**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549**

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**FORM 10-K**

**x**        ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

**ForThe Fiscal Year Ended September 30, 2006**

**OR**

**o**  TRANSITION REPORT PURSUANT TO SECTION 13 OR15(d) OF THESECURITIES EXCHANGE ACT OF 1934

**CommissionFile Number 001-15951**

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**AVAYAINC.**

(Exact name of registrantas specified in its charter)

| **Delaware**                                                    | **22-3713430**                        |
|-----------------------------------------------------------------|---------------------------------------|
| (State or other jurisdiction  of incorporation or organization) | (I.R.S. Employer  Identification No.) |

 

| **211 Mount Airy Road  Basking Ridge, New Jersey** | **07920**  |
|----------------------------------------------------|------------|
| (Address of Principal executive offices)           | (Zip Code) |

 

Registrant’s telephonenumber, including area code:**(908)-953-6000**

Securities registeredpursuant to Section 12(b) of the Act:

| Title of each class                                                 | ** ** | **Name of each exchange on which registered** |
|---------------------------------------------------------------------|------------|-----------------------------------------------|
| Common Stock, par  value $.01 per share                             |       | New York Stock Exchange                       |
| Series A Junior Participating Preferred  Stock Purchase Rights |       | New York Stock Exchange                       |

 

Securities registeredpursuant to Section 12(g) of the Act: **None**

Indicate by check mark ifthe Registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act. Yes x Noo

Indicate by check mark ifthe Registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes o  No x

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

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to thebest of the Registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K. x

Indicateby check mark whether the Registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the ExchangeAct. (Check one):

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

 

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

The aggregate market valueof common stock held by non-affiliates as of March 31, 2006 (the lastbusiness day of the Registrant’s most recently completed second quarter) wasapproximately $5.19 billion. This amount is based on the closing price of theRegistrant’s Common Stock on the New York Stock Exchange on March 31, 2006.Shares of Common Stock held by each officer and director on that date and/orthe date of this filing have been excluded in that such persons may be deemedto be affiliates. This determination of affiliate status is not necessarily aconclusive determination for other purposes.

At November 30, 2006,the Registrant had 454,106,457 shares of Common Stockoutstanding.

**DOCUMENTS INCORPORATED BYREFERENCE**

| Portions of the 2006 Annual Report to  Shareholders for the Fiscal Year Ended September 30, 2006 |   | Parts I and II |
|-------------------------------------------------------------------------------------------------------|--------|----------------|
| Portions of the Proxy Statement for the 2007 Annual  Meeting of Shareholders                          |   | Part III  |

 

 

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**TABLEOF CONTENTS**
| Item       | ** ** | ** **                                                                                                                | ** ** | **Description** | ** ** | ** ** |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|------------|
| ** ** | ** ** | **PART I**                                                                                                           | ** ** | ** **      |
| 1.         |       | Business                                                                                                                  |       | 1               |
| 1A.        |       | Risk Factors                                                                                                              |       | 18              |
| 1B.        |       | Unresolved Staff Comments                                                                                                 |       | 25              |
| 2.         |       | Properties                                                                                                                |       | 25              |
| 3.         |       | Legal Proceedings                                                                                                         |       | 25              |
| 4.         |       | Submission of Matters to a  Vote of Security-Holders                                                                      |       | 25              |
| ** ** | ** ** | **PART II**                                                                                                          |       |            |
| 5.         |       | Market for Registrant’s  Common Equity, Related Stockholder Matters and Issuer Purchases of Equity  Securities  |       | 26              |
| 6.         |       | Selected Financial Data                                                                                                   |       | 27              |
| 7.         |       | Management’s Discussion and  Analysis of Financial Condition and Results of  Operations                              |       | 27              |
| 7A.        |       | Quantitative and Qualitative  Disclosures About Market Risk                                                               |       | 27              |
| 8.         |       | Financial Statements and  Supplementary Data                                                                              |       | 27              |
| 9.         |       | Changes in and Disagreements  With Accountants on Accounting and Financial  Disclosure                                    |       | 27              |
| 9A.        |       | Controls and Procedures                                                                                                   |       | 27              |
| 9B.        |       | Other Information                                                                                                         |       | 28              |
| ** ** | ** ** | **PART III**                                                                                                         |       |            |
| 10.        |       | Directors, Executive  Officers and Corporate Governance                                                                   |       | 28              |
| 11.        |       | Executive Compensation                                                                                                    |       | 29              |
| 12.        |       | Security Ownership of  Certain Beneficial Owners and Management and Related Stockholder Matters            |       | 29              |
| 13.        |       | Certain Relationships and  Related Transactions and Director Independence                                                 |       | 29              |
| 14.        |       | Principal Accounting Fees  and Services                                                                                   |       | 29              |
| ** ** | ** ** | **PART IV**                                                                                                          |       |            |
| 15.        |       | Exhibits  and Financial Statement Schedules                                                                               |       | 30              |

 

This Annual Report on Form 10-K containsregistered and unregistered trademarks and service marks of Avaya and itssubsidiaries and other companies, as indicated. Unless otherwise provided inthis Annual Report on Form 10-K, marks identified by “®,” “TM” and “SM**”** are registered marks, trademarks and servicemarks, respectively, of Avaya Inc. or its subsidiaries. All other trademarksand service marks are the properties of their respective owners. Outlook® is a registered trademark of MicrosoftCorporation. Lotus Notes® is a registered trademark of InternationalBusiness Machines Corporation.

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***Note About Forward-Looking Statements***

*Our disclosure andanalysis in this Annual Report on Form 10-K and in our 2006 AnnualReport to Shareholders contains some forward-looking statements withinthe meaning of the Private Securities Litigation Reform Act of 1995, Section 27Aof the Securities Act of 1933 and Section 21E of the Securities ExchangeAct of 1934. Forward-looking statements give our current expectations orforecasts of future events. You can identify these statements by the fact thatthey do not relate strictly to historical or current facts. They use words suchas “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe”and other words and terms of similar meaning in connection with any discussionof future operating or financial performance. From time to time, we also mayprovide oral or written forward-looking statements in other materials werelease to the public.*

*Any or all of our forward-looking statements inthis report, in the 2006 Annual Report to Shareholders and in any other publicstatements we make*mayturn out to be wrong. They can be affected by inaccurate assumptions wemight make or by known or unknown risks and uncertainties. A detaileddiscussion of these and other risks and uncertainties that could cause actualresults and events to differ materially from such forward-looking statements isincluded in the section entitled “Risk Factors” (see Item 1A). Consequently,no forward-looking statement can be guaranteed and you are cautioned notto place undue reliance on these forward-looking statements. Actual futureresults may vary materially. Except as may be required under the federalsecurities laws, we undertake no obligation to publicly update forward-lookingstatements, whether as a result of new information, future events or otherwise.You are advised, however, to consult any further disclosures we make on relatedsubjects in our reports to the SEC.

**PART I**

**Item 1.        *Business.***

**Overview**

We provide communicationsystems, applications and services for enterprises, including businesses,government agencies and other organizations. Our product offerings includeInternet Protocol (“IP”) telephony systems and traditional voice communicationssystems, multi-media contact center infrastructure and applications in supportof customer relationship management, unified communications applications andappliances, such as IP telephone sets. The Company supports its broad customerbase with comprehensive global service offerings that enable our customers toplan, design, implement, monitor and manage their communications networks.

**Operating Segments**

We offer a broad array of communications solutions,comprised of hardware, software and services, that enable enterprises tocommunicate with their customers, suppliers, partners and employees throughvoice, web, electronic mail, facsimile, web chat sessions and other forms ofcommunication, across a broad spectrum of devices. These devices includetelephones, computers, cell phones and personal digital assistants.

Our software andhardware portfolio includes products:

·  we have developed internally,

·  we have obtained through acquisitions,

·  manufactured by third parties that we resellor license as components of our offerings, and

·  we have developed through our strategicalliances with other technology leaders.

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Our products range from communications solutions designed formultinational enterprises with multiple locations worldwide, thousands ofemployees and advanced communications requirements to communications solutions designed for businesses with fewer thanten employees.

The Company reports its operations in two segments—GlobalCommunications Solutions (“GCS”) and Avaya Global Services (“AGS”)—which arediscussed in more detail below. Because many of our customers who purchase equipment and licenseapplications directly from our GCS segment purchase contracts to implement,integrate and service the equipment and applications from our AGS segment, theperformance of our AGS segment is related to the performance of our GCSsegment.

Historically, sales of our traditional enterprisevoice communication solutions represented a significant portion of our revenue.Revenue generated by these systems has been declining, however, and asdescribed more fully below under “Global Communications Solutions Segment,” weare focused on the sale of IP telephony solutions to existing customers and themigration of our new and existing customers’ networks from traditional voicecommunications systems to IP telephony solutions. If we are successful inimplementing our strategy, we believe that sales of IP telephony solutions willincrease, as adoption of IP telephony by enterprises becomes morewidespread. Although the maintenance revenue for traditional telephony systemshas declined, this decline is being partially offset by new revenue generatedby services offers targeted at the IP telephony environment.

Forthe fiscal years ended September 30, 2006, 2005 and 2004, the percentageof total revenue contributed by each class of similar products, applications orservices is as follows:

| ** **                               | ** ** | **Percentage of Consolidated Revenue**    | ** ** |
|------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                               | ** ** | **    2006    ** | ** ** | **    2005    ** | ** ** | **    2004    ** | ** ** |
| Large  communications systems            |       |                                                     | 34         | % |   |   | 32 | % |   |   | 30 | % |   |
| Small  communications systems            |       |                                                     | 7          | % |   |   | 7 | % |   |   | 6 | % |   |
| Converged voice  applications            |       |                                                     | 12         | % |   |   | 12 | % |   |   | 13 | % |   |
| Other                                    |       |                                                     | 1          | % |   |   | 1 | % |   |   | 1 | % |   |
| Total Global Communications Solutions    |       |                                                     | 54         | % |   |   | 52 | % |   |   | 50 | % |   |
| Maintenance                              |       |                                                     | 29         | % |   |   | 30 | % |   |   | 35 | % |   |
| Implementation  and integration services |       |                                                     | 10         | % |   |   | 10 | % |   |   | 9 | % |   |
| Managed services                         |       |                                                     | 7          | % |   |   | 7 | % |   |   | 6 | % |   |
| Other                                    |       |                                                     | 0          | % |   |   | 1 | % |   |   | 0 | % |   |
| Total Avaya Global Services              |       |                                                     | 46         | % |   |   | 48 | % |   |   | 50 | % |   |
| Total                                    |       |                                                     | 100        | % |   |   | 100 | % |   |   | 100 | % |   |

 

Please see Note 15, “Operating Segments,” to our ConsolidatedFinancial Statements which are included in our 2006 Annual Report toShareholders, for more financial information regarding our operating segments.

Our GCS and AGS segments,which are discussed in more detail below, were reorganized at the beginning offiscal 2007. The descriptions set forth below describe these two segments asthey are currently organized. The organization of these two segments duringfiscal 2006 was substantially the same as was described in Avaya’s Form 10-Kfor fiscal 2005, filed with the Securities and Exchange Commission on December 13,2005.

***Global Communications Solutions Segment***

Our GCS segment is focused on the sale ofcommunications systems, equipment and applications to our enterprise customers.Our primary offerings for this segment include IP telephony solutions andtraditional voice communications solutions, multi-media contact centerinfrastructure and applications in 

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support of customerrelationship management, unified communications applications and devices, suchas IP telephone sets. A unique feature of our strategy is our ability to helpcustomers migrate from traditional voice communications systems to a convergednetwork that provides for the integration, based on IP technology, ofvoice, data, video and other application traffic on a single unified networkcontaining both wired and wireless elements. IP is a type of protocol, or setof standardized procedures, for the formatting and timing of transmission ofcommunications traffic between two devices.

We believe theimplementation of a converged network can provide significant benefits to anenterprise in a number of ways. These benefits include:

·  reduced costs through the use of a singleunified network;

·  simplified administration and lower costs formoves, adds and changes;

·  least cost routing techniques for callprocessing;

·  increased worker productivity resulting fromenhanced wired and wireless network access to all communication channels, suchas voice, e-mail and fax, from an array of devices, including computer,telephone, cell phone, fax machine and personal digital assistant;

·  enhanced business performance through theintegration of IP telephony with other communications applications, such asvoice messaging, e-mail, unified communications and contact centers, andthird-party business applications, such as those that facilitate supply chainmanagement and work flow processes; and

·  helpingcustomers to improve their ability to serve their customers.

Acquisitions and strategic alliances have also playeda significant part in the growth and development of our GCS segment. Forexample, in fiscal 2005 we acquired Tenovis, a European leader in the provisionof enterprise communications systems and services. This acquisitionsignificantly increased our size and scale in Europe and positions us tocapitalize on the acceleration in adoption of IP telephony in Europe. In fiscal2005 we also acquired Spectel plc, a leader in audio conferencing solutions. Thisacquisition enabled us to continue to expand our capabilities in audioconferencing, which we believe is a core business communications technology.

We have formed strategic alliances with a variety ofcompanies in areas where we believe that we can gain a competitive advantage bycollaborating. For a description of our strategic alliances, see the discussionbelow in “—Acquisitions and Strategic Alliances.”

*ConvergedCommunications Division.**  *We are a worldwide leader in enterprise telephony,which we define as the market for traditional voice telephony and IP telephony.

Our suite of IPtelephony offerings includes:

·  Communication Manager, our voice applicationsoftware that manages call processing, facilitates secure customer interactionsacross a variety of media and supports a range of Avaya and third-partyapplications;

·  media servers, which put voice applicationssuch as call processing on the customer’s local area network;

·  media gateways, which support traffic routingbetween traditional voice and IP telephony systems, providing enterprises withthe flexibility to implement a new IP telephony solution or to “IP-enable”their existing voice communications system, thereby helping to preserveexisting communications technology investments;

·  a suite of management tools that supportscomplex voice and data network infrastructures; and

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·  our Session Initiation Protocol (“SIP”)Enablement Services solution, enabling standards-based, real time multi-modalcommunication with features such as user presence and instant messaging withinthe secure enterprise network, including the ability to support voicecommunication with existing Avaya analog, digital and IP devices.

We also offer traditional voice communicationssystems, although the market for these systems is declining and we are focusedon the migration of customers’ traditional voice communications systems to IPtelephony solutions.

*CustomerService Applications Division.**  *This division is focused oninfrastructure and applications for multimedia contact centers that facilitateand enhance interactions in an enterprise with customers, partners, suppliersand employees. Our contact center product offerings are software and hardwaresystems and software applications for customer contact centers, assisted orself-service, which are the foundation of many customer sales and serviceofferings. Avaya’s offerings support routing and managing customer interactionsvia telephone, the web and e-mail, as well as outbound calling and voiceself-service. Our strategy is to enable enterprises to interact with customersin an efficient and effective way beyond the boundaries of the traditionalcontact center, such as in branch offices, in homes and in other departments.

Avaya Customer Interaction Suite offers a suiteof intelligent call routing alternatives that can accommodate single callcenters or multiple call centers through “virtual” routing over a convergednetwork. Calls can be routed to customer care agents or self-serviceapplications based on a variety of criteria or business rules, including callvolume, workload, agent language, subject matter expertise or across time zonesor countries and, in each case, routing is transparent to the end customer. Oursuite also includes data for reporting and analytics that provide insight onresource utilization and the efficiency and effectiveness of a center.

*UnifiedCommunications Division.**  *We define Unified Communications as a highly productiveunified user experience providing a seamless interface across allcommunications types, applications, and devices. The Avaya family of UnifiedCommunications offerings supports virtual teams and increases personalproductivity using business rules and presence-based technology to connectthe right people at the right time in the most efficient way, enablingcustomers to access all enterprise communications capabilities from PCs,mobile phones and via speech access. The Unified Communications portfolio includesModular Messaging, Multimedia Conferencing, Video, Avaya Communications Portal,Soft Clients technology, and the Application Enablement Server platform.

Our Unified Communications offerings, such as IPSoftphone with instant messaging, video, voice mail, and “click to call”capabilities, are ideal for the telecommuter and mobile worker. Theseofferings, coupled with voice and web conferencing, create a set ofproductivity tools for an effective office without boundaries. Avaya ModularMessaging and Message Networking solutions give users a single mailbox forvoice, email and fax visually presented through their favorite email client,either Microsoft Outlook or IBM Lotus Notes. Speech access to email, voicemail, calendar and dialing from directory plus “find me” features provide userswith the tools required to conduct business anyplace, anytime, anywhere.

*Appliances,Mobile and Small Systems Division.*   TheAppliances portfolio consists of a comprehensive line of IP and traditional TDMtelephones, in-building wireless devices and phone accessories. Our mobiledevice software applications, like Avaya’s Extension to Cellular solution whichtransparently bridges calls to any cell phone regardless of location orwireless service provider, are targeted at extending the reach of enterprisecommunications irrespective of device or location. The latest member of the Avaya desk phone family is the Avaya one-XTMDeskphone Edition launched in June 2006.This product family provides a simple and easy to use cell-phone-like userinterface, modular design to provide investment protection, internationalstyling and high fidelity audio.

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Small Systems is focused on communications productsand applications for small and medium-sized businesses. Our primary offeringsinclude IP telephony solutions and traditional voice systems, as well as a hostof applications, including messaging, contact center, mobility, andconferencing, among others. Our products and applications provide enhancedcommunications capabilities to customers with fewer than 100 employees and in awide range of industries and market segments.

In September 2005, weacquired Nimcat Networks, a provider of peer-to-peer communications softwaredesigned to run in IP telephones rather than on a central server. Avaya’s one-XTMQuick Edition is built on the technology acquired with Nimcat and was launchedin March 2006. This product was designed with the unique needs of the enduser in mind, targeting customers with small locations who are seeking basictelephony functionality, combined with low total cost of ownership. In additionto this technology and the ability to tap into a previously under-servedsegment, the Nimcat acquisition brought to Avaya a research and developmentcenter located in Ottawa, Canada.

***Avaya Global Services Segment***

Our AGS segment is focused on supporting our customerbase with comprehensive end to end global service offerings that enable ourcustomers to plan, design, implement, integrate, monitor and manage theirconverged communications networks worldwide.

Our broad portfolio addresses the following businessneeds of our customers:

*Businesscommunications strategy development and planning.**  *We help ourcustomers define communications strategies that support their businessoperations utilizing technologies that are best suited to their businesses,including creating infrastructure and integration roadmaps, designingarchitectural frameworks and developing transformation and migration plans. Thestrategies are developed through a collaborative effort with the objective ofmaximizing technology investments through network optimization and leveragingcommunications for strategic, competitive advantage.

*Applicationsdesign and integration.**  *Throughoperation, implementation and integration specialists worldwide, we helpcustomers leverage and optimize their multi-technology, multi-vendorenvironments through the use of contact centers, Unified Communicationsnetworks, and IP telephony with the goal of enhancing their communication withcustomers, partners, suppliers, and employees and improving operationalefficiency.

*Migratingto IP.**  *Throughour team of IP migration specialists supported by our industry-leading AvayaExpertNetSM VoIP Assessment Tool, we are able to provide asingle point of accountability and a full range of service offerings to helpour customers develop migration plans to IP telephony, assess networkreadiness, and address issues of network optimization and security.

*Securingcommunications networks and ensuring continuity.*   Ourspecialists, working with government, defense, intelligence, and disasterrecovery agencies use documented methodologies to help customers reduce risk ofunauthorized network intrusion and denial of service attacks, protect customerinformation, and maintain continuous communications by identifying vulnerable points in their communications networks anddeveloping disaster recovery plans. Our telephony systems have been certifiedby the Joint Interoperability Test Command on behalf of the Defense InformationSystems Agency. In addition, Avaya telephony products are used throughout theU.S. government, including agencies which require the highest degree of reliabilityand security.

*Day-to-daycommunications support and network monitoring.**  *Our services team, supported by extensive tools andtechnologies such as Avaya Expert SystemsSM  Diagnostic Tools, monitors and optimizescustomers’ network performance ensuring availability and keeps communicationnetworks current with the latest releases. In the event of an outage, ourservices team helps customers to restore their networks.

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*Managingbusiness communications solutions.*   Our portfolioof Global Managed Services solutions provides expertise in managing complexmulti-vendor, multi-technology networks and delivering voice applications overthe network. These solutions range from simple services on existing enterprisenetworks—such as backing up systems, detecting and resolving faults andperforming moves, adds, and changes—to comprehensive engagements that providesecure business communications support and management of large enterprise voicenetworks and migration of those networks to new technologies. We also provideon-demand solutions that allow delivery of hosted voice applications to endusers over telecommunication service provider networks.

AGS has complemented our customers’ businesscommunications capabilities through our Global Managed Services Offerings,including IP Converged Solutions (fully managing and migrating complex businesscommunications infrastructures to client specifications), Managed Applications(consulting, designing, and managing our customers’ contact center &conferencing applications), IP Support Services (remotely managing IPtelephony) and Avaya On-Demand (delivering hosted Avaya applications over thenetwork).

Our hosted offerings allow customers to adopt, procureand implement converged business communication solutions in a network-based,on-demand model. These solutions are delivered in cooperation withtelecommunications service providers, such as carriers and other third parties.The on-demand solutions are designed to reduce the risk and expense indeploying next generation business communications solutions while shorteningthe time to achieve the benefits of these new applications.

*Globalization.*   OurAGS service centers are staffed to supply expertise to our customers on a fullrange of products 24 hours a day throughout the world. A global knowledge sharingsystem provides our service representatives with the skills and informationthey need to solve problems quickly and effectively. AGS supplies our businesspartners with a range of options to supplement their own capabilities so thateach customer is ensured quality support leveraging all of Avaya’scapabilities.

We continue to focus onupgrading our services skills to deliver best-in-class services. This requiresus to continue to enhance our services organization’s ability to service morecomplex, multi-vendor IP networks, versus traditional closed, proprietary TDMnetworks, and in general ensure that there is a sufficient level of servicetechnicians with IP skills and skills in other emerging technologies. It alsomeans training our services employees or hiring new services employees toservice new products and applications and taking other measures to ensure wecan deliver consistent levels of service, in particular to our multinationalcustomers on a global basis.

**Acquisitions andStrategic Alliances**

***Acquisitions***

Aspreviously noted, we have acquired a number of companies and we are likely toacquire more in the future. We cannot assure you that our previous orfuture acquisitions will be successful or that they will not materiallyadversely affect our financial condition or operating results. The risksassociated with acquisitions are significant and are more fully described inItem 1A. “Risk Factors—Risks Related To Our Operations—If we are unable tointegrate acquired businesses into ours effectively, our operating results maybe adversely affected. Even if we are successful, the integration of thesebusinesses has required, and will likely continue to require, significantresources and management attention.”

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***Strategic Alliances***

We have formed strategic alliances with a variety ofcompanies in areas where we believe that we can gain a competitive advantage bycollaborating. Our strategic alliances can take different forms, includingthose intended, among other things, to extend our marketing reach, develop newproducts or enhance existing ones and exchange technology. Some of our currentstrategic alliances are with the following companies:

·  Extreme Networks, Inc., to jointlydevelop and market converged communications solutions;

·  International Business Machines Inc., toco-market IP-based solutions and for integration with its core middleware;

·  Juniper Networks, Inc., to jointly marketand develop integrated voice, data and security functionality on commonplatforms to create converged solutions;

·  Microsoft Corporation, to develop openstandards, SIP-based interoperability between Avaya MultiVantage® Communications Applications and MicrosoftOffice Communicator;

·  Meru Networks, Inc., to market convergedcommunications solutions;

·  Samsung Electronics Co., Ltd., to co-developand market products for IP-based solutions that serve the voice, video and dataconvergence market; and

·  SAPAmerica, Inc., to market intelligent communications-enabled businessapplications that bring together people and business processes to achievehigher levels of customer service and business agility.

**Customers, Salesand Distribution**

***Customers***

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

We have thousands of customers, and no single customerrepresented more than 10% of our revenue for fiscal 2006, 2005 or 2004.

For more information concerning customer information aboutgeographic areas, please see Note 15, “Operating Segments,” to our ConsolidatedFinancial Statements which are included in our 2006 Annual Report toShareholders.

***Sales and Distribution***

Our globalgo-to-market strategy is designed to focus and strengthen our reach and impactin large multinational enterprises, mid-market and more regional enterprises,as well as small businesses. The Company’s global strategy is to serve ourcustomers the way they prefer to work with us, either through our direct salesforce or our indirect sales channel, which includes our global network ofdistributors, dealers, value-added resellers, telecommunications serviceproviders and system integrators. Our direct and partner-led salesorganizations are equipped with a broad product and software portfolio,complemented with services offerings including professional, implementation,maintenance and managed services.

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The Avayasales organization is globally deployed with direct and indirect presence inover 50 countries. We continue to focus on efficient deployment of Avayasales resources, direct and indirect, for maximum market penetration and globalgrowth.

Aspreviously disclosed, we changed our go-to-market strategy at the beginning offiscal 2005 by expanding direct sales coverage of key accounts, by enlargingthe number of large multinational enterprises accounts, by identifying a secondtier of enterprise accounts served by a combination of our direct sales teamand our channel partners, and by servicing small and medium-sized businesscustomers primarily through our channel partners. These changes wereimplemented primarily in the United States.

We launcheda training initiative in the fourth quarter of fiscal 2006 to support theevolution of our sales strategy towards a solutions-based sales processtargeted at helping businesses reduce costs, lower risk and grow theirrevenues. Theprogram includes sales process, skills and solutions curricula for all roleswithin the sales organizations.

For information regarding risks related to ourchannels, please see Item 1A. “Risk Factors—Risks Related To Our Operations—Werely on outsourced product manufacturers, distributors and warehousing agentsfor our products and various issues with respect to the delivery of ourproducts could arise which could adversely impact both our revenue and ourcosts” and “Risk Factors—Risks Related To Our Revenue and Business Strategy—Akey component of our strategy is our focus on the development and sale ofadvanced communications products and applications and related services,including IP telephony solutions, and this strategy may not be successful.”

For information regardingrisks relating to our international operations, please see Item 1A. “RiskFactors—Risks Related To Our Operations—Asour international business has grown significantly in the last two fiscalyears, changes in economic or political conditions in a specific country orregion could negatively affect our revenue, costs, expenses and financialcondition.”

**Research andDevelopment**

We plan on using our substantial investments inresearch and development to develop new systems and software related toconverged communication systems, communications applications, multi-mediacontact center innovations, messaging applications, speech enabledapplications, business infrastructure and architectures, converged mobilitysystems, hosted offerings, web services, communications-enabling businessprocesses and applications, data networks and services for Avaya’s customers. Wealso are developing self-service web interfaces and tools as part of our supportoffers for use by our customers and indirect channel partners.

Both of our operatingsegments have a dedicated product development organization and receive supportfrom Avaya’s Chief Technology Office to address the strategic technologydirection of Avaya and architectural alignment across the operating segments.

We invested $428million, or 8.3% of our total revenue and 15.4% of our GCS revenue, in fiscal2006; $394 million or 8.0% of our total revenue and 15.3% of our GCSrevenue, in fiscal 2005; and $348 million, or 8.6% of our total revenueand 17.0% of our GCS revenue, in fiscal 2004, in research and development. In-processresearch and development costs of $7 million associated with our Spectel,Nimcat and Tenovis acquisitions are included in the fiscal 2005 amount. Anycustomer-sponsored research and development activities that we conduct are notmaterial.

**Manufacturing andSupplies**

We have outsourced substantially all of our productmanufacturing operations. A majority of these operations have been outsourcedto Celestica Inc. (“Celestica”) in Mexico, Malaysia and the Czech Republic. Ourcurrent outsourcing agreement with Celestica expires in November 2007. Theremaining 

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sources of ourmanufacturing capacity are outsourced to a number of other contractmanufacturers located in the United Kingdom, France, Germany, China, Israel,Poland, Ireland and the United States. All manufacturing of the Company’sproducts is performed in accordance with detailed specifications and productdesigns furnished by the Company and is subject to rigorous quality controlstandards.

Earlier in fiscal 2006, we experienced disruption anddelays in delivery of certain products from our contract manufacturers inmeeting timelines for our customer requirements. This supply situation improvedthroughout the third and fourth quarters in relation to our requirements. Weworked with our contract manufacturers to correct the causes of thesedisruptions and delays, and while we believe these issues from the second andthird quarters of fiscal 2006 have been resolved as of the end of our fiscalyear, we cannot assure you that we will not experience similar issues in thefuture.

As we continueto seek to optimize our end to end supply chain, we have also been outsourcingvarious logistics functions over the course of the past few years.  We rely on third-partylogistics service providers to provide services for our business, includingwarehousing and physical distribution.  If a logistics service provider does notmeet our service level and quality requirements for any reason, we may beunable to fulfill our customers orders in a timely and accurate manner, whichcould delay or decrease our revenue or otherwise have an adverse effect on our revenueand our costs.   In the first quarter of fiscal 2007 we movedcertain warehousing and staging operations to a different third party logisticsservice provider at a new facility, which now services a significant portion ofour warehousing and physical distribution needs.  While we and our logistics service providerhave been making improvements as we progress through this transition, therehave been disruptions and delays in delivery of certain products from thisfacility and this could have an adverse effect on our revenue and increase ourcosts.

We also face increasing complexity in our productdesign, logistics and procurement operations as we adjust to new and upcomingrequirements relating to the materials composition of our products, such as theEuropean Union (“EU”) directives regarding Restriction of the Use of CertainHazardous Substances in Electrical and Electronic Equipment (“RoHS”) and theWaste Electrical and Electronic Equipment (“WEEE”) directive, each of which isdiscussed below under the heading “—Environmental, Health and Safety Matters.” Otherenvironmental regulations may require us to reengineer products to utilizecomponents compatible with these changing regulatory requirements and theresulting reengineering and component substitution may result in additionalcosts to us. Even if we are able and willing to reengineer products or payadditional costs, we still may be adversely affected if the materials andcomponents that we need are unavailable to us. In addition, if we were found tobe in violation of these regulations, we could be subject to government fines,noncompliant products may be banned from markets covered by the regulations andour customers could incur liability. Although we do not anticipate any materialadverse effects based on the nature of our operations and the effect of suchregulations, there is no assurance that existing regulations or futureregulations will not have an adverse effect on us.

We also purchase certainhardware components and license certain software components from third-partyoriginal equipment manufacturers and resell them under the Avaya brand. In somecases certain components are only available from a single source or from alimited source of suppliers. Delays or shortages associated with thesecomponents could cause significant disruption to our operations. For moreinformation on risks related to products and components, see Item 1A. “RiskFactors—Risks Related To Our Operations—We rely on outsourced productmanufacturers, distributors and warehousing agents for our products and variousissues with respect to the delivery of our products could arise which couldadversely impact both our revenue and our costs.”

**Competition**

The market for communications solutions, comprised ofhardware, software and services, is quickly evolving, highly competitive andsubject to rapid technological change. Because we offer a wide range of 

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systems, applications andservices for several types of enterprises, we have a broad range ofcompetitors. Many of our competitors are substantially larger than we are andhave significantly greater financial, sales, marketing, distribution, technical,manufacturing and other resources.

Historically, our GCS segment has competed againstother providers of enterprise voice communications solutions such as NortelNetworks Corporation, Siemens AG, Alcatel S.A. and NEC Corporation. As we focuson the development and marketing of advanced communications solutions, such asIP telephony solutions, we face intense competition from these providers ofvoice communications solutions as well as from data networking companies suchas Cisco Systems, Inc. and 3Com Corp. The GCS segment also facescompetition in the small and medium business market from many competitors,including Cisco, Nortel, Alcatel, NEC, Matsushita Electric Corporation ofAmerica, Inter-Tel, Incorporated, 3Com, and Mitel Networks Corp., although themarket for these products is fragmented. Our AGS segment competes withcompanies like those above offering services with respect to their own productofferings, as well as many consulting and systems integration firms and networkservice providers.

In addition, because the market for our products issubject to rapid technological change, as the market evolves we may facecompetition in the future from companies that do not currently compete in theenterprise communications market, including companies that currently compete inother sectors of the information technology, communications and softwareindustries or communications companies that serve residential rather thanenterprise customers. In particular, as the convergence of enterprise voice anddata networks becomes more widely deployed by enterprises, the business,information technology and communication applications deployed on convergednetworks become more integrated. We may face increased competition from currentleaders in information technology infrastructure, information technology,personal and business applications and the software that connects the networkinfrastructure to those applications, such as Microsoft, which recentlyannounced an alliance with Nortel. We may also face competition from companiesthat seek to sell remotely hosted services or software as a service directly tothe end customer. Competition from these potential market entrants may takemany forms, including offering products and applications similar to those weoffer as part of another offering. In addition, these technologies continue tomove from a proprietary environment to an open standards-based environment.

Several of these existing competitors have, and manyof our future competitors may have, greater financial, personnel, research andother resources, more well-established brands or reputations and broadercustomer bases than we and, as a result, these competitors may be in a strongerposition to respond quickly to potential acquisitions and other market opportunities,new or emerging technologies and changes in customer requirements. Some ofthese competitors may have customer bases that are more geographically balancedthan ours and, therefore, may be less affected by an economic downturn in aparticular region. Competitors with greater resources also may be able to offerlower prices, additional products or services or other incentives that wecannot match or do not offer. Industry consolidations such as the mergerbetween Alcatel and Lucent Technologies, Inc. may also create competitorswith broader and more geographic coverage, with the ability to reachenterprises through service provider customers.

In addition, existingcustomers of data networking companies that compete against us may be inclinedto purchase enterprise communications solutions from their current datanetworking vendor rather than from us. Also, as communications and datanetworks converge, we may face competition from systems integrators thattraditionally have been focused on data network integration. We cannot predictwith precision which competitors may enter our markets in the future, what formsuch competition may take or whether we will be able to respond effectively to theentry of new competitors into our markets or the rapid evolution in technologyand product development that has characterized our markets. In addition, inorder to effectively compete with any new market entrant, we may need to makeadditional investments in our business or use more capital resources than ourbusiness currently requires or reduce prices, which may adversely affect ourprofitability.

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Technologicaldevelopments and consolidation within the communications industry result infrequent changes to our group of competitors. The principal competitive factorsapplicable to our products include:

·  product features, performance and reliability;

·  customer service and technical support;

·  relationships with distributors, value-addedresellers and systems integrators;

·  an installed base of similar or relatedproducts;

·  relationships with buyers and decision makers;

·  price;

·  the financial condition of the competitor;

·  brand recognition;

·  the ability to integrate various products intoa customer’s existing networks, including the ability of a provider’s productsto interoperate with other providers’ communications products; and

·  theability to be among the first to introduce new products.

**Patents, Trademarks and Other Intellectual Property**

We own a significantnumber of commercially important patents and we actively are filing newapplications to protect our research and development investments in newproducts and services across all areas of the business. As of September 30,2006, we held approximately 3,500 total worldwide patents and pending patentapplications. The duration of our patents is determined by the laws of thecountry of issuance and for U.S. patents may be 17 years from the date ofissuance of the patent or 20 years from the date of its filing depending uponwhen the patent application was filed, and we have patents of all durations. Inaddition, we hold numerous trademarks, both in the United States and in foreigncountries.

Our intellectual propertyholdings include those assigned to us by Lucent at Avaya’s inception, whichincluded a number of patents, trademarks, copyrights, trade secrets and otherintellectual property directly related to and important to our business. Lucentand its subsidiaries also granted rights and licenses to their patents,trademarks, copyrights, trade secrets and other intellectual property neededfor the manufacture, use and sale of our products. Rights to these patents weregranted through a cross license entered into with Lucent. In addition, Lucentalso conveyed to Avaya numerous sublicenses under patents of third parties.

Our intellectual propertypolicy is to protect our products, technology and processes by asserting ourintellectual property rights where appropriate and prudent. We also will obtainpatents, copyrights, and other intellectual property rights used in connectionwith our business when practicable and appropriate. From time to time,assertions of infringement of certain patents or other intellectual propertyrights of others have been made against us. Certain pending claims are invarious stages of evaluation; however, we believe no material litigation hasarisen from these claims. Based on industry practice, we believe that anylicenses or other rights that might be necessary for us to continue with ourcurrent business could be obtained on commercially reasonable terms. However,we cannot assure you that any of those licenses or other rights could beobtained on acceptable terms or that litigation will not occur. The failure toobtain necessary licenses or other rights, or litigation arising out ofsuch claims, could adversely affect our business.

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Formore information concerning patents, trademarks and other intellectualproperty, please see Item 1A. “Risk Factors—RisksRelated To Our Operations—If weare unable to protect our proprietary rights, our business and future prospectsmay be harmed” and Item 1A.“Risk Factors—Risks Related to Contingent Liabilities—We may be subject to litigation andinfringement claims, which could cause us to incur significant expenses orprevent us from selling our products or services.”

**Employees**

As of September 30, 2006, we employedapproximately 18,525 employees, of which approximately 18,300 are full-timeemployees (approximately 12,800 are management and non-represented employeesand 5,500 are represented employees covered by collective bargaining agreementsor works councils) and 225 are part-time employees (approximately 135 aremanagement and non-represented employees and 90 are represented employeescovered by collective bargaining agreements or works councils). Not included inthe numbers above are approximately 700 non-represented employees at AvayaGlobalConnect Ltd. (“AGC”), our majority-owned subsidiary in India.

Of the approximately 5,500full-time and part-time employees covered by collective bargaining agreementsor works councils, approximately 2,800 employees are covered by collectivebargaining agreements in the United States. Effective May 28, 2006, werenewed our collective bargaining agreements with the Communications Workers ofAmerica and the International Brotherhood of Electrical Workers. Therepresented employees ratified the agreements in July 2006. The agreementsare for a term of three years, ending May 23, 2009. The agreements providefor a 3% per year wage increase for employees during the duration of theagreements and an initial, one-time 4% increase to future employees’ pensionbenefits after July 1, 2006. Among other terms, the agreements alsoinclude additional cost sharing by employees and retirees for certain healthbenefits. 

**Backlog**

Our backlog for productsales generated by our direct sales channel, which represents the aggregate ofthe sales price of orders received from customers, but not yet recognized asrevenue, was approximately $120 million and $117 million on September 30,2006 and 2005, respectively. The majority of these orders are fulfilled withintwo months. However, all orders are subject to possible rescheduling bycustomers. Although we believe that the orders included in the backlog arefirm, some orders may be cancelled by the customer without penalty, and we mayelect to permit cancellation of orders without penalty where managementbelieves it is in our best interests to do so. Therefore, we do not believethat our backlog, as of any particular date, is necessarily indicative ofactual net sales for any future period.

**Contracts with theU.S. Federal Government**

As required by Federal lawand dictated by the Federal Acquisition Regulations, all procurement contractswith agencies of the U.S. Federal government must contain a provisionpermitting the procuring agency to terminate the contract for the convenienceof the government. Each of our numerous contracts with the U.S. Federalgovernment contains such a clause. In the event that an agency exercises itsrights under this clause, we would be permitted to submit a “Termination Claim”seeking direct damages incurred as a result of the termination. We are notaware of any agency exercising its rights under this clause within the lastyear, nor are we aware of any agency’s plans to do so in the future.

**Seasonality**

Our business historicallyhas had some seasonality, with the highest revenues and earnings typicallyrealized in our fourth fiscal quarter. We believe that the seasonality in ourbusiness is primarily due to the structure of our sales compensation plan,which is based on annual sales targets. As our compensation plan 

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is basedon annual targets, not quarterly targets, there is additional incentive tofinalize as many sales as possible before our fiscal year end. 

**FinancialInformation About Geographic Areas**

Information about ourrevenues by geography and long-lived assets by geography can be found inNote 15, “Operating Segments” to our Consolidated Financial Statementswhich are included in our 2006 Annual Report to Shareholders.

**Environmental,Health and Safety Matters**

We are subject to a wide range of governmentalrequirements relating to employee safety and health and to the handling andemission into the environment of various substances used in its operations. Weare subject to certain provisions of environmental laws, particularly in theUnited States and Germany, governing the cleanup of soil and groundwatercontamination. Such provisions impose liability for the costs of investigatingand remediating releases of hazardous materials at currently or formerly ownedor operated sites. In certain circumstances, this liability may also includethe cost of cleaning up historical contamination, whether or not caused by us.We are currently conducting investigation and/or cleanup of known contaminationat nine of our current or former facilities either voluntarily or pursuant togovernment directives. Based on currently available information, none of thesites is reasonably likely to generate environmental costs that will beindividually material nor will environmental costs for all sites in theaggregate be material in any fiscal year. There are no known third parties whomay be responsible for investigation and/or cleanup at these sites andtherefore, for purposes of assessing the adequacy of accruals for theseliabilities, we have not assumed that we will recover amounts from any thirdparty, including under any insurance coverage or indemnification arrangement.  

It is often difficult to estimate the future impact ofenvironmental matters, including potential liabilities. We have establishedfinancial reserves to cover environmental liabilities where they are probableand reasonably estimable. Reserves for estimated losses from environmentalmatters are undiscounted and consist primarily of estimated remediation andmonitoring costs and are, depending on the site, based primarily upon internalor third party environmental studies and the extent of contamination and thetype of required cleanup. We are not aware of, and have not included in reservesany provision for, unasserted environmental claims.

The reliability and precision of estimates of ourenvironmental costs may be affected by a variety of factors, including whetherthe remediation treatment will be effective, contamination sources have beenaccurately identified and assumptions regarding the movement of contaminantsare accurate. In addition, estimates of environmental costs may be affected bychanges in law and regulation, including the willingness of regulatoryauthorities to conclude that remediation and/or monitoring performed by us isadequate.

We assess the adequacy of environmental reserves on aquarterly basis. We do not expect the outcome of these matters to have amaterial impact on our financial position. Expenditures for environmentalmatters for fiscal 2006, 2005 and 2004 were not material to our financialposition, results of operations or cash flows. Payment for the environmentalcosts covered by the reserves may be made over a 30-year period. Although we donot separately track recurring costs of managing hazardous substances andpollutants in ongoing operations, we do not believe them to be material.

We also may from time totime be subject to various state, federal and international laws andregulations governing the environment, including those restricting the presenceof certain substances in electronic products and making producers of thoseproducts financially responsible for the collection, treatment, recycling anddisposal of certain products. For example, the EU has adopted the RoHS and WEEEdirectives. RoHS prohibits the use of certain substances, including mercury andlead, in certain 

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productsput on the market after July 1, 2006. The WEEE directive obligates partiesthat place electrical and electronic equipment onto the market in the EU to puta clearly identifiable mark on the equipment, register with and report to EUmember countries regarding distribution of the equipment, and provide amechanism to take back and properly dispose of the equipment. Each EU member countryhas enacted, or is expected soon to enact, legislation clarifying what is andwhat is not covered by the WEEE directive in that country. We believe that wehave met the requirements of the RoHS and WEEE directives. Similar laws andregulations have been or may be enacted in other regions.

**Contribution andDistribution Agreement Between Lucent and Us**

We were incorporated in Delaware in February 2000,as a wholly owned subsidiary of Lucent. On September 30, 2000, Lucentcontributed its enterprise networking business to us and distributed all of theoutstanding shares of our capital stock to its shareholders. We refer to thesetransactions in this Annual Report on Form 10-K as the “distribution.”Prior to the distribution, we had no material assets or activities as aseparate corporate entity. Following the distribution, we became an independentpublic company, and Lucent has no continuing stock ownership interest in us.

The Contribution andDistribution Agreement (the “Agreement”) sets forth the agreements between usand Lucent with respect to the principal corporate transactions required toeffect the distribution, and other agreements governing the relationshipbetween Lucent and us.

***The Contribution and the Distribution***

To effect thecontribution, Lucent transferred or caused its subsidiaries to transfer, theassets of its enterprise networking businesses. In general, we assumed all ofthe liabilities of the contributed businesses in accordance with theirrespective terms. Pursuant to the Agreement, the distribution was effected asof September 30, 2000.

***Releases and Indemnification***

The Agreement provides for a full and complete releaseand discharge of all liabilities existing or arising from all acts and eventsoccurring or failing to occur or alleged to have occurred or to have failed tooccur and all conditions existing or alleged to have existed on or before thedate of the Agreement, between or among us or any of our subsidiaries oraffiliates, on the one hand, and Lucent or any of its subsidiaries oraffiliates other than us, on the other hand, except as expressly set forth inthe Agreement.

We have agreed toindemnify, hold harmless and defend Lucent, each of its affiliates and each oftheir respective directors, officers and employees, from and against certainliabilities relating to, arising out of or resulting from the contribution andthe distribution or any material breach by us of the Agreement or any of theancillary agreements. Lucent has agreed to indemnify, hold harmless and defendus, each of our affiliates and each of our respective directors, officers andemployees from and against all liabilities related to Lucent’s businesses otherthan the contributed businesses and any material breach by Lucent of theagreement or any of the ancillary agreements. Also, each party has indemnifiedthe other party and its affiliates, subject to limited exceptions, against anyclaims of patent, copyright or trademark infringement or trade secretmisappropriation with respect to any product, software or other materialprovided by or ordered from such party.

***Contingent Liabilities and Contingent Gains***

The Agreement provides for liability sharing by us andLucent with respect to contingencies primarily relating to our respectivebusinesses or otherwise assigned to each of us. The Agreement requires Lucentto bear 50% of all losses in excess of $50 million incurred by us inconnection with a contingent liability primarily related to our businesses. Inaddition, we are required to bear 10% of all losses in excess of 

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$50 million incurredby Lucent in connection with a contingent liability primarily related to Lucent’sbusinesses.

The Agreement alsoprovides that we will bear 10% and Lucent will bear 90% of all losses incurredin connection with shared contingent liabilities, which are defined as:

·  any contingent liabilities that are notprimarily contingent liabilities of Lucent or contingent liabilities associatedwith the contributed businesses;

·  some specifically identified liabilities,including liabilities relating to terminated, divested or discontinuedbusinesses or operations; and

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

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

The Agreement provides that we and Lucent will havethe exclusive right to any benefit received with respect to any contingent gainthat primarily relates to the business of, or that is expressly assigned to, usor Lucent, respectively.

Please see Note 17, “Commitmentsand Contingencies—Legal Proceedings,” to our Consolidated Financial Statementswhich are included in our 2006 Annual Report to Shareholders for a descriptionof certain matters involving Lucent for which we have assumed responsibilityunder the Agreement.

***Tax Sharing Agreement***

In addition, in connectionwith the distribution, we and Lucent entered into a Tax Sharing Agreement whichgoverns Lucent’s and our respective rights, responsibilities and obligationsafter the distribution with respect to taxes for the periods ending on orbefore the distribution. Generally, pre-distribution taxes that are clearlyattributable to the business of one party will be borne solely by that party,and other pre-distribution taxes will be shared by the parties based on aformula set forth in the Tax Sharing Agreement. In addition, the Tax SharingAgreement addresses the allocation of liability for taxes that are incurred asa result of restructuring activities undertaken to implement the distribution.If the distribution fails to qualify as a tax-free distribution under Section 355of the Internal Revenue Code because of an acquisition of our stock or assets,or some other actions of ours, then we will be solely liable for any resultingcorporate taxes.

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**Executive Officersof the Registrant**

Executiveofficers are elected annually by our Board of Directors and hold office at thepleasure of the Board until the next annual election of officers or until theirsuccessors are elected and qualified. Each of our current executive officers isidentified below together with information about each officer’s age, positionand employment history for the last five years.
| Name                     | ** ** | ** ** | ** ** | **Age**                                                                   | ** ** | **Position** |
|--------------------------|------------|------------|------------|---------------------------------------------------------------------------|------------|--------------|
| Louis J. D’Ambrosio |       | 42         |       | Director, President and  Chief Executive Officer                          |
| Jocelyne J. Attal        |       | 50         |       | Chief Marketing  Officer                                                  |
| Pamela F. Craven         |       | 52         |       | Chief  Administrative Officer                                             |
| Roger C. Gaston          |       | 50         |       | Senior Vice  President,  Human Resources                             |
| Charles L. Ill           |       | 52         |       | Senior Vice  President, Global Sales                                      |
| Karyn Mashima            |       | 53         |       | Senior Vice  President, Strategy and Technology                           |
| Garry K. McGuire         |       | 60         |       | Chief Financial  Officer and Senior Vice President, Corporate Development |
| Francis M. Scricco       |       | 57         |       | Senior Vice  President, Avaya Global Services                             |
| Michael C. Thurk         |       | 53         |       | Director and Chief  Operating Officer                                     |

 

The information required by this item relating to ourDirectors and nominees, and compliance with Section 16(a) of theSecurities Act of 1934, is incorporated by reference from the discussion underthe heading “Proposals—Directors’ Proposal to Elect Directors” and “Section 16(a) BeneficialOwnership Reporting Compliance” set forth in our Proxy Statement for the 2007Annual Meeting of Shareholders.

*Louis J. D’Ambrosio* has been a Director of Avaya since November 2006and has been our President and Chief Executive Officer since July 2006.Mr. D’Ambrosio was previously our Senior Vice President and President,Global Sales and Marketing from November 2005 until July 2006. From January 2004until November 2005, Mr. D’Ambrosio was our Group Vice President,Global Sales, Channels and Marketing. From December 2002 until December 2003,Mr. D’Ambrosio was our Group Vice President, Avaya Global Services. Priorto December 2002, Mr. D’Ambrosio served in a number of executivepositions with International Business Machines Corporation, including mostrecently as Vice President of Worldwide Sales and Marketing—Software Business.

*Jocelyne J. Attal* has been our Chief Marketing Officer since May 2004.She was previously Executive Vice President -Business at Gateway, Inc.from September 2003 until March 2004. Prior to that, she was withInternational Business Machines Corporation for more than five years until September 2003where she was most recently Chief Marketing Executive for WebSphere and VicePresident of Worldwide Channel Sales and Marketing for IBM Software.

*Pamela F. Craven* has been our Chief Administrative Officer since August 2006.In that role, she continues to serve as General Counsel andSecretary, which are positions she has held since September 2000.She was a Senior Vice President from August 2002 to August 2006and a Vice President from September 2000 to July 2002.

*Roger C. Gaston*has been our Senior Vice President, Human Resourcessince May 2006. He was previously Executive Vice President—EmploymentOutsourcing Processes of Kenexa Corporation from January 2006 until May 2006.Prior to Kenexa, Mr. Gaston was Corporate Vice President, Human Resourcesfor StorageTek from March 2001 until September 2005.

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*Charles L. Ill* has been our Senior Vice President, Global Salessince July 2006. He was previously our Vice President—Software SystemsDevelopment from November 2005 until July 2006 and was previouslyVice President—Global Business Partners and Sales Operations from February 2005until November 2005. Prior to joining Avaya, he was Executive VicePresident, Worldwide Sales of BEA Systems, Inc. from January 2003until December 2004. Until January 2003 he held various sales andmarketing positions with International Business Machines Corporation, mostrecently as Vice President, Worldwide Software Geographic Sales, Marketing andTechnical team.

*Karyn Mashima* has been our Senior Vice President, Strategy andTechnology since September 2000.

*Garry K. McGuire*has been our Chief Financial Officer since September 2000and our Senior Vice President, Corporate Development since June 2003. Mr. McGuirecurrently serves as a director of Anadigics, Inc. Mr. McGuire willretire in his current role and as an executive officer of Avaya effective December 31,2006.

*Francis M. Scricco*has been our Senior Vice President, Avaya GlobalServices since July 2006. He was previously Senior Vice President andPresident, Avaya Global Services from November 2005 until July 2006. FromMarch 2004 until November 2005, Mr. Scricco was our Group VicePresident, Avaya Global Services. From 1997 to 2002, Mr. Scricco served ina number of executive positions with Arrow Electronics, Inc., includingPresident and Chief Executive Officer from 2000-2002 and President and ChiefOperating Officer from 1999-2000.

*Michael C. Thurk* has been a Director of Avaya since November 2006and has been our Chief Operating Officersince July 2006. He was previously our Senior Vice President andPresident, Global Communications Solutions from November 2005 until July 2006.From October 2004 until November 2005, Mr. Thurk was our GroupVice President, Global Communications Solutions. Mr. Thurk was our GroupVice President, Enterprise Communications Group from August 2002 until September 2004.Mr. Thurk was our Group Vice President, Systems, from January 2002until July 2002. From June 1998 until December 2001, Mr. Thurkheld various positions at Telefonaktiebolaget LM Ericsson including President,Ericsson Datacom Inc. and Vice President, Division Data Backbone and OpticalNetworks.

**Other Information**

Unless otherwise indicated by the context in thisAnnual Report on Form 10-K, “we,” “us,” “our,” the “Company” and “Avaya”refer to Avaya Inc. and its consolidated subsidiaries. The term “traditional”with respect to “voice communications,” “enterprise voice communications,” “telephony,”“voice telephony,” “voice systems,” or “TDM,” refers to circuit-basedenterprise voice communications.

Avaya maintains acorporate website at www.avaya.com, and you can find additional informationabout Avaya through the Investor Relations website, located athttp://investors.avaya.com. Visitors to the Investor Relations website can viewand print copies of Avaya’s SEC filings, including periodic and current reportson Forms 10-K, 10-Q and 8-K, as soon as reasonably practicable after thosefilings are made with the SEC. All of these filings are available free ofcharge. Please note that the information contained on Avaya’s websites is notincorporated by reference in, or considered to be a part of, this document.  Our corporate headquarters are located at 211Mt. Airy Road, Basking Ridge, New Jersey 07920 and the telephone number at thatlocation is (908) 953-6000.

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**Item 1A.     *Risk Factors.***

We provide the following cautionary discussion ofrisks, uncertainties and possibly inaccurate assumptions relevant to ourbusinesses. We note these factors forinvestors as permitted by the Private Securities Litigation Reform Act of1995, Section 27A of the Securities Act of 1933 and Section 21E ofthe Securities Exchange Act of 1934. Theseare factors that we think could cause our actual results to differ materiallyfrom expected and historical results. However,it is not possible to predict or identify all such factors. Consequently, youshould not consider the following to be a complete discussion of all potentialrisks or uncertainties.

The risks anduncertainties referred to above include, but are not limited to:

·  price and product competition, including fromcompetitors who may offer products and applications similar to those we offeras part of another offering;

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

·  dependence on new product development;

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

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

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

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

·  the economic, political and other risksassociated with international sales and operations, including increasedexposure to currency fluctuations and to European economies as a result of alarge percentage of our business being conducted in Europe;

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

·  the ability to attract and retain qualifiedemployees;

·  control of costs and expenses, includingdifficulties in completing restructuring actions in a timely and efficientmanner due to labor laws and required approvals;

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

·  the ability to form and implement alliances.

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

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***Risks Related To Our Revenue and Business Strategy***

**A key component ofour strategy is our focus on the development and sale of advanced communications products and applicationsand related services, including IP telephony solutions, and this strategy maynot be successful.**

A key component of our strategy is our focus on thedevelopment and sale of IP telephony solutions and other advancedcommunications products and applications and related services. Our productofferings include IP telephony systems and traditional voice communicationssystems, multi-media contact center infrastructure and applications in supportof customer relationship management, unified communications applications andappliances, such as IP telephone sets. These offerings are part of our broadervision of “Intelligent Communications,” which seamlessly connectscommunications applications and business applications, giving workers,customers and processes the ability to be linked to the right person, at theright time, by the right medium - voice, text and video - over any network.

In order to executethis strategy successfully, we must continue to:

·  train our sales staff and distributionpartners to sell new types of products, applications and services and improveour marketing of such products, applications and services;

·  research and develop more IP telephonysolutions and other advanced communications products and applications;

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

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

·  train our services employees and channelpartners to service new products and applications, and take other measures toensure we can deliver consistent levels of service globally to ourmultinational customers;

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

·  make sales to our existing customers thatincorporate our advanced communications products, applications and serviceswith and without retaining their existing network infrastructure;

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

·  developrelationships with new types of channel partners who are capable of bothselling more advanced products and extending our reach into new and existingmarkets; and

·  establish presence in key geographic markets.

If we do notsuccessfully execute this strategy, our operating results may be adverselyaffected. Moreover, even if we successfully address these challenges, ouroperating results may still be adversely affected if the market opportunity foradvanced communications products, applications and services, including IPtelephony solutions, does not develop in the ways that we anticipate. The ratioof revenue attributable to IP telephony solutions versus traditional voicecommunication systems is expected to increase as more and more companiesconvert to IP telephony solutions. However, IP telephony lines currentlyconstitute a small percentage of global installed enterprise telephony linesand if IP telephony does not gain widespread acceptance in the marketplace asan alternative replacement option for enterprise telephony systems our overallrevenue and operating results may be adversely affected. Even if we aresuccessful in increasing our revenue from sales of IP telephony solutions, ifrevenue from 

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traditionalenterprise voice communications systems and services declines faster than revenuefrom IP telephony solutions increases, our overall revenue and operatingresults may be adversely affected. As the industry begins to go through themainstream adoption phase, we cannot predict whether:

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

·  current or future competitors or newtechnologies will cause the market to evolve in a manner different than weexpect;

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

·  we will beable to maintain a leadership or profitable position as this opportunitydevelops.

**We face intensecompetition from our current competitors and, as the enterprise communicationsand informationtechnology markets evolve, may face increased competition from companies thatdo not currently compete directly against us.**

For information regardingthe competitors we face in our different markets as well as various competitiverisks associated with our business and our segments, please refer to Item 1. “Business—Competition.”

**Although ourrevenue has continued to increase since 2003, we recently have experienceddifficulties insignificantly growing our revenue other than through acquisitions.**

Although our revenue increased from $4,069 million infiscal 2004 to $4,902 million in fiscal 2005 and $5,148 million in fiscal 2006,we recently have experienced difficulty in significantly growing our revenue. Ouroperating results for fiscal 2005 and 2006 include the operating results ofTenovis from November 18, 2004, as well as other acquisitions.

One factor that significantly affects our operatingresults is the impact of economic conditions on the willingness of enterprisesto make capital investments, particularly in enterprise communicationstechnology and related services. Although general economic conditions haveimproved in recent years, we believe that enterprises continue to be concernedabout their ability to increase revenues and thereby increase theirprofitability. Accordingly, they have tried to maintain or improveprofitability through cost control and constrained capital spending. Because itis not certain whether enterprises will increase spending on enterprisecommunications technology significantly in the near term, we could experiencecontinued pressure on our ability to increase our revenue. Our ability to growrevenue is also affected by other factors, such as competitive pricingpressures and price erosion, see “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations—Key Trends and UncertaintiesAffecting Our Revenue—Technology transition,” “—Competitive environment’’ and “—Pressureson services business,” whichare included in our 2006 Annual Report to Shareholders.

If these or otherconditions limit our ability to grow revenue or cause our revenue to declineand we cannot reduce costs on a timely basis or at all, our operating resultswill be adversely affected.

***Risks Related To Our Operations***

**If we are unable tointegrate acquired businesses into ours effectively, our operating results maybe adversely affected.Even if we are successful, the integration of these businesses has required,and will likely continue to require, significant resources and managementattention.**

We may not be able tosuccessfully integrate acquired businesses into ours, and therefore we may notbe able to realize the intended benefits from an acquisition. If we fail tosuccessfully integrate these acquisitions or if they fail to perform as weanticipated, our existing businesses and our revenue and 

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operatingresults could be adversely affected. If the due diligence of the operations ofthese acquired businesses performed by us and by third parties on our behalfwere inadequate or flawed, we could later discover unforeseen financial orbusiness liabilities, or the acquired businesses may not perform as expected.Additionally, acquisitions could result in difficulties assimilating acquiredoperations and products, and the diversion of capital and management’sattention away from other business issues and opportunities. To the extent thatthe Company expands internationally through acquisitions and fails to identifyand respond to cross-cultural employee issues appropriately, it may fail toretain employees acquired through those acquisitions, which may negativelyimpact its integration efforts. Acquisitions could also have a negative impacton our results of operations if it is subsequently determined that goodwill orother acquired intangible assets are impaired, thus resulting in an impairmentcharge in a future period. Finally, acquisitions often necessitaterestructurings in order to control costs and expenses and optimize theoperational performance of the combined entity. These restructurings are moredifficult due to labor laws and required approvals when the acquired businessis a company operating in multiple jurisdictions, which may hinder completionof restructuring actions in a timely and efficient manner and delay anticipatedcost savings.

**We rely onoutsourced product manufacturers, distributors and warehousing agents for ourproducts and variousissues with respect to the delivery of our products could arise which couldadversely impact both our revenue and our costs.**

We have outsourced substantially all of ourmanufacturing operations and we may experience significant disruption to ouroperations by outsourcing too much of our manufacturing. Our ability to realizethe intended benefits of our manufacturing outsourcing initiative depends onthe willingness and ability of our contract manufacturers to produce ourproducts. If a contract manufacturer terminates its relationship with us or isunable to fill our orders on a timely basis or in accordance with our qualityrequirements, we may be unable to deliver the affected products to meet ourcustomers’ orders, which could delay or decrease our revenue or otherwise havean adverse effect on our operations. As discussed in Item 1. “Business—Manufacturingand Supplies,” we recently have experienced these types of disruptions anddelays and they have impacted our ability to meet timelines for our customerrequirements. In addition, we periodically review our product manufacturingoperations and consider appropriate changes as necessary. Although we endeavorto appropriately manage any disruption in transitioning from one contractmanufacturer to another contract manufacturer, we may experience significantdisruption to our operations during any contract manufacturer transition, anddid experience such a disruption recently while making this type of transition.See Item 1. “Business—Manufacturing and Supplies” for more information.

As we continueto seek to optimize our end to end supply chain, we have also been outsourcingvarious logistics functions over the course of the past few years.  We rely on third-partylogistics service providers to provide services for our business, includingwarehousing and physical distribution.  If a logistics service provider does notmeet our service level and quality requirements for any reason, we may beunable to fulfill our customers orders in a timely and accurate manner, whichcould delay or decrease our revenue or otherwise have an adverse effect on our revenueand our costs.   In the first quarter of fiscal 2007 we movedcertain warehousing and staging operations to a different third party logisticsservice provider at a new facility, which now services a significant portion ofour warehousing and physical distribution needs.  While we and our logistics service providerhave been making improvements as we progress through this transition, therehave been disruptions and delays in delivery of certain products from thisfacility and this could have an adverse effect on our revenue and increase ourcosts.

We also rely on outside sources for the supply of thecomponents of our products and for the finished products that we purchase fromthird parties. In some cases certain components are only available from asingle source or from a limited source of suppliers. Delays or shortagesassociated with these components 

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could cause significantdisruption to our operations. We have in the past experienced component shortagesthat have affected our operations and we may in the future experience theseshortages. Shortages could be a result of manufacturing or capacity issues atour outsourced manufacturers or suppliers or strong demand for certain productsfor which we have not made adequate forecasts. Our operating results could beadversely affected if shortages or delays persist or if the price of thenecessary components increases or the components become unavailable atreasonable prices or at all.

For more information concerningthe risks associated with our contract manufacturers operating internationally,please see Item 1A. “Risk Factors—Risks Related To Our Operations—Asour international business has grown significantly in the last fiscal year,changes in economic or political conditions in a specific country or regioncould negatively affect our revenue, costs, expenses and financial condition.”

**If we are unable toprotect our proprietary rights, our business and future prospects may beharmed.**

We protect our intellectual property through patents,trademarks, trade secrets, copyrights, confidentiality and nondisclosureagreements and other measures. Despite our efforts, protecting our intellectualproperty is difficult and not always certain, and the measures we take may notprovide adequate protection for our proprietary rights, particularly incountries that do not have well-developed judicial systems or laws thatadequately protect intellectual property rights. Patent filings by thirdparties, whether made before or after the date of our filings, could render ourintellectual property less valuable. Competitors may misappropriate ourintellectual property, disputes as to ownership of intellectual property mayarise and our intellectual property may otherwise fall into the public domainor be independently developed by competitors. We believe that developing newproducts and technology that are unique to Avaya is critical to our success.

We rely on the security ofour information systems, among other things, to protect our proprietaryinformation and information of our customers. If we do not maintain adequatesecurity procedures over our information systems, we may be susceptible tocomputer hacking, cyberterrorism or other unauthorized attempts by thirdparties to access our proprietary information or that of our customers. Even ifwe are able to maintain procedures that are adequate to address currentsecurity risks, hackers, cyberterrorists or other unauthorized users maydevelop new techniques that will enable them to successfully circumvent ourcurrent security procedures. The failure to protect our proprietary informationcould seriously harm our business and future prospects or expose us to claimsby our customers, employees or others that we did not adequately protect theirproprietary information.

**As ourinternational business has grown significantly in the last two fiscal years,changes in economic orpolitical conditions in a specific country or region could negatively affectour revenue, costs, expenses and financial condition.**

We conduct significant sales and customer supportoperations in countries outside of the United States and also depend onnon-U.S. operations of our contract manufacturers and our distributionpartners. For the fiscal years ended September 30, 2006 and 2005, wederived 42% and 41% of our revenue, respectively, from sales outside the UnitedStates. Our future international operating results, including our ability toimport our products to, export our products from, or sell our products invarious countries, could be materially adversely affected by a variety ofuncontrollable and changing factors. These factors include politicalconditions, economic conditions, legal and regulatory constraints, currencyregulations, health or similar issues, natural disasters and other matters inany of the countries or regions in which we currently operate or intend tooperate in the future. Currently, we have concerns about weakness anduncertainty in European economies, including high unemployment levels and loweconomic growth forecasts, particularly in Germany where we have a highconcentration of our business resulting from the Tenovis acquisition.

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Other factors which may impact our internationaloperations include foreign trade, environmental, monetary and fiscal policies,laws, regulations and other activities of foreign governments, agencies andsimilar organizations, and risks associated with having facilities located incountries which have historically been less stable than the United States. Forexample, the EU has enacted the RoHS and WEEE directives, which are discussedin “Item 1. “Business—Manufacturing and Supplies.”

Additional risks inherent in our internationaloperations generally include, among others, the costs and difficulties of managinginternational operations, adverse tax consequences, including imposition ofwithholding or other taxes on payments by subsidiaries, and greater difficultyin enforcing intellectual property rights. Our effective tax rates in thefuture could be adversely affected if the geographical distribution of ourearnings and losses is unfavorable, by changes in the valuation of our deferredtax assets or liabilities, or by changes in tax laws, regulations, accountingprinciples, or interpretations thereof. The various risks inherent in doingbusiness in the United States generally also exist when doing business outsideof the United States, and may be exaggerated by the difficulty of doingbusiness in numerous sovereign jurisdictions due to differences in culture,laws and regulations.

In addition, foreigncurrency exchange rates and fluctuations may have an impact on our revenue,costs or cash flows from our international operations, which could adverselyaffect our financial performance. Because a significant portion of our businessis conducted outside the United States, we face exposure to movements incurrency exchange rates which can be adverse. These exposures may change overtime as business practices evolve, and they could have a material adverseimpact on our financial results and cash flows. An increase in the value of theU.S. dollar could increase the real cost to our customers of our products inthose markets outside the United States, and a weakened U.S. dollar couldincrease the cost of local operating expenses and procurement of raw materials.

***Risks Related to Contingent Liabilities***

**We may incurliabilities as a result of our obligation to indemnify, and to share certainliabilities with, Lucentin connection with our spin-off from Lucent in September 2000.**

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

Please see Note 17, “Commitments andContingencies—Legal Proceedings,” to our Consolidated FinancialStatements which are included in our 2006 Annual Report to Shareholders for adescription of certain matters involving Lucent for which we have assumedresponsibility under the Contribution and Distribution Agreement.

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

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

From time to time, we receive notices from third partiesasserting that our proprietary or licensed products, systems and softwareinfringe their intellectual property rights. We cannot assure you that thenumber of these notices will not increase in the future and that others willnot claim that our proprietary or licensed products, systems and software areinfringing their intellectual property rights or that we do not in factinfringe those intellectual property rights. We may be unaware of intellectualproperty rights of others that may cover some of our technology. Irrespectiveof the merits of these claims, if someone claimed that our proprietary orlicensed systems and software infringed their intellectual property rights, anyresulting litigation could be costly and time consuming and would divert the attentionof management and key personnel from other business issues. The complexity ofthe technology involved and the uncertainty of intellectual property litigationincrease these risks. These matters may result in any number of outcomes forus, including entering into licensing agreements, redesigning our products toavoid infringement, being enjoined from selling products that are found toinfringe, paying damages if products are found to infringe, and indemnifyingcustomers from claims as part of our contractual obligations. Royalty orlicense agreements may be very costly or we may be unable to obtain royalty orlicense agreements on terms acceptable to us or at all. We also may be subjectto significant damages or an injunction against us or our proprietary orlicensed systems. A successful claim of patent or other intellectual propertyinfringement against us could materially adversely affect our operatingresults. We have made and will likely continue to make investments to licenseand/or acquire the use of third party intellectual property rights andtechnology as part of our strategy to manage this risk, but we cannot assureyou that we will be successful. We may also be subject to additional notice andother requirements to the extent we incorporate open source software into ourapplications.

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

**If the distributiondoes not qualify for tax-free treatment, we could be required to pay Lucent orthe Internal RevenueService a substantial amount of money.**

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

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

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

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**Item 1B.     *Unresolved Staff Comments.***

None.

**Item 2.        *Properties.***

As of September 30, 2006, we had 441 leasedfacilities (which includes 91 storage locations containing between 25 to 1,250square feet), located in 52 countries. This included 13 primary research anddevelopment facilities located in Canada, France, Germany, India, Israel, the UnitedKingdom and the United States. Our real property portfolio consists ofaggregate floor space of approximately 8.1 million square feet, of whichapproximately 2.7 million square feet is owned and approximately5.4 million square feet is leased. Our lease terms range from monthlyleases to 19 years. Through our majority interest in AGC, we also have aninterest in 5 owned properties and 26 leased properties in various locations. Webelieve that all of our facilities and equipment are in good condition and arewell maintained. Our facilities are used for current operations of alloperating segments.

For additional informationregarding obligations under operating leases, see Note 17, “Commitments andContingencies—Leases,” to our Consolidated Financial Statements whichare included in our 2006 Annual Report to Shareholders.

**Item 3.        *Legal Proceedings.***

Information required bythis item is incorporated by reference from Note 17, “Commitments andContingencies—Legal Proceedings,” to our Consolidated FinancialStatements which are included in our 2006 Annual Report to Shareholders.

**Item 4.        *Submission of Matters to aVote of Security-Holders.***

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

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**PART II**

**Item 5.        *Market For Registrant’sCommon Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.***

(a)   None.

(b)   None.

(c)   IssuerPurchases of Equity Securities.

On April 19, 2005, we announced that the Board ofDirectors had authorized a share repurchase plan. Under the provisions of thisplan, the Company was authorized to repurchase and retire up to $500 million ofits outstanding shares of common stock through April 1, 2007. For fiscal2006, our $400 million revolving credit facility (see Note 8, “Capital LeaseObligations and Long-Term Debt,” to our Consolidated Financial Statements which are included in our 2006 Annual Reportto Shareholders) limited our ability to make dividend payments ordistributions or to repurchase, redeem or otherwise acquire shares of Avayacommon stock to $461 million (which represents 50% of consolidated net incomefor the Company for fiscal 2005). On September 8, 2006, an amendment tothe credit facility provided that theCompany may use an additional $500 million during the period from October 1,2006 through September 30, 2008 for such activities, over the amountprovided for under the 50% of consolidated net income test each year.

Duringfiscal 2006, the Company repurchased and retired 29,909,400 shares of commonstock at an average purchase price of $10.98 per share, for a total of $328million. Approximately $65 million is available through April 1, 2007 forfurther share repurchases under the plan.  These repurchases are made at management’s discretionin the open market or in privately negotiated transactions in compliance withapplicable securities laws and other legal requirements and are subject tomarket conditions, share price, the terms of Avaya’s credit facility and otherfactors. See Note 8, “Capital Lease Obligations and Long-Term Debt,” to ourConsolidated Financial Statements which are included in our 2006 Annual Report to Shareholders forfurther information concerning the limitations under the credit facility. Thefollowing table sets forth the repurchase activity during the fourth quarter offiscal 2006:

| ** **                     | ** ** | ** **            | ** ** | ** **          | ** ** | ** **            | ** ** | **Approximate**                        | ** ** |
|--------------------------------|------------|-----------------------|------------|---------------------|------------|-----------------------|------------|----------------------------------------|------------|
| ** **                     | ** ** | ** **            | ** ** | ** **          | ** ** | **Total number** | ** ** | **dollar value of**          | ** ** |
| ** **                     | ** ** | **Total number** | ** ** | **Average**         | ** ** | **of shares**    | ** ** | **shares that may**          | ** ** |
| ** **                     | ** ** | **of shares**    | ** ** | **price paid** | ** ** | **purchased as** | ** ** | **yet be purchased as** | ** ** |
| **Period**                     | ** ** | ** **            | ** ** | **purchased**       | ** ** | **per share**    | ** ** | **part of program**          | ** ** | **part of program*** | ** ** |
| July 1–31            |       |                  | 1,315,000  |                |       |                  | $          | 9.21                                   |       |   |   | 35,374,200 |   |   |   | $ | 124,790,762 |   |   |
| August 1–30          |       |                  | 4,315,000  |                |       |                  | $          | 9.27                                   |       |   |   | 39,689,200 |   |   |   | $ | 84,808,336 |   |   |
| September 1–30       |       |                  | 1,745,200  |                |       |                  | $          | 11.38                                  |       |   |   | 41,434,400 |   |   |   | $ | 64,943,097 |   |   |
| Fourth quarter of  fiscal 2006 |       |                  | 7,375,200  |                |       |                  |       |                                   |       |   |   |   |   |   |   |   |   |
|                                |            |                       |            |                     |            |                       |            |                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |

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*       Subjectto the limitations of our credit facility noted above.

Our equity-basedcompensation program consists principally of stock options and restricted stockunit (“RSU”) awards. Shares underlying restricted stock units are issued to theholder only upon the vesting of the award. Upon the vesting of the RSUs, we maywithhold shares to satisfy the holder’s tax obligation. Because the withholdingdoes not require the transfer of previously-issued shares from the holder toAvaya, such withholding is not deemed an issuer purchase of an equity security.With respect to both the withholding of shares from shares being purchased tocover the exercise price or taxes in the context of the exercise of a stockoption, such withholding is not deemed an issuer purchase of an equity securitybecause the withheld shares had not previously been issued.

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**Item 6.        *Selected Financial Data.***

Information required bythis item is incorporated by reference from “Selected Financial Data,” which isincluded in our 2006 Annual Report to Shareholders.

**Item 7.        *Management’s Discussionand Analysis of Financial Condition and Results of Operations.***

Information required bythis item is incorporated by reference from “Management’s Discussion andAnalysis of Financial Condition and Results of Operations,” which isincluded in our 2006 Annual Report to Shareholders.

**Item 7A.     *Quantitative andQualitative Disclosures About Market Risk.***

Information required bythis item is incorporated by reference from the discussion under the heading “Management’s Discussion andAnalysis of Financial Condition and Results of Operations—FinancialInstruments,” which is included in our 2006 Annual Report toShareholders.

**Item 8.        *Financial Statements andSupplementary Data.***

Information required bythis item is incorporated by reference from the Report of Independent Auditorsand from our Consolidated Financial Statements, which are included in our 2006Annual Report to Shareholders.

**Item 9.        *Changes in andDisagreements with Accountants on Accounting and Financial Disclosure.***

None.

**Item 9A.     *Controls and Procedures.***

a)     *Evaluation of Disclosure Controls and Procedures.*

As ofthe end of the period covered by this report, our management, under the supervisionand with the participation of the principal executive officer and principalfinancial officer, evaluated the effectiveness of the design and operation ofour disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (the“Exchange Act”)). Based on this evaluation, our principal executive officer andprincipal financial officer have concluded (1) that the disclosurecontrols and procedures were effective to provide reasonable assurance thatinformation required to be disclosed in reports that we file or submit underthe Exchange Act is recorded, processed, summarized and reported within thetime periods specified in SEC rules and forms and (2) that thedisclosure controls and procedures were effective to ensure that informationrequired to be disclosed in the reports that we file or submit under theExchange Act is accumulated and communicated to our management, including theprincipal executive officer and principal financial officer, as appropriate toallow timely decisions regarding required disclosure.

b)     *Internal Control Over Financial Reporting.*

Management’s report on ourinternal control over financial reporting and the report of our independentregistered public accounting firm are incorporated by reference to the sectionentitled “Management’s Report on Internal Control Over Financial Reporting” andthe section entitled “Internal Control Over Financial Reporting,” respectively,of our 2006 Annual Report to Shareholders.

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c)     *Remediation of Material Weakness.*

As previously disclosed in our Quarterly Reports on Form 10-Qfor the second and third fiscal quarters of 2006, management identified a “materialweakness” in our internal control over financial reporting as of March 31,2006. A “material weakness” is a control deficiency, or a combination ofcontrol deficiencies, that results in more than a remote likelihood that amaterial misstatement of our interim or annual financial statements will not beprevented or detected. The controls over communication between the HumanResources and Finance organizations within our European operations were noteffective to ensure that information related to business restructuringactivities within the EMEA region were appropriately communicated and therelated liability recorded in the proper amount and period in accordance withaccounting principles generally accepted in the United States of America (“U.S.GAAP”). This control deficiency could have resulted in a misstatement of employeeseverance costs, related liabilities and financial statement disclosures. Thismatter did not, in fact, have any impact on our financial statements as theseissues were identified and properly accounted for within our unaudited interimconsolidated financial statements for the second quarter of fiscal 2006. Weundertook a remediation plan in response to the identification of this materialweakness that resulted in certain changes in our internal control overfinancial reporting as described below and our management has concluded thatthe material weakness has been remediated at September 30, 2006.

Inresponse to the identified material weakness, our management, with oversightfrom our Audit Committee, dedicated resources to support our efforts to improveinternal control over financial reporting in this area. Our remediation effortsincluded (i) implementing new policies and procedures, and relatedcontrols in the affected area, (ii) additional training to the HumanResources and Finance organizations in the EMEA region on accounting foremployee separation obligations under U.S. GAAP, (iii) cross-functionalmanagement of restructuring activities and related reserves with enhancedFinance oversight, (iv) improvement of the Company’s existing internal representationletter process to provide additional assurances as to the adequacy ofseverance/restructuring reserves and associated internal controls over suchreserves and (v) the appointment of a person with significant U.S. GAAPexperience in Germany. We believe that these remediation efforts have improvedour internal control over financial reporting, as well as our disclosurecontrols and procedures, and that the material weakness has been remediated at September 30,2006.

d)     *Changes in Internal Control Over Financial Reporting.*

There were changes in ourinternal control over financial reporting during the fourth quarter of fiscal2006, described under “Remediation of Material Weakness” above and actionsrelated thereto, that have materially affected, or are reasonably likely tomaterially affect our internal control over financial reporting.

**Item 9B.     *Other Information.***

None.

**PART III**

**Item 10.      *Directors, ExecutiveOfficers and Corporate Governance.***

A list of our executive officers and biographicalinformation appears in Part I, Item 1 of this report. Informationabout our Directors isincorporated by reference from the discussion under the heading**“Information with Respect toNominees and Continuing Directors” inour Proxy Statement for the 2007 Annual Meeting of Shareholders.

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Information required by this item about our auditcommittee and our audit committee financial experts is incorporated byreference from the discussion under the heading “Corporate Governance andRelated Matters—Board of Directors’ Meetings, Committees and Fees” set forth inour Proxy Statement for the 2007 Annual Meeting of Shareholders.

Information required bythis item about our code of ethics is incorporated by reference from thediscussion under the heading***“***Corporate Governance and Related Matters—Code ofConduct” in our Proxy Statement for the 2007 Annual Meeting of Shareholders. Weintend to satisfy the disclosure requirement under Item 5.05 of Form 8-Kregarding an amendment to, or waiver from, a provision of our Code of Conductby posting such information on our website, at www.avaya.com.

**Item 11.      *Executive Compensation.***

Information required bythis item is incorporated by reference from the discussion under the heading “ExecutiveCompensation and Other Information” in our Proxy Statement for the 2007 AnnualMeeting of Shareholders.

**Item 12.      *Security Ownership ofCertain Beneficial Owners and Management and Related Stockholder Matters.***

Information required bythis item is incorporated by reference from the discussion under the heading “SecurityOwnership of Certain Beneficial Owners and Management” and under the heading “ExecutiveCompensation and Other Information—Equity Compensation Plan Information as of September 30,2006”**in our Proxy Statement forthe 2007 Annual Meeting of Shareholders.

**Item 13.      *Certain Relationships andRelated Transactions and Director Independence.***

Information required bythis item is incorporated by reference from the discussion under the headings*“*Corporate Governance and Related Matters—CertainRelationships and Related Party Transactions” and “—Certain CorporateGovernance Policies” in our Proxy Statement for the 2007 Annual Meeting ofShareholders.

**Item 14.      *Principal Accounting Feesand Services.***

Information required bythis item is incorporated by reference from the discussion under the headings “CorporateGovernance and Related Matters—Board of Directors’ Meetings, Committees andFees—Audit Committee” and “Corporate Governance and Related Matters—AuditCommittee Information” in our Proxy Statement for the 2007 Annual Meeting ofShareholders.

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**PART IV**

**Item 15.      *Exhibits and FinancialStatement Schedules.***

The following documentsare filed as a part of this Annual Report on Form 10-K:

(a)(1)   FinancialStatements:
|                                                                | ** ** | ** **                                                                                   | ** ** | **Corresponding page**                       |
|----------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|----------------------------------------------|
| ** **                                                     | ** ** | ** **                                                                                   | ** ** | **numbers in Exhibit 13**               |
| ** **                                                     | ** ** | ** **                                                                                   | ** ** | **to this**                                  |
| ** **                                                     | ** ** | ** **                                                                                   | ** ** | **Annual Report**                            |
| ** **                                                     | ** ** | ** **                                                                                   | ** ** | **on Form 10-K**                        |
| (i)                                                            |       | Consolidated Statements of Income                                                            |       | 41                                           |
| (ii)                                                           |       | Consolidated Balance Sheets                                                                  |       | 42                                           |
| (iii)                                                          |       | Consolidated Statements of Changes in Stockholders’  Equity and of Comprehensive Income |       | 43                                           |
| (iv)                                                           |       | Consolidated Statements of Cash Flows                                                        |       | 44                                           |
| (v)                                                            |       | Notes to Consolidated Financial Statements                                                   |       | 45                                           |
| (a)(2)     Financial  Statement Schedules: |       |                                                                                         |
| (i)                                                            |       | Schedule II—Valuation and Qualifying Accounts                                           |       | Page 34 of this  Annual Report on  Form 10-K |

 

The schedules listed inRegulation 210.5-04 have been omitted because they are not applicable orthe required information is shown in the consolidated financial statements ornotes thereto.

(a)(3)   Exhibits:

Thefollowing documents are filed as Exhibits to this Annual Report on Form 10-Kor incorporated by reference herein:
| Exhibit   Number | ** ** | **Description**                                                                                                                                                                                                                                                                                                                            |
|------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1              |       | Contribution and Distribution Agreement by and  between Lucent Technologies Inc. and Avaya Inc. dated as of  September 30, 2000 (incorporated by reference to Exhibit 2.1 of  Amendment No. 1 to the Registration Statement on Form 10  (Registration No. 1-15951) (the “2000 Registration Statement”). |
| 2.2              |       | Share Purchase  Agreement, dated as of October 5, 2004, by and among Avaya Inc., Avaya  HoldCo, affiliates of Kohlberg, Kravis Roberts & Co. and Tenovis  Manager Trust GmbH (incorporated by reference to Exhibit 2.1 to the  Current Report on Form 8-K dated October 7, 2004).                        |
| 3.1              |       | Restated Certificate of  Incorporation of Avaya Inc. (incorporated by reference to Exhibit 3.1 to  the 2000 Registration Statement).                                                                                                                                                                                                  |
| 3.2              |       | Amended and Restated  By-laws of Avaya Inc., as amended on July 18, 2002 (incorporated by  reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q  for the quarter ended June 30, 2002).                                                                                                                   |
| 4.1              |       | Specimen Common Stock  certificate of Avaya Inc. (incorporated by reference to Exhibit 4.1 to  Amendment No. 2 to the 2000 Registration Statement).                                                                                                                                                                              |

30

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| 4.2   |   | Rights Agreement dated  as of September 29, 2000 between Avaya Inc. and The Bank of New York, as  Rights Agent (the “Rights Agreement”) (incorporated by reference to  Exhibit 4.4 to the 2000 Registration Statement).                                                                                                                                                                                                                                                                                                                        |
|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.3   |   | Amendment No. 1 dated as of February 28,  2002 to the Rights Agreement (incorporated by reference to Exhibit 4.1  to the Current Report on Form 8-K dated February 28, 2002).                                                                                                                                                                                                                                                                                                                                                             |
| 4.4   |   | Form of Certificate  of Designations of Series A Junior Participating Preferred Stock  (incorporated by reference to Exhibit 4.4 to the 2000 Registration  Statement).                                                                                                                                                                                                                                                                                                                                                                              |
| 4.5   |   | Form of Rights  Certificate (incorporated by reference to Exhibit 4.4 to the 2000  Registration Statement).                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.1  |   | Interim Services and  Systems Replication Agreement (incorporated by reference to Exhibit 10.2  to the 2000 Registration Statement).                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.2  |   | Employee Benefits  Agreement (incorporated by reference to Exhibit 10.3 to the 2000  Registration Statement).                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.3  |   | Tax Sharing Agreement  (incorporated by reference to Exhibit 10.4 to the 2000 Registration  Statement).                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.4  |   | Trademark License  Agreement (incorporated by reference to Exhibit 10.13 to the 2000  Registration Statement).                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.5  |   | Patent and Technology  License Agreement (incorporated by reference to Exhibit 10.14 to the  2000 Registration Statement).                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 10.6  |   | Technology Assignment  and Joint Ownership Agreement (incorporated by reference to  Exhibit 10.15 to the 2000 Registration Statement).                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.7  |   | Development Project  Agreement (incorporated by reference to Exhibit 10.16 to the 2000  Registration Statement).                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.8  |   | $400,000,000 Credit  Agreement dated as of February 23, 2005 among Avaya Inc. and Avaya  International Sales Limited as Borrowers and the Initial Lenders named  therein and Citicorp USA, Inc., as Administrative Agent and JPMorgan  Chase Bank, N.A. as Syndication Agent and Citigroup Global Markets Inc. and  J.P. Morgan Securities Inc. as Joint Bookrunners and Joint Lead Arrangers  (the “Credit Agreement”) (incorporated by reference to Exhibit 99.2 to the Current Report on  Form 8-K dated February 23, 2005). |
| 10.9  |   | Amendment No. 1 to  the Credit Agreement dated as of May 25, 2005 (incorporated by reference  to Exhibit 99.1 to the Current Report on Form 8-K dated  May 25, 2005.                                                                                                                                                                                                                                                                                                                                                                      |
| 10.10 |   | Amendment No. 2 to  the Credit Agreement dated as of May 26, 2006 (incorporated by reference  to Exhibit 10.1 to the Current Report on Form 8-K dated  May 30, 2006).                                                                                                                                                                                                                                                                                                                                                                     |
| 10.11 |   | Amendment No. 3 to  the Credit Agreement dated as of September 8, 2006 (incorporated by  reference to Exhibit 10.1 to the Current Report on Form 8-K  dated September 8, 2006).                                                                                                                                                                                                                                                                                                                                                           |
| 10.12 |   | Avaya Inc. Supplemental  Pension Plan (incorporated by reference to Exhibit 10.11 to the 2000  Registration Statement).+                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.13 |   | Avaya Inc. Savings  Restoration Plan, effective January 1, 2004 (incorporated by reference  to Exhibit 10.41 to the 2004 Form 10-K).+                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.14 |   | Avaya Inc. Short Term  Incentive Plan (incorporated by reference to Exhibit 10.5 to the 2000  Registration Statement).+                                                                                                                                                                                                                                                                                                                                                                                                                                       |

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| 10.15  |   | Avaya Inc. 2000 Long  Term Incentive Plan (incorporated by reference to Exhibit 10.6 to the  2000 Registration Statement).+                                                                                                                                          |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.16  |   | Avaya Inc. 2000 Long  Term Incentive Plan, amended as of November 1, 2003 (incorporated by  reference to Exhibit 10.37 to the 2003 Form 10-K).+                                                                                                            |
| 10.17  |   | Avaya Inc. 2000 Long Term Incentive Plan Restricted  Stock Unit Award Agreement (incorporated by reference to Exhibit 10.7 to  the 2000 Registration Statement).+                                                                                                    |
| 10.18  |   | Avaya Inc. 2000 Long  Term Incentive Plan Non-statutory Stock Option Agreement (incorporated by  reference to Exhibit 10.8 to the 2000 Registration Statement).+                                                                                                     |
| 10.19  |   | Avaya Inc. 2000 Stock  Compensation Plan for Non-Employee Directors (incorporated by reference to  Exhibit 10.12 to the 2000 Registration Statement).+                                                                                                               |
| 10.20  |   | Avaya Inc. 2004 Long  Term Incentive Plan, effective February 26, 2004 (incorporated by  reference to Exhibit 10.38 to the 2004 Form 10-K).+                                                                                                               |
| 10.21  |   | Form of Avaya Inc.  2004 Long Term Incentive Plan Stock Option Agreement (incorporated by  reference to Exhibit 10.39 to the 2004 Form 10-K).+                                                                                                             |
| 10.22  |   | Form of Avaya Inc.  2004 Long Term Incentive Plan Restricted Stock Unit Award Agreement  (incorporated by reference to Exhibit 10.40 to the 2004 Form 10-K).+                                                                                              |
| 10.23  |   | Form of Avaya Inc. 2004 Long Term Incentive  Plan Performance Vesting Restricted Stock Unit Award Agreement for awards  made in fiscal 2005 (incorporated by reference to Exhibit 10.1 to the  Current Report on Form 8-K dated December 16, 2004).+  |
| 10.24  |   | Form of Avaya Inc.  2004 Long Term Incentive Plan Performance Vesting Restricted Stock Unit Award  Agreement for awards made in fiscal 2006 (incorporated by reference to Exhibit  10.1 to the Current  Report on Form 8-K dated December 21, 2005).+ |
| 10.25  |   | Form of Avaya Inc.  2004 Long Term Incentive Plan Time Vesting Restricted Stock Unit Award  Agreement for Senior Officers (incorporated by reference to Exhibit  10.21 to the Current  Report on Form 8-K dated November 7, 2006).+                   |
| 10.26  |   | Avaya Inc. Deferred  Compensation Plan (incorporated by reference to Exhibit 10.9 to the 2000  Registration Statement).+                                                                                                                                             |
| 10.27  |   | Avaya Inc. Deferred  Compensation Plan, as amended as of October 31, 2003 (incorporated by  reference to Exhibit 10.35 to the Annual Report on Form 10-K  for the fiscal year ended September 30, 2003) (the “2003 Form 10-K”).+       |
| 10.28  |   | Avaya Involuntary  Separation Plan for Senior Officers as amended effective November 2,  2006 (incorporated by reference to Exhibit 10.1 to the Current Report on  Form 8-K dated November 7, 2006).+                                                 |
| 10.29  |   | Separation Agreement and  General Release dated as of July 24, 2006, between the Company and  Donald K. Peterson (incorporated by reference to Exhibit 10.1 to the  Current Report on Form 8-K dated July 28, 2006).+                                 |
| 10.30  |   | Separation Agreement and  General Release dated as of October 3, 2006, between the Company and  Garry K. McGuire (incorporated by reference to Exhibit 10.1 to the  Current Report on Form 8-K dated October 5, 2006).+                               |
| 10.31  |   | Summary of the Avaya Inc. Non-Employee Director Compensation Program as  of November 2, 2006 (incorporated by reference to  Exhibit 10.3 to the Current Report on Form 8-K dated  November 2, 2006).+                                                 |
| *10.32 |   | Compensation Arrangements  for Named Executive Officers of Avaya Inc. in Fiscal 2006.                                                                                                                                                                                     |

32

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| *13   |   | The  2006 Annual Report to Shareholders (only those portions incorporated  by reference in this document are deemed “filed”). |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------|
| *21   |   | Subsidiaries of Avaya  Inc.                                                                                                             |
| *23.1 |   | Consent of Independent Registered Public Accounting  Firm (PricewaterhouseCoopers LLP).                                                 |
| *24.1 |   | Power of Attorney.                                                                                                                      |
| *31.1 |   | Rule 13a-14(a)/Rule 15d-14(a) Certification  of the Chief Executive Officer.                                             |
| *31.2 |   | Rule 13a-14(a)/Rule 15d-14(a) Certification  of the Chief Financial Officer.                                             |
| *32.1 |   | Section 1350  Certification of the Chief Executive Officer.                                                                        |
| *32.2 |   | Section 1350  Certification of the Chief Financial Officer.                                                                        |

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*       Filed herewith.

+     Management contract orcompensatory plan or arrangement.

A copy of any of the exhibits included in this Annual Report on Form 10-K,other than those as to which confidential treatment has been granted by theSecurities and Exchange Commission, upon payment of a fee to cover thereasonable expenses of furnishing such exhibits, may be obtained by writtenrequest to us at the address set forth on the front cover, attention CorporateSecretary.

33

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**AVAYA INC.**

**SCHEDULE II—VALUATIONAND QUALIFYING ACCOUNTS**

Information required by this item is incorporated byreference toNote 6, Supplementary Financial Information, to our ConsolidatedFinancial Statements, which are included in our 2006 Annual Report toShareholders.

34

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**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

|                       |   | AVAYA  INC.                                         |
|-----------------------|--------|-----------------------------------------------------|
|                  | By:    | /s/ AMARNATH K. PAI                                 |
|                  |   | Amarnath  K. Pai                                    |
|                  |   | *Vice President, Finance Operations and Controller* |
| December 8, 2006 |   | * *                                            |
|                       |        |                                                     |  |  |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons in the capacities and on the dateindicated.

|                               | **Signature** | ** **                                       | ** ** | ** **             | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** | ** ** |
|-------------------------------|---------------|--------------------------------------------------|------------|------------------------|-----------|------------|------------|------------|----------|------------|------------|
| Principal Executive Officer:  |          |                                             |       |                   |      |
| /s/ LOUIS J. D’AMBROSIO  |          | President and  Chief Executive Officer; Director |       | December 8,  2006 |      |
| Louis J. D’Ambrosio      |          |                                             |       |                   |      |
| Principal Financial Officer:  |          |                                             |       |                   |      |
| /s/ GARRY K. MCGUIRE          |          | Chief Financial  Officer and Senior Vice         |       | December 8,  2006 |      |
| Garry K. McGuire              |          | President, Corporate Development                 |       |                   |      |
| Principal Accounting Officer: |          |                                             |       |                   |      |
| /s/ AMARNATH K. PAI           |          | Vice President,  Finance Operations and          |       | December 8,  2006 |      |
| Amarnath K. Pai               |          | Controller                                       |       |                   |      |
| Directors:                    |          |                                             |       |                   |      |
| *                             |          | Director                                         |       | December 8,  2006 |      |
| Bruce Bond                    |          |                                             |       |                   |      |
| *                             |          | Director                                         |       | December 8,  2006 |      |
| Frank J. Fanzilli             |          |                                             |       |                   |      |
| *                             |          | Director                                         |       | December 8,  2006 |      |
| Joseph P. Landy               |          |                                             |       |                   |      |
| *                             |          | Director                                         |       | December 8,  2006 |      |
| Mark Leslie                   |          |                                             |       |                   |      |

35

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| *                    |                               | Chairman of the Board |     | December 8, 2006  |   |
|----------------------|------------------------------------|-----------------------|----------|------------------------|--------|
| Philip Odeen         |                               |                  |     |                   |   |
| *                    |                               | Director              |     | December 8,  2006 |   |
| Hellene S. Runtagh   |                               |                  |     |                   |   |
|                 |                               | Director              |     | December 8,  2006 |   |
| Daniel C. Stanzione  |                               |                  |     |                   |   |
| *                    |                               | Director              |     | December 8,  2006 |   |
| Paula Stern          |                               |                  |     |                   |   |
| /s/ MICHAEL C. THURK |                               | Director              |     | December 8,  2006 |   |
| Michael C. Thurk     |                               |                  |     |                   |   |
| *                    |                               | Director              |     | December 8,  2006 |   |
| Anthony Terracciano  |                               |                  |     |                   |   |
| *                    |                               | Director              |     | December 8,  2006 |   |
| Richard F. Wallman   |                               |                  |     |                   |   |
| *                    |                               | Director              |     | December 8,  2006 |   |
| Ronald Zarrella      |                               |                  |     |                   |   |
| *By:                 | /s/ PAMELA F. CRAVEN               |                  |     |                   |   |   |
|                 | Pamela F. Craven*Attorney-in-Fact* | * *              | * * |                   |   |   |

 

 

36

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