an analysis of historical bad debts and other adjustments, a review of
the aging of our receivables and the current creditworthiness of our customers.
We have recorded allowances for receivables which we feel are uncollectible,
including amounts for the resolution of potential issues such as disputed
invoices, customer satisfaction claims and pricing discrepancies. However,
depending on how such potential issues are resolved, or if the financial
condition of our customers were to deteriorate and their ability to make
required payments became impaired, increases in these allowances may be
required.

INVENTORIES--In order to record our inventory at its lower of cost or market, we
assess the ultimate realizability of our inventory which requires us to make
judgments as to future demand and compare that with the current or committed
inventory levels. Where we have determined that the future demand is lower than
our current inventory levels, we have adjusted our inventory forecasts to
reflect that demand. Additionally, we review our usage and inventory levels and
record a provision to adjust our inventory balance based on our historical usage
and inventory turnover. It is possible that we may need to adjust our inventory
balance in the future based on the dynamic nature of this relationship. In
addition, we have outsourced the manufacturing of substantially all of our
Systems and Applications products. We are not obligated to purchase products
from our outsourced manufacturer in any specific quantity, except as we outline
in forecasts or orders for products required to be manufactured by the
outsourced manufacturer. We may be obligated to purchase certain excess
inventory levels from our outsourced manufacturer that could result from our
actual sales of product varying from forecast.

LONG-LIVED ASSETS--We have recorded property, plant and equipment, intangible
assets, and capitalized software costs at cost less accumulated depreciation or
amortization. The determination of useful lives and whether or not these assets
are impaired involves significant judgment.

    Effective October 1, 2001, we adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142") which
requires that goodwill and certain other intangible assets having indefinite
lives no longer be amortized to earnings, but instead be subject to periodic
testing for impairment. We have reviewed the classification of our existing
goodwill and other intangible assets, reassessed the useful lives previously
assigned to other intangible assets, and

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discontinued amortization of goodwill. We also tested goodwill for impairment by
comparing the fair value of our reporting units to their carrying value. Under
these transition provisions, there was no goodwill impairment as of October 1,
2001.

    The provisions of SFAS 142 require that goodwill of a reporting unit be
tested for impairment on an annual basis or between annual tests if an event
occurs or circumstances change that would more likely than not reduce the fair
value of a reporting unit below its carrying amount. We intend to conduct the
required impairment review for fiscal 2002 during the fourth quarter of fiscal
2002, at which time, if an impairment is identified, it will be recognized as a
charge to the Statement of Operations. In making this assessment, we rely on a
number of factors including operating results, business plans, economic
projections, anticipated future cash flows, transactions and market place data.

    If market conditions become less favorable, future cash flows, the key
variable in assessing the impairment of long-lived assets, may decrease and, as
a result, an impairment charge may need to be recognized.

DEFERRED TAX ASSETS--We currently have significant deferred tax assets which we
periodically review for recoverability. A valuation allowance was recorded to
reduce the carrying amounts of our deferred tax assets where it is more likely
than not that such assets will not be realized. Realization of our deferred tax
assets is principally dependent upon our achievement of projected future taxable
income. Our judgments regarding future profitability may change due to future
market conditions, our ability to successfully implement our business
restructuring plan and other factors. Changes in our judgment, if any, may
require material adjustments to these deferred tax asset balances.

BUSINESS RESTRUCTURING CHARGES--During fiscal 2000, 2001, and the second quarter
of fiscal 2002, we recorded significant reserves in connection with our spin off
from Lucent, the outsourcing of certain manufacturing facilities, the
acceleration of our restructuring plan originally adopted in September 2000, and
our efforts to improve our business performance in response to the continued
industry-wide slowdown. These reserves include estimates related to employee
separation costs, lease termination obligations and other exit costs. Although
we do not anticipate significant changes, the actual costs may differ materially
from these estimates resulting in additional charges or reversals.

PENSION AND POSTRETIREMENT BENEFIT COSTS--Our pension and postretirement benefit
costs are developed from actuarial valuations. Inherent in these valuations are
key assumptions provided by us to the actuaries including discount rates,
expected return on plan assets and rate of compensation increases. In selecting
the rates and returns, we are required to consider current market conditions,
including changes in interest rates. Material changes in our pension and
postretirement benefit costs may occur in the future in addition to changes
resulting from fluctuations in our related headcount due to changes in the
assumptions.

COMMITMENTS AND CONTINGENCIES--We are subject to legal proceedings related to
environmental, product, employment, intellectual property, licensing and other
matters. In addition, we are subject to indemnification claims by Lucent under
the terms of the contribution and distribution agreement. In order to determine
the amount of reserves required, we assess the likelihood of any adverse
judgments or outcomes to these matters as well as potential ranges of probable
losses. A determination of the amount of reserves required for these
contingencies are made after analysis of each individual issue. The required
reserves may change in the future due to new developments in each matter or
changes in approach such as a change in settlement strategy. Assessing the
adequacy of any reserve for matters for which we may have to indemnify Lucent is
especially difficult, as we do not control the defense of those matters. In
addition, estimates are made for our repurchase obligations related to products
sold to various distributors who obtain financing from certain third party
lending institutions. Actual repurchases resulting from these obligations could
differ materially from our estimates.

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PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENTS COSTS--In connection with our
acquisitions in fiscal 2001, a portion of the purchase prices were allocated to
purchased in-process research and development and immediately expensed at
acquisition since the related technology had not yet reached technological
feasibility and had no future alternative uses. We believe that the estimated
in-process research and development amounts so determined represented fair value
and did not exceed the amount a third party would have paid for the projects.
However, if the projects are not successful or completed in a timely manner, our
product pricing and growth rates may not be achieved and we may not realize the
financial benefits expected from the projects.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

    See Avaya's Annual Report filed on Form 10-K for the fiscal year ended
September 30, 2001 (Item 7A). At June 30, 2002, there has been no material
change in this information other than the interest rate swap agreements
disclosed in Note 8 "Short-Term Borrowings and Long-Term Debt" to the unaudited
interim consolidated financial statements. As a result of the interest rate swap
agreements, we are subject to interest rate risk.

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                                    PART II

ITEM 1. LEGAL PROCEEDINGS.

    See Note 13--"Commitments and Contingencies" to the unaudited interim
consolidated financial statements.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

    None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

    None.

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

    None.

ITEM 5. OTHER INFORMATION.

    None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

    (a) Exhibits:

    3.1 Amended and Restated By-laws of Avaya Inc., as amended on July 18, 2002.

    10.1 Avaya Involuntary Separation Plan for Senior Officers.

    99.1 Certification of Donald K. Peterson pursuant to Section 906 of the
       Sarbanes-Oxley Act
       of 2002.

    99.2 Certification of Garry K. McGuire pursuant to Section 906 of the
       Sarbanes-Oxley Act
       of 2002.

    (b) Reports on Form 8-K:

    The following Current Report on Form 8-K was filed by us during the fiscal
quarter ended June 30, 2002:

    1.  June 5, 2002--Item 5. Other Events--Avaya furnished restated segment
       amounts as of and for the fiscal year ended September 30, 2001 to conform
       to the Company's new operating segment presentation.

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                                   SIGNATURES

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

<Table>
<S>                                                    <C>  <C>
                                                       AVAYA INC.

                                                       By:            /s/ CHARLES D. PEIFFER
                                                            -----------------------------------------
                                                                        Charles D. Peiffer
                                                                            CONTROLLER
                                                                  (PRINCIPAL ACCOUNTING OFFICER)
</Table>

    August 14, 2002

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