<Page>


                                                                      Exhibit 13


FINANCIAL REVIEW


TABLE OF CONTENTS

Selected Financial Data 12 Management's Discussion and Analysis of Financial
Condition and Results of Operations 13 Report of Independent Accountants 27
Consolidated Statements of Operations 28 Consolidated Balance Sheets 29
Consolidated Statements of Changes in Stockholders' Equity and of
Comprehensive Income (Loss) 30 Consolidated Statements of Cash Flows 31 Notes
to Consolidated Financial Statements 32

SELECTED FINANCIAL DATA

The following table sets forth selected financial information derived from our
audited consolidated financial statements as of and for the fiscal years ended
September 30, 1997, 1998, 1999, 2000 and 2001. The selected financial
information for the years prior to the fiscal year ended September 30, 2001 may
not be indicative of our future performance as an independent company. The
selected financial information for all periods should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the consolidated financial statements and the notes thereto
included elsewhere in this annual report.

   In reviewing the selected financial information, please note the following:

o The purchased in-process research and development is attributable to the
acquisitions of Quintus Corporation and VPNet Technologies, Inc. in 2001, Lannet
Ltd., SDX Business Systems PLC, and Prominet Corporation in 1998, and Octel
Communications Corporation and Agile Networks, Inc. in 1997.
o We merged with Mosaix, Inc. in July 1999.
o Effective October 1, 1998, we changed our method for calculating the
market-related value of plan assets used in determining the expected
return-on-asset component of annual net pension and postretirement benefit
costs.
o Total debt represents the amount of financing we assumed as a stand-alone
company following the separation from Lucent as of September 30, 2000 and debt
attributable to our foreign entities.
o In October 2000, we sold four million shares of our Series B convertible
participating preferred stock and warrants to purchase our common stock for an
aggregate purchase price of $400 million.


<Table>
<Caption>

                                                                                   Year Ended September 30,
                                                                  ---------------------------------------------------------
                                                                  2001          2000         1999         1998         1997
                                                                  ----          ----         ----         ----         ----
                                                                      (dollars in millions, except per share amounts)
<S>                                                             <C>           <C>          <C>          <C>          <C>
Statement of operations information:
Revenue                                                         $6,793        $7,732       $8,268       $7,754       $6,413
Business restructuring and related charges (reversals)             837           684          (33)           -            -
Purchased in-process research and development                       32             -            -          306          472
Income (loss) before cumulative effect of accounting change       (352)         (375)         186           43         (148)
Cumulative effect of accounting change                               -             -           96            -            -
Net income (loss)                                                 (352)         (375)         282           43         (148)

Earnings (loss) per common share - basic:

Income (loss) available to common stockholders                  $(1.33)       $(1.39)      $ 0.72       $ 0.17       $(0.60)
Cumulative effect of accounting change                               -             -         0.37            -            -
                                                                ------        ------       ------       ------       ------
Net income (loss) available to common stockholders              $(1.33)       $(1.39)      $ 1.09       $ 0.17       $(0.60)
                                                                ------        ------       ------       ------       ------

Earnings (loss) per common share - diluted:

Income (loss) available to common stockholders                  $(1.33)       $(1.39)      $ 0.68       $ 0.17       $(0.60)
Cumulative effect of accounting change                               -             -         0.35            -            -
                                                                ------        ------       ------       ------       ------
Net income (loss) available to common stockholders              $(1.33)       $(1.39)      $ 1.03       $ 0.17       $(0.60)
                                                                ------        ------       ------       ------       ------

<Caption>

                                                                                     As of September 30,
                                                                  ---------------------------------------------------------
                                                                  2001          2000         1999         1998         1997
                                                                  ----          ----         ----         ----         ----
                                                                                   (dollars in millions)
<S>                                                             <C>           <C>          <C>          <C>          <C>
Balance sheet information:
Total assets                                                    $4,648        $5,037       $4,239       $4,177       $3,340
Total debt                                                         645           793           10           14           25
Series B convertible participating preferred stock                 395             -            -            -            -

</Table>


12.
<Page>

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following section should be read in conjunction with the consolidated
financial statements and the notes thereto included elsewhere in this annual
report. The matters discussed in Management's Discussion and Analysis of
Financial Condition and Results of Operations contain certain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Statements made that are not historical facts are forward-looking and are
based on estimates, forecasts and assumptions involving risks and uncertainties
that could cause actual results or outcomes to differ materially from those
expressed in the forward-looking statements.

The risks and uncertainties referred to above include, but are not limited
to, price and product competition; rapid technological development;
dependence on new product development; the successful introduction of new
products; the mix of our products and services; customer demand for our
products and services; the ability to successfully integrate acquired
companies; control of costs and expenses; the ability to form and implement
alliances; the ability to implement in a timely manner our restructuring
plans; the economic, political and other risks associated with international
sales and operations; United States and foreign government regulation;
general industry and market conditions; and growth rates and general domestic
and international economic conditions including interest rate and currency
exchange rate fluctuations. See also "Forward-Looking Statements" in our
Annual Report on Form 10-K.

OVERVIEW

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

   We report our operations in three segments: Communications Solutions,
Services and Connectivity Solutions. The Communications Solutions segment
represents our core business, which consists of our enterprise voice
communications systems and software, communications applications, professional
services for customer relationship management, converged voice and data networks
and unified communication, multi-servicing networking products and product
installation services. The Services segment represents our maintenance,
value-added and data services. The Connectivity Solutions segment represents our
structured cabling systems and our electronic cabinets. The costs of shared
services and other corporate center operations managed on a common basis
represent business activities that do not qualify for separate operating segment
reporting and are aggregated in the corporate and other category. In the first
quarter of fiscal 2001, we realigned the method of allocating costs of shared
services and other corporate center operations managed outside of the reportable
operating segments. Financial data for the periods prior to the realignment have
been restated to conform to the current presentation. Effective January 1, 2002,
we intend to implement a broad internal reorganization of our company and expect
to effect a corresponding reorganization of our reportable segments in the
second quarter of fiscal 2002.

   We have been experiencing declines in revenue from our traditional business,
enterprise voice communications products. We expect, based on various industry
reports, a low growth rate in the market segments for these traditional
products. We are implementing a strategy to capitalize on the higher growth
opportunities in our market, including advanced communications solutions such as
converged voice and data networks, customer relationship management solutions,
unified communication applications and multi-service networking products. This
strategy requires us to make a significant change in the direction and strategy
of our company to focus on the development and sales of these advanced products.
The success of this strategy, however, is subject to many risks, including the
risks that:

o we do not develop new products or enhancements to our current products on a
timely basis to meet the changing needs of our customers;
o customers do not accept our products or new technology, or industry standards
develop that make our products obsolete; or
o our competitors introduce new products before we do and achieve a competitive
advantage by being among the first to market.

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

   In addition, although the September 11, 2001 terrorist attacks against the
U.S. and the national and global response to these terrorist attacks have not
had a direct material effect on our business, the attacks and related response
may continue to create widespread business uncertainty and adversely affect the
global economy, which may continue to result in delays in purchasing decisions
and/or may adversely affect our business generally.

                                                                             13.
<Page>

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

<Table>
<Caption>

                                       Year Ended September 30,
                                    -------------------------------
                                    2001          2000         1999
                                    ----          ----         ----
<S>                                 <C>          <C>          <C>
Operating Segments:
Communications Solutions             49.7%        56.3%        61.6%
Services                             30.8         25.3         23.0
Connectivity Solutions               19.5         18.4         15.4
                                    -----        -----        -----
   Total                            100.0%       100.0%       100.0%
                                    =====        =====        =====
</Table>


SEPARATION FROM LUCENT TECHNOLOGIES INC.

On September 30, 2000, under the terms of a Contribution and Distribution
Agreement between Lucent and us, Lucent contributed its enterprise networking
business to us and distributed all of the outstanding shares of our capital
stock to its stockholders. We refer to these transactions as the contribution
and the distribution, respectively. We had no material assets or activities
until the contribution, which occurred immediately prior to the distribution.
Lucent conducted such businesses through various divisions and subsidiaries.
Following the distribution, we became an independent public company, and Lucent
no longer has a continuing stock ownership interest in us. Prior to the
distribution, we entered into several agreements with Lucent in connection with,
among other things, intellectual property, interim services and a number of
ongoing commercial relationships, including product supply arrangements. The
interim services agreement set forth charges generally intended to allow the
providing company to fully recover the allocated direct costs of providing the
services, plus all out-of-pocket costs and expenses, but without any profit.
With limited exceptions, these interim services expired on March 31, 2001. The
pricing terms for goods and services covered by the commercial agreements
reflect current market prices at the time of the transaction.

   Our consolidated financial statements as of and for each of the two fiscal
years ended September 30, 2000 have been derived from the financial statements
and accounting records of Lucent using the historical results of operations and
historical basis of the assets and liabilities of the enterprise networking
businesses transferred to us immediately prior to the distribution. We believe
these consolidated financial statements are a reasonable representation of the
financial position, results of operations, cash flows and changes in
stockholders' equity of such businesses as if Avaya were a separate entity.

   Our consolidated financial statements as of and for each of the two years
ended September 30, 2000 include allocations of certain Lucent corporate
headquarters' assets, liabilities, and expenses relating to these businesses
that were transferred to us from Lucent. General corporate overhead has been
allocated either based on the ratio of our costs and expenses to Lucent's costs
and expenses, or based on our revenue as a percentage of Lucent's total revenue.
General corporate overhead primarily includes cash management, legal,
accounting, tax, insurance, public relations, advertising and data services and
amounted to $398 million and $449 million in fiscal 2000 and 1999, respectively.
In addition, the consolidated financial statements for fiscal 2000 and 1999
include an allocation from Lucent to fund a portion of the costs of basic
research conducted by Lucent's BellLaboratories. This allocation was based on
our revenue as a percentage of Lucent's total revenue and amounted to $75
million and $78 million in fiscal 2000 and 1999, respectively. We believe the
costs of corporate services and research charged to us are a reasonable
representation of the costs that would have been incurred if we had performed
these functions as a stand-alone entity. We currently perform these corporate
functions and basic research requirements using our own resources or purchased
services.

   Prior to the distribution, cash deposits from our businesses were transferred
to Lucent on a regular basis. As a result, none of Lucent's cash, cash
equivalents or debt at the corporate level had been allocated to us. Although
our Consolidated Statements of Operations include interest expense for the
fiscal years ended September 30, 2000 and 1999, the Consolidated Balance Sheets
for periods prior to the distribution do not include an allocation of Lucent
debt at the corporate level because Lucent used a centralized approach to cash
management and the financing of its operations. We have assumed for purposes of
calculating interest expense that we would have had average debt balances of
$962 million and $1,320 million and average interest rates of 7.9% and 6.8% per
annum for fiscal 2000 and 1999, respectively. We believe the interest rates and
average debt balances used in the calculation of interest expense reasonably
reflect the cost of financing our assets and operations during the periods prior
to the distribution.

   Income taxes were calculated in fiscal 2000 and 1999 as if we filed separate
tax returns. However, Lucent was managing its tax position for the benefit of
its entire portfolio of businesses, and its tax strategies were not necessarily
reflective of the tax strategies that we would have followed or will follow as a
stand-alone company. Commencing with fiscal 2001, we will begin filing our own
consolidated income tax returns.

   We have resolved all of the contribution and distribution issues with Lucent
related to the settlement of certain employee obligations and the transfer of
certain assets. Accordingly, we recorded a $42 million net reduction to
additional paid-in capital in fiscal 2001. Following the distribution, we had
identified approximately $15 million recorded in our Consolidated Balance Sheets
that was primarily related to certain accounts receivable balances due from
Lucent and certain fixed assets, which we have agreed will remain with Lucent.
Also in connection with the distribution, we had recorded estimates in our
Consolidated Balance Sheets at September 30, 2000 in prepaid benefit costs and
benefit obligations of various existing Lucent benefit plans related to
employees for whom we assumed responsibility. Following an actuarial review, we
received a valuation, agreed upon by us and


14.
<Page>

Lucent, that provides for a reduction of approximately $44 million in prepaid
benefit costs and $17 million in pension and postretirement benefit obligations.
We recorded the net effect of these adjustments as a reduction to additional
paid-in capital in fiscal 2001 because the transactions relate to the original
capital contribution from Lucent.

   In addition, Avaya and Lucent have amended the Contribution and Distribution
Agreement to remove the provisions restricting us from entering into strategic
alliances with Nortel Networks Corporation and Cisco Systems, Inc.


BUSINESS RESTRUCTURING AND RELATED CHARGES

In fiscal 2001, we outsourced certain manufacturing facilities and accelerated
our restructuring plan that was originally adopted in September 2000 to improve
profitability and business performance as a stand-alone company. As a result, we
recorded a pretax charge of $872 million in fiscal 2001 for business
restructuring and related charges, which is expected to result in a $295 million
usage of cash. This charge was partially offset by a $35 million reversal to
income primarily attributable to fewer employee separations than originally
anticipated and more favorable than expected real estate lease termination
costs.

   The components of the fiscal 2001 charge include $650 million of employee
separation costs, $24 million of lease termination costs, and $198 million of
other related charges. The charge for employee separation costs is composed of
$577 million primarily related to enhanced pension and postretirement benefits,
which represent the cost of curtailment in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits," and $73 million for severance, special benefit payments
and other employee separation costs. The $198 million of other related charges
is composed of $178 million for incremental period expenses primarily to
facilitate the separation from Lucent, including computer system transition
costs, and $20 million for an asset impairment charge related to land, buildings
and equipment at the Shreveport manufacturing facility that we expect to dispose
of during fiscal 2002. Employee separation costs of $55 million established in
fiscal 2000 for union-represented employees at Shreveport will be paid as
enhanced severance benefits from existing pension and benefit assets and,
accordingly, such amount was reclassified in fiscal 2001 out of the business
restructuring reserve and recorded as a reduction to prepaid benefit costs.

   The employee separation costs in fiscal 2001 were incurred in connection with
the elimination of 6,810 employee positions of which 5,600 were through a
combination of involuntary and voluntary separations, including an early
retirement program targeted at U.S. management employees, and a workforce
reduction of 1,210 employees due to the outsourcing of certain of our
manufacturing operations to Celestica Inc. Employee separation payments that are
included in the business restructuring reserve will be made either through a
lump sum or a series of payments extending over a period of up to two years from
the date of departure at each employee's option. This workforce reduction was
substantially complete as of September 30, 2001. Real estate lease termination
costs are being incurred primarily in the U.S., Europe and Asia, and have been
reduced for sublease income that management believes is probable. Payments on
lease obligations, which consist of real estate and equipment leases, will
extend through 2003. In fiscal 2001, accrued costs for lease obligations
represent approximately 666,000 square feet of excess sales and services support
offices, materials, stocking and logistics warehouses, and Connectivity
Solutions facilities. As of September 30, 2001, we had not yet vacated any of
this space.

   In fiscal 2000, we recorded a pretax business restructuring charge of $684
million in connection with our separation from Lucent. The components of the
charge include $365 million of employee separation costs, $127 million of lease
termination costs, $28 million of other exit costs, and $164 million of other
related charges.

   The charge for employee separation costs in fiscal 2000 includes severance,
medical and other benefits attributable to the worldwide reduction of 4,900
union-represented and management positions. This charge is the result of
redesigning the services organization by reducing the number of field
technicians to a level needed for non-peak workloads, consolidating and closing
certain U.S. and European manufacturing facilities and realigning the sales
effort to focus the direct sales force on strategic accounts and address smaller
accounts through indirect sales channels. This workforce reduction was
substantially complete as of September 30, 2001. The charge for lease
termination obligations included approximately two million square feet of excess
manufacturing, distribution and administrative space, of which we have vacated
646,000 square feet as of September 30, 2001. Other exit costs consist of
decommissioning legacy computer systems in connection with our separation from
Lucent and terminating other contractual obligations.

   The $164 million of other related charges in fiscal 2000 is composed of $89
million for incremental period expenses related to the separation from Lucent,
including computer system transition costs, and a $75 million asset impairment
charge that was primarily related to an outsourcing contract with a major
customer. With respect to the asset impairment, we terminated our obligation
under a leasing arrangement and purchased the underlying equipment, which had
been used to support a contract with a customer to provide outsourcing and
related services. Based on the terms of this contract, the estimated
undiscounted cash flows from the equipment's use and eventual disposition was
determined to be less than the equipment's carrying value, and resulted in an
impairment charge of $50 million to write such equipment down to its fair value.

   In fiscal 1999, we reversed $33 million of employee separation costs,
originally established in December 1995, due to higher than expected voluntary
employee attrition. As of September 30, 1999, all prior restructuring related
plans were complete and no such reserves remained.

                                                                             15.
<Page>

   The following table summarizes the status of our business restructuring and
related charges as well as the related reserve during fiscal 2000 and 2001:

<Table>
<Caption>

                                                   Business Restructuring Charges            Other Related Charges
                                       ---------------------------------------------------  ------------------------
                                                                                     Total                           Total Business
                                         Employee         Lease                   Business                            Restructuring
                                       Separation   Termination       Other  Restructuring        Asset  Incremental    and Related
                                            Costs   Obligations  Exit Costs        Charges  Impairments Period Costs        Charges
                                       ----------   -----------  ----------  -------------  ----------- ------------  -------------
                                                                          (dollars in millions)
<S>                                          <C>           <C>          <C>          <C>           <C>         <C>          <C>
Fiscal 2000:
Charges                                      $ 365         $127         $ 28         $ 520         $ 75        $  89        $ 684
Cash payments                                  (20)           -           (1)          (21)           -          (89)        (110)
Asset impairments                                -            -            -             -          (75)           -          (75)
                                             -----         ----         ----         -----         ----        -----        -----
Balance as of September 30, 2000             $ 345         $127         $ 27         $ 499         $  -        $   -        $ 499
                                             -----         ----         ----         -----         ----        -----        -----

Fiscal 2001:
Charges                                      $ 650         $ 24         $  -         $ 674         $ 20        $ 178        $ 872
Reversals                                      (17)          (7)         (11)          (35)           -            -          (35)
Decrease in prepaid benefit costs/
  increase in benefit obligations, net        (577)           -            -          (577)           -            -         (577)
Cash payments                                 (250)         (66)         (11)         (327)           -         (178)        (505)
Asset impairments                                -            -            -             -          (20)           -          (20)
Reclassification                               (55)           -            -           (55)           -            -          (55)
                                             -----         ----         ----         -----         ----        -----        -----
Balance as of September 30, 2001             $  96         $ 78         $  5         $ 179         $  -        $  -         $ 179
                                             =====         ====         ====         =====         ====        =====        =====

</Table>

In addition, in fiscal 2001 and 2000, we recorded $48 million and $73 million,
respectively, in selling, general and administrative expenses for start-up
activities related to establishing independent operations, including fees for
investment banking and other professional advisors, and marketing costs
associated with establishing the Avaya brand.

   During fiscal 2002, we expect to incur additional period costs of
approximately $22 million and $24 million related to the outsourcing of certain
of our manufacturing facilities and our accelerated restructuring program,
respectively. We expect to fund these expenses through a combination of debt and
internally generated funds.

   We believe that outsourcing our manufacturing will allow us to improve our
cash flow over the next few years through a reduction of inventory and reduced
capital expenditures.


ACQUISITIONS

As part of our continued efforts to broaden our portfolio of product offerings,
we completed the following key acquisitions during fiscal 2001 and 1999. There
were no material acquisitions in fiscal 2000.

APRIL 2001 - Acquisition of substantially all of the assets, including $10
million of cash acquired, and the assumption of $20 million of certain
liabilities of Quintus Corporation, a provider of comprehensive electronic
customer relationship management solutions. We paid $29 million in cash for
these assets. This transaction was accounted for as a purchase combination.

FEBRUARY 2001 - Acquisition of VPNet Technologies, Inc. ("VPNet"), a privately
held distributor of virtual private network solutions and devices. The total
purchase price of $117 million was paid in cash and stock options. This
transaction was accounted for as a purchase combination.


JULY 1999 - Merger with Mosaix, Inc., a provider of software that manages an
enterprise's various office functions. Lucent issued 2.6 million shares of
Lucent common stock, with a value of $145 million, for all of the outstanding
stock of Mosaix. The transaction was accounted for as a pooling of interests.


REVENUE

We derive revenue primarily from the sales of communication systems and
software. We sell our products both directly through our worldwide sales force
and indirectly through our global network of approximately 4,000 distributors,
dealers, value-added resellers, system integrators and contractors. The purchase
price of our systems and software typically includes installation and a one-year
warranty. We also derive revenue from:
o maintenance services, including services provided under maintenance contracts
and on a time and material basis;
o professional services for customer relationship management, converged voice
and data networks, and unified communications; and
o value-added services for outsourcing messaging and other parts of
communication systems.

16.
<Page>

   Maintenance contracts typically have terms that range from one to five years.
Contracts for professional services typically have terms that range from two to
four weeks for standard solutions and from six months to one year for customized
solutions. Contracts for value-added services typically have terms that range
from one to seven years. Revenue from sales of communications systems and
software is recognized when contractual obligations have been satisfied, title
and risk of loss has been transferred to the customer, and collection of the
resulting receivable is reasonably assured. Revenue from the direct sales of
products that include installation services is recognized at the time the
products are installed, after satisfaction of all the terms and conditions of
the underlying customer contract. Our indirect sales to distribution partners
generally are recognized at the time of shipment if all contractual obligations
have been satisfied. We provide for estimated sales returns and other allowances
and deferrals as a reduction of revenue at the time of revenue recognition, as
required. Revenue from services performed under our value-added service
arrangements, professional services and services performed under maintenance
contracts are recognized over the term of the underlying customer contract or at
the end of the contract, when obligations have been satisfied. For services
performed on a time and materials basis, revenue is recognized upon performance.


COSTS AND OPERATING EXPENSES

Our costs of products consist primarily of materials and components, labor and
manufacturing overhead. Our costs of services consist primarily of labor, parts
and service overhead. Our selling, general and administrative expenses and
research and development expenses consist primarily of salaries, commissions,
benefits and other miscellaneous items. Please see "Purchased In-Process
Research and Development" for a discussion of this line item.

   Total operating expenses in the fiscal years ended September 30, 2001 and
1999 were reduced due to the reversal of $35 million and $33 million of business
restructuring liabilities recorded in September 2000 and December 1995,
respectively, primarily related to fewer employee separations than originally
anticipated for those years.


OPERATING TRENDS

We have been increasing, and intend to continue to increase, the percentage of
our sales made through our indirect sales channels. To further this strategy, in
March 2000, we sold our primary distribution function for our voice
communications systems for small- and mid-sized enterprises to Expanets, Inc. If
sales volumes remain constant as the percentage of our sales through indirect
sales channels increases, then our revenue would decline.


RESULTS OF OPERATIONS

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

<Table>
<Caption>

                                       Year Ended September 30,
                                    -------------------------------
                                    2001          2000         1999
                                    ----          ----         ----

<S>                                 <C>          <C>          <C>
Revenue                             100.0%       100.0%       100.0%
Costs                                57.4         58.0         57.6
                                    -----        -----        -----
Gross margin                         42.6         42.0         42.4
                                    -----        -----        -----
Operating expenses:
   Selling, general and
     administrative                  30.3         32.8         31.8
   Business restructuring and
     related charges (reversals)     12.3          8.8         (0.4)
   Research and development           7.9          6.1          6.5
   Purchased in-process research
     and development                  0.5          -            -
                                    -----        -----        -----
Total operating expenses             51.0         47.7         37.9
                                    -----        -----        -----
Operating income (loss)              (8.4)        (5.7)         4.5
Other income, net                     0.5          0.9          0.3
Interest expense                     (0.5)        (1.0)        (1.1)
Provision (benefit) for income taxes (3.2)        (1.0)         1.5
Cumulative effect of
   accounting change                  -            -            1.2
                                    -----        -----        -----
Net income (loss)                    (5.2)%       (4.8)%        3.4%
                                    =====        =====        =====
</Table>

   Included in operating income for the fiscal year ended September 30, 1999, is
$97 million received on the sale of equipment, which was previously leased to
customers, net of the equipment's book value of approximately $2 million. This
equipment consisted predominantly of discontinued product lines. This
transaction represented 1.2% of fiscal 1999 revenue.


FISCAL YEAR ENDED SEPTEMBER 30, 2001 COMPARED WITH FISCAL YEAR ENDED SEPTEMBER
30, 2000

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

<Table>
<Caption>

                   Year Ended September 30,           Change
                   ------------------------      ------------------
                       2001         2000             $            %
                       ----         ----         -----        -----
                           (dollars in millions)
<S>                  <C>          <C>            <C>          <C>
Operating Segments:
Communications
   Solutions         $3,377       $4,354         $(977)       (22.4)%
Services              2,092        1,958           134          6.8
Connectivity
   Solutions          1,322        1,418           (96)        (6.8)
Corporate and other       2            2             -            -
                     ------       ------         -----        -----
     Total           $6,793       $7,732         $(939)       (12.1)%
                     ======       ======         =====        =====
</Table>


                                                                             17.
<Page>

REVENUE. Revenue decreased 12.1% or $939 million, from $7,732 million in fiscal
2000 to $6,793 million in fiscal 2001, due to a decrease in revenue from the
Communications Solutions and Connectivity Solutions segments partially offset by
an increase in revenue from the Services segment. The overall reduction in
revenue was mainly attributable to the weakened economic conditions in the
technology sector that resulted in a sagging demand for telephony equipment and
related products. The decrease in the Communications Solutions segment was
largely due to a decline in customer purchases of $639 million in enterprise
voice communications systems, $163 million in messaging systems and $105 million
in customer relationship management products predominantly in the U.S.,
partially offset by growth worldwide of $155 million in the multi-service
networking business. The revenue decline in the Communications Solutions segment
also resulted from a shift in the sales effort to focus the direct sales force
on strategic accounts and address smaller accounts through indirect sales
channels beginning in the third quarter of fiscal 2000, changes in product mix,
a decrease of $145 million in installation revenue as a result of the reduction
in product sales, and the effects of customers having purchased systems in
fiscal 2000 in anticipation of Year 2000 concerns. In addition to the negative
effects of the economic slowdown in the U.S., the decrease in revenues within
the Connectivity Solutions segment was also related to a reduction in purchases
of $164 million in our ExchangeMAX cabling systems for service providers, due to
a reduction in capital spending by customers of ExchangeMAX, and certain Federal
Communications Commission regulatory changes that permitted common exchange
carriers access to local exchange carrier networks. The decrease in revenues
from ExchangeMAX was partially offset by a modest increase of $47 million in
revenues from sales primarily in the U.S. of our SYSTIMAX(R) structured cabling
systems for enterprises, including the introduction of new apparatus products
and increased sales of $21 million of electronic cabinets predominantly in the
U.S. The increase in the Services segment was mainly the result of the positive
effects in the U.S. of introducing data services of $142 million as well as the
strong growth outside of the U.S. in value-added services of $46 million,
partially offset by a decrease of $62 million in maintenance revenues primarily
in the U.S.

   Revenue within the U.S. decreased 15.6% or $952 million, from $6,110 million
in fiscal 2000 to $5,158 million in fiscal 2001. However, revenue outside the
U.S. increased slightly by 0.8% or $13 million, from $1,622 million for fiscal
2000, to $1,635 million for fiscal 2001. Revenue outside the U.S. represented
24.1% of revenue in fiscal 2001 compared with 21.0% in fiscal 2000.

   We continued to expand our business outside of the U.S. with marginal growth
across most regions, primarily led by the Asia Pacific region. Our largest
increases in sales outside of the U.S. were made in Services, Communications
Solutions' multi-service networking products and professional services, and
Connectivity Solutions' ExchangeMAX product.

COSTS AND GROSS MARGIN. Total costs decreased 13.1% or $586 million, from $4,483
million in fiscal 2000 to $3,897 million in fiscal 2001. The gross margin
percentage increased slightly from 42.0% in fiscal 2000 to 42.6% in fiscal 2001.
The increase in gross margin was primarily attributed to favorable product mix
and lower discounts in Connectivity Solutions combined with the ongoing savings
from the business restructuring, including the improvement to the cost structure
within the Services segment. This increase was largely offset by the decrease in
gross margin within Communications Solutions due to lower sales volumes, a less
favorable product mix and the shift to an indirect sales channel.

SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses decreased 19.0% or $482
million, from $2,540 million in fiscal 2000 to $2,058 million in fiscal 2001.
The decrease is primarily due to savings associated with our business
restructuring plan, including lower staffing levels, terminated real estate
lease obligations, cost improvements associated with the implementation of our
new SAP information technology system, process improvements in sales and sales
operations, and streamlining delivery of several corporate functions, including
the outsourcing of payroll and procurement services. The reduction in SG&A was
also attributable to lower start-up activities related to establishing
independent operations, which are primarily composed of advertising costs
associated with establishing our brand. The reduction in SG&A expenses was
partially offset by an increase in ongoing marketing expense.

BUSINESS RESTRUCTURING AND RELATED CHARGES. Business restructuring and related
charges of $837 million in fiscal 2001 represent costs associated with our
restructuring plan to improve profitability and business performance as a
stand-alone company. The components of the fiscal 2001 charge include $540
million for our accelerated restructuring plan, which is essentially composed of
enhanced pension and healthcare benefits that were offered through an early
retirement program, severance and terminated lease obligations, $134 million
primarily for employee separation costs associated with the outsourcing of
certain manufacturing operations to Celestica, $178 million representing
incremental period costs largely associated with our separation from Lucent
including computer system transition costs such as data conversion activities,
asset transfers and training, and a $20 million asset impairment charge. These
charges were partially offset by a $35 million reversal of business
restructuring liabilities originally recorded in September 2000.

   Business restructuring and related charges of $684 million for fiscal 2000
include $520 million principally for employee separations and lease obligations,
$75 million of asset impairment charges, and $89 million of incremental period
costs associated with our separation from Lucent.

18.
<Page>


RESEARCH AND DEVELOPMENT. R&D expenses increased 14.5% or $68 million, from $468
million in fiscal 2000 to $536 million in fiscal 2001. Our investment in R&D
represented 7.9% of revenue in fiscal 2001 as compared with 6.1% in fiscal 2000.
This increased investment supports our plan to shift spending to high growth
areas of our business and reduce spending on more mature product lines.

   We intend to invest in R&D an amount equal to approximately 8% to 10% of our
total revenue by the end of fiscal 2003. These investments represent a
significant increase over our investments in R&D for the fiscal years prior to
the distribution, which were approximately 6% of total revenue. As a part of
Lucent, we were allocated a portion of Lucent's basic research, which did not
necessarily directly benefit our business. Our current and future investments in
R&D will have a greater focus on our products.

PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT. In fiscal 2001, we acquired VPNet
and substantially all of the assets of Quintus Corporation. The purchase prices
for these acquisitions included certain technologies that had not reached
technological feasibility and had no future alternative use and, accordingly,
were charged to expense immediately upon consummation of the respective
acquisitions. There was no charge in fiscal 2000 for purchased in-process
research and development.

OTHER INCOME, NET. Other income, net decreased 52.1% or $37 million, from $71
million in fiscal 2000 to $34 million in fiscal 2001. This decrease was
primarily due to a gain recorded in March 2000 on the sale of our U.S. sales
division serving small- and mid-sized enterprises, which was partially offset by
interest income earned on higher cash balances during fiscal 2001.

INTEREST EXPENSE. Interest expense decreased 51.3% or $39 million, from $76
million in fiscal 2000 to $37 million in fiscal 2001. The decrease is primarily
attributable to higher weighted average interest rates and assumed debt levels
utilized in fiscal 2000 to reflect the level of financing that was thought to be
needed to fund our operations as a stand-alone entity.

PROVISION FOR INCOME TAXES. The effective tax rates in fiscal 2001 and 2000
reflect a benefit of 38.3% and 16.3%, respectively. The difference between the
rates is due primarily to a favorable change in the tax differential on foreign
earnings and lower non-deductible restructuring costs offset by an increase in
purchased in-process research and development expense. Excluding purchased
in-process research and development and other acquisition related costs, the
adjusted effective tax rates in fiscal 2001 and 2000 would be benefits of 40.7%
and 16.3%, respectively.


FISCAL YEAR ENDED SEPTEMBER 30, 2000 COMPARED WITH FISCAL YEAR ENDED SEPTEMBER
30, 1999

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

<Table>
<Caption>

                   Year Ended September 30,           Change
                   ------------------------      ------------------
                       2000         1999             $            %
                       ----         ----         -----        -----
                           (dollars in millions)
<S>                  <C>          <C>            <C>          <C>
Operating Segments:
Communications
   Solutions         $4,354       $5,088         $(734)       (14.4)%
Services              1,958        1,900            58          3.1
Connectivity
   Solutions          1,418        1,274           144         11.3
Corporate and other       2            6            (4)       (66.7)
                     ------       ------         -----        -----
   Total             $7,732       $8,268         $(536)        (6.5)%
                     ======       ======         =====        =====
</Table>

REVENUE. Revenue decreased 6.5% or $536 million, from $8,268 million in fiscal
1999 to $7,732 million in fiscal 2000 due to a decrease in the Communications
Solutions segment, partially offset by increases in the Connectivity Solutions
and Services segments. The decrease in the Communications Solutions segment was
partially attributable to a sales reduction of $188 million of our Merlin
Magix(R) and Partner,(R) and $127 million of our DEFINITY(R) product lines due
largely to the shift in the sales effort to focus the direct sales force on
strategic accounts and address smaller accounts through indirect sales channels
resulting from our sale of this distribution function in March 2000. The sales
reduction of our enterprise voice communications systems was also attributed to
attrition within our skilled sales force, which particularly affected our most
advanced DEFINITY product offering. In addition, sales of our messaging products
decreased by $204 million as customers purchased a higher than usual number of
systems in 1999 to upgrade their systems in anticipation of Year 2000 concerns.
In addition, the Communications Solutions segment experienced a $218 million
decrease in installation revenue as a result of the reduction in product sales.
These decreases were partially offset by increases in professional services as
well as in sales of our eBusiness Communications Solutions. The Connectivity
Solutions segment increase was driven by growth in ExchangeMAX structured
cabling systems and electronic cabinet sales of $215 million, largely offset by
a decrease in SYSTIMAX structured cabling systems. The increase in the Services
segment was the result of strong growth in maintenance services internationally
and in existing value-added services.

   Revenue within the U.S. decreased 8.6% or $573 million, from $6,683 million
in fiscal 1999 to $6,110 million in fiscal 2000. Revenue outside the U.S.
increased 2.3% or $37 million, from $1,585 million in fiscal 1999 to $1,622
million in fiscal 2000. Revenue outside the U.S. in fiscal 2000 represented
21.0% of revenue compared with 19.2% in fiscal 1999. We continued to expand our
business outside of the U.S., with growth led by the Asia Pacific region.


                                                                             19.
<Page>

COSTS AND GROSS MARGIN. Total costs decreased 5.8% or $277 million, from $4,760
million in fiscal 1999 to $4,483 million in fiscal 2000 primarily due to the
decrease in product sales. Gross margin percentage remained essentially flat
with a decrease of 0.4%, from 42.4% in fiscal 1999 to 42.0% in fiscal 2000. The
slight reduction in gross margin was largely due to aggressive pricing and
promotional actions that more than offset the decrease in costs.

SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses decreased 3.5% or $92
million, from $2,632 million in fiscal 1999 to $2,540 million in fiscal 2000.
The decrease is primarily due to reduced bonus compensation expenses resulting
from lower than anticipated financial performance and lower staffing levels
resulting from the realignment and integration of our sales force and our
information systems group. The headcount reductions for our information systems
group were associated with the ongoing implementation of a new computer software
platform. The majority of these reductions were associated with the shutdown and
elimination of support for obsolete and redundant computer systems. The
reduction in SG&A expenses was partially offset by $73 million in charges for
start-up activities related to establishing independent operations including
fees for investment banking and other professional advisors, and marketing costs
associated with establishing our brand.

BUSINESS RESTRUCTURING AND RELATED CHARGES (REVERSALS). Business restructuring
and related charges of $684 million in fiscal 2000 represent costs associated
with our restructuring plan to improve profitability and business performance as
a stand-alone company. The components of the charge include $520 million of
business restructuring costs principally for employee separations and lease
obligations, $75 million of asset impairment charges, and $89 million of
incremental period costs associated with our separation from Lucent.

   The business restructuring reversal of $33 million in fiscal 1999 represents
the reduction of business restructuring liabilities recorded in December 1995
and is primarily the result of fewer employee separations than originally
anticipated under that plan.

RESEARCH AND DEVELOPMENT. R&D expenses decreased 13.3% or $72 million, from $540
million in fiscal 1999 to $468 million in fiscal 2000. Increases in funding for
call center and converged voice and data products, as well as spending
associated with the acquisition of Mosaix, were more than offset by reduced
spending on more mature product lines such as Partner, Merlin Magix and
Wireless. In addition, spending decreased due to synergies realized in
consolidation of the data product line research and development operations of
Prominet and Lannet.

OTHER INCOME, NET. Other income, net increased 153.6% or $43 million, from $28
million in fiscal 1999 to $71 million in fiscal 2000. This increase was
primarily due to a gain of $45 million recognized in March 2000 on the sale of
our U.S. sales division serving small- and mid-sized enterprises, which was
calculated based on the net cash proceeds received related to this sale.

PROVISION FOR INCOME TAXES. The effective tax rate in fiscal 2000 was a benefit
of 16.3% as compared with an expense of 39.4% in fiscal 1999. The tax benefit in
fiscal 2000 is primarily due to our net loss that resulted from the business
restructuring and related charges, offset by non-deductible charges associated
with our reorganization, and taxes on foreign earnings in connection with our
separation from Lucent.


LIQUIDITY AND CAPITAL RESOURCES

Avaya's cash and cash equivalents decreased to $250 million at September 30,
2001, from $271 million at September 30, 2000. The decrease resulted from $133
million and $365 million of net cash used for operating and investing
activities, respectively, partially offset by $483 million of net cash provided
by financing activities. In fiscal 2000, Avaya's cash and cash equivalents
increased to $271 million at September 30, 2000, from $194 million at September
30, 1999. The increase resulted from $485 million of net cash provided by
operating activities, offset in part by $428 million of net cash used in
investing activities.

   Our net cash used for operating activities was $133 million in fiscal 2001
compared with net cash provided by operating activities of $485 million in
fiscal 2000. Net cash used for operating activities in fiscal 2001 was composed
of a net loss of $352 million adjusted for non-cash items of $779 million, and
net cash used for changes in operating assets and liabilities of $560 million.
Net cash used for operating activities is primarily attributed to cash payments
made for our business restructuring related activities resulting from our
separation from Lucent and our establishment as an independent company. In
addition, we have decreased our accounts payable, payroll related liabilities
and advance billings and deposits. This usage of cash was partially offset by
receipts of cash on amounts due from our customers. Days sales outstanding in
accounts receivable for fiscal 2001, excluding the effect of the securitization
transaction discussed below, was 95 days versus 74 days for fiscal 2000. This
increase is primarily attributable to transition issues resulting from the
consolidation of our customer collection facilities coupled with the temporary
effects of the September 11, 2001 tragedy on our customers and business
partners. Days sales of inventory on-hand for fiscal 2001 were 70 days versus 51
days for fiscal 2000. The increase in days sales of inventory on-hand is
primarily due to lower than expected sales volumes.

   In fiscal 2000, net cash provided by operating activities of $485 million
resulted primarily from a net loss of $375 million adjusted for non-cash charges
of $538 million, and cash generated by changes in operating assets and
liabilities of $322 million. Our net cash provided by operating activities
increased from $431 million in fiscal 1999 to $485 million in fiscal 2000
primarily as a result of a reduction in working capital. The reduction in
working capital resulted from a decrease in inventory and an increase in
accounts payable due to business restructuring and start-up activities related
to establishing our independent operations. These changes were partially offset
by a decrease in payroll and benefit liabilities. In fiscal 2000 and 1999, days
sales outstanding

20.
<Page>

in accounts receivable were 74 and 69, respectively, and days sales of inventory
on-hand were 51 and 61, respectively.

   Our net cash used for investing activities was $365 million in fiscal 2001
compared with $428 million and $86 million in fiscal 2000 and 1999,
respectively. Capital expenditures, which account for the largest component of
investing activities in each year, generally relate to expenditures for
equipment and facilities used in manufacturing and research and development.
Capital expenditures for fiscal 2001 and 2000 also include payments made by
Avaya to establish itself as a stand-alone entity, including the implementation
of SAP, establishing and upgrading our information technology systems, and other
corporate infrastructure expenditures. Additionally, in fiscal 2001, we used
$120 million of cash to acquire VPNet and substantially all the assets of
Quintus Corporation. The net cash used for investing activities in fiscal 2001
was partially offset by the receipt of proceeds from the sale-leaseback of an
aircraft, the sale of manufacturing equipment to Celestica and the sale of other
corporate infrastructure assets. In fiscal 2000, cash used for investing
activities was partially offset by the receipt of proceeds from the sale of our
U.S. sales division serving small- and mid-sized enterprises.

   Net cash provided by financing activities was $483 million in fiscal 2001
compared with $42 million in fiscal 2000. Cash flows from financing activities
in fiscal 2001 were mainly due to (i) $400 million in proceeds from the sale of
our Series B convertible participating preferred stock and warrants to purchase
our common stock described below, (ii) $200 million of proceeds from the
securitization of certain trade receivables, (iii) a $200 million drawdown on
our credit facility, which was used to repay maturing commercial paper, and (iv)
$40 million in proceeds resulting from the issuance of our common stock,
primarily through our Employee Stock Purchase Plan. The receipt of cash from
financing activities in fiscal 2001 was partially offset by $357 million in net
payments for the retirement of commercial paper and other debt.

   Net cash provided by financing activities was $42 million in fiscal 2000
compared with net cash used in financing activities of $257 million in fiscal
1999. Prior to the distribution, we relied on Lucent to provide financing for
our operations. Cash flows from financing activities principally reflect changes
in Lucent's investment in us prior to the distribution. In addition, upon the
distribution, we assumed all of Lucent's obligations in connection with its
issuance of $780 million of commercial paper, which had a weighted average
interest rate and maturity period of approximately 6.9% and 21 days,
respectively.

   Our commercial paper program is composed of short-term borrowings in the
commercial paper market at market interest rates. Interest rates on our
commercial paper obligations are variable due to their short-term nature. The
weighted average interest rate and maturity period for the $432 million of
commercial paper outstanding as of September 30, 2001 was approximately 3.9% and
62 days, respectively.

   We have two unsecured revolving credit facilities with third party financial
institutions consisting of a $400 million 364-day credit facil- ity that expires
in August 2002 and an $850 million five-year credit facility that expires in
September 2005. Funds are available under these revolving credit facilities for
general corporate purposes, to backstop commercial paper, and for acquisitions.
In September 2001, we borrowed $200 million under the five-year credit facility
and used the proceeds to repay maturing commercial paper. The borrowing carried
a variable interest rate of 3.5% and was repaid in October 2001 using proceeds
from the issuance of commercial paper. The borrowing under the credit facility
was necessitated by disruptions in the commercial paper markets as a result of
the September 11 terrorist attacks.

   As of September 30, 2001, we classified our outstanding commercial paper as
long-term debt in our Consolidated Balance Sheets since it is supported by the
five-year credit facility and it is management's intent to reissue approximately
$500 million of commercial paper on a long-term basis. A variation of .125% in
the interest rate charged under the commercial paper program and revolving
credit facilities would result in an annual change of approximately $790,000 in
interest expense based on the aggregate of variable interest rate debt
outstanding as of September 30, 2001.

   In October 2000, we sold to Warburg, Pincus Equity Partners, L.P. and related
investment funds (collectively, the "Warburg Funds") four million shares of our
Series B convertible participating preferred stock and warrants to purchase our
common stock for an aggregate purchase price of $400 million. Based on a
conversion price of $26.71, the Series B preferred stock is convertible into
15,973,068 shares of our common stock as of September 30, 2001.

   The warrants have an exercise price of $34.73 representing 130% of the
conversion price for the Series B preferred stock. Of these warrants, warrants
exercisable for 6,883,933 shares of common stock have a four-year term expiring
on October 2, 2004, and warrants exercisable for 5,507,146 shares of common
stock have a five-year term expiring on October 2, 2005. During the period from
May 24, 2001 until October 2, 2002, if the market price of our common stock
exceeds 200%, in the case of the four-year warrants, and 225%, in the case of
the five-year warrants, of the exercise price of the warrants for 20 consecutive
trading days, we can force the exercise of up to 50% of the four-year and the
five-year warrants, respectively.

   The shares of Series B preferred stock had an aggregate initial liquidation
value of $400 million and will accrete for the first 10 years at an annual rate
of 6.5% and 12% thereafter, compounded quarterly. After the third anniversary of
the original issue date of the Series B preferred stock, 50% of the amount
accreted for the year may be paid in cash as a dividend on a quarterly basis at
our option. After the fifth anniversary of the issue date through the tenth
anniversary, we may elect to pay 100% of the amount accreted for the year as a
cash dividend on a quarterly basis. The liquidation value calculated on each
quarterly dividend payment date, which includes the accretion for the dividend
period, will be reduced by the amount of any cash dividends paid. Following the
tenth anniversary of the issue date, we will pay quarterly cash dividends at an
annual rate of 12% of the then accreted liquidation value of the Series B
preferred stock, compounded quarterly. The Series B preferred shares also
participate, on an as-converted basis, in dividends paid on our common stock.
For fiscal 2001, accretion of the Series B preferred stock was $27 million

                                                                             21.
<Page>

resulting in a liquidation value of $427 million as of September 30, 2001. The
total number of shares of common stock into which the Series B preferred stock
are convertible is determined by dividing the liquidation value in effect at the
time of conversion by the conversion price.

   A beneficial conversion feature would exist if the conversion price for the
Series B preferred stock or warrants was less than the fair value of our common
stock at the commitment date. We determined that no beneficial conversion
features existed at the commitment date and therefore there was no impact on our
results of operations associated with the Series B preferred stock or with the
warrants. The beneficial conversion features, if any, associated with dividends
paid in-kind, where it is our option to pay dividends on the Series B preferred
stock in cash or in-kind, will be measured when dividends are declared and
recorded as a reduction to net income available to common stockholders.

   At any time after the fifth anniversary of their issuance, we may force
conversion of the shares of Series B preferred stock. If we give notice of a
forced conversion, the investors will be able to require us to redeem the Series
B preferred shares at 100% of the then current liquidation value, plus accrued
and unpaid dividends. Following a change in control of us during the first five
years after the investment, other than a change of control transaction involving
solely the issuance of common stock, the accretion of some or all of the
liquidation value of the Series B preferred stock through the fifth anniversary
of the issue date will be accelerated, subject to our ability to pay a portion
of the accelerated accretion in cash in some instances. In addition, for 60 days
following the occurrence of any change of control of us during the first five
years after the investment, the investors will be able to require us to redeem
the Series B preferred stock at 101% of the liquidation value, including any
accelerated accretion of the liquidation value, plus accrued and unpaid
dividends.

   Our cost of capital and ability to obtain external financing may be affected
by our debt ratings, which are periodically reviewed by the major credit rating
agencies. Our commercial paper is currently rated P-2 by Moody's and A-2 by
Standard & Poor's, and our long-term debt rating is Baa1 by Moody's and BBB by
Standard & Poor's, each with a negative outlook. A security rating is not a
recommendation to buy, sell or hold securities and may be subject to revision or
withdrawal at any time by the rating organization. Each rating should be
evaluated independently of any other rating.

   Our ability to issue additional equity may be constrained because our
issuance of additional equity may cause the distribution to be taxable to Lucent
under Section 355(e) of the Internal Revenue Code, and under the tax-sharing
agreement between Lucent and us, we would be required to indemnify Lucent
against that tax.

   In May 2001, the Securities and Exchange Commission ("SEC") declared
effective our shelf registration statement on Form S-3 registering $1.44 billion
of common stock, preferred stock, debt securities or warrants to purchase debt
securities, or any combination of these securities, in one or more offerings
through May 2003. We intend to use the proceeds from the sale of the securities
for general corporate purposes, including debt repayment and refinancing,
capital expenditures and acquisitions. We also registered with the SEC for
resale by the Warburg Funds, of the preferred stock and warrants described above
and shares of common stock issuable upon conversion or exercise thereof. We will
not receive any proceeds from the sale by the Warburg Funds of these securities.

   In October 2001, we sold in an underwritten public offering under our shelf
registration statement an aggregate principal amount at maturity of
approximately $821 million of Liquid Yield Option(TM) Notes ("LYONs") due in
2021. In November 2001, we sold an additional $123 million aggregate principal
amount at maturity of LYONs pursuant to the exercise of the underwriter's
overallotment option. The net proceeds of approximately $447 million were used
to refinance a portion of our outstanding commercial paper. Underwriting fees
for these transactions amounted to $13 million. The LYONs were issued at a $484
million discount that will accrue daily at a rate of 3.625% per year calculated
on a semiannual bond equivalent basis. We will not make periodic cash payments
of interest on the LYONs. Instead, the original issue discount will be recorded
as interest expense and represents the accretion of the LYONs issue price to its
maturity value. The original issue discount will cease to accrue on the LYONs
upon maturity, conversion, or purchase by us at the option of the holder or
redemption. The LYONs are unsecured obligations that rank equally in right of
payment with all existing and future unsecured and unsubordinated indebtedness
of Avaya.

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

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

   Our primary future cash needs on a recurring basis will be to fund working
capital, capital expenditures and debt service. We believe that our cash flows
from operations will be sufficient to meet these needs. We expect to fund our
business restructuring and related charges through a combination of debt and
internally generated funds. If we do not generate sufficient cash from
operations, we may need to incur additional debt. We currently anticipate
spending approximately $208 million in fiscal 2002 for activities related to
business restructuring, our establishment as an independent company, and
outsourcing of certain manufacturing facilities. The cash payments are planned
to be composed of $108 million for employee

22.
<Page>

separation costs, $54 million for lease obligations, $5 million for other exit
costs and $41 million for incremental period costs, including computer
transition expenditures, relocation and consolidation costs.

   In order to meet our cash needs, we may from time to time issue additional
commercial paper under our commercial paper program, if the market permits such
borrowings, borrow under our revolving credit facilities or issue other long- or
short-term debt, if available. We may also refinance all or a portion of the
commercial paper program with long-term or other short-term debt instruments. We
cannot assure you that any such financings will be available to us on acceptable
terms or at all. Our ability to make payments on and to refinance our
indebtedness, and to fund working capital, capital expenditures and strategic
acquisitions, will depend on our ability to generate cash in the future, which
is subject to general economic, financial, competitive, legislative, regulatory
and other factors that are beyond our control. Our credit facilities and the
indenture governing the LYONs impose, and any future indebtedness may impose,
various restrictions and covenants which could limit our ability to respond to
market conditions, to provide for unanticipated capital investments or to take
advantage of business opportunities. We may also incur higher than expected
interest expense in servicing our debt, which would decrease our profitability.


PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT

In connection with our acquisitions in fiscal 2001, a portion of the purchase
price, $31 million for VPNet and $1 million for Quintus Corporation, was
allocated to purchased in-process research and development. As part of the
process of analyzing these acquisitions, we made a decision to buy technology
that had not yet been commercialized rather than develop the technology
internally. We based this decision on factors such as the amount of time it
would take to bring the technology to market. We also considered each entity's
resource allocation and its progress on comparable technology, if any. Our
management expects to use a similar decision process in the future.

   At the date of each acquisition, the in-process research and development
projects had not yet reached technological feasibility and had no future
alternative use. Accordingly, the value allocated to these projects was
capitalized and immediately expensed at acquisition. If the projects are not
successful or completed in a timely manner, management's product pricing and
growth rates may not be achieved and we may not realize the financial benefits
expected from the projects.

   The value allocated to purchased in-process research and development for the
acquisitions was determined using an income approach. This involved estimating
the fair value of the in-process research and development using the present
value of the estimated after-tax cash flows expected to be generated by the
purchased in-process research and development, using risk-adjusted discount
rates and revenue forecasts as appropriate. Where appropriate, we deducted an
amount reflecting the contribution of the core technology from the anticipated
cash flows from an in-process research and development project. The selection of
the discount rate was based on consideration of our weighted average cost of
capital, as well as other factors, including the useful life of each technology,
profitability levels of each technology, the uncertainty of technology advances
that were known at the time, and the stage of completion of each technology. We
believe that the estimated in-process research and development amounts so
determined represent fair value and do not exceed the amount a third party would
have paid for the projects.

   Revenue forecasts were estimated based on relevant market size and growth
factors, expected industry trends, individual product sales cycles and the
estimated life of each product's underlying technology. Estimated operating
expenses, income taxes, and charges for the use of contributory assets were
deducted from estimated revenue to determine estimated after-tax cash flows for
each project. Estimated operating expenses include cost of goods sold, selling,
general and administrative expenses, and research and development expenses. The
research and development expenses include estimated costs to maintain the
products once they have been introduced into the market and generate revenue and
costs to complete the purchased in-process research and development.

   The development efforts related to the majority of the purchased in-process
technology projects are progressing in accordance with the assumptions
underlying the appraisals. As expected in the normal course of product
development, a number of projects have experienced delays and other projects are
being evaluated due to changes in strategic direction and market conditions.
These factors are not expected to have a material adverse effect on our results
of operations and financial position in future periods.

   Set forth below are descriptions of the significant acquired in-process
research and development projects related to our acquisition of VPNet.

   In February 2001, we completed the purchase of VPNet and allocated
approximately $31 million to in-process research and development projects, using
the income approach described above, to the following projects: low-end
technologies for $5 million and high-end technologies for $26 million. These
projects under development at the valuation date represent next-generation
technologies that are expected to address emerging market demands for low- and
high-end network data security needs.

   At the acquisition date, the low-end technologies under development were
approximately 80% complete based on engineering data and technological progress.
Revenue attributable to the developmental low-end VPNet technologies was
estimated to be $8 million in 2002 and $13 million in 2003. Revenue was
estimated to grow at a compounded annual growth rate of approximately 60% for
the six years following introduction, assuming the successful completion and
market acceptance of the major research and development programs. Revenue was
expected to peak in 2004 and decline thereafter through the end of the
technologies' life in 2007 as new product technologies were expected to be
introduced.

   At the acquisition date, the high-end technologies under development were
approximately 60% complete, based on engineering data and technological
progress. Revenue attributable to the developmental high-end VPNet technologies
was estimated to be $52 million in 2002 and $86 million in 2003. Revenue was
estimated

                                                                             23.
<Page>

to grow at a compounded annual growth rate of approximately 50% for the seven
years following introduction, assuming the successful completion and market
acceptance of the major research and development programs. Revenue was expected
to peak in 2004 and decline thereafter through the end of the technologies' life
in 2008 as new product technologies were expected to be introduced.

   VPNet had spent approximately $4 million on these in-process technology
projects, and expected to spend approximately $4 million to complete all phases
of research and development.

   The rates utilized to discount the net cash flows to their present value were
based on estimated cost of capital calculations. Due to the nature of the
forecasts and the risks associated with the successful development of the
projects, a discount rate of 25% was used to value the in-process research and
development. The discount rate utilized was higher than our weighted average
cost of capital due to the inherent uncertainties surrounding the successful
development of the purchased in-process technology, the useful life of such
technology, the profitability levels of the technology, and the uncertainty of
technological advances that are unknown at this time.


ENVIRONMENTAL, HEALTH AND SAFETY MATTERS

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

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


LEGAL PROCEEDINGS

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


YEAR 2000 ACTIONS

Three separate purported class action lawsuits are pending against Lucent, one
in state court in West Virginia, one in federal court in the Southern District
of New York and another in federal court in the Southern District of California.
The case in New York was filed in January 1999 and, after being dismissed, was
refiled in September 2000. The case in West Virginia was filed in April 1999 and
the case in California was filed in June 1999, and amended in 2000, to include
Avaya as a defendant. We may also be named a party to the other actions and, in
any event, have assumed the obligations of Lucent for all of these cases under
the Contribution and Distribution Agreement. All three actions are based upon
claims that Lucent sold products that were not Year 2000 compliant, meaning that
the products were designed and developed without considering the possible impact
of the change in the calendar from December 31, 1999 to January 1, 2000. The
complaints allege that the sale of these products violated statutory consumer
protection laws and constituted breaches of implied warranties. A class has not
been certified in any of the three cases and, to the extent a class is certified
in any of the cases, we expect that class to constitute those enterprises that
purchased the products in question. The complaints seek, among other remedies,
compensatory damages, punitive damages and counsel fees in amounts that have not
yet been specified. Although we believe that the outcome of these actions will
not adversely affect our financial position, results of operations or cash
flows, if these cases are not resolved in a timely manner, they will require
expenditure of significant legal costs related to their defense.


COUPON PROGRAM CLASS ACTION

In April 1998, a class action was filed against Lucent in state court in New
Jersey, alleging that Lucent improperly administered a coupon program resulting
from the settlement of a prior class action. The plaintiffs allege that Lucent
improperly limited the redemption of the coupons from dealers by not allowing
them to be combined with other volume discount offers, thus limiting the market
for the coupons. We have assumed the obligations of Lucent for these cases under
the Contribution and Distribution Agreement. The complaint alleges breach of
contract, fraud and other claims and the plaintiffs seek compensatory and
consequential damages, interest and attorneys' fees. The parties have entered
into a proposed settlement agreement, pending final approval by the court.


LUCENT SECURITIES LITIGATION

In November 2000, three purported class actions were filed against Lucent in the
Federal District Court for the District of New Jersey alleging violations of the
federal securities laws as a result of the facts disclosed in Lucent's
announcement on November 21, 2000 that it had identified a revenue recognition
issue affecting its financial results for the fourth quarter of fiscal 2000. The
actions purport

24.
<Page>

to be filed on behalf of purchasers of Lucent common stock during the period
from October 10, 2000 (the date Lucent originally reported these financial
results) through November 21, 2000.

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

   Any liability incurred by Lucent in connection with these stockholder class
action lawsuits may be deemed a shared contingent liability under the
Contribution and Distribution Agreement and, as a result, we would be
responsible for 10% of any such liability in excess of $50 million. All of these
actions are in the early stages of litigation and an outcome cannot be predicted
and, as a result, we cannot assure you that these cases will not have a material
adverse effect on our financial position, results of operations or cash flows.


LICENSING MEDIATION

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


FINANCIAL INSTRUMENTS

We are exposed to risk from changes in foreign currency exchange rates and
interest rates that could affect our results of operations, financial position
or cash flows. We manage our exposure to these market risks through our regular
operating and financing activities and, when deemed appropriate, through the use
of derivative financial instruments. We conduct our business on a multi-national
basis in a wide variety of foreign currencies and, as such, use derivative
financial instruments to reduce earnings and cash flow volatility associated
with foreign exchange rate changes. We use foreign currency forward contracts,
and to a lesser extent, foreign currency options, to mitigate the effects of
fluctuations of exchange rates on intercompany loans that are denominated in
currencies other than the subsidiary's functional currency, and to reduce the
exposure to the risk that the eventual net cash flows resulting from the
purchase or sale of products to or from non-U.S. customers will be adversely
affected by changes in exchange rates. Derivative financial instruments are used
as risk management tools and not for speculative or trading purposes.


RECORDED TRANSACTIONS

We use foreign currency forward contracts primarily to manage exchange rate
exposures on intercompany loans residing on our foreign subsidiaries' books that
are denominated in currencies other than the subsidiary's functional currency.
When these loans are translated into the subsidiary's functional currency at the
month-end exchange rates, the fluctuations in the exchange rates are recognized
in earnings as other income or expense. Gains and losses resulting from the
impact of currency exchange rate movements on foreign currency forward contracts
designated to offset these non-functional currency denominated loans are also
recognized in earnings as other income or expense in the period in which the
exchange rates change and are generally offset by the foreign currency losses
and gains on the loans. For the fiscal year ended September 30, 2001, the net
effect of the gains and losses on the change in the fair value of the foreign
currency forward contracts and the translation of the non-functional currency
denominated loans were not material to our results of operations.

   The fair value of foreign currency exchange contracts is sensitive to changes
in foreign currency exchange rates. As of September 30, 2001 and 2000, a 10%
appreciation in foreign currency exchange rates from the prevailing market rates
would increase our related net unrealized gain for fiscal 2001 and 2000 by $13
million and $20 million, respectively. Conversely, a 10% depreciation in these
currencies from the prevailing market rates would decrease our related net
unrealized gain for fiscal 2001 and 2000 by $13 million and $18 million,
respectively. Consistent with the nature of the economic hedge of such foreign
currency exchange contracts, such unrealized gains or losses would be offset by
corresponding decreases or increases, respectively, of the underlying asset,
liability or transaction being hedged.


FORECASTED TRANSACTIONS

We use foreign currency forward and option contracts to offset certain
forecasted foreign currency transactions primarily related to the purchase or
sale of product expected to occur during the ensuing twelve months. The gains
and losses resulting from the impact of currency exchange rate movements on
these foreign currency forward and option contracts are recognized as other
income or expense in the period in which the exchange rates change. For the
fiscal years ended September 30, 2001 and 2000, these gains and losses were not
material to our results of operations.


                                                                             25.
<Page>

   Electing to not use hedge accounting under SFAS 133, "Accounting for
Derivative Investments and Hedging Activities," could result in a gain or loss
from fluctuations in exchange rates related to a derivative contract that is
different from the loss or gain recognized from the underlying forecasted
transaction. However, we have procedures to manage the risks associated with our
derivative instruments, which include limiting the duration of the contracts,
typically six months or less, and the amount of the underlying exposures that
can be economically hedged. Historically, the gains and losses on these
transactions have not been significant.

   While we hedge many foreign currency transactions, the decline in value of
non-U.S. dollar currencies may, if not reversed, adversely affect our ability to
contract for product sales in U.S. dollars because our products may become more
expensive to purchase in U.S. dollars for local customers doing business in the
countries of the affected currencies.

   By their nature, all derivative instruments involve, to varying degrees,
elements of market risk and credit risk not recognized in our financial
statements. The market risk associated with these instruments resulting from
currency exchange rate movements is expected to offset the market risk of the
underlying transactions, assets and liabilities being economically hedged. The
counterparties to the agreements relating to our foreign exchange instruments
consist of a diversified group of major financial institutions. We do not
believe that there is significant risk of loss in the event of non-performance
of the counterparties because we control our exposure to credit risk through
credit approvals and limits, and continual monitoring of the credit ratings of
such counterparties. In addition, we limit the financial exposure and the amount
of agreements entered into with any one financial institution.


European Monetary Unit ("EURO")

In 1999, most member countries of the European Union established fixed
conversion rates between their existing sovereign currencies and the European
Union's new currency, the euro. This conversion permitted transactions to be
conducted in either the euro or the participating countries' national
currencies. By February 28, 2002, all member countries are expected to have
permanently withdrawn their national currencies as legal tender and replaced
their currencies with euro notes and coins.

   The euro conversion may have a favorable impact on cross-border competition
by eliminating the effects of foreign currency translations thereby creating
price transparency. We will continue to evaluate the accounting, tax, legal and
regulatory requirements associated with the euro introduction. We do not expect
the conversion to the euro to have a material adverse effect on our consolidated
financial position, results of operations or cash flows.


RECENT ACCOUNTING PRONOUNCEMENTS

SFAS 141 - In July 2001, the Financial Accounting Standards Board ("FASB")
issued Statement No. 141, "Business Combinations" ("SFAS 141"), which requires
all business combinations initiated after June 30, 2001 to be accounted for
using the purchase method of accounting. As a result, use of the
pooling-of-interests method is prohibited for business combinations initiated
thereafter. SFAS 141 also establishes criteria for the separate recognition of
intangible assets acquired in a business combination. In fiscal 2001, we adopted
this Statement which did not have a material impact on our consolidated results
of operations, financial position or cash flows.

   New accounting statements issued, but not yet adopted by us, include the
following:

SFAS 142 - In July 2001, the FASB issued Statement No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"), which requires that goodwill and certain other
intangible assets having indefinite lives no longer be amortized to earnings,
but instead be subject to periodic testing for impairment. Intangible assets
determined to have definitive lives will continue to be amortized over their
useful lives. This Statement is effective for our 2003 fiscal year, and early
adoption is permitted. However, goodwill and intangible assets acquired after
June 30, 2001 are subject immediately to the non-amortization and amortization
provisions of this Statement. Effective October 1, 2001, we adopted SFAS142 and
implemented certain provisions, specifically the discontinuation of goodwill
amortization, and will be implementing the remaining provisions by the end of
fiscal 2002. In fiscal 2001, we recorded goodwill amortization expense of $40
million. We are currently evaluating the remaining provisions of SFAS 142 to
determine the effect, if any, they may have on our consolidated results of
operations, financial position or cash flows.

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

SFAS 144 - In October 2001, the FASB issued Statement No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which excludes
from the definition of long-lived assets goodwill and other intangibles that are
not amortized in accordance with SFAS 142. SFAS 144 requires that long-lived
assets to be disposed of by sale be measured at the lower of carrying amount or
fair value less cost to sell, whether reported in continuing operations or in
discontinued operations. SFAS 144 also expands the reporting of discontinued
operations to include components of an entity that have been or will be disposed
of rather than limiting such discontinuance to a segment of a business. This
Statement is effective for our 2003 fiscal year, and early adoption is
permitted. We are currently evaluating the impact of SFAS 144 to determine the
effect, if any, it may have on our consolidated results of operations, financial
position or cash flows.


26.
<Page>

REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Stockholders of Avaya Inc.:

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in stockholders' equity and of
comprehensive income (loss), and of cash flows present fairly, in all material
respects, the financial position of Avaya Inc. and its subsidiaries (the
"Company") at September 30, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended September
30, 2001, in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

   Until September 30, 2000, the Company was a fully integrated business of
Lucent Technologies Inc. ("Lucent"); consequently, as indicated in Note 1, these
consolidated financial statements have been derived from the consolidated
financial statements and accounting records of Lucent, and reflect significant
assumptions and allocations. Moreover, as indicated in Note 1, prior to
September 30, 2000, the Company relied on Lucent and its other businesses for
administrative, management and other services. Accordingly, the consolidated
financial statements as of and for each of the two years ended September 30,
2000 do not necessarily reflect the financial position, results of operations,
changes in stockholders' equity and cash flows of the Company had it been a
separate stand-alone entity, independent of Lucent during such periods.

   As discussed in Notes 2 and 12 to the consolidated financial statements, the
Company adopted Statement of Position 98-1 "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" in 2000 and changed its method
for calculating annual pension and postretirement benefit costs in 1999,
respectively.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP
New York, New York
October 24, 2001

                                                                             27.
<Page>

CONSOLIDATED STATEMENTS OF OPERATIONS
Avaya Inc. and Subsidiaries

<Table>
<Caption>

                                                                         Year Ended September 30,
                                                                      -----------------------------
                                                                        2001       2000       1999
                                                                        ----       ----       ----
                                                              (dollars in millions, except per share amounts)
<S>                                                                   <C>        <C>        <C>
REVENUE

Products                                                              $ 4,701    $ 5,774    $ 6,368
Services                                                                2,092      1,958      1,900
                                                                      -------    -------    -------
                                                                        6,793      7,732      8,268
                                                                      -------    -------    -------
COSTS
Products                                                                2,937      3,471      3,720
Services                                                                  960      1,012      1,040
                                                                      -------    -------    -------
                                                                        3,897      4,483      4,760
                                                                      -------    -------    -------
GROSS MARGIN                                                            2,896      3,249      3,508
                                                                      -------    -------    -------
OPERATING EXPENSES
Selling, general and administrative                                     2,058      2,540      2,632
Business restructuring and related charges (reversals)                    837        684        (33)
Research and development                                                  536        468        540
Purchased in-process research and development                              32         --         --
                                                                      -------    -------    -------
TOTAL OPERATING EXPENSES                                                3,463      3,692      3,139
                                                                      -------    -------    -------
OPERATING INCOME (LOSS)                                                  (567)      (443)       369
Other income, net                                                          34         71         28
Interest expense                                                          (37)       (76)       (90)
                                                                      -------    -------    -------
INCOME (LOSS) BEFORE INCOME TAXES                                        (570)      (448)       307
Provision (benefit) for income taxes                                     (218)       (73)       121
                                                                      -------    -------    -------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE              (352)      (375)       186
Cumulative effect of accounting change (net of income taxes of $62)        --         --         96
                                                                      -------    -------    -------
NET INCOME (LOSS)                                                     $  (352)   $  (375)   $   282
                                                                      =======    =======    =======
EARNINGS (LOSS) PER COMMON SHARE:
Basic                                                                 $ (1.33)   $ (1.39)   $  1.09
                                                                      =======    =======    =======
Diluted                                                               $ (1.33)   $ (1.39)   $  1.03
                                                                      =======    =======    =======

</Table>


See Notes to Consolidated Financial Statements.


28.
<Page>


CONSOLIDATED BALANCE SHEETS
Avaya Inc. and Subsidiaries


<Table>
<Caption>

                                                                                             As of September 30,
                                                                                             -------------------
                                                                                              2001       2000
                                                                                              ----       ----
                                                                            (dollars in millions, except per share amounts)

<S>                                                                                         <C>        <C>
ASSETS
Current assets:
  Cash and cash equivalents                                                                 $   250    $   271
  Receivables, less allowances of $68 in 2001 and $62 in 2000                                 1,163      1,758
  Inventory                                                                                     649        639
  Deferred income taxes, net                                                                    246        450
  Other current assets                                                                          461        244
                                                                                            -------    -------
TOTAL CURRENT ASSETS                                                                          2,769      3,362
                                                                                            -------    -------
  Property, plant and equipment, net                                                            988        966
  Prepaid benefit costs                                                                          --        387
  Deferred income taxes, net                                                                    529         44
  Goodwill and other intangible assets, net                                                     255        204
  Other assets                                                                                  107         74
                                                                                            -------    -------
TOTAL ASSETS                                                                                $ 4,648    $ 5,037
                                                                                            =======    =======

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                                                          $   624    $   763
  Current portion of long-term debt                                                             145         80
  Business restructuring reserve                                                                179        499
  Payroll and benefit obligations                                                               333        491
  Advance billings and deposits                                                                 133        253
  Other current liabilities                                                                     604        503
                                                                                            -------    -------
TOTAL CURRENT LIABILITIES                                                                     2,018      2,589
                                                                                            -------    -------
  Long-term debt                                                                                500        713
  Benefit obligations                                                                           637        421
  Deferred revenue                                                                               84         83
  Other liabilities                                                                             533        467
                                                                                            -------    -------
TOTAL NON-CURRENT LIABILITIES                                                                 1,754      1,684
                                                                                            -------    -------
Commitments and contingencies

Series B convertible participating preferred stock, par value $1.00 per share,
  4 million shares authorized, issued and outstanding as of September 30, 2001                  395         --
                                                                                            -------    -------

STOCKHOLDERS' EQUITY
  Series A junior participating preferred stock, par value $1.00 per share,
    7.5 million shares authorized; none issued and outstanding                                   --         --
  Common stock, par value $0.01 per share, 1.5 billion shares authorized, 286,851,934 and
    282,027,675 issued and outstanding as of September 30, 2001 and 2000, respectively            3          3
  Additional paid-in capital                                                                    905        825
  Accumulated deficit                                                                          (379)        --
  Accumulated other comprehensive loss                                                          (46)       (64)
  Less treasury stock at cost (147,653 shares as of September 30, 2001)                          (2)        --
                                                                                            -------    -------
TOTAL STOCKHOLDERS' EQUITY                                                                      481        764
                                                                                            -------    -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                  $ 4,648    $ 5,037
                                                                                            =======    =======
</Table>


See Notes to Consolidated Financial Statements.


                                                                             29.
<Page>

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND OF COMPREHENSIVE
INCOME (LOSS)
Avaya Inc. and Subsidiaries

<Table>
<Caption>

                                                                        Year Ended September 30,
                                                                      -----------------------------
                                                                        2001       2000      1999
                                                                        ----       ----      ----
                                                                          (dollars in millions)
<S>                                                                   <C>        <C>        <C>
FORMER PARENT'S NET INVESTMENT:
Beginning balance                                                     $    --    $ 1,871    $ 1,854
Net income (loss)                                                          --       (375)       282
Transfers to Lucent                                                        --     (7,783)    (8,488)
Transfers from Lucent                                                      --      7,115      8,223
Recapitalization upon Distribution                                         --       (828)        --
                                                                      -------    -------    -------
Ending balance                                                        $    --    $    --    $ 1,871
                                                                      -------    -------    -------

COMMON STOCK:
Beginning balance                                                     $     3    $    --    $    --
Issuance of stock pursuant to the Distribution                             --          3         --
                                                                      -------    -------    -------
Ending balance                                                        $     3    $     3    $    --
                                                                      -------    -------    -------

ADDITIONAL PAID-IN CAPITAL:
Beginning balance                                                     $   825    $    --    $    --
Additional paid-in capital resulting from the Distribution                 --        825         --
Issuance of warrants                                                       32         --         --
Issuance of common stock for options exercised                              7         --         --
Issuance of common stock to employees under the stock purchase plan        33         --         --
Issuance of other stock unit awards                                        28         --         --
Other stock transactions (Note 4)                                          22         --         --
Adjustment to Lucent capital contribution (Notes 12 and 16)               (42)        --         --
                                                                      -------    -------    -------
Ending balance                                                        $   905    $   825    $    --
                                                                      -------    -------    -------

ACCUMULATED DEFICIT:
Beginning balance                                                     $    --    $    --    $    --
Preferred stock accretion                                                 (27)        --         --
Net loss                                                                 (352)        --         --
                                                                      -------    -------    -------
Ending balance                                                        $  (379)   $    --    $    --
                                                                      -------    -------    -------

ACCUMULATED OTHER COMPREHENSIVE LOSS:
Beginning balance                                                     $   (64)   $   (54)   $   (59)
Foreign currency translations                                              18        (10)         5
                                                                      -------    -------    -------
Ending balance                                                        $   (46)   $   (64)   $   (54)
                                                                      -------    -------    -------
TREASURY STOCK:
Beginning balance                                                     $    --    $    --    $    --
Purchase of treasury stock at cost                                         (2)        --         --
                                                                      -------    -------    -------
Ending balance                                                        $    (2)   $    --    $    --
                                                                      -------    -------    -------
TOTAL STOCKHOLDERS' EQUITY                                            $   481    $   764    $ 1,817
                                                                      =======    =======    =======

COMPREHENSIVE INCOME (LOSS):
Net income (loss)                                                     $  (352)   $  (375)   $   282
Other comprehensive income (loss) - foreign currency translations          18        (10)         5
                                                                      -------    -------    -------
Comprehensive income (loss)                                           $  (334)   $  (385)   $   287
                                                                      =======    =======    =======

</Table>



See Notes to Consolidated Financial Statements.

30.
<Page>

CONSOLIDATED STATEMENTS OF CASH FLOWS
Avaya Inc. and Subsidiaries

<Table>
<Caption>

                                                                       Year Ended September 30,
                                                                       -----------------------
                                                                        2001    2000     1999
                                                                        ----    ----     ----
                                                                         (dollars in millions)
<S>                                                                    <C>      <C>      <C>
OPERATING ACTIVITIES:
Net income (loss)                                                      $(352)   $(375)   $ 282
Adjustments to reconcile net income (loss) to net cash provided by
   (used for) operating activities:
      Cumulative effect of accounting change                              --       --      (96)
      Business restructuring and related charges (reversals)             659      595      (33)
      Depreciation and amortization                                      273      220      212
      Provision for uncollectible receivables                             53       36       25
      Deferred income taxes                                             (264)    (288)      (2)
      Purchased in-process research and development                       32       --       --
      Gain on businesses sold                                             (6)     (44)     (24)
      Adjustments for other non-cash items, net                           32       19       26
      Changes in operating assets and liabilities, net of effects of
         acquired and divested businesses:
         Receivables                                                     198      (50)       5
         Inventory                                                        (6)     131       81
         Accounts payable                                               (138)     298      (47)
         Payroll and benefits, net                                      (215)    (372)     (12)
         Advance billings and deposits                                  (120)      55       59
         Other assets and liabilities                                   (279)     260      (45)
                                                                       -----    -----    -----
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES                    (133)     485      431
                                                                       -----    -----    -----

INVESTING ACTIVITIES:
Capital expenditures                                                    (341)    (499)    (202)
Proceeds from the sale of property, plant and equipment                  108       14       17
Disposal of businesses                                                    --       82       29
Acquisitions of businesses, net of cash acquired                        (120)      --       --
Cash from merger                                                          --       --       60
Purchases of equity investments                                          (27)      --       --
Other investing activities, net                                           15      (25)      10
                                                                       -----    -----    -----
NET CASH USED FOR INVESTING ACTIVITIES                                  (365)    (428)     (86)
                                                                       -----    -----    -----

FINANCING ACTIVITIES:
Issuance of convertible participating preferred stock                    368       --       --
Issuance of warrants                                                      32       --       --
Issuance of common stock                                                  40       --       --
Transfers to Lucent, net                                                  --     (741)    (253)
Credit facility borrowing                                                200       --       --
Net decrease in commercial paper                                        (348)      --       --
Assumption of commercial paper from Lucent                                --      780       --
Proceeds from securitization of accounts receivable                      200       --       --
Other financing activities, net                                           (9)       3       (4)
                                                                       -----    -----    -----
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES                     483       42     (257)
                                                                       -----    -----    -----
Effect of exchange rate changes on cash and cash equivalents              (6)     (22)      (1)
                                                                       -----    -----    -----
Net increase (decrease) in cash and cash equivalents                     (21)      77       87
Cash and cash equivalents at beginning of year                           271      194      107
                                                                       -----    -----    -----
Cash and cash equivalents at end of year                               $ 250    $ 271    $ 194
                                                                       =====    =====    =====
</Table>


See Notes to Consolidated Financial Statements.

                                                                             31.
<Page>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Avaya Inc. and Subsidiaries


1. BACKGROUND AND BASIS OF PRESENTATION

BACKGROUND

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

   The Company was incorporated in Delaware under the name "Lucent EN Corp." in
February 2000 as a wholly owned subsidiary of Lucent. In June 2000, the
Company's name was changed to "Avaya Inc." At the Distribution, the Company's
authorized capital stock consisted of 200 million shares of preferred stock, par
value $1.00 per share, of which the Company has presently designated 7.5 million
shares as Series A junior participating preferred stock and 4 million shares as
Series B convertible participating preferred stock, and 1.5 billion shares of
common stock, par value $0.01 per share.

   The Company adopted a rights agreement prior to the Distribution date. The
issuance of a share of the Company's common stock also constitutes the issuance
of a Series A junior participating preferred stock purchase right associated
with such share. These rights may have anti-takeover effects in that the
existence of the rights may deter a potential acquirer from making a takeover
proposal or a tender offer.


BASIS OF PRESENTATION

The accompanying consolidated financial statements as of and for the fiscal year
ended September 30, 2001 depict the first full year of Avaya's results as a
stand-alone company.

   The consolidated financial statements as of and for each of the two fiscal
years ended September 30, 2000 include the Company and its subsidiaries as well
as certain assets, liabilities, and related operations transferred to the
Company from Lucent immediately prior to the Distribution. These consolidated
financial statements have been derived from the accounting records of Lucent
using the historical results of operations and historical basis of the assets
and liabilities of the enterprise networking businesses transferred to the
Company. Since no direct ownership existed among all of the various units
comprising the Company prior to the Distribution, Lucent's net investment in
Avaya is shown in place of stockholders' equity in the Consolidated Statements
of Changes in Stockholders' Equity in fiscal 2000 and 1999. Management believes
these consolidated financial statements are a reasonable representation of the
financial position, results of operations, cash flows and changes in
stockholders' equity of such businesses as if Avaya were a separate entity
during such periods.

   The consolidated financial statements as of and for each of the two years
ended September 30, 2000 include allocations of certain Lucent corporate
headquarters' assets, liabilities, and expenses relating to these businesses
that were transferred to Avaya fromLucent. General corporate overhead has been
allocated either based on the ratio of the Company's costs and expenses to
Lucent's costs and expenses, or based on the Company's revenue as a percentage
of Lucent's total revenue.General corporate overhead primarily includes cash
management, legal, accounting, tax, insurance, public relations, advertising and
data services and amounted to $398 million and $449 million in fiscal 2000 and
1999, respectively. In addition, the consolidated financial statements for
fiscal 2000 and 1999 include an allocation from Lucent to fund a portion of the
costs of basic research conducted byLucent's Bell Laboratories.This allocation
was based on the Company's revenue as a percentage of Lucent's total revenue and
amounted to $75 million and $78 million in fiscal 2000 and 1999, respectively.
Management believes the costs of corporate services and research charged to the
Company are a reasonable representation of the costs that would have been
incurred if the Company had performed these functions as a stand-alone entity.
The Company currently performs these corporate functions and basic research
requirements using its own resources or purchased services.

   During the periods covered by the consolidated financial statements as of and
for each of the two years ended September 30, 2000, Lucent used a centralized
approach to cash management and the financing of its operations.Prior to the
Distribution, cash deposits from the Company's businesses were transferred to
Lucent on a regular basis and were netted against Lucent's net investment
account. As a result, none of Lucent's cash or cash equivalents at the corporate
level had been allocated to the Company. Changes in stockholders' equity in
fiscal 2000 and 1999 represent funding required fromLucent for working capital,
acquisitions or capital expenditures after giving effect to the Company's
transfers to or fromLucent of its cash flows from operations and other non-cash
transactions between the Company and Lucent.

   Although the Company's Consolidated Statements of Operations include interest
expense for each of the two fiscal years ended September 30, 2000, the
Consolidated Balance Sheets for periods prior to the Distribution do not include
an allocation of Lucent debt at the corporate level because of the centralized
approach that Lucent used to finance its operations. The Company has assumed for
purposes of calculating interest expense that it would have had average debt
balances of $962 million and $1,320 million and average interest rates of 7.9%
and 6.8% per annum for fiscal 2000 and 1999, respectively. The Company believes
the interest rates and average debt balances used in the calculation of interest
expense reasonably reflect the cost of financing its assets and operations
during the periods prior to the Distribution.

   Income taxes were calculated in fiscal 2000 and 1999 as if the Company filed
separate tax returns. However, Lucent was managing its tax position for the
benefit of its entire portfolio of businesses, and its tax strategies were not
necessarily reflective of the tax strategies that the Company would have
followed or will follow as a stand-alone company. Commencing with fiscal 2001,
the Company will begin filing consolidated income tax returns for Avaya and its
subsidiaries.

32.
<Page>

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include all majority-owned subsidiaries in
which the Company exercises control. Investments in which the Company exercises
significant influence, but which it does not control (generally a 20%-50%
ownership interest), are accounted for under the equity method of accounting.
All intercompany transactions and balances between and among the Company's
businesses have been eliminated. Transactions between any of the Company's
businesses and Lucent are included in these financial statements.


USE OF ESTIMATES

The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and revenue and expenses
during the period reported. These estimates include an allocation of costs by
Lucent in fiscal 2000 and 1999, assessing the collectability of accounts
receivable, the use and recoverability of inventory, the realization of deferred
tax assets, restructuring reserves, and useful lives of tangible and intangible
assets, among others. The markets for the Company's products are characterized
by intense competition, rapid technological development and frequent new product
introductions, all of which could affect the future realizability of the
Company's assets. Estimates and assumptions are reviewed periodically and the
effects of revisions are reflected in the consolidated financial statements in
the period they are determined to be necessary. Actual results could differ from
these estimates.


FOREIGN CURRENCY TRANSLATION

Balance sheet accounts of the Company's foreign operations are translated from
foreign currencies into U.S. dollars at period-end exchange rates while income
and expenses are translated at average exchange rates during the period.
Translation gains or losses related to net assets located outside the U.S. are
shown as a component of accumulated other comprehensive loss in stockholders'
equity. Gains and losses resulting from foreign currency transactions, which are
denominated in a currency other than the entity's functional currency, are
included in the Consolidated Statements of Operations.


REVENUE RECOGNITION

Revenue from sales of communications systems and software is recognized when
contractual obligations have been satisfied, title and risk of loss have been
transferred to the customer, and collection of the resulting receivable is
reasonably assured. Revenue from the direct sales of products that include
installation services is recognized at the time the products are installed,
after satisfaction of all the terms and conditions of the underlying customer
contract. The Company's indirect sales to distribution partners are generally
recognized at the time of shipment if all contractual obligations have been
satisfied. The Company accrues a provision for estimated sales returns and other
allowances and deferrals as a reduction of revenue at the time of revenue
recognition, as required. Revenue from services performed under value-added
service arrangements, professional services and services performed under
maintenance contracts are recognized over the term of the underlying customer
contract or at the end of the contract, when obligations have been satisfied.
For services performed on a time and materials basis, revenue is recognized upon
performance.


RESEARCH AND DEVELOPMENT COSTS AND
SOFTWARE DEVELOPMENT COSTS

Research and development costs are charged to expense as incurred. The costs
incurred for the development of computer software that will be sold, leased or
otherwise marketed, however, are capitalized when technological feasibility has
been established. These capitalized costs are subject to an ongoing assessment
of recoverability based on anticipated future revenues and changes in hardware
and software technologies. Costs that are capitalized include direct labor and
related overhead.

   Amortization of capitalized software development costs begins when the
product is available for general release to customers. Amortization is
recognized on a product-by-product basis on the greater of either the ratio of
current gross revenues to the total of current and anticipated future gross
revenues, or the straight-line method over three years. Unamortized capitalized
software development costs determined to be in excess of net realizable value of
the product are expensed immediately.


CASH AND CASH EQUIVALENTS

Cash and cash equivalents primarily represent amounts held by the Company's
foreign operations. All highly liquid investments with original maturities of
three months or less are considered to be cash equivalents.


ACCOUNTS RECEIVABLE SECURITIZATION

The amount attributable to the sale of a qualified trade accounts receivable is
removed from the Consolidated Balance Sheets and the proceeds received from the
sale are reflected as cash provided by financing activities in the Consolidated
Statements of Cash Flows. The Company is generally required to retain an
interest in the trade receivables sold and arranges for the transfer of the
applicable receivables at their carrying amount to a wholly owned
bankruptcy-remote subsidiary, a special purpose entity. The carrying amount of
the retained interest in the receivables is reclassified to other current assets
and typically approximates fair value because of the relatively short-term
nature of the receivable collections. Costs associated with the sale of
receivables are recorded in other income, net in the Consolidated Statements of
Operations.

   The Company reviews the fair value assigned to retained interests at each
reporting date. Fair value is reviewed using similar valuation techniques as
those used to initially measure the retained interest and, if a change in events
or circumstances warrants, the fair value is adjusted.

                                                                             33.
<Page>

INVENTORY

Inventory is stated at the lower of cost, determined on a first-in, first-out
basis, or market.


PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost less accumulated depreciation.
Depreciation is determined using a straight-line method over the estimated
useful lives of the various asset classes. Estimated lives range from three to
10 years for machinery and equipment, and 40 years for buildings.

   Major renewals and improvements are capitalized and minor replacements,
maintenance and repairs are charged to expense as incurred. Upon retirement or
disposal of assets, the cost and related accumulated depreciation are removed
from the Consolidated Balance Sheets and any gain or loss is reflected in the
Consolidated Statements of Operations.

   The Company adopted Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" in October 1999.
Certain costs of computer software developed or obtained for internal use, which
were previously expensed as incurred, are capitalized and amortized on a
straight-line basis over three years. Costs for general and administrative,
overhead, maintenance and training, as well as the cost of software that does
not add functionality to the existing system, are expensed as incurred. As of
September 30, 2001 and 2000, the Company had unamortized internal use software
costs of $68 million and $46 million, respectively.


GOODWILL AND LONG-LIVED ASSETS

Goodwill is the excess of the purchase price over the fair value of identifiable
net assets acquired in business combinations accounted for as purchases.
Goodwill is amortized on a straight-line basis over the periods benefited.
Long-lived assets and goodwill are reviewed for impairment whenever events such
as product discontinuance, plant closures, product dispositions or other changes
in circumstances indicate that the carrying amount may not be recoverable. In
reviewing for impairment, the Company compares the carrying value of such assets
to the estimated undiscounted future cash flows expected from the use of the
assets and their eventual disposition. An impairment loss, equal to the
difference between the assets' fair value and their carrying value, is
recognized when the estimated future cash flows are less than their carrying
amount (see Note 3 - SFAS 142).

   Goodwill and other intangible assets as of September 30, 2001 and 2000 were
net of accumulated amortization of $230 million and $161 million, respectively.


FINANCIAL INSTRUMENTS

The Company uses various financial instruments, including foreign currency
forward contracts, to manage and reduce risk to the Company by generating cash
flows which offset the cash flows of certain transactions in foreign currencies
or underlying financial instruments in relation to their amount and timing. The
Company's derivative financial instruments are used as risk management tools and
not for speculative or trading purposes. Although not material, these
derivatives represent assets and liabilities and are classified as other current
assets or other current liabilities on the accompanying Consolidated Balance
Sheets. Gains and losses on the changes in the fair values of the Company's
derivative instruments are included in other income, net on the Consolidated
Statements of Operations.

   The Company has elected to not use hedge accounting under Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which could result in a gain or loss from
fluctuations in exchange rates related to a derivative contract which is
different from the loss or gain recognized from the underlying forecasted
transaction. However, the Company has procedures to manage risks associated with
its derivative instruments, which include limiting the duration of the
contracts, typically six months or less, and the amount of the underlying
exposures that can be economically hedged. Historically, the gains and losses on
these transactions have not been significant.

   The Company also utilizes non-derivative financial instruments including
letters of credit and commitments to extend credit.


INCOME TAXES

Income taxes are accounted for under the asset and liability method. Under this
method, deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases, and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates in effect for
the year in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in the Consolidated Statement of Operations in the period
that includes the enactment date. A valuation allowance is recorded to reduce
the carrying amounts of deferred tax assets if it is more likely than not that
such assets will not be realized.


OTHER COMPREHENSIVE INCOME (LOSS)

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


RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform to the current year
presentation.

34.
<Page>


3. RECENT ACCOUNTING PRONOUNCEMENTS

SFAS 141 - In July 2001, the Financial Accounting Standards Board ("FASB")
issued Statement No. 141, "Business Combinations" ("SFAS 141"), which requires
all business combinations initiated after June 30, 2001 to be accounted for
using the purchase method of accounting. As a result, use of the
pooling-of-interests method is prohibited for business combinations initiated
thereafter. SFAS 141 also establishes criteria for the separate recognition of
intangible assets acquired in a business combination. In fiscal 2001, Avaya
adopted this Statement, which did not have a material impact on the Company's
consolidated results of operations, financial position or cash flows.

   New accounting statements issued, but not yet adopted by the Company, include
the following:

SFAS 142 - In July 2001, the FASB issued Statement No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142"), which requires that goodwill and
certain other intangible assets having indefinite lives no longer be
amortized to earnings, but instead be subject to periodic testing for
impairment. Intangible assets determined to have definitive lives will
continue to be amortized over their useful lives. This Statement is effective
for the Company's 2003 fiscal year, and early adoption is permitted. However,
goodwill and intangible assets acquired after June 30, 2001 are subject
immediately to the non-amortization and amortization provisions of this
Statement. Effective October 1, 2001, the Company adopted SFAS142 and
implemented certain provisions, specifically the discontinuation of goodwill
amortization, and will be implementing the remaining provisions by the end of
fiscal 2002. In fiscal 2001, the Company recorded goodwill amortization
expense of $40 million. The Company is currently evaluating the remaining
provisions of SFAS 142 to determine the effect, if any, they may have on the
Company's consolidated results of operations, financial position or cash
flows.

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

SFAS 144 - In October 2001, the FASB issued Statement No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which excludes
from the definition of long-lived assets goodwill and other intangibles that are
not amortized in accordance with SFAS 142. SFAS 144 requires that long-lived
assets to be disposed of by sale be measured at the lower of carrying amount or
fair value less cost to sell, whether reported in continuing operations or in
discontinued operations. SFAS 144 also expands the reporting of discontinued
operations to include components of an entity that have been or will be disposed
of rather than limiting such discontinuance to a segment of a business. This
Statement is effective for the Company's 2003 fiscal year, and early adoption is
permitted. The Company is currently evaluating the impact of SFAS 144 to
determine the effect, if any, it may have on the Company's consolidated results
of operations, financial position or cash flows.

4. BUSINESS COMBINATIONS AND OTHER TRANSACTIONS

ACQUISITIONS

The following table presents information about certain acquisitions by the
Company during the fiscal year ended September 30, 2001. These acquisitions were
accounted for under the purchase method of accounting, and the acquired
technology valuation included existing technology, purchased in-process research
and development ("IPR&D") and other intangibles. The consolidated financial
statements include the results of operations and the estimated fair values of
the assets and liabilities assumed from the respective dates of acquisition. All
charges related to the write-off of purchased in-process research and
development were recorded in the quarter in which the transaction was completed.
There were no material acquisitions accounted for under the purchase method in
fiscal 2000 and 1999.

<Table>
<Caption>

                                                     Allocation of Purchase Price(1)              Amortization Period (in years)
                                                 ---------------------------------------------  ---------------------------------
                                     Purchase                Existing        Other   Purchased              Existing        Other
                   Acquisition Date     Price    Goodwill  Technology  Intangibles       IPR&D  Goodwill  Technology  Intangibles
                   ----------------     -----    --------  ----------  -----------       -----  --------  ----------  -----------
                                                     (dollars in millions)
<S>                <C>                 <C>          <C>         <C>        <C>         <C>           <C>        <C>         <C>
VPNet(2)           February 6, 2001    $117         $48         $30        $16         $31           5          5           5
Quintus(3)           April 11, 2001    $ 29         $ 3         $ 9        $ 3         $ 1           5          3           3
</Table>

(1) Excludes amounts allocated to specific tangible assets and liabilities.
(2) Acquisition of VPNet Technologies, Inc., a privately held distributor of
virtual private network solutions and devices. The total purchase price of $117
million was paid in cash and stock options.
(3) Acquisition of substantially all of the assets, including $10 million of
cash acquired, and the assumption of $20 million of certain liabilities of
Quintus Corporation, a provider of comprehensive electronic customer
relationship management solutions. The Company paid $29 million in cash for
these assets.

Included in the purchase price for each of the above acquisitions was purchased
in-process research and development. At the date of each acquisition, some of
the technology had not yet reached technological feasibility and had no future
alternative use. Accordingly, the purchased in-process research and development
was written off as a charge to earnings immediately upon consummation of the
respective acquisitions.

                                                                             35.
<Page>

The charge related to VPNet purchased in-process research and development was
not tax deductible. The remaining purchase price was allocated to tangible and
intangible assets, including goodwill, existing technology and other intangible
assets, less liabilities assumed.

   The value allocated to purchased in-process research and development for the
acquisitions was determined using an income approach. This involved estimating
the fair value of the in-process research and development using the present
value of the estimated after-tax cash flows expected to be generated by the
purchased in-process research and development, using risk-adjusted discount
rates and revenue forecasts as appropriate. Where appropriate, the Company
deducted an amount reflecting the contribution of the core technology from the
anticipated cash flows from an in-process research and development project. The
selection of the discount rate was based on consideration of the Company's
weighted average cost of capital, as well as other factors, including the useful
life of each technology, profitability levels of each technology, the
uncertainty of technology advances that were known at the time, and the stage of
completion of each technology. The Company believes that the estimated
in-process research and development amounts so determined represent fair value
and do not exceed the amount a third party would have paid for the projects.

   Revenue forecasts were estimated based on relevant market size and growth
factors, expected industry trends, individual product sales cycles and the
estimated life of each product's underlying technology. Estimated operating
expenses, income taxes, and charges for the use of contributory assets were
deducted from estimated revenue to determine estimated after-tax cash flows for
each project. Estimated operating expenses include cost of goods sold, selling,
general and administrative expenses, and research and development expenses. The
research and development expenses include estimated costs to maintain the
products once they have been introduced into the market and generate revenue and
costs to complete the purchased in-process research and development.

   Management is primarily responsible for estimating the fair value of the
assets and liabilities acquired, and has conducted due diligence in determining
the fair value. Management has made estimates and assumptions that affect the
reported amounts of assets, liabilities and expenses resulting from such
acquisitions. Actual results could differ from these amounts.


POOLING OF INTERESTS MERGER

In July 1999, the Company completed its merger with Mosaix, Inc., a provider of
software that manages an enterprise's various office functions and helps to
deliver more responsive and efficient customer service. Under the terms of the
agreement, the outstanding common stock of Mosaix was converted into
approximately 2.6 million shares of Lucent common stock with a value of $145
million. The financial position and results of operations of Mosaix were
immaterial to the Company and, as such, the consolidated financial statements
include the results of operations and the historical basis of the assets
acquired and liabilities assumed from the date of acquisition.


DIVESTITURES

In March 2000, the Company completed the sale of its U.S. sales division that
served small- and mid-sized businesses to Expanets, Inc. Under the agreement,
approximately 1,800 of the Company's sales and sales support employees were
transferred to Expanets, which became a distributor of the Company's products to
this market and a significant customer of the Company. A gain of $45 million was
recognized to the extent of cash proceeds received related to the sale of this
business and is included in other income, net.


OTHER TRANSACTIONS

AIRCRAFT SALE-LEASEBACK In June 2001, the Company sold a corporate aircraft for
approximately $34 million and subsequently entered into an agreement to lease it
back over a five-year period. At the end of the lease term, the Company has the
option to renew the lease subject to the consent of the lessors, or to purchase
the aircraft for a price as defined in the agreement. If the Company elects not
to either renew the lease or purchase the aircraft, the Company must arrange for
the sale of the aircraft to a third party. Under the sale option, the Company
has guaranteed approximately 60% of the unamortized original cost as the
residual value of the aircraft. The lease is accounted for as an operating lease
for financial statement purposes and as a loan for tax purposes.


OUTSOURCING OF CERTAIN MANUFACTURING FACILITIES In May 2001, the Company closed
the first phase of a five-year strategic manufacturing agreement to outsource
most of the manufacturing of its communications systems and software to
Celestica Inc. Under the agreement, Avaya will receive approximately $200
million in cash for the assets it is transferring to Celestica, of which the
Company has received $188 million as of September 30, 2001. The Company has
deferred $100 million of these proceeds, which will be recognized to income on a
straight-line basis over the term of the agreement. As of September 30, 2001,
the unamortized portion of these proceeds amounted to $20 million in other
current liabilities and $71 million in other liabilities. The Company expects
the remaining phases of the transaction, which include closing the Shreveport,
Louisiana facility, to be completed by the end of the first quarter of fiscal
2002.

   In September 2000, in conjunction with the Company's restructuring plans to
exit certain manufacturing businesses, the Company sold its manufacturing
facility located in San Jose, California, to Sanmina Corporation. This facility
produced electronic equipment used in structured cabling systems. In connection
with the sale, the Company received proceeds of approximately $18 million and
recorded a loss of approximately $1 million.

SALE OF EQUIPMENT In fiscal 1999, the Company sold equipment, which was
previously leased to customers, for $97 million. The equipment had a net book
value of approximately $2 million and consisted predominantly of discontinued
product lines. Rental income generated by this equipment for fiscal 1999 was $79
million.


36.
<Page>

5. SUPPLEMENTARY FINANCIAL INFORMATION

STATEMENT OF OPERATIONS INFORMATION

<Table>
<Caption>

                                       Year Ended September 30,
                                       ------------------------
                                        2001     2000     1999
                                        ----     ----     ----
                                         (dollars in millions)
<S>                                     <C>      <C>      <C>
DEPRECIATION AND AMORTIZATION
   INCLUDED IN COSTS:
   Amortization of software
     development costs                  $  24    $  24    $  14
INCLUDED IN SELLING, GENERAL
   AND ADMINISTRATIVE EXPENSES:
   Amortization of goodwill and
     other intangible assets               72       55       59
INCLUDED IN COSTS AND
   OPERATING EXPENSES:
   Depreciation and amortization of
     property, plant and equipment
     and internal use software            177      141      139
                                        -----    -----    -----
     Total depreciation and
       amortization                     $ 273    $ 220    $ 212
                                        =====    =====    =====
OTHER INCOME, NET
Loss on foreign currency transactions   $  (5)   $ (10)   $  --
Gain on businesses sold                     6       44       24
Interest income                            27        7       --
Miscellaneous, net                          6       30        4
                                        -----    -----    -----
     Total other income, net            $  34    $  71    $  28
                                        =====    =====    =====

<Caption>

BALANCE SHEET INFORMATION

                                                 As of September 30,
                                                 -------------------
                                                  2001         2000
                                                  ----         ----
                                                (dollars in millions)
<S>                                               <C>        <C>
INVENTORY
Completed goods                                   $   420    $   472
Work in-process and raw materials                     229        167
                                                  -------    -------
   Total inventory                                $   649    $   639
                                                  =======    =======

PROPERTY, PLANT AND EQUIPMENT, NET
Land and improvements                             $    46    $    42
Buildings and improvements                            485        383
Machinery and equipment                             1,126      1,091
Assets under construction                              47        179
Internal use software                                  89         50
                                                  -------    -------
Total property, plant and equipment                 1,793      1,745
Less: Accumulated depreciation and amortization      (805)      (779)
                                                  -------    -------
   Property, plant and equipment, net             $   988    $   966
                                                  =======    =======


<Caption>

SUPPLEMENTAL CASH FLOW INFORMATION

                                                Year Ended September 30, 2001
                                                -----------------------------
                                                     (dollars in millions)
<S>                                                       <C>
ACQUISITION OF BUSINESSES:
Fair value of assets acquired, net of cash acquired       $ 192
Less: Fair value of liabilities assumed                     (72)
                                                          -----
   Acquisition of businesses, net of cash acquired        $ 120
                                                          -----
In the second quarter of fiscal 2001, the Company
   paid off $9 million of debt assumed from its
   acquisition of VPNet

Interest payments, net of amounts capitalized             $  41
                                                          -----
Income tax payments                                       $  66
                                                          -----
Non-cash transactions:
Accretion of Series B Preferred Stock (Note 8)            $  27
Fair market value of stock options issued in connection
   with acquisition (Note 4)                                 16
Adjustments to Contribution by Lucent
   (Notes 12 and 16):
   Accounts receivable                                        8
   Property, plant and equipment, net                         7
   Net benefit assets                                        27
                                                          -----
     Total non-cash transactions                          $  85
                                                          =====

<Caption>

                                     Year Ended September 30, 2000
                                     -----------------------------
                                              (dollars in millions)
<S>                                                        <C>
DISPOSITION OF BUSINESSES:
Cash proceeds                                              $ 82
Less: Basis in net assets sold                              (38)

   Gain on businesses sold                                 $ 44
</Table>

   Payments for interest and income taxes prior to the Distribution were paid by
Lucent on behalf of the Company and do not necessarily reflect what the Company
would have paid had it been a stand-alone company.

   Net transfers to Lucent prior to the Distribution are composed predominantly
of the following non-cash transactions: (1) for the fiscal year ended September
30, 2000, a $528 million increase in Former Parent's net investment due to
prepaid pension costs and other assets and a $439 million decrease from benefit
obligations and other accrued liabilities assumed by the Company from Lucent on
the Distribution date, and for the fiscal year ended September 30, 1999, (2) a
$96 million decrease in Former Parent's net investment for a change in
accounting related to pension and postretirement benefit costs, partially offset
by (3) an $82 million increase in Former Parent's net investment attributed to
the Mosaix pooling of interests merger.

                                                                             37.
<Page>

6. SECURITIZATION OF ACCOUNTS RECEIVABLE

In June 2001, the Company entered into a receivables purchase agreement and
transferred a designated pool of qualified trade accounts receivable to a
special purpose entity ("SPE"), which in turn sold an undivided ownership
interest to an unaffiliated financial institution. The Company, through the SPE,
has a retained interest in a portion of the receivables, and the financial
institution has no recourse to the Company's other assets for failure of
customers to pay when due. The assets of the SPE are not available to pay
creditors of the Company. The Company is responsible for defined fees payable
monthly to the financial institution for costs associated with the outstanding
capital issued by the financial institution to fund the purchase of receivables
and a backstop liquidity commitment. The Company will continue to service,
administer and collect the receivables on behalf of the financial institution
and receive a fee for performance of these services. Collections of receivables
are used by the financial institution to purchase, from time to time, new
interests in receivables up to an aggregate of $200 million. The Company is
subject to certain receivable collection ratios, among other covenants contained
in the agreement. During fiscal 2001, the Company was in compliance with such
covenants. The receivables purchase agreement expires in June 2002, but may be
extended through June 2004 with the financial institution's consent.

   In connection with the transaction, the Company received cash proceeds of
$200 million from the sale and securitization of these receivables. The accounts
receivable balances were removed from the Consolidated Balance Sheet and the
proceeds received from the sale were reflected as cash provided by financing
activities in the Consolidated Statement of Cash Flows. As of September 30,
2001, the Company had a retained interest of $153 million in the SPE's
designated pool of qualified accounts receivable representing collateral for the
sale. The carrying amount of the Company's retained interest, which approximates
fair value because of the relatively short-term nature of the receivable
collections, was reclassified to other current assets.

   The Company did not record an asset or liability related to any servicing
obligations because the initial measure for servicing was determined to be
adequate to compensate the Company for its servicing responsibilities. Although
not material, costs associated with the sale of the receivables were recorded in
other income, net in the Consolidated Statement of Operations. No significant
gain or loss resulted from this transaction.


7. BUSINESS RESTRUCTURING AND RELATED CHARGES

In fiscal 2001, the Company outsourced certain manufacturing facilities and
accelerated its restructuring plan that was originally adopted in September 2000
to improve profitability and business performance as a stand-alone company. As a
result, the Company recorded a pretax charge of $872 million in fiscal 2001 for
business restructuring and related charges, which is expected to result in a
$295 million usage of cash. This charge was partially offset by a $35 million
reversal to income primarily attributable to fewer employee separations than
originally anticipated and more favorable than expected real estate lease
termination costs.

   The components of the fiscal 2001 charge include $650 million of employee
separation costs, $24 million of lease termination costs, and $198 million of
other related charges. The charge for employee separation costs is composed of
$577 million primarily related to enhanced pension and postretirement benefits,
which represent the cost of curtailment in accordance with SFAS No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and $73 million for severance,
special benefit payments and other employee separation costs. The $198 million
of other related charges is composed of $178 million for incremental period
expenses primarily to facilitate the separation from Lucent, including computer
system transition costs, and $20 million for an asset impairment charge related
to land, buildings and equipment at the Shreveport manufacturing facility that
the Company expects to dispose of during fiscal 2002. Employee separation costs
of $55 million established in fiscal 2000 for union-represented employees at
Shreveport will be paid as enhanced severance benefits from existing pension and
benefit assets and, accordingly, such amount was reclassified in fiscal 2001 out
of the business restructuring reserve and recorded as a reduction to prepaid
benefit costs.

   The employee separation costs in fiscal 2001 were incurred in connection with
the elimination of 6,810 employee positions of which 5,600 were through a
combination of involuntary and voluntary separations, including an early
retirement program targeted at U.S. management employees, and a workforce
reduction of 1,210 employees due to the outsourcing of certain of the Company's
manufacturing operations to Celestica. Employee separation payments that are
included in the business restructuring reserve will be made either through a
lump sum or a series of payments extending over a period of up to two years from
the date of departure at each employee's option. This workforce reduction was
substantially complete as of September 30, 2001. Real estate lease termination
costs are being incurred primarily in the U.S., Europe and Asia, and have been
reduced for sublease income that management believes is probable. Payments on
lease obligations, which consist of real estate and equipment leases, will
extend through 2003. In fiscal 2001, accrued costs for lease obligations
represent approximately 666,000 square feet of excess sales and services support
offices, materials, stocking and logistics warehouses, and Connectivity
Solutions facilities. As of September 30, 2001, the Company had not yet vacated
any of this space.

   In fiscal 2000, the Company recorded a pretax business restructuring charge
of $684 million in connection with its separation from Lucent. The components of
the charge include $365 million of employee

38.
<Page>

separation costs, $127 million of lease termination costs, $28 million of other
exit costs, and $164 million of other related charges.

   The charge for employee separation costs in fiscal 2000 includes severance,
medical and other benefits attributable to the worldwide reduction of 4,900
union-represented and management positions. This charge is the result of
redesigning the services organization by reducing the number of field
technicians to a level needed for non-peak workloads, consolidating and closing
certain U.S. and European manufacturing facilities and realigning the sales
effort to focus the direct sales force on strategic accounts and address smaller
accounts through indirect sales channels. This workforce reduction was
substantially complete as of September 30, 2001. The charge for lease
termination obligations included approximately two million square feet of excess
manufacturing, distribution and administrative space, of which the Company has
vacated 646,000 square feet as of September 30, 2001. Other exit costs consist
of decommissioning legacy computer systems in connection with the Company's
separation from Lucent and terminating other contractual obligations.

   The $164 million of other related charges in fiscal 2000 is composed of $89
million for incremental period expenses related to the separation from Lucent,
including computer system transition costs, and a $75 million asset impairment
charge that was primarily related to an outsourcing contract with a major
customer. With respect to the asset impairment, the Company terminated its
obligation under a leasing arrangement and purchased the underlying equipment,
which had been used to support a contract with a customer to provide outsourcing
and related services. Based on the terms of this contract, the estimated
undiscounted cash flows from the equipment's use and eventual disposition was
determined to be less than the equipment's carrying value, and resulted in an
impairment charge of $50 million to write such equipment down to its fair value.

   In fiscal 1999, the Company reversed $33 million of employee separation
costs, originally established in December 1995, due to higher than expected
voluntary employee attrition. As of September 30, 1999, all prior restructuring
related plans were complete and no such reserves remained.

The following table summarizes the status of the Company's business
restructuring and related charges as well as the related reserve during fiscal
2000 and 2001:

<Table>
<Caption>

                                                 Business Restructuring Charges             Other Related Charges
                                       --------------------------------------------------  -----------------------
                                                                                                                            Total
                                                                                    Total                                Business
                                         Employee        Lease                   Business               Incremental Restructuring
                                       Separation  Termination        Other Restructuring        Asset       Period   and Related
                                            Costs  Obligations   Exit Costs       Charges  Impairments        Costs      Charges
                                            -----  -----------   ----------       -------  -----------        -----      -------
                                                                          (dollars in millions)
<S>                                         <C>           <C>         <C>           <C>           <C>         <C>          <C>
FISCAL 2000:
Charges                                     $ 365         $127        $  28         $ 520        $  75        $  89        $ 684
Cash payments                                 (20)           -           (1)          (21)           -          (89)        (110)
Asset impairments                               -            -            -             -          (75)           -          (75)
                                            -----         ----        -----         -----        -----        -----        -----
Balance as of September 30, 2000            $ 345         $127        $  27         $ 499        $   -        $   -        $ 499
                                            -----         ----        -----         -----        -----        -----        -----
FISCAL 2001:
Charges                                     $ 650         $ 24        $   -         $ 674         $ 20        $ 178        $ 872
Reversals                                     (17)          (7)         (11)          (35)           -            -          (35)
Decrease in prepaid benefit costs/
   increase in benefit obligations, net      (577)           -            -          (577)           -            -         (577)
Cash payments                                (250)         (66)         (11)         (327)           -         (178)        (505)
Asset impairments                               -            -            -             -          (20)           -          (20)
Reclassification                              (55)           -            -           (55)           -            -          (55)
                                            -----         ----        -----         -----        -----        -----        -----
Balance as of September 30, 2001            $  96         $ 78         $  5         $ 179        $   -        $   -        $ 179
                                            =====         ====         ====         =====        =====        =====        =====
</Table>

   In addition, in fiscal 2001 and 2000, the Company recorded $48 million and
$73 million, respectively, in selling, general and administrative expenses for
start-up activities related to establishing independent operations, including
fees for investment banking and other professional advisors, and marketing costs
associated with establishing the Avaya brand.

                                                                             39.
<Page>

8. CONVERTIBLE PARTICIPATING PREFERRED STOCK

In October 2000, the Company sold to Warburg, Pincus Equity Partners, L.P. and
related investment funds (collectively, "the Warburg Funds") four million shares
of the Company's Series B convertible participating preferred stock and warrants
to purchase the Company's common stock for an aggregate purchase price of $400
million. Based on a conversion price of $26.71, the Series B preferred stock is
convertible into 15,973,068 shares of the Company's common stock as of September
30, 2001.

   The warrants have an exercise price of $34.73 representing 130% of the
conversion price for the Series B preferred stock. Of these warrants, warrants
exercisable for 6,883,933 shares of common stock have a four-year term expiring
on October 2, 2004, and warrants exercisable for 5,507,146 shares of common
stock have a five-year term expiring on October 2, 2005. During the period from
May 24, 2001 until October 2, 2002, if the market price of the Company's common
stock exceeds 200%, in the case of the four-year warrants, and 225%, in the case
of the five-year warrants, of the exercise price of the warrants for 20
consecutive trading days, the Company can force the exercise of up to 50% of the
four-year and the five-year warrants, respectively.

   The shares of Series B preferred stock had an aggregate initial liquidation
value of $400 million and will accrete for the first 10 years at an annual rate
of 6.5% and 12% thereafter, compounded quarterly. After the third anniversary of
the original issue date of the Series B preferred stock, 50% of the amount
accreted for the year may be paid in cash as a dividend on a quarterly basis at
the Company's option. After the fifth anniversary of the issue date through the
tenth anniversary, the Company may elect to pay 100% of the amount accreted for
the year as a cash dividend on a quarterly basis. The liquidation value
calculated on each quarterly dividend payment date, which includes the accretion
for the dividend period, will be reduced by the amount of any cash dividends
paid. Following the tenth anniversary of the issue date, the Company will pay
quarterly cash dividends at an annual rate of 12% of the then accreted
liquidation value of the Series B preferred stock, compounded quarterly. The
Series B preferred shares also participate, on an as-converted basis, in
dividends paid on the Company's common stock. For the fiscal year ended
September 30, 2001, accretion of the Series B preferred stock was $27 million
resulting in a liquidation value of $427 million as of September 30, 2001. The
total number of shares of common stock into which the Series B preferred stock
are convertible is determined by dividing the liquidation value in effect at the
time of conversion by the conversion price.

   The $400 million proceeds from the Warburg Pincus investment were initially
allocated between the Series B preferred stock and warrants based upon the
relative fair market value of each security, with $368 million allocated to the
Series B preferred stock and $32 million to the warrants. The fair value
allocated to the Series B preferred stock including the amount accreted for the
fiscal year ended September 30, 2001 was recorded in the mezzanine section of
the Consolidated Balance Sheet because the investors may require the Company,
upon the occurrence of any change of control in the Company during the first
five years from the investment, to redeem the Series B preferred stock. As of
September 30, 2001, the Company recorded a $27 million reduction in accumulated
deficit representing the amount accreted for the dividend period. The fair value
allocated to the warrants was included in additional paid-in capital.

   A beneficial conversion feature would exist if the conversion price for the
Series B preferred stock or warrants was less than the fair value of the
Company's common stock at the commitment date. The Company determined that no
beneficial conversion features existed at the commitment date and therefore
there was no impact on its results of operations associated with the Series B
preferred stock or with the warrants. The beneficial conversion features, if
any, associated with dividends paid in-kind, where it is the Company's option to
pay dividends on the Series B preferred stock in cash or in-kind, will be
measured when dividends are declared and recorded as a reduction to net income
available to common stockholders.

   At any time after the fifth anniversary of their issuance, the Company may
force conversion of the shares of Series B preferred stock. If the Company gives
notice of a forced conversion, the investors will be able to require the Company
to redeem the Series B preferred shares at 100% of the then current liquidation
value, plus accrued and unpaid dividends. Following a change in control of the
Company during the first five years after the investment, other than a change of
control transaction involving solely the issuance of common stock, the accretion
of some or all of the liquidation value of the Series B preferred stock through
the fifth anniversary of the issue date will be accelerated, subject to the
Company's ability to pay a portion of the accelerated accretion in cash in some
instances. In addition, for 60 days following the occurrence of any change of
control of the Company during the first five years after the investment, the
investors will be able to require the Company to redeem the Series B preferred
stock at 101% of the liquidation value, including any accelerated accretion of
the liquidation value, plus accrued and unpaid dividends.


9. EARNINGS (LOSS) PER SHARE OF COMMON STOCK

Basic earnings (loss) per common share was calculated by dividing net income
(loss) available to common stockholders by the weighted average number of common
shares outstanding during the year. Since the Distribution was not effective
until September 30, 2000, the weighted average number of common shares
outstanding during fiscal 2000 and 1999 was calculated based on a twelve-to-one
ratio of Lucent's weighted average number of shares to Avaya's weighted average
number of shares. Diluted earnings (loss) per common share

40.
<Page>

was calculated by adjusting net income (loss) available to common stockholders
and weighted average outstanding shares, assuming conversion of all potentially
dilutive securities including stock options, warrants and convertible
participating preferred stock.

<Table>
<Caption>

                                                                                  Year Ended September 30,
                                                                                  ------------------------
                                                                                  2001     2000      1999
                                                                                  ----     ----      ----
                                                                             (dollars and shares in millions,
                                                                                 except per share amounts)
<S>                                                                              <C>      <C>      <C>
Income (loss) before cumulative effect of accounting change                      $(352)   $(375)   $ 186
Accretion of Series B preferred stock                                              (27)      --       --
                                                                                 -----    -----    -----
Income (loss) available to common stockholders                                    (379)    (375)     186
Cumulative effect of accounting change                                              --       --       96
                                                                                 -----    -----    -----
Net income (loss) available to common stockholders                               $(379)   $(375)   $ 282
                                                                                 =====    =====    =====

SHARES USED IN COMPUTING EARNINGS (LOSS) PER COMMON SHARE:

Basic                                                                              284      269      259
                                                                                 =====    =====    =====
Diluted                                                                            284      269      273
                                                                                 =====    =====    =====

EARNINGS (LOSS) PER COMMON SHARE - BASIC:

Income (loss) available to common stockholders                                   $(1.33)  $(1.39)  $0.72
Cumulative effect of accounting change                                              --       --     0.37
                                                                                 -----    -----    -----
Net income (loss) available to common stockholders                               $(1.33)  $(1.39)  $1.09
                                                                                 -----    -----    -----
EARNINGS (LOSS) PER COMMON SHARE - DILUTED:

Income (loss) available to common stockholders                                   $(1.33)  $(1.39)  $0.68
Cumulative effect of accounting change                                              --       --     0.35
                                                                                 -----    -----    -----
Net income (loss) available to common stockholders                               $(1.33)  $(1.39)  $1.03
                                                                                 -----    -----    -----

SECURITIES EXCLUDED FROM THE COMPUTATION OF DILUTED EARNINGS (LOSS) PER COMMON
SHARE:

Options(1)                                                                          52        9        2
Series B preferred stock(2)                                                         16       --       --
Warrants(1)                                                                         12       --       --
                                                                                 -----    -----    -----
   Total                                                                            80        9        2
                                                                                 =====    =====    =====

</Table>

(1) These securities have been excluded from the diluted earnings (loss) per
common share calculation since their inclusion would be antidilutive because the
option and warrant exercise prices are greater than the average market value of
the underlying stock.
(2) In applying the "if-converted" method, the Series B convertible
participating preferred stock was excluded from the diluted earnings (loss) per
common share calculation since the effect of its inclusion would have been
antidilutive.


10. LONG-TERM DEBT

Long-term debt outstanding consisted of the following:

<Table>
<Caption>

                                                 As of September 30,
                                                 -------------------
                                                  2001         2000
                                                  ----         ----
                                                (dollars in millions)
<S>                                               <C>          <C>
Commercial paper                                  $432         $780
Revolving credit facilities:
   364-day facility                                  -            -
   Five-year facility                              200            -
Other                                               13           13
                                                  ----         ----

   Total debt                                      645          793
Less: Current portion                              145           80
                                                  ----         ----
   Total long-term debt                           $500         $713
                                                  ====         ====
</Table>


COMMERCIAL PAPER PROGRAM

The Company has established a commercial paper program (the "CP Program")
pursuant to which the Company may issue up to $1.25 billion of commercial paper
at market interest rates with maturities not exceeding one year. Commercial
paper issued under the CP Program may bear interest at a fixed rate or at a
floating rate that may be reset periodically throughout the term. The floating
interest rate may be adjusted based on any one of a number of prevailing rates
for the relevant maturity period, as determined by the Company at the time of
issuance, including without limitation, certificate of deposit rates, commercial
paper rates for non-financial issuers, the federal funds rate, bank prime rates
and treasury bond rates.


41.
<Page>

   Under the CP Program, the Company assumed, upon the Distribution, all of
Lucent's obligations in connection with its issuance of $780 million of
commercial paper. As of September 30, 2001 and 2000, $432 million and $700
million, respectively, in commercial paper was classified as long-term debt in
the Consolidated Balance Sheets since it is supported by the five-year credit
facility described below and it is management's intent to reissue the commercial
paper on a long-term basis. The weighted average yield and maturity period for
the commercial paper outstanding as of September 30, 2001 and 2000 was
approximately 3.9% and 6.9% and 62 days and 21 days, respectively.


CREDIT FACILITIES

The Company has two unsecured revolving credit facilities (the "Credit
Facilities") with third party financial institutions consisting of a $400
million 364-day credit facility that expires in August 2002 and an $850 million
five-year credit facility that expires in September 2005. Funds are available
under the Credit Facilities for general corporate purposes, to backstop
commercial paper, and for acquisitions. The Credit Facilities provide, at the
Company's option, for fixed interest rate and floating interest rate borrowings.
Fixed rate borrowings under the Credit Facilities bear interest at a rate equal
to (i) the greater of (A) Citibank, N.A.'s base rate and (B) the federal funds
rate plus 0.5% plus (ii) a margin based on the Company's long-term debt rating
(the "Applicable Margin"). Floating rate borrowings bear interest at a rate
equal to the LIBOR rate plus the Applicable Margin and a utilization fee based
on the Company's long-term debt rating (the "Applicable Utilization Fee"). Based
on the Company's current long-term debt rating, the Applicable Margins for the
364-day credit facility and the five-year credit facility are 0.5% and 0.4%,
respectively, and the Applicable Utilization Fee for both facilities is 0.125%.

   As of September 30, 2001, $200 million was outstanding under the five-year
credit facility bearing interest at a floating rate of approximately 3.5%, which
was repaid in October 2001. There were no outstanding borrowings under the
364-day credit facility as of September 30, 2001. No amounts were drawn under
either credit facility as of September 30, 2000.

   The Credit Facilities contain certain covenants, including limitations on the
Company's ability to incur liens in certain circumstances or enter into certain
change of control transactions. In addition, for each of the Company's first
three fiscal quarters of 2001, the Company had to maintain a ratio of annualized
consolidated earnings before interest and taxes to annualized consolidated
interest expense of at least three to one. Commencing in the fourth quarter of
fiscal 2001 and each fiscal quarter thereafter, the Company had to maintain such
ratio for the previous four consecutive fiscal quarters. The covenant permitted
the Company to exclude up to $950 million of business restructuring and related
charges and $300 million of start-up expenses from the calculation of
consolidated earnings before interest and taxes to be taken no later than
September 30, 2001. In August 2001, the five-year credit facility was amended to
permit the Company to exclude up to an additional $450 million of non-cash
business restructuring and related charges from the calculation of earnings
before interest and taxes during such period to be taken no later than the
fourth quarter of fiscal 2001. The Company was in compliance with this covenant
in fiscal 2001.

   In addition, the Company, through its foreign operations, entered into
several uncommitted credit facilities totaling $118 million, of which letters of
credit of $10 million and $27 million, were issued and outstanding as of
September 30, 2001 and 2000, respectively. Letters of credit are purchased
guarantees that ensure the Company's performance or payment to third parties in
accordance with specified terms and conditions. Management does not believe it
is practicable to estimate the fair value of these financial instruments and
does not expect any material losses from their resolution since performance is
not likely to be required.

   As of September 30, 2001 and 2000, the Company had debt outstanding
attributable to its foreign entities of $13 million.


FAIR VALUE

The carrying value of the Company's commercial paper and other borrowings
approximate fair value due to their short-term maturities and variable interest
rates.


11. INCOME TAXES

Commencing with fiscal 2001, the Company will begin filing its own consolidated
tax returns. Prior to the Distribution, the Company's income taxes were
reflected on a separate tax return basis and included as part of Lucent's
consolidated income tax returns. The following table presents the principal
reasons for the difference between the effective tax rate and the U.S. federal
statutory income tax rate:

<Table>
<Caption>

                                         Year Ended September 30,
                                         ------------------------
                                          2001     2000     1999
                                          ----     ----     ----

<S>                                      <C>      <C>       <C>
U.S. federal statutory income
   tax rate (benefit)                    (35.0)%  (35.0)%   35.0%
State and local income taxes, net
   of federal income tax effect           (4.3)    (4.8)     4.2
Tax differentials on foreign earnings     (2.2)     3.7      1.9
Research credits                          (2.1)    (2.2)    (3.7)
Purchased in-process research and
   development and other acquisition
   related costs                           2.4     --       --
Amortization of intangibles                1.8      2.3      7.0
Non-deductible restructuring costs         2.3     18.2     --
Other differences - net                   (1.2)     1.5     (5.0)
                                         -----    -----     ----
Effective tax rate (benefit)             (38.3)%  (16.3)%   39.4%
                                         =====    =====     ====
</Table>


42.
<Page>

The following table presents the U.S. and foreign components of income (loss)
before income taxes and the provision (benefit) for income taxes:

<Table>
<Caption>

                                        Year Ended September 30,
                                        ------------------------
                                         2001    2000     1999
                                         ----    ----     ----
                                         (dollars in millions)
<S>                                     <C>      <C>      <C>
INCOME (LOSS) BEFORE INCOME TAXES:
U.S.                                    $(456)   $(588)   $ 173
Foreign                                  (114)     140      134
                                        -----    -----    -----
Income (loss) before income taxes       $(570)   $(448)   $ 307
                                        =====    =====    =====

PROVISION (BENEFIT) FOR INCOME TAXES:
CURRENT

Federal                                 $  --    $ 130    $  45
State and local                            --       11       19
Foreign                                    46       74       59
                                        -----    -----    -----
Subtotal                                $  46    $ 215    $ 123
                                        =====    =====    =====

DEFERRED

Federal                                 $(219)   $(244)   $  (3)
State and local                           (38)     (44)       1
Foreign                                    (7)      --       --
                                        -----    -----    -----
Subtotal                                $(264)   $(288)   $  (2)
                                        -----    -----    -----
Provision (benefit) for income taxes    $(218)   $ (73)   $ 121
                                        =====    =====    =====

</Table>

   As of September 30, 2001, the Company had tax credit carryforwards of $18
million and federal, state and local, and foreign net operating loss
carryforwards (after-tax) of $305 million. The tax credit carryforwards expire
primarily after the year 2003. Federal and state net operating loss
carryforwards expire through the year 2021. The majority of foreign net
operating loss carryforwards have no expiration.

   The components of deferred tax assets and liabilities as of September 30,
2001 and 2000 are as follows:

<Table>
<Caption>

                                         As of September 30,
                                         -------------------
                                           2001     2000
                                           ----     ----
                                        (dollars in millions)
<S>                                       <C>      <C>
DEFERRED INCOME TAX ASSETS
Benefit obligations                       $ 249    $ 119
Accrued liabilities                         353      459
Net operating loss/credit carryforwards     323       35
Valuation allowance                         (49)     (49)
Other                                         7        5
                                          -----    -----
   Total deferred tax assets              $ 883    $ 569
                                          =====    =====

DEFERRED INCOME TAX LIABILITIES
Property, plant and equipment             $  37    $  29
Other                                        71       46
                                          -----    -----
   Total deferred tax liabilities         $ 108    $  75
                                          =====    =====
</Table>

   The valuation allowance established for deferred tax assets primarily relates
to state tax credit carryforwards and foreign net operating loss carryforwards
for which management believes it is more likely than not such deferred tax
amounts will not be realized.

   The Company has not provided for U.S. deferred income taxes or foreign
withholding taxes on $534 million of undistributed earnings of its non-U.S.
subsidiaries as of September 30, 2001, since the Company intends to reinvest
these earnings indefinitely.


12. BENEFIT OBLIGATIONS

PENSION AND POSTRETIREMENT BENEFITS

The Company maintains defined benefit pension plans covering the majority of its
employees and retirees, and postretirement benefit plans for retirees that
include healthcare benefits and life insurance coverage. At the Distribution,
the Company assumed responsibility for pension and postretirement benefit
obligations for its active employees. Obligations related to retired and
terminated vested employees as of September 30, 2000 remained the responsibility
of Lucent. Prior to the Distribution, the Company's employees participated in
the Lucent pension plans and postretirement benefit plans. The Company's share
of the Lucent plans' assets and liabilities was not included in the Company's
consolidated financial statements until the Distribution since Lucent had not
yet separated Avaya's portion of the employee benefit plans.

   In connection with the Distribution, the Company recorded estimates in its
Consolidated Balance Sheet at September 30, 2000 in prepaid benefit costs and
benefit obligations of various existing Lucent benefit plans related to
employees for whom the Company assumed responsibility. Following an actuarial
review, the Company received a valuation, agreed upon by the Company and Lucent,
that reduced prepaid benefit costs by $44 million and pension and postretirement
benefit obligations by $17 million. The Company recorded the net effect of these
adjustments as a reduction to additional paid-in capital in fiscal 2001 because
the transfer of the net benefit assets relates to the original capital
contribution from Lucent.

   The pension and postretirement costs incurred by Lucent for employees who
performed services for the Company were based on estimated plan assets being
equal to a proportional share of plan obligations incurred by Lucent for
employees who performed services for the Company. In relation to the Lucent
plans, the Company recorded pension expense of $115 million and $126 million,
and postretirement expense of $49 million and $53 million in fiscal 2000 and
1999, respectively, as adjusted through the Former Parent's net investment. In
fiscal 2001, the Company recorded pension and postretirement expense of $457
million and $138 million, respectively, including charges for curtailment and
special termination benefits of $474 million and $112 million, respectively, in
connection with the Company's business restructuring efforts.

   During fiscal 2001, as a result of the restructuring initiatives, the
Company's pension plans experienced significant decreases in the number of
active employees. In fiscal 2001, as a result of the manufacturing outsourcing
transaction and an early retirement program,

                                                                             43.
<Page>

interim measurements were performed and curtailment accounting was implemented.
The Company recognized a loss from curtailment and special termination benefits
related to its pension plan of $26 million and $448 million, respectively. The
special termination benefits provided employees with improved pension benefits
and earlier eligibility for postretirement benefits. In addition, effective
August 1, 2001, the Company amended its pension plan for salaried employees by
increasing the minimum retirement age which resulted in a $76 million decrease
to the projected benefit obligation.

   The Company has several non-pension postretirement benefit plans. Consistent
with the curtailment accounting recorded for pensions during fiscal 2001, the
Company recorded curtailment and special termination benefit charges of $91
million and $21 million, respectively.

   Effective August 1, 2001, the Company also amended its postretirement
benefits for salaried employees by decreasing the maximum employer contribution
to retiree healthcare coverage from 90% to 75%. In addition, the Company amended
the point in time when life insurance begins to be reduced. Under the amended
plan, retiree life insurance will be reduced by 10% a year beginning one year
after retirement, until 50% of the original coverage amount is reached.
Previously, this reduction started when the retiree reached age 66. The net
effect of these amendments resulted in a decrease in the accumulated
postretirement benefit obligation of $35 million.

   Effective October 1, 1998, the Company changed its method for calculating the
market-related value of plan assets used in determining the expected
return-on-asset component of annual net pension and postretirement benefit
costs. The cumulative effect of this accounting change related to periods prior
to fiscal 1999 of $158 million ($96 million after-tax) is reflected as a
one-time, non-cash credit to fiscal 1999 earnings. This accounting change also
resulted in a reduction in benefit costs in fiscal 1999 that increased income by
$30 million ($18 million after-tax).

The following table shows the activity in Avaya's defined benefit and
postretirement plans:

<Table>
<Caption>

                                                         Pension Benefits   Postretirement Benefits
                                                         ----------------   -----------------------
                                                        As of September 30,  As of September 30,
                                                        -------------------  -------------------
                                                         2001      2000        2001       2000
                                                         ----      ----        ----       ----
                                                                 (dollars in millions)
<S>                                                   <C>        <C>        <C>        <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation as of October 1                    $ 1,758    $ 2,688    $   412    $   604
Adjustment for final obligation assumed from Lucent      (174)        --        (48)        --
Service cost                                               79        115         11         16
Interest cost                                             128        195         30         44
Amendments                                                (76)        --        (35)        --
Actuarial loss (gain)                                     399     (1,240)       124       (252)
Special termination benefits                              448         --         21         --
Reclassification (Note 7)                                  55         --         --         --
Benefits paid                                             (99)        --         (2)        --
                                                      -------    -------    -------    -------
Benefit obligation as of September 30                 $ 2,518    $ 1,758    $   513    $   412
                                                      -------    -------    -------    -------

CHANGE IN PLAN ASSETS
Fair value of plan assets as of October 1             $ 2,985    $ 2,450    $   255    $   222
Actual return on plan assets                             (255)       584        (44)        33
Adjustment for final assets assumed from Lucent          (260)        --        (36)        --
Employer contributions                                     --         --          1         --
Benefits paid                                             (99)        --         (2)        --
Transfer to former affiliates                              --        (49)        --         --
                                                      -------    -------    -------    -------
Fair value of plan assets as of September 30          $ 2,371    $ 2,985    $   174    $   255
                                                      -------    -------    -------    -------

FUNDED (UNFUNDED) STATUS OF THE
PLAN                                                  $  (147)   $ 1,227    $  (339)   $  (157)
Unrecognized prior service cost                            (5)       133        (16)        35
Unrecognized transition asset                              (7)       (22)        --         --
Unrecognized net (gain)/loss                              (11)      (951)        34        (76)
                                                      -------    -------    -------    -------
Prepaid (accrued) benefit cost                        $  (170)   $   387    $  (321)   $  (198)
                                                      =======    =======    =======    =======

</Table>


44.
<Page>

<Table>
<Caption>

                                                                 As of September 30,
                                                                 -------------------
                                                                     2001   2000
                                                                     ----   ----
<S>                                                                  <C>    <C>
PENSION AND POSTRETIREMENT BENEFITS WEIGHTED AVERAGE ASSUMPTIONS
Discount rate                                                        7.0%   7.5%
Expected return on plan assets                                       9.0%   9.0%
Rate of compensation increase                                        4.5%   4.5%
</Table>

   For postretirement healthcare, a 5.7% annual rate of increase in the per
capita cost of covered healthcare benefits was assumed for fiscal year 2002. The
rate was assumed to decline gradually to 3.9% by the year 2007, and remain at
that level thereafter.

<Table>
<Caption>

                                                           Pension Benefits                     Postretirement Benefits
                                                     -------------------------------         ------------------------------
                                                       Year ended September 30,                Year ended September 30,
                                                     -------------------------------         ------------------------------
                                                     2001         2000          1999         2001         2000         1999
                                                     ----         ----          ----         ----         ----         ----
                                                                             (dollars in millions)
<S>                                                 <C>          <C>           <C>           <C>          <C>          <C>
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost                                        $  79        $ 115         $ 125         $ 11         $ 16         $ 19
Interest cost                                         128          195           167           30           44           42
Expected return on plan assets                       (208)        (200)         (171)         (18)         (17)         (15)
Amortization of unrecognized prior service cost        16           23            22            5            7            7
Recognized net actuarial gain                         (19)          (1)            -           (2)          (1)           -
Amortization of transition asset                      (13)         (17)          (17)           -            -            -
Curtailment expense                                    26            -             -           91            -            -
Special termination benefits                          448            -             -           21            -            -
                                                    -----        -----         -----         ----         ----         ----
Net periodic benefit cost                           $ 457        $ 115        $  126         $138         $ 49         $ 53
                                                    =====        =====        ======         ====         ====         ====
</Table>

   As of September 30, 2001, the Company's pension and postretirement plan
assets did not hold any direct investment in Avaya common stock. As of September
30, 2000, the Lucent pension plan assets included $102 million and the
postretirement plan assets included $3 million of Avaya and Lucent common stock.

   A one-percentage-point change in the Company's healthcare cost trend rate
would have the following effects:

<Table>
<Caption>

                                                  One-Percentage-Point
                                                  --------------------
                                                 Increase      Decrease
                                                 --------      --------
                                                  (dollars in millions)
<S>                                                 <C>         <C>
Effect on total of service and interest
   cost components                                  $0.1        $(0.1)
Effect on postretirement benefit obligation         $0.6        $(0.8)
</Table>


SAVINGS PLANS

The majority of the Company's employees are eligible to participate in savings
plans sponsored by the Company. The plans allow employees to contribute a
portion of their compensation on a pre-tax and/or after-tax basis in accordance
with specified guidelines. Avaya matches a percentage of employee contributions
up to certain limits. The Company's expense related to these savings plans was
$58 million in fiscal 2001. Lucent had similar plans prior to the Distribution
of which the Company's expense was $54 million and $68 million in 2000 and 1999,
respectively.


13. STOCK COMPENSATION PLANS

Prior to fiscal 2001, certain employees of the Company were granted stock
options and other equity-based awards under Lucent's stock-based compensation
plans. At the time of the Distribution, unvested awards outstanding under
Lucent's stock plans that were held by Lucent employees who transferred to the
Company were converted to awards to acquire stock of Avaya. Vested Lucent stock
options have remained options to acquire Lucent common stock, subject to
adjustments as described below. The Avaya stock options and other awards as
converted have the same vesting provisions, option periods, and other terms and
conditions as the Lucent options and awards they replaced. The number of shares
and exercise price of each stock option has been adjusted so that each option,
whether a Lucent option or an Avaya option, has the same ratio of the exercise
price per share to the market value per share, and the same aggregate difference
between market value and exercise price (intrinsic value), as the Lucent stock
options prior to the Distribution. Upon conversion, the stock options retained
the measurement date from the original issuance.


STOCK OPTIONS

Stock options generally are granted with an exercise price equal to the market
value of a share of common stock on the date of grant, have a term of 10 years
or less and vest within four years from the date of grant. As of September 30,
2001, there were approximately


                                                                             45.
<Page>

23 million stock options authorized for grant to purchase Avaya common stock
under the Company's stock compensation plans, excluding those stock options
assumed by the Company from Lucent and converted to Avaya stock options at the
Distribution date.

   In connection with certain of the Company's acquisitions, outstanding stock
options held by employees of acquired companies became exercisable, according to
their terms, for Avaya's common stock effective at the acquisition date. For
acquisitions accounted for as purchases, the fair value of these options was
included as part of the purchase price.

   The Company has adopted the disclosure requirements of SFAS No. 123,
"Accounting for Stock-Based Compensation" and, as permitted under SFAS No. 123,
applies Accounting Principles Board Opinion ("APB") No. 25 and related
interpretations in accounting for its stock compensation plans. Compensation
expense recorded under APB No. 25, which uses the intrinsic-value method, was
$10 million, $7 million and $14 million for the years ended September 30, 2001,
2000 and 1999, respectively. If the Company had elected to adopt the optional
recognition provisions of SFAS No. 123, which uses the fair value-based method,
for its stock option plans and employee stock purchase plan, net income (loss)
would have been changed to the pro forma amounts indicated below:

<Table>
<Caption>

                                       Year Ended September 30,
                                    -------------------------------
                                    2001          2000         1999
                                    ----          ----         ----
                                         (dollars in millions)
<S>                                <C>           <C>           <C>
NET INCOME (LOSS)
As reported                        $(352)        $(375)        $282
Pro forma                          $(429)        $(469)        $231
</Table>

   The fair value of stock options used to compute pro forma net income
disclosures is the estimated fair value at grant date using the Black-Scholes
option-pricing model with the following assumptions:

<Table>
<Caption>

                                          Year Ended September 30,
                                      -------------------------------
                                      2001          2000         1999
                                      ----          ----         ----

<S>                                   <C>           <C>          <C>
WEIGHTED AVERAGE ASSUMPTIONS
Dividend yield                         0%            0.20%        0.13%
Expected volatility                   50.4%         38.4%        34.1%
Risk-free interest rate                5.7%          6.3%         5.3%
Expected holding period (in years)     3.3           2.8          3.8
</Table>

   The following table summarizes information concerning options outstanding
including the related transactions for the fiscal year ended September 30, 2001
and a summary for the fiscal years ended September 30, 2000 and 1999 of the
Lucent stock options held by employees for whom the Company has assumed
responsibility. Stock option activity for fiscal 2000 and 1999 may not
necessarily be indicative of what the activity would have been had the Company
been a stand-alone entity during these periods.

<Table>
<Caption>

                                                                Weighted
                                                Shares           Average
                                                (000's)   Exercise Price
                                                -------   --------------

<S>                                              <C>       <C>
OPTIONS OUTSTANDING AS OF SEPTEMBER 30, 1998     27,066    $   20.99
Granted/Assumed                                   6,814        49.81
Exercised                                        (2,246)       11.44
Forfeited/Expired                                   (33)       36.86
                                                 ------
OPTIONS OUTSTANDING AS OF SEPTEMBER 30, 1999     31,601        27.87
Granted/Assumed                                  18,431        52.66
Exercised                                        (5,124)       12.26
Forfeited/Expired/Transferred(1)                 (7,176)       28.37
                                                 ------
OPTIONS OUTSTANDING AS OF SEPTEMBER 30, 2000
   (IMMEDIATELY PRIOR TO DISTRIBUTION)           37,732        41.90
Less: Lucent vested options                      (7,147)       17.50
                                                 ------
Lucent unvested options to be converted          30,585        47.61
                                                 ======

AVAYA OPTIONS CONVERTED AT DISTRIBUTION DATE,
   SEPTEMBER 30, 2000                            44,971        31.63
Granted/Assumed                                  31,626        15.00
Exercised                                        (1,384)        4.81
Forfeited/Expired/Exchanged(2)                  (26,890)       30.35
                                                 ------
OPTIONS OUTSTANDING AS OF SEPTEMBER 30, 2001     48,323    $   19.83
                                                 ======

</Table>

(1) Includes 7,133 options attributable to the movement of employees between
Avaya and Lucent during the year.
(2) Includes the exchange of 19,506 employee stock options for restricted stock
units, as noted below.

   The weighted average fair value of Avaya's stock options granted during the
fiscal year ended September 30, 2001 and Lucent's stock options granted during
the fiscal years ended September 30, 2000 and 1999, calculated using the
Black-Scholes option-pricing model, was $5.86, $15.75 and $19.21 per share,
respectively.

   The following table summarizes the status of the Company's stock options as
of September 30, 2001:

<Table>
<Caption>

                           Stock Options             Stock Options
                            Outstanding               Exercisable
                   ------------------------------  -------------------
                                Average  Weighted             Weighted
                              Remaining   Average              Average
Range of           Shares   Contractual  Exercise  Shares     Exercise
Exercise Prices    (000's)  Life (Years)    Price  (000's)       Price
                   -------  ------------    -----  -------       -----


<S>                 <C>            <C>     <C>     <C>          <C>
$ 0.01 to $10.00       951         7.64    $ 6.18     608       $ 5.35
$10.01 to $16.89    25,968         8.97     14.35     792        13.77
$16.90 to $34.98    19,846         4.74     25.98  11,530        27.37
$34.99 to $44.11     1,316         8.02     40.13     331        40.14
$44.12 to $61.98       242         8.17     47.33      99        47.81
                    ------                         ------
Total               48,323                 $19.83  13,360       $26.03
                    ======                         ======
</Table>

   There were no stock options exercisable as of September 30, 2000 and 1999.

46.
<Page>

RESTRICTED STOCK UNITS

In June 2001, the Company commenced an offer to eligible employees to exchange
(the "Exchange") certain employee stock options for restricted stock units
representing common shares. The Exchange was based on a predetermined exchange
value divided by $12.85 per common share, which was the average of the high and
low trading prices of Avaya common stock on the New York Stock Exchange ("NYSE")
on July 26, 2001. As a result of the Exchange, approximately 19.5 million
options were cancelled and approximately 3.4 million restricted stock units were
granted on July 31, 2001. The restricted stock units resulting from the Exchange
will vest in three succeeding annual anniversary dates beginning on August 1,
2002, subject to acceleration of vesting upon certain events.

   The Company recorded approximately $43 million as non-cash deferred
compensation for the intrinsic value of the restricted stock units on the
effective date of the Exchange. This amount was calculated by multiplying the
number of restricted stock units by $12.62, which was the average of the high
and low trading price of the Company's common stock on the NYSE on July 31,
2001, the date of grant of the restricted stock units. The non-cash deferred
compensation associated with the restricted stock units will be recognized as
expense on a straight-line basis over the three-year vesting period.

   Restricted stock units are granted under certain award plans. The following
table presents the total number of shares of common stock represented by
restricted stock units granted to Company employees, including those granted in
connection with the Exchange:

<Table>
<Caption>

                                          Year Ended September 30,
                                          ------------------------
                                          2001     2000       1999
                                          ----     ----       ----
<S>                                   <C>         <C>       <C>
Restricted stock units
   granted (000's)                        4,394       496        10
Weighted average market value of
   shares granted during the period   $   13.06   $ 57.83   $ 47.73
</Table>

   As of September 30, 2001, the Company recognized $17 million of non-cash
compensation expense related to restricted stock units, of which approximately
$7 million was recorded as a business restructuring charge attributable to the
vesting of 326,000 restricted stock units related to employees who departed the
business.


EMPLOYEE STOCK PURCHASE PLAN ("ESPP")

Under the terms of the Avaya ESPP, eligible employees may have up to 10% of
eligible compensation deducted from their pay to purchase common stock through
March 31, 2003, the expiration date of the existing plan. The per share purchase
price is 85% of the average high and low per share trading price of Avaya's
common stock on the NYSE on the last trading day of each month. During fiscal
2001, 3 million shares were purchased under the Avaya ESPP at a weighted average
price of $10.95. In fiscal 2000 and 1999, 1.3 million and 1.2 million Lucent
shares, respectively, were purchased under the Lucent ESPP by employees who were
transferred to the Company upon the Distribution, at a weighted average price of
$45.50 and $47.02, respectively.


14. DERIVATIVE FINANCIAL INSTRUMENTS

The Company conducts its business on a multi-national basis in a wide variety of
foreign currencies and, as such, uses derivative financial instruments to reduce
earnings and cash flow volatility associated with foreign exchange rate changes.
The Company uses foreign currency forward contracts, and to a lesser extent,
foreign currency options, to mitigate the effects of fluctuations of exchange
rates on intercompany loans which are denominated in currencies other than the
subsidiary's functional currency, and to reduce exposure to the risk that the
eventual net cash flows resulting from the purchase or sale of products to or
from non-U.S. customers will be adversely affected by changes in exchange rates.


RECORDED TRANSACTIONS

Foreign currency forward contracts are used primarily to manage exchange rate
exposures on intercompany loans residing on foreign subsidiaries' books, which
are denominated in currencies other than the subsidiary's functional currency.
When these loans are translated into the subsidiary's functional currency at the
month-end exchange rates, the fluctuations in the exchange rates are recognized
in earnings as other income or expense. Gains and losses resulting from the
impact of currency exchange rate movements on foreign currency forward contracts
designated to offset these non-functional currency denominated loans are also
recognized in earnings as other income or expense in the period in which the
exchange rates change and are generally offset by the foreign currency losses
and gains on the loans. For the fiscal years ended September 30, 2001 and 2000,
the net effect of the gains and losses from the change in the fair value of the
foreign currency forward contracts and the translation of the non-functional
currency denominated loans were not material to the Company's results of
operations.


FORECASTED TRANSACTIONS

Foreign currency forward and option contracts are used to offset certain
forecasted foreign currency transactions primarily related to the purchase or
sale of product expected to occur during the ensuing twelve months. The gains
and losses resulting from the impact of currency exchange rate movements on
these foreign currency forward and option contracts are recognized as other
income or expense in the period in which the exchange rates change. For the
fiscal years ended September 30, 2001 and 2000, these gains and losses were not
material to the Company's results of operations.

   The Company engages in foreign currency hedging activities to reduce the risk
that changes in exchange rates will adversely affect the eventual net cash flows
resulting from the sale of products to foreign customers and purchases from
foreign suppliers. The Company believes that it has achieved risk reduction and
hedge effectiveness because the gains and losses on its derivative instruments
substantially offset the losses and gains on the assets, liabilities and
transactions being hedged. Hedge effectiveness is periodically measured

                                                                             47.
<Page>

by comparing the change in fair value of each hedged foreign currency exposure
at the applicable market rate with the change in market value of the
corresponding derivative instrument.

   The notional amounts as of September 30, 2001 and 2000 of the Company's
foreign exchange forward contracts were $175 million and $339 million,
respectively, and foreign exchange option contracts were $17 million and $24
million, respectively. In fiscal 2001, these notional amounts principally
represent contracts in British pounds, Canadian dollars and Australian dollars.
Notional amounts represent the face amount of the contractual arrangements and
the basis on which U.S. dollars are to be exchanged and are not a measure of
market or credit exposure.


FAIR VALUE

The Company's foreign currency forward exchange contracts and options were
assets and had a net carrying amount and an estimated fair value each of $1
million as of September 30, 2001. Market quotes were used to estimate the fair
value of foreign currency forward contracts and options.


NON-DERIVATIVE AND OFF-BALANCE-SHEET INSTRUMENTS

Requests for providing commitments to extend credit and financial guarantees are
reviewed and approved by senior management. Management regularly reviews all
outstanding commitments, letters of credit and financial guarantees, and the
results of these reviews are considered in assessing the adequacy of the
Company's reserve for possible credit and guarantee losses.

   As of September 30, 2001 and 2000, in management's opinion, there was no
significant risk of loss in the event of non-performance of the counterparties
to these financial instruments.


15. OPERATING SEGMENTS

The Company reports its operations in three segments: Communications Solutions,
Services and Connectivity Solutions. The Communications Solutions segment
represents the Company's core business, composed of enterprise voice
communications systems and software, communications applications, professional
services for customer relationship management, converged voice and data networks
and unified communication, multi-service networking products and product
installation services. The Services segment represents maintenance, value-added
and data services. The Connectivity Solutions segment represents structured
cabling systems and electronic cabinets. The costs of shared services and other
corporate center operations managed on a common basis represent business
activities that do not qualify for separate operating segment reporting and are
aggregated in the Corporate and other category.

   In the first quarter of fiscal 2001, the Company realigned the method of
allocating costs of shared services and other corporate center operations
managed outside of the reportable segments. Financial data for the periods prior
to the realignment have been restated to conform to the current presentation.

REPORTABLE SEGMENTS

<Table>
<Caption>

                                       Year Ended September 30,
                                    -------------------------------
                                    2001          2000         1999
                                    ----          ----         ----
                                        (dollars in millions)
<S>                               <C>           <C>          <C>
COMMUNICATIONS SOLUTIONS:
External revenue                  $3,377        $4,354       $5,088
Intersegment revenue                   -             9           24
                                  ------        ------       ------

   Total revenue                   3,377         4,363        5,112
Operating income                     726         1,375        1,704
Assets                             1,794         1,795        2,204
Capital expenditures                  27           137           64
Depreciation and amortization        121           131          138

SERVICES:
External revenue                  $2,092        $1,958       $1,900
Intersegment revenue                   -             -            -
                                  ------        ------       ------
   Total revenue                   2,092         1,958        1,900
Operating income                   1,010           798          704
Assets                               669           680          599
Capital expenditures                  15            63           20
Depreciation and amortization         29            27           23

CONNECTIVITY SOLUTIONS:
External revenue                  $1,322        $1,418       $1,274
Intersegment revenue                   -             1            8
                                  ------        ------       ------
   Total revenue                   1,322         1,419        1,282
Operating income                     387           265          225
Assets                               619           804          707
Capital expenditures                  26            22           51
Depreciation and amortization         29            42           37
</Table>


RECONCILING ITEMS

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

<Table>
<Caption>

                                      Year Ended September 30,
                                    -------------------------------
                                    2001          2000         1999
                                    ----          ----         ----
                                        (dollars in millions)
<S>                              <C>           <C>          <C>
EXTERNAL REVENUE
Total reportable segments        $ 6,791       $ 7,730      $ 8,262
Corporate and other                    2             2            6
                                 -------       -------      -------
   Total external revenue        $ 6,793       $ 7,732      $ 8,268
                                 =======       =======      =======

OPERATING INCOME (LOSS)
Total reportable segments        $ 2,123       $ 2,438      $ 2,633
Corporate and other:
   Business restructuring and
     related (charges) reversals
     and start-up expenses          (885)         (757)          33
   Corporate and unallocated
     shared expenses              (1,805)       (2,124)      (2,297)
                                 -------       -------      -------
   Total operating income (loss) $  (567)      $  (443)     $   369
                                 =======       =======      =======
</Table>

48.
<Page>

   Corporate and unallocated shared expenses include costs such as selling,
research and development, marketing, information technology and finance that are
not directly managed by or identified with the reportable segments.

GEOGRAPHIC INFORMATION

<Table>
<Caption>

                                   External Revenue(1)                    Long-Lived Assets(2)
                              -------------------------------         ------------------------------
                                Year Ended September 30,                   As of September 30,
                              -------------------------------         ------------------------------
                              2001         2000          1999         2001         2000         1999
                              ----         ----          ----         ----         ----         ----
                                                      (dollars in millions)
<S>                         <C>          <C>           <C>            <C>          <C>          <C>
External Revenue(1)
U.S.                        $5,158       $6,110        $6,683         $868         $850         $583
Foreign countries            1,635        1,622         1,585          120          116           93
                            ------       ------        ------         ----         ----         ----
   Total                    $6,793       $7,732        $8,268         $988         $966         $676
                            ======       ======        ======         ====         ====         ====
</Table>

(1) Revenue is attributed to geographic areas based on the location of
customers.
(2) Represents property, plant and equipment, net.


CONCENTRATIONS

The Company sells its products and services to a broad set of enterprises
ranging from large, multi-national enterprises, to small- and mid-sized
enterprises, governments agencies and schools. Management believes that the
Company is exposed to minimal risk since the majority of its business is
conducted with companies within numerous industries. The Company performs
periodic credit evaluations of its customers' financial condition and may
require collateral for its accounts receivables. In some cases, the Company will
require payment in advance or security in the form of a letter of credit or
third party guarantees.

   For the fiscal year ended September 30, 2001, sales to Avaya's largest
distributor, which are included in the Communications Solutions segment, were
approximately 10% of the Company's revenue, and accounts receivable from such
distributor, including amounts outstanding under the line of credit described
below, represented 15% of the Company's total accounts receivable. No single
customer accounted for more than 10% of the Company's revenue and accounts
receivable as of and for the fiscal years ended September 30, 2000 and 1999,
respectively.

   During fiscal 2001, the Company granted a short-term line of credit for the
purchase of Avaya products and services to its largest distributor. The credit
line applies to certain unpaid and outstanding receivables and the maximum
amount available under the credit agreement is $125 million. Outstanding amounts
under the credit agreement, which expires in March 2002, are secured by the
distributor's accounts receivable and inventory and accrue interest at an annual
rate of 12%. Interest payments are due to the Company monthly. Upon termination
of this agreement, the distributor is required to obtain a collateralized
commercial credit facility to replace the existing credit line and repay in full
all amounts due under the credit line. As of September 30, 2001, the amount
outstanding under the line of credit was $121 million, of which $71 million is
included in receivables and $50 million is included in other current assets.
There can be no assurance that the distributor will be able to obtain financing
sufficient to satisfy all of its obligations under the line of credit upon
termination of the credit agreement.

   As a result of the contract manufacturing transaction, Celestica exclusively
manufactures substantially all of the Company's Communications Solutions
products at various facilities in the U.S. and Mexico. The Company is not
obligated to purchase products from Celestica in any specific quantity, except
as the Company outlines in forecasts or orders for products required to be
manufactured by Celestica. In addition, Avaya may be obligated to purchase
certain excess inventory levels from Celestica that could result from the
Company's actual sales of product varying from forecast. The Company's
outsourcing agreement with Celestica results in a concentration that, if
suddenly eliminated, could have an adverse effect on the Company's operations.
While the Company believes that alternative sources of supply would be
available, disruption of its primary source of supply could create a temporary,
adverse effect on product shipments. The Company is not aware of any other
significant concentration of business transacted with a particular supplier that
could, if suddenly eliminated, have a material adverse affect on the Company's
financial position, results of operations or cash flows.


16. TRANSACTIONS WITH LUCENT AND OTHER RELATED PARTY TRANSACTIONS

Subsequent to the Distribution, Lucent was no longer a related party. For the
fiscal years 2000 and 1999, the Company had $98 million and $108 million,
respectively, of revenue for products sold to Lucent. For the fiscal years 2000
and 1999, the Company had $261 million and $189 million, respectively, of
products purchased from Lucent.


CONTRIBUTION AND DISTRIBUTION AGREEMENT

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

   Pursuant to the Contribution and Distribution Agreement, Lucent contributed
to the Company substantially all of the assets, liabilities and operations
associated with its enterprise networking businesses (the "Company's
Businesses"). The Contribution and Distribution Agreement, among other things,
provides that, in general, the

                                                                             49.
<Page>

Company will indemnify Lucent for all liabilities including certain
pre-Distribution tax obligations of Lucent relating to the Company's Businesses
and all contingent liabilities primarily relating to the Company's Businesses or
otherwise assigned to the Company. In addition, the Contribution and
Distribution Agreement provides that certain contingent liabilities not
allocated to one of the parties will be shared by Lucent and the Company in
prescribed percentages. The Contribution and Distribution Agreement also
provides that each party will share specified portions of contingent liabilities
based upon agreed percentages related to the business of the other party that
exceed $50 million.

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

   The Company has resolved all of the Contribution and Distribution issues with
Lucent related to the settlement of certain employee obligations and the
transfer of certain assets. Following the Distribution, the Company had
identified approximately $15 million recorded in its Consolidated Balance Sheets
that was primarily related to certain accounts receivable balances due from
Lucent and certain fixed assets, which the Company has agreed will remain with
Lucent. Since these assets, among other resolved issues, relate to the original
capital contribution by Lucent, the Company reduced additional paid-in capital
in fiscal 2001 for the net effect of these adjustments.


OTHER RELATED PARTY TRANSACTIONS

Jeffrey A. Harris has been a Director of Avaya since October 2, 2000. Mr. Harris
is a Member and Senior Managing Director of Warburg Pincus LLC and a general
partner of Warburg, Pincus & Co. Each of Warburg Pincus LLC and Warburg, Pincus
& Co. is an affiliate of Warburg Pincus Equity Partners L.P. Mr. Harris was
designated for election to the Company's Board of Directors by Warburg Pincus
Equity Partners, L.P. and its affiliates pursuant to the terms of the equity
investment described in Note 8. Henry B. Schacht has been a Director of Avaya
since September 30, 2000. Mr. Schacht is currently on a leave of absence as a
managing director and senior advisor of Warburg Pincus LLC but has not been
designated for election to the Company's Board of Directors by Warbug Pincus LLC
or its affiliates.


During fiscal 2000, a privately held business, of which Mr. Schacht holds an
80% equity interest and of which his son is the controlling stockholder,
purchased and paid for call center equipment and consulting services from the
Company for a total of approximately $1 million. This business has continued
to purchase routine services from the Company on a time and materials basis.

17. COMMITMENTS AND CONTINGENCIES

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


YEAR 2000 ACTIONS

Three separate purported class action lawsuits are pending against Lucent, one
in state court in West Virginia, one in federal court in the Southern District
of New York and another in federal court in the Southern District of California.
The case in New York was filed in January 1999 and, after being dismissed, was
refiled in September 2000. The case in West Virginia was filed in April 1999 and
the case in California was filed in June 1999, and amended in 2000, to include
Avaya as a defendant. The Company may also be named a party to the other actions
and, in any event, has assumed the obligations of Lucent for all of these cases
under the Contribution and Distribution Agreement. All three actions are based
upon claims that Lucent sold products that were not Year 2000 compliant, meaning
that the products were designed and developed without considering the possible
impact of the change in the calendar from December 31, 1999 to January 1, 2000.
The complaints allege that the sale of these products violated statutory
consumer protection laws and constituted breaches of implied warranties. A class
has not been certified in any of the three cases and, to the extent a class is
certified in any of the cases, the Company expects that class to constitute
those enterprises that purchased the products in question. The complaints seek,
among other remedies, compensatory damages, punitive damages and counsel fees in
amounts that have not yet been specified. Although the Company believes that the
outcome of these actions will not adversely affect its financial position,
results of operations or cash flows, if these cases are not resolved in a timely
manner, they will require expenditure of significant legal costs related to
their defense.


COUPON PROGRAM CLASS ACTION

In April 1998, a class action was filed against Lucent in state court in New
Jersey, alleging that Lucent improperly administered a coupon program resulting
from the settlement of a prior class action. The plaintiffs allege that Lucent
improperly limited the redemption of the coupons from dealers by not allowing
them to be combined with other volume discount offers, thus limiting the market
for the coupons. The Company has assumed the obligations of Lucent for these
cases under the Contribution and Distribution Agreement. The complaint alleges
breach of contract, fraud and other claims and the plaintiffs seek compensatory
and consequential damages, interest and attorneys' fees. The parties have
entered into a proposed settlement agreement pending final approval by the
court.


LUCENT SECURITIES LITIGATION

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

50.
<Page>

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

   Any liability incurred by Lucent in connection with these stockholder class
action lawsuits may be deemed a shared contingent liability under the
Contribution and Distribution Agreement and, as a result, the Company would be
responsible for 10% of any such liability in excess of $50 million. All of these
actions are in the early stages of litigation and an outcome cannot be predicted
and, as a result, there can be no assurance that these cases will not have a
material adverse effect on the Company's financial position, results of
operations or cash flows.


LICENSING MEDIATION

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


ENVIRONMENTAL MATTERS

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

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


CONDITIONAL REPURCHASE OBLIGATIONS

Avaya sells product to various distributors that may obtain financing from
unaffiliated third party lending institutions. In the event the lending
institution repossesses the distributor's inventory of Avaya products, Avaya is
obligated to repurchase such inventory from the lending institution. The
repurchase amount is equal to the price originally paid to Avaya by the lending
institution for the inventory. The Company's obligation to repurchase from the
lending institution terminates 180 days from the date of invoicing by Avaya to
the distributor. During the fiscal year ended September 30, 2001, there were no
repurchases made by the Company under such agreements. There can be no assurance
that the Company will not be obligated to repurchase inventory under these
arrangements in the future.

Leases

The Company leases land, buildings and equipment under agreements that expire in
various years through 2019. Rental expense under operating leases was $194
million, $176 million and $146 million for the years ended September 30, 2001,
2000 and 1999, respectively. The table below shows the future minimum lease
payments due under non-cancelable operating leases as of September 30, 2001.

<Table>
<Caption>

                      Year Ended September 30,
  -----------------------------------------------------------------
                                                  Later
  2002     2003       2004      2005      2006     Years      Total
  ----     ----       ----      ----      ----     -----      -----
                        (dollars in millions)
<S>        <C>         <C>       <C>       <C>      <C>        <C>
  $197     $153        $83       $56       $41      $236       $766
</Table>

   The Company also has sales-type and direct financing leases for certain
products. Lease payment receivables under such agreements were $12 million and
$35 million as of September 30, 2001 and 2000, respectively. The future minimum
lease payments to be received under sales-type and direct financing leases as of
September 30, 2001 expire in fiscal 2005 and are not material to the Company's
financial position, results of operations or cash flows.

                                                                             51.
<Page>

18. QUARTERLY INFORMATION (UNAUDITED)

<Table>
<Caption>

                                                              Fiscal Year Quarters
                                                 -----------------------------------------------
                                                 First    Second      Third    Fourth      Total
                                                 -----    ------      -----    ------      -----
                                             (dollars and shares in millions, except per share amounts)
<S>                                             <C>       <C>        <C>       <C>        <C>
YEAR ENDED SEPTEMBER 30, 2001
Revenue                                         $ 1,785   $ 1,852    $ 1,714   $ 1,442    $ 6,793
Gross margin                                        757       819        731       589      2,896
Business restructuring and related charges(1)        23       182         66       566        837
Net income (loss)                                    16       (64)        24      (328)      (352)
Earnings (loss) per share - Basic               $  0.03   $ (0.25)   $  0.06   $ (1.17)   $ (1.33)
Earnings (loss) per share - Diluted             $  0.03   $ (0.25)   $  0.06   $ (1.17)   $ (1.33)
Stock price (2):
   High                                         $ 22.94   $ 19.24    $ 17.06   $ 14.40    $ 22.94
   Low                                          $ 10.00   $  9.88    $ 10.30   $  9.39    $  9.39

YEAR ENDED SEPTEMBER 30, 2000
Revenue                                         $ 1,850   $ 1,945    $ 1,899   $ 2,038    $ 7,732
Gross margin                                        833       798        802       816      3,249
Business restructuring and related charges(1)        --        --         --       684        684
Net income (loss)                                    69        66         33      (543)      (375)
Earnings (loss) per share - Basic               $  0.26   $  0.25    $  0.12   $ (1.95)   $ (1.39)
Earnings (loss) per share - Diluted             $  0.25   $  0.24    $  0.12   $ (1.95)   $ (1.39)

</Table>

(1) These charges represent costs associated with the Company's restructuring
plan to improve profitability and business performance as a stand-alone company.
(2) There were approximately 1,082,055 registered holders of the Company's
common stock as of December 5, 2001. The Company's common stock began "when
issued trading" on September 18, 2000 and began "regular way trading" on
September 30, 2000. The high and low stock price during this period was
$26.00 and $18.81, respectively.

19. SUBSEQUENT EVENTS

SECURITIZATION OF ACCOUNTS RECEIVABLE

On October 3, 2001, the financial institution participating in the receivables
purchase agreement granted the Company a waiver from a covenant that measures
the ratio of certain unpaid receivables as a percentage of the aggregate
outstanding balance of all designated receivables. The waiver effectively
increases the ratio required by the covenant for each of the individual months
of September through December 2001. Non-compliance with the required ratio would
entitle the financial institution to exercise its rights under the agreement,
including an early liquidation of the outstanding cash proceeds.


LYONS DEBT OFFERING (UNAUDITED)

On October 31, 2001, the Company sold through an underwritten public offering
under a shelf registration statement an aggregate principal amount at maturity
of approximately $821 million of Liquid Yield Option(TM) Notes (LYONs) due in
2021. On November 16, 2001, the Company sold an additional $123 million
aggregate principal amount at maturity of LYONs pursuant to the exercise of the
underwriter's overallotment option. The net proceeds of approximately $447
million were used to refinance a portion of the Company's outstanding commercial
paper. Underwriting fees for these transactions amounted to $13 million, which
will be recorded as deferred financing costs and amortized to interest expense
over a three-year period representing the first date on which the holders may
require us to purchase all or a portion of their LYONs. The LYONs were issued at
a $484 million discount that will accrue daily at a rate of 3.625% per year
calculated on a semiannual bond equivalent basis. The Company will not make
periodic cash payments of interest on the LYONs. Instead, the original issue
discount will be recorded as interest expense and represents the accretion of
the LYONs issue price to its maturity value. The original issue discount will
cease to accrue on the LYONs upon maturity, conversion, or purchase by the
Company at the option of the holder or redemption. The LYONs are unsecured
obligations that rank equally in right of payment with all existing and future
unsecured and unsubordinated indebtedness of Avaya.

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

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



52.