Document:

Exhibit 10.35

 

SEVERANCE AGREEMENT

 

THIS AGREEMENT is entered into as of the 1st day of
September 2003 (the “Effective Date”) by and between Avaya Inc., a Delaware
corporation, and Donald K. Peterson (the “Executive”).

 

W I T N E S S E T H

 

WHEREAS, the Executive currently serves as a key
employee of the Company (as defined in Section 1) and the Executive’s services
and knowledge are valuable to the Company in connection with the management of
one or more of the Company’s principal operating facilities, divisions,
departments or subsidiaries; and

 

WHEREAS, the Board (as defined in Section 1) has
determined that it is in the best interests of the Company and its stockholders
to secure the Executive’s continued services and to ensure the Executive’s
continued dedication and objectivity in the event of any threat or occurrence
of, or negotiation or other action that could lead to, or create the
possibility of, a Change in Control (as defined in Section 1) of the
Company, without concern as to whether the Executive might be hindered or
distracted by personal uncertainties and risks created by any such possible
Change in Control, and to encourage the Executive’s full attention and
dedication to the Company, the Board has authorized the Company to enter into
this Agreement.

 

NOW, THEREFORE, for and in consideration of the
premises and the mutual covenants and agreements herein contained, the Company
and the Executive hereby agree as follows:

 

1.                                       Definitions.  As used in this Agreement, the following
terms shall have the respective meanings set forth below:

 

(a)                                  “Board”
means the Board of Directors of the Company.

 

(b)                                 “Cause”
means:

 

(1)                                  a
material breach by the Executive of those duties and responsibilities of the
Executive which do not differ in any material respect from the duties and
responsibilities of the Executive during the 90-day period immediately prior to
a Change in Control (other than as a result of incapacity due to physical or
mental illness) which is demonstrably willful and deliberate on the Executive’s
part, which is committed in bad faith or without reasonable belief that such
breach is in the best interests of the Company and which is not remedied in a
reasonable period of time after receipt of written notice from the Company
specifying such breach;

 

(2)                                  the
commission by the Executive of a felony involving moral turpitude;

 

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(3)                                  the
commission by the Executive of theft, fraud, breach of trust or any act of
dishonesty involving the Company or its subsidiaries; or

 

(4)                                  the
significant violation by the Executive of the Company’s code of conduct or any
statutory or common law duty of loyalty to the Company or its subsidiaries.

 

(c)                                  “Change
in Control” means:

 

(1)                                  an
acquisition by any individual, entity or group (within the meaning of Section
13 (d)(3) or 14 (d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), (an “Entity”) of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of 50% or more of either (A) the then
outstanding shares of common stock of the Company (the “Outstanding Company
Common Stock”) or (B) the combined voting power of the then outstanding voting
securities of the Company entitled to vote generally in the election of directors
(the “Outstanding Company Voting Securities”); excluding, however, the
following: (1) any acquisition directly from the Company, other than an
acquisition by virtue of the exercise of a conversion privilege unless the
security so being converted was itself acquired directly from the Company, (2)
any acquisition by the Company, (3) any acquisition by any employee benefit
plan (or related trust) sponsored or maintained by the Company or any
corporation controlled by the Company, or (4) any acquisition by any
corporation pursuant to a transaction which complies with clauses (A), (B) and
(C) of subsection (3) of this Section 1(c); or

 

(2)                                  a
change in the composition of the Board such that the individuals who, as of the
Effective Date, constitute the Board (such Board shall be hereinafter referred
to as the “Incumbent Board”) cease for any reason to constitute at least a
majority of the Board; provided, however, that for purposes of
this definition, that any individual who becomes a member of the Board subsequent
to the Effective Date, whose election, or nomination for election by the
Company’s stockholders, was approved by a vote of at least a majority of those
individuals who are members of the Board and who were also members of the
Incumbent Board (or deemed to be such pursuant to this proviso) shall be
considered as though such individual were a member of the Incumbent Board; and provided,
further  however, that any such individual whose initial
assumption of office occurs as a result of or in connection with either an
actual or threatened solicitation by an Entity other than the Board for the
purpose of opposing a solicitation by any other Entity with respect to the
election or removal of directors or other actual or threatened solicitation of
proxies or consents by or on behalf of an Entity other than the Board shall not
be so considered as a member of the Incumbent Board; or

 

(3)                                  the
approval by the stockholders of the Company of a merger, reorganization or
consolidation or sale or other disposition of all or substantially all of the
assets of the Company (each, a “Corporate Transaction”) or, if consummation of
such Corporate Transaction is subject, at the time of such approval by
stockholders, to the consent of any government or governmental agency, the obtaining
of such consent (either explicitly or implicitly by consummation); excluding
however, such a Corporate

 

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Transaction pursuant to which (A) all or substantially
all of the individuals and entities who are beneficial owners, respectively, of
the Outstanding Company Stock and Outstanding Company Voting Securities
immediately prior to such Corporate Transaction will beneficially own, directly
or indirectly, more than 60% of, respectively, the outstanding shares of common
stock, and the combined voting power of the then outstanding voting securities
entitled to vote generally in the election of directors, as the case may be, of
the corporation resulting from such Corporate Transaction (including, without limitation,
a corporation or other individual, partnership, association, joint-stock
company, trust, unincorporated organization, limited liability company, other
entity or government or political subdivision which as a result of such
transaction owns the Company or all or substantially all of the Company’s
assets either directly or through one or more subsidiaries (a “Parent Company”))
in substantially the same proportions as their ownership, immediately prior to
such Corporate Transaction, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities, as the case may be, (B) no Entity (other
than the Company, any employee benefit plan (or related trust) of the Company,
such corporation resulting from such Corporate Transaction or, if reference was
made to equity ownership of any Parent Company for purposes of determining
whether clause (A) above is satisfied in connection with the applicable
Corporate Transaction, such Parent Company) will beneficially own, directly or
indirectly, 50% or more of, respectively, the outstanding shares of common
stock of the corporation resulting from such Corporate Transaction or the
combined voting power of the outstanding voting securities of such corporation
entitled to vote generally in the election of the directors unless such
ownership resulted solely from ownership of securities of the Company prior to
the Corporate Transaction, and (C) individuals who were members of the
Incumbent Board will immediately after the consummation of the Corporate
Transaction constitute at least a majority of the members of the board of
directors of the corporation resulting from such Corporate Transaction (or, if
reference was made to equity ownership of any Parent Company for purposes of
determining whether clause (A) above is satisfied in connection with the
applicable Corporate Transaction, of the Parent Company); or

 

(4)                                  the
approval by the stockholders of the Company of a complete liquidation or
dissolution of the Company.

 

(d)                                 “Company”
means Avaya Inc., a Delaware corporation.

 

(e)                                  “Date
of Termination” means:

 

(1)                                  the
effective date on which the Executive’s employment by the Company terminates as
specified in a prior written notice by the Company or the Executive, as the
case may be, to the other, delivered pursuant to Section 11 or

 

(2)                                  if
the Executive’s employment by the Company terminates by reason of death, the
date of death of the Executive.

 

(f)                                    “Entity”
has the meaning set forth in Section 1(c)(1).

 

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(g)                                 “Good
Reason” means, without the Executive’s express written consent, the occurrence
of any of the following events after a Change in Control:

 

(1)                                  any
of (i) the assignment to the Executive of any duties inconsistent in any
material respect with the Executive’s duties or responsibilities with the
Company immediately prior to such Change in Control, (ii) any material
reduction in the Executive’s duties or responsibilities with the Company
immediately prior to such Change in Control; (iii) a change in the Executive’s
titles or offices with the Company as in effect immediately prior to such
Change in Control which is adverse to the Executive or (iv) any removal or
involuntary termination of the Executive from the Company otherwise than as
expressly permitted by this Agreement;

 

(2)                                  a
reduction by the Company in the Executive’s rate of annual base salary or
Target Percentage as in effect immediately prior to such Change in Control (or
if a different short-term incentive compensation opportunity is then in effect,
a reduction in the amount of such different short-term incentive compensation
opportunity below the short-term incentive compensation opportunity which had
been afforded by the Target Percentage as in effect immediately prior to such Change
in Control) or as the same may be increased from time to time thereafter;

 

(3)                                  any
requirement of the Company that the Executive be based more than 30 miles from
the facility where the Executive is located at the time of the Change in
Control;

 

(4)                                  the
failure of the Company to continue in effect any incentive compensation plan or
supplemental retirement plan, including the Supplemental Pension Plan, in which
the Executive is participating immediately prior to such Change in Control,
unless the Executive is permitted to participate in other plans providing the
Executive with substantially comparable compensation opportunity and benefits,
or the taking of any action by the Company which would adversely affect the
Executive’s participation in or materially reduce the Executive’s compensation
opportunity and benefits under any such plan; or

 

(5)                                  the
failure of the Company to obtain the assumption agreement from any successor as
contemplated in Section 10(b).

 

For purposes of this Agreement, any good faith
determination of Good Reason made by the Executive shall be conclusive; provided,
however, that an isolated, insubstantial and inadvertent action taken in
good faith and which is remedied by the Company promptly after receipt of
written notice thereof given by the Executive shall not constitute Good Reason.

 

(h)                                 “Nonqualifying
Termination” means a termination of the Executive’s employment:

 

(1)                                  by
the Company for Cause,

 

(2)                                  by
the Executive for any reason other than Good Reason,

 

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(3)                                  by
the Executive for Good Reason more than six (6) months after the event
constituting Good Reason,

 

(4)                                  as
a result of the Executive’s death or

 

(5)                                  by
the Company under circumstances where the Executive qualifies for benefits
under a long-term disability pay plan.

 

(i)                                     “Potential
Change in Control,” for purposes of this Plan, shall mean the happening of any
of the following events:

 

(1)                                  the
commencement of a tender or exchange offer by any third person which, if
consummated, would result in a Change in Control;

 

(2)                                  the
execution of an agreement by the Company, the consummation of which would
result in the occurrence of a Change in Control;

 

(3)                                  the
public announcement by any person (including the Company) of an intention to
take or to consider taking actions which if consummated would constitute a
Change in Control other than through a contested election for directors of the
Company; or

 

(4)                                  the
adoption by the Board, as a result of other circumstances, including, without
limitation, circumstances similar or related to the foregoing, of a resolution
to the effect that a Potential Change in Control has occurred.

 

A
Potential Change in Control shall be deemed to be pending until the earliest of
(i) the first anniversary thereof, (ii) the occurrence of a Change in Control
and (iii) the occurrence of a subsequent Potential Change in Control.

 

(j)                                     “Supplemental
Pension Plan” means the Avaya Inc. Supplemental Pension Plan or any successor
plan.

 

(k)                                  “Target
Percentage” means the annualized percentage applied to an Executive’s annual
base salary in order to calculate the target award for such Executive under the
Company’s short-term incentive compensation program, prior to the application
of Company or individual performance factors.

 

(l)                                     “Termination
Period” means the period of time beginning with a Change in Control and ending
on the earlier to occur of:

 

(1)                                  two
years following such Change in Control and

 

(2)                                  the
Executive’s death.

 

2.                                       Obligations
of the Executive.  The Executive
agrees that in the event of a Potential Change in Control, he shall not
voluntarily leave the employ of the Company without Good Reason prior to the
termination of such Potential Change in Control as follows:

 

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(a)                                  if
the Potential Change in Control terminates by reason other than the occurrence
of a Change in Control, until the earlier of (1) the first anniversary of such
Potential Change in Control and (2) the occurrence of a subsequent Potential
Change in Control; and

 

(b)                                 if
the Potential Change in Control terminates by reason of the occurrence of a
Change in Control, until 90 days following such Change in Control.

 

For purposes of clause (a) of the preceding sentence,
Good Reason shall be determined as if a Change in Control had occurred when
such Potential Change in Control became known to the Board.

 

3.                                       Payments
Upon Termination of Employment.

 

(a)                                  If
during the Termination Period the employment of the Executive shall terminate,
other than by reason of a Nonqualifying Termination, then the Company shall pay
to the Executive, within 30 days following the Date of Termination, as
compensation for services rendered to the Company:

 

(1)                                  a
cash amount equal to the sum of (i) the Executive’s full annual base salary
from the Company and its affiliated companies through the Date of Termination
and any short-term incentive compensation earned by the Executive for any
performance period ending prior to the Date of Termination, in each case to the
extent not theretofore paid, (ii) an amount equal to the Executive’s annual
base salary multiplied by the Executive’s Target Percentage applicable
immediately prior to the Date of Termination (or, if greater, immediately prior
to the Change in Control), multiplied by 50%, multiplied by a fraction, the numerator
of which is the number of days elapsed in the applicable six-month performance
period in which the Date of Termination occurs through the Date of Termination
and the denominator of which is 180 (or if a different short-term incentive
compensation opportunity is then in effect, an amount equal to the target
short-term incentive compensation afforded by such different short-term
incentive compensation opportunity for the applicable performance period in
which the Date of Termination occurs (but not less than the amount that would
have been afforded by the Target Percentage as in effect immediately prior to
such Change in Control), multiplied by a fraction, the numerator of which is
the number of days elapsed in the applicable performance period in which the
Date of Termination occurs through the Date of Termination and the denominator
of which is the total number of days in such applicable performance period) and
(iii) any compensation previously deferred by the Executive (together with any
interest and earnings thereon) and any accrued vacation pay, in each case to
the extent not theretofore paid; plus

 

(2)                                  a
lump-sum cash amount (subject to any applicable payroll or other taxes required
to be withheld pursuant to Section 5) in an amount equal to (i) three (3) times the Executive’s highest annual base salary from the
Company and its affiliated companies in effect during the 12-month period prior
to the Date of Termination, plus (ii) an amount equal to the product of three
(3) times such annual base salary
multiplied by the Executive’s Target Percentage as applicable immediately prior
to the Date of Termination (or, if greater, immediately prior to the Change in
Control) (or if a different

 

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short-term incentive compensation opportunity is then
in effect, an amount equal to the product of three (3) times
the annual target short-term incentive compensation afforded by such different
short-term incentive compensation opportunity, but not less than three (3) times
the amount that would have been afforded by the Target Percentage as in effect
immediately prior to such Change in Control); 
provided, however, that any amount paid pursuant to this
Section 3(a)(2) shall be paid in lieu of any other amount of severance relating
to salary, short-term incentive compensation or other bonus continuation to be
received by the Executive upon termination of employment of the Executive under
any severance plan, policy or arrangement of the Company.  Notwithstanding the foregoing, if the Company
is obligated by law or contract to pay severance pay, notice pay or other
similar benefits, or if the Company is obligated by law or by contract to
provide advance notice of separation (“Notice Period”), then the payments made
pursuant to this Section 3(a)(2) shall be reduced by the amount of any such
severance, notice pay or other similar benefits, as applicable, and by the
amount of any severance pay, notice pay or other similar benefits received
during any Notice Period.

 

(b)                                 In
addition to the payments to be made pursuant to Section 3(a), the Company shall
pay to the Executive at the time the payments pursuant to Section 3(a) shall be
made, a lump-sum cash amount equal to the actuarial equivalent of the excess of
(i) the Executive’s accrued benefits under any qualified defined benefit
pension plan and any nonqualified supplemental defined benefit pension plan of
the Company in which the Executive is a participant, calculated by increasing
the Executive’s age and service credit under such plans as of the Date of
Termination by three (3) year(s)
over (ii) the Executive’s accrued benefits under such plans as of the Date of
Termination.  Such lump sum cash amount
shall be computed using the same actuarial methods and assumptions then in use
for purposes of computing benefits under such plans, provided that the interest
rate used in making such computation shall not be greater than the interest
rate permitted under Section 417(e) of the Internal Revenue Code of 1986, as
amended (the “Code”), on the Date of Termination.

 

(c)                                  For
a period of three (3) years
commencing on the Date of Termination, the Company shall continue to keep in
full force and effect all policies of medical and life insurance with respect
to the Executive and his dependents with the same level of coverage, upon the
same terms and otherwise to the same extent as such policies shall have been in
effect immediately prior to the Date of Termination or as provided generally
with respect to other peer executives of the Company and its affiliated
companies, and the Company and the Executive shall share the costs of the
continuation of such insurance coverage in the same proportion as such costs
were shared immediately prior to the Date of Termination; provided, however,
that the medical and life insurance coverage provided pursuant to this Section
3(c) shall be in lieu of any other medical and life insurance coverage to which
the Executive is entitled under any plan, policy or arrangement of the Company
or any law obligating the Company to provide such insurance coverage upon
termination of employment of the Executive.

 

(d)                                 If
during the Termination Period the employment of the Executive shall terminate
by reason of a Nonqualifying Termination, then the Company shall pay to the
Executive, within 30 days following the Date of
Termination, a cash amount equal to the sum of:

 

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(1)                                  the
Executive’s full annual base salary from the Company through the Date of
Termination, to the extent not theretofore paid, and

 

(2)                                  any
compensation previously deferred by the Executive (together with any interest
and earnings thereon) and any accrued vacation pay, in each case to the extent
not theretofore paid.

 

4.                                       Certain
Additional Payments by the Company.  

 

(a)                                  Anything
in this Agreement to the contrary notwithstanding, in the event it shall be
determined that any payment or distribution by the Company or its affiliated
companies to or for the benefit of the Executive (whether paid or payable or
distributed or distributable pursuant to the terms of this Agreement or
otherwise, including, without limitation, as a result of the acceleration of
the vesting of stock options, restricted stock units or other equity awards,
but determined without regard to any additional payments required under this
Section 4) (a “Payment”) would be subject to the excise tax imposed by Section
4999 of the Code, or any interest or penalties are incurred by the Executive
with respect to such excise tax (such excise tax, together with any such
interest and penalties, are hereinafter collectively referred to as the “Excise
Tax”), then the Executive shall be entitled to receive an additional payment (a
“Gross-Up Payment”) in an amount such that after payment by the Executive of
all taxes (including any interest or penalties imposed with respect to such
taxes), including, without limitation, any income and employment taxes (and any
interest and penalties imposed with respect thereto) and the Excise Tax imposed
upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up
Payment equal to the Excise Tax imposed upon the Payments; provided, however,
that the Executive shall be entitled to receive a Gross-Up Payment only if the
amount of the “parachute payment” (as defined in Section 280G(b)(2) of the
Code) exceeds the sum of (A) $50,000 plus (B) 2.99 times the
Executive’s “base amount” (as defined in Section 280G(b)(3) of the Code),
and provided  further, that if the Executive is not entitled to
receive a Gross-Up Payment, the Executive shall be entitled to receive only
such amounts under Sections 3(a)(2), 3(b) and 3(c) of this Agreement that
would not include any “excess parachute payment” (as defined in
Section 280G(b)(1) of the Code). 
The intent of the parties is that the Company shall be solely
responsible for, and shall pay, any Excise Tax on any Payment and Gross-Up
Payment and any income and employment taxes (including, without limitation,
penalties and interest) imposed on any Gross-Up Payment, as well as bearing any
loss of tax deduction caused by the Gross-Up Payment.

 

(b)                                 Subject
to the provisions of Section 4(c), all determinations required to be made under
this Section 4, including whether and when a Gross-Up Payment is required and
the amount of such Gross-Up Payment and the assumptions to be utilized in
arriving at such determination, shall be made by the Company’s public
accounting firm (the “Accounting Firm”) which shall provide detailed supporting
calculations both to the Company and the Executive within 15 business days of
the receipt of notice from the Executive that there has been a Payment, or such
earlier time as is requested by the Company. 
All fees and expenses of the Accounting Firm shall be borne solely by
the Company.  Any Gross-Up Payment, as
determined pursuant to this Section 4, shall be paid by the Company to the
Executive within five (5) days of the receipt of the Accounting Firm’s
determination.  If the Accounting Firm
determines that no Excise Tax is payable by the Executive, it shall furnish the
Executive with a written opinion that

 

8

 

failure to report the
Excise Tax on the Executive’s applicable federal income tax return would not
result in the imposition of a negligence or similar penalty.  The Accounting Firm shall make all
determinations under the tax standard of “substantial authority” as such term
is used in Section 6662 of the Code. 
Any determination by the Accounting Firm shall be binding upon the
Company and the Executive.  As a result
of the uncertainty in the application of Section 4999 of the Code at the time
of the initial determination by the Accounting Firm hereunder, it is possible
that Gross-Up Payments which will not have been made by the Company should have
been made (“Underpayment”), consistent with the calculations required to be
made hereunder.  In the event that the
Company exhausts its remedies pursuant to Section 4(c) and the Executive
thereafter is required to make a payment of any Excise Tax, the Accounting Firm
shall determine the amount of the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company to or for the benefit of the
Executive.

 

(c)                                  The
Executive shall notify the Company in writing of any claim by the Internal
Revenue Service that, if successful, would require the payment by the Company
of the Gross-Up Payment.  Such
notification shall be given as soon as practicable but no later than 10
business days after the Executive is informed in writing of such claim and
shall apprise the Company of the nature of such claim and the date on which
such claim is requested to be paid.  The
Executive shall not pay such claim prior to the expiration of the 30-day period
following the date on which the Executive gives such notice to the Company (or
such shorter period ending on the date that any payment of taxes with respect
to such claim is due).  If the Company
notifies the Executive in writing prior to the expiration of such period that
it desires to contest such claim, the Executive shall:

 

(1)                                  give
the Company any information reasonably requested by the Company relating to
such claim,

 

(2)                                  take
such action in connection with contesting such claim as the Company shall
reasonably request in writing from time to time, including, without limitation,
accepting legal representation with respect to such claim by an attorney
reasonably selected by the Company,

 

(3)                                  cooperate
with the Company in good faith in order effectively to contest such claim, and

 

(4)                                  permit
the Company to participate in any proceedings relating to such claim;

 

provided, however, that the Company shall
bear and pay directly all costs and expenses (including additional interest and
penalties) incurred in connection with such contest and shall indemnify and
hold the Executive harmless, on an after-tax basis, for any Excise Tax or
income tax (including interest and penalties with respect thereto) imposed as a
result of such representation and payment of costs and expenses.  Without limitation on the foregoing
provisions of this Section 4(c), the Company shall control all proceedings
taken in connection with such contest and, at its sole option, may pursue or
forgo any and all administrative appeals, proceedings, hearings and conferences
with the taxing authority in respect of such claim and may, at its sole option,
either direct the Executive to pay the tax claimed and sue for a refund or

 

9

 

contest
the claim in any permissible manner, and the Executive agrees to prosecute such
contest to a determination before any administrative tribunal, in a court of
initial jurisdiction and in one or more appellate courts, as the Company shall
determine; provided  further, that if the Company directs the
Executive to pay such claim and sue for a refund, the Company shall advance the
amount of such payment to the Executive on an interest-free basis and shall
indemnify and hold the Executive harmless, on an after-tax basis, from any
Excise Tax or income tax (including interest or penalties with respect thereto)
imposed with respect to such advance or with respect to any imputed income with
respect to such advance; and provided  further, that any extension
of the statute of limitations relating to payment of taxes for the taxable year
of the Executive with respect to which such contested amount is claimed to be
due is limited solely to such contested amount. 
Furthermore, the Company’s control of the contest shall be limited to
issues with respect to which a Gross-Up Payment would be payable hereunder and
the Executive shall be entitled to settle or contest, as the case may be, any
other issue raised by the Internal Revenue Service or any other taxing
authority.

 

(d)                                 If,
after the receipt by the Executive of an amount advanced by the Company
pursuant to Section 4(c), the Executive becomes entitled to receive, and
receives, any refund with respect to such claim, the Executive shall (subject
to the Company’s complying with the requirements of Section 4(c)) promptly pay
to the Company the amount of such refund (together with any interest paid or
credited thereon after taxes applicable thereto).  If, after the receipt by the Executive of an
amount advanced by the Company pursuant to Section 4(c), a determination is
made that the Executive shall not be entitled to any refund with respect to
such claim and the Company does not notify the Executive in writing of its
intent to contest such denial of refund prior to the expiration of 30 days
after such determination, then such advance shall be forgiven and shall not be
required to be repaid and the amount of such advance shall offset, to the
extent thereof, the amount of Gross-Up Payment required to be paid.

 

5.                                       Withholding
Taxes.  The Company may withhold from
all payments due to the Executive (or his beneficiary or estate) hereunder all
taxes which, by applicable federal, state, local or other law, the Company is
required to withhold therefrom.

 

6.                                       Reimbursement
of Expenses.  If any contest or
dispute shall arise under this Agreement involving termination of the Executive’s
employment with the Company or involving the failure or refusal of the Company
to perform fully in accordance with the terms hereof, the Company shall
reimburse the Executive, on a current basis, for all reasonable legal fees and
expenses, if any, incurred by the Executive in connection with such contest or
dispute, together with interest thereon at a rate equal to the prime rate, as
published under “Money Rates” in The Wall Street Journal from time to
time, but in no event higher than the maximum legal rate permissible under
applicable law, such interest to accrue from the date the Company receives the
Executive’s statement for such fees and expenses through the date of payment
thereof; provided, however, that in the event the resolution of
any such contest or dispute includes a finding denying, in total, the Executive’s
claims in such contest or dispute, the Executive shall be required to reimburse
the Company, over a period of 12 months from the date of such resolution, for
all sums advanced to the Executive pursuant to this Section 6.

 

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7.                                       Operative
Event.  Notwithstanding any provision
herein to the contrary, no amounts shall be payable hereunder unless and until
there is a Change in Control at a time when the Executive is employed by the
Company.

 

8.                                       Termination
of Agreement.

 

(a)                                  This
Agreement shall be effective on the Effective Date and shall expire on the
second anniversary of the Effective Date, provided that the term of this
Agreement shall be extended automatically for one additional year as of each
annual anniversary of the Effective Date, commencing with the second
anniversary of the Effective Date (each such date a “Renewal Date”) unless this
Agreement is terminated pursuant to Section 8(b) or, if earlier, upon the
earlier to occur of (i) termination of the Executive’s employment with the
Company prior to a Change in Control and (ii) the Executive’s death.  Notwithstanding the foregoing, any expiration
of this Agreement shall not retroactively impair or otherwise adversely affect
the rights of the Executive which have arisen prior to the date of such
expiration.

 

(b)                                 The
Company shall have the right, in its sole discretion, pursuant to action by the
Board, to approve the amendment or termination of this Agreement, which
amendment or termination shall not become effective until the Renewal Date
coincident with or next following the date of such action, or if later, the
date fixed by the Board for such amendment or termination; provided, that an
amendment which is not adverse to the interests of the Executive shall take
effect immediately; and provided further, that in no event shall this Agreement
be amended in a manner adverse to the interests of the Executive or be
terminated during any period that a Potential Change in Control is pending or
in the event of a Change in Control.

 

9.                                       Scope
of Agreement.  Nothing in this
Agreement shall be deemed to entitle the Executive to continued employment with
the Company or its subsidiaries and, if the Executive’s employment with the
Company shall terminate prior to a Change in Control, then the Executive shall
have no further rights under this Agreement; provided, however,
that any termination of the Executive’s employment following a Change in
Control shall be subject to all of the provisions of this Agreement.

 

10.                                 Successors;
Binding Agreement.

 

(a)                                  This
Agreement shall not be terminated by any merger or consolidation of the Company
whereby the Company is or is not the surviving or resulting corporation or as a
result of any transfer of all or substantially all of the assets of the
Company.  In the event of any such
merger, consolidation or transfer of assets, the provisions of this Agreement
shall be binding upon the surviving or resulting corporation or the person or
entity to which such assets are transferred.

 

(b)                                 The
Company agrees that concurrently with any merger, consolidation or transfer of
assets referred to in Section 10(a), it will cause any successor or transferee
unconditionally to assume, by written instrument delivered to the Executive (or
the Executive’s beneficiary or estate), all of the obligations of the Company
hereunder.  Failure of the Company to
obtain such assumption prior to the effectiveness of any such merger,
consolidation or transfer of assets shall be a breach of this Agreement and
shall entitle the Executive to compensation and

 

11

 

other benefits from the
Company in the same amount and on the same terms as the Executive would be
entitled hereunder if the Executive’s employment were terminated following a
Change in Control other than by reason of a Nonqualifying Termination during
the Termination Period.  For purposes of
implementing the foregoing, the date on which any such merger, consolidation or
transfer becomes effective shall be deemed the Date of Termination.

 

(c)                                  This
Agreement shall inure to the benefit of and be enforceable by the Executive’s
personal or legal representatives, executors, administrators, successors,
heirs, distributees, devisees and legatees. 
If the Executive shall die while any amounts would be payable to the
Executive hereunder had the Executive continued to live, all such amounts,
unless otherwise provided herein, shall be paid in accordance with the terms of
this Agreement to such person or persons appointed in writing by the Executive
to receive such amounts or, if no person is so appointed, to the Executive’s
estate.

 

11.                                 Notices.

 

(a)                                  For
purposes of this Agreement, all notices and other communications required or
permitted hereunder shall be in writing and shall be deemed to have been duly
given when delivered or five (5) days after deposit in the United States mail,
certified and return receipt requested, postage prepaid, addressed

 

(1)                                  if
to the Executive, to the home address of the Executive on the most current
Company records, and if to the Company, to Avaya Inc., attention Vice
President, Human Resources with a copy to the Secretary of the Board, or

 

(2)                                  to
such other address as either party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.

 

(b)                                 A
written notice of the Executive’s Date of Termination by the Company or the
Executive, as the case may be, to the other, shall (i) indicate the specific
termination provision in this Agreement relied upon, (ii) to the extent
applicable, set forth in reasonable detail the facts and circumstances claimed
to provide a basis for termination of the Executive’s employment under the
provision so indicated and (iii) specify the termination date (which date shall
be not less than fifteen (15) days after the
giving of such notice).  The failure by
the Executive or the Company to set forth in such notice any fact or
circumstance which contributes to a showing of Good Reason or Cause shall not
waive any right of the Executive or the Company hereunder or preclude the
Executive or the Company from asserting such fact or circumstance in enforcing
the Executive’s or the Company’s rights hereunder.

 

12.                                 Full
Settlement; Resolution of Disputes. 

 

(a)                                  The
Company’s obligation to make any payments provided for in this Agreement and
otherwise to perform its obligations hereunder shall not be affected by any
set-off, counterclaim, recoupment, defense or other claim, right or action
which the Company may have against the Executive or others.  In no event shall the Executive be obligated
to seek other employment or take any other action by way of mitigation of the
amounts payable to the

 

12

 

Executive under any of
the provisions of this Agreement and such amounts shall not be reduced whether
or not the Executive obtains other employment.

 

(b)                                 If
there shall be any dispute between the Company and the Executive in the event
of any termination of the Executive’s employment, then, unless and until there
is a final, nonappealable judgment by a court of competent jurisdiction
declaring that such termination was for Cause, that the determination by the
Executive of the existence of Good Reason was not made in good faith, or that
the Company is not otherwise obligated to pay any amount or provide any benefit
to the Executive and his dependents or other beneficiaries, as the case may be,
under Sections 3(a), 3(b) and 3(c), the Company shall pay all amounts, and
provide all benefits, to the Executive and his dependents or other
beneficiaries, as the case may be, that the Company would be required to pay or
provide pursuant to Sections 3(a), 3(b) and 3(c) as though such termination
were by the Company without Cause or by the Executive with Good Reason; provided,
however, that the Company shall not be required to pay any disputed
amounts pursuant to this Section 12(b) except upon receipt of an undertaking by
or on behalf of the Executive to repay all such amounts to which the Executive
is ultimately adjudged by such court not to be entitled.

 

13.                                 Employment
with Subsidiaries.  Employment with
the Company for purposes of this Agreement shall include employment with (i)
any “subsidiary corporation” of the Company, as defined in Section 424(f) of
the Code, (ii) an entity in which the Company directly or indirectly owns 50%
or more of the voting interests or (iii) an entity in which the Company has a
significant equity interest, as determined by the Board or by the Corporate
Governance and Compensation Committee (or any successor committee) of the
Board.

 

14.                                 Governing
Law; Validity.  The interpretation,
construction and performance of this Agreement shall be governed by and
construed and enforced in accordance with the internal laws of the State of
Delaware without regard to the principle of conflicts of laws.  The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provisions of this Agreement, which other provisions shall remain in
full force and effect.

 

15.                                 Counterparts.  This Agreement may be executed in two
counterparts, each of which shall be deemed to be an original and both of which
together shall constitute one and the same instrument.

 

16.                                 Miscellaneous.  No provision of this Agreement may be
modified or waived unless such modification or waiver is agreed to in writing
and signed by the Executive and by a duly authorized officer of the Company.  No waiver by either party hereto at any time
of any breach by the other party hereto of, or compliance with, any condition
or provision of this Agreement to be performed by such other party shall be
deemed a waiver of similar or dissimilar provisions or conditions at the same
or at any prior or subsequent time. 
Failure by the Executive or the Company to insist upon strict compliance
with any provision of this Agreement or to assert any right the Executive or
the Company may have hereunder, including, without limitation, the right of the
Executive to terminate employment for Good Reason, shall not be deemed to be a
waiver of such provision or right or any other provision or right of this
Agreement.  Except as otherwise expressly
set forth in this Agreement, the rights of, and benefits

 

13

 

payable to, the
Executive, his estate or his beneficiaries pursuant to this Agreement are in
addition to any rights of, or benefits payable to, the Executive, his estate or
his beneficiaries under any other employee benefit plan or compensation program
of the Company.

 

14

 

IN WITNESS WHEREOF, the Company has caused this
Agreement to be executed by a duly authorized officer of the Company and the
Executive has executed this Agreement as of the day and year first above
written.

 

	
   

  	
  AVAYA INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Michael J. Harrison

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  EXECUTIVE

  
	
   

  	
   

  
	
   

  	
  /s/ Donald K. Peterson

  	
   

  
	
   

  	
  Donald K. Peterson

  

 

 

Note: The Company has also entered into
Severance Agreements, each dated as of September 1, 2003 (other than with
respect to Francis M. Scricco, which such agreement was entered into on
September 1, 2004), with each of the following executive officers:

 

 

	
  Garry K. McGuire

  	
  Chief Financial Officer
  and Senior

  Vice President, Corporate

  Development

  
	
   

  	
   

  
	
  Louis J. D’Ambrosio

  	
  Group Vice President,
  Avaya

  Global Sales, Channels and

  Marketing

  
	
   

  	
   

  
	
  David P. Johnson

  	
  Senior Vice President,
  Europe,

  Middle East and Africa

  
	
   

  	
   

  
	
  Francis M. Scricco

  	
  Group Vice President,
  Avaya

  Global Services

  
	
   

  	
   

  
	
  Michael Thurk

  	
  Group Vice President,
  Enterprise

  Communications Group

  

 

Such Severance Agreements are substantially
identical to Mr. Peterson’s in all material respects, except that the severance
benefit for each above listed executive officer is two times the sum of their
respective annual base salaries and target bonuses. In addition, these
executive officers are entitled to continuation of medical and life insurance
and a pension enhancement payment for a two-year period.

 

15EXHIBIT 10.38

 

 

 

AVAYA INC. 2004 LONG TERM INCENTIVE PLAN

 

 

 

 

 

Article 1 - Background and Purpose

 

This is the amended and restated
Avaya Inc. Long Term Incentive Plan for Management Employees (the “Prior Plan”),
which, among other things, has been amended and restated to include provisions relating
to Awards to Non-Employee Directors.  Pursuant
to the terms of this document, this amended and restated plan shall be called the
Avaya Inc. 2004 Long Term Incentive Plan.

 

The purpose of this Plan is
to enhance shareholder value by reinforcing the Company’s efforts to motivate Employees
to contribute to the Company’s growth and performance and enabling the Company to
attract and retain individuals of exceptional managerial talent upon whom, in large
measure, the sustained progress, growth and profitability of the Company depend.  In addition, the Plan is designed to attract and
retain qualified persons to serve as directors, to enhance the equity interest of
directors in the Company, and to solidify the common interests of its directors
and shareholders in enhancing the value of the Company’s common stock.  The Plan seeks to encourage the highest level
of director performance by providing directors with a proprietary interest in the
Company’s performance and progress.

 

Article 2 - Definitions

 

For the purposes of this Plan,
the following words shall have the meanings ascribed to them below:

 

(a)                                  Affiliate

 

Any (i) Person that
directly or through one or more intermediaries, controls, or is controlled by, or
is under common control with, the Company or (ii) entity in which the Company has
a significant equity interest, as determined by the Committee.

 

(b)                                  Annual
Meeting

 

The Company’s annual, general meeting of shareholders.

 

(c)                                  Annual
Term

 

Each twelve calendar-month period beginning on March
1, 2004 and each March 1 thereafter.

 

(d)                                  Award

 

Any Option, Stock Appreciation Right, Restricted Stock Award, Performance
Award, Dividend Equivalent, Other Stock Unit Award, Substitute Award, Stock Retainer
or any other right, interest, or option relating to Shares or other securities of
the Company granted pursuant to the provisions of the Plan.

 

 

(e)                                  Award
Agreement

 

The written agreement, contract or other instrument or
document provided by the Company to evidence an Award and signed by both the Company
and the Participant, or such other documentation in such form as the Committee
may from time to time approve.

 

(f)                                    Board

 

The Board
of Directors of the Company.

 

(g)                                 Business
Day

 

Any day
on which the New York Stock Exchange is open for transaction of business.

 

(h)                                 Change
in Control

 

The happening
of any of the following events:

 

(i) An acquisition by any individual, entity or group (within
the meaning of Section 13 (d)(3) or 14 (d)(2) of the Exchange Act) (an “Entity”)
of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of 50% or more of either (A) the then outstanding shares of common
stock of the Company (the “Outstanding Company Common Stock”) or (B) the combined
voting power of the then outstanding voting securities of the Company entitled to
vote generally in the election of directors (the “Outstanding Company Voting Securities”);
excluding, however, the following: (1) any acquisition directly from the Company,
other than an acquisition by virtue of the exercise of a conversion privilege unless
the security so being converted was itself acquired directly from the Company, (2)
any acquisition by the Company, (3) any acquisition by any employee benefit plan
(or related trust) sponsored or maintained by the Company or any corporation controlled
by the Company, or (4) any acquisition by any corporation pursuant to a transaction
which complies with clauses (A), (B) and (C) of subsection (iii) of this Article
2(g); or

 

(ii) A change in the composition of the Board such that
the individuals who, as of the Effective Date, constitute the Board (such Board
shall be hereinafter referred to as the “Incumbent Board”) cease for any reason
to constitute at least a majority of the Board; provided, however,
that for purposes of this definition, any individual who becomes a member of the
Board subsequent to the Effective Date, whose election, or nomination for election
by the Company’s stockholders, was approved by a vote of at least a majority of
those individuals who are members of the Board and who were also members of the
Incumbent Board (or deemed to be such pursuant to this proviso) shall be considered
as though such individual were a member of the Incumbent Board; and provided,
further  however, that any such individual whose initial assumption
of office occurs as a result of or in connection with either an actual or threatened
election contest

 

3

 

(as such
terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act)
or other actual or threatened solicitation of proxies or consents by or on behalf
of an Entity other than the Board shall not be so considered as a member of the
Incumbent Board; or

 

(iii) The approval by the stockholders of the Company of
a merger, reorganization or consolidation or sale or other disposition of all or
substantially all of the assets of the Company (each, a “Corporate Transaction”)
or, if consummation of such Corporate Transaction is subject, at the time of such
approval by stockholders, to the consent of any government or governmental agency,
the obtaining of such consent (either explicitly or implicitly by consummation);
excluding however, such a Corporate Transaction pursuant to which (A) all or substantially
all of the individuals and entities who are beneficial owners, respectively, of
the Outstanding Company Stock and Outstanding Company Voting Securities immediately
prior to such Corporate Transaction will beneficially own, directly or indirectly,
more than 60% of, respectively, the outstanding shares of common stock, and the
combined voting power of the then outstanding voting securities entitled to vote
generally in the election of directors, as the case may be, of the corporation resulting
from such Corporate Transaction (including, without limitation, a corporation or
other Person which as a result of such transaction owns the Company or all or substantially
all of the Company’s assets either directly or through one or more subsidiaries
(a “Parent Company”)) in substantially the same proportions as their ownership,
immediately prior to such Corporate Transaction, of the Outstanding Company Common
Stock and Outstanding Company Voting Securities, as the case may be, (B) no Entity
(other than the Company, any employee benefit plan (or related trust) of the Company,
such corporation resulting from such Corporate Transaction or, if reference was
made to equity ownership of any Parent Company for purposes of determining whether
clause (A) above is satisfied in connection with the applicable Corporate Transaction,
such Parent Company) will beneficially own, directly or indirectly, 50% or more
of, respectively, the outstanding shares of common stock of the corporation resulting
from such Corporate Transaction or the combined voting power of the outstanding
voting securities of such corporation entitled to vote generally in the election
of the directors unless such ownership resulted solely from ownership of securities
of the Company prior to the Corporate Transaction, and (C) individuals who were
members of the Incumbent Board will immediately after the consummation of the Corporate
Transaction constitute at least a majority of the members of the board of directors
of the corporation resulting from such Corporate Transaction (or, if reference was
made to equity ownership of any Parent Company for purposes of determining whether
clause (A) above is satisfied in connection with the applicable Corporate Transaction,
of the Parent Company); or

 

                                                (iv)  The approval by the stockholders of the Company
of a complete liquidation or dissolution of the Company.

 

(i)                                    Code

 

The Internal
Revenue Code of 1986, as amended.

 

4

 

(j)                                    Committee

 

The Corporate
Governance and Compensation Committee of the Board, or any successor committee that
is comprised of two or more Directors who meet the criteria for independence as
required by any applicable law and the listing standards of the New York Stock Exchange.

 

(k)                                Company

 

Avaya Inc.,
a Delaware corporation.

 

(l)                                    Company
Action

 

A Company
or Subsidiary declared or initiated (i) termination from service under a force management
program, (ii) sale of a unit or portion of a unit, (iii) transfer of a Participant
to a corporation, partnership, limited liability company or other business entity
in which the Company has a direct or indirect equity interest and which does not
constitute a Subsidiary or (iv) placement of the job function of a Participant with
an outsourcing contractor unless the successor employer has made appropriate provision
for the assumption and continuation of Awards of Employees who are employed by the
successor employer after an event described in (ii), (iii) or (iv).

 

(m)                              Covered Employee

 

The Chief
Executive Officer and all Vice-Presidents.

 

(n)                                 Deferral
Plan

 

The Company’s Deferred Compensation Plan, and any successor
or replacement plan then in effect with respect to Participants.

 

(o)                                  Delegate

 

The person
or committee authorized by the Committee or the Board to exercise specified authority
under this Plan.

 

(p)                                  Dividend Equivalent

 

Has the meaning assigned
in Article 6(b).

 

5

 

(q)                                  Disability
or Disabled

 

Termination
of employment under circumstances where the Participant qualifies for benefits under
a long-term disability pay plan as provided in the Participant’s Award Agreement.

 

(r)                                  Discounted
Option

 

Any Option
awarded under Article 7 with an exercise price that is less than the Fair Market
Value of a Share on the date of the grant.

 

(s)                                  Effective
Date

 

See Article
21.

 

(t)                                    Employee

 

Any employee
of the Company or any Subsidiary, excluding leased employees within the meaning
of Section 414(n) of the Code.

 

(u)                                 Exchange
Act

 

The Securities
Exchange Act of 1934, as amended.

 

(v)                                   Exercise
Date

 

See Article
19(c)(v).

 

(w)                                Existing
Plans

 

The Prior Plan, the 2000 Long Term Incentive Plan, the
2000 Stock Compensation Plan for Non-Employee Directors and the Broad-Based Stock
Option Plan.

 

(x)                                  Expiration
Date

 

The date
specified in the Award Agreement after which rights under the Award expire.

 

(y)                                  Fair
Market Value

 

The average of the high and low sales prices of a Share as reported on the
New York Stock Exchange on the Grant Date, or if no sales of Shares were reported
on such date, the average of the high and low sales prices of a Share on the next
preceding day on which sales were reported.

 

6

 

(z)                                  Grant
Date

 

The Grant Date shall be the date an Award is granted as set forth in the
Award Agreement.

 

(aa)                            Net Income

 

The net income of the Company as determined under generally
accepted accounting principles, excluding (a) extraordinary items (net of applicable
taxes); (b) cumulative effects of changes in accounting principles; (c) gains and
losses (net of applicable taxes) from the sales of securities; and (d) nonrecurring
items (net of applicable taxes) including, but not limited to, gains or losses on
asset dispositions and sales of divisions, business units or subsidiaries, restructuring
charges, gains and losses from qualified benefit plan curtailments and settlements,
and income or expenses related to deferred tax assets.

 

 (bb)                         Non-Employee Director

 

A member of the Board
who is not an Employee of the Company or any of its Affiliates.

 

(cc)                            Option

 

An Award described in Article 7.

 

(dd)                            Other Stock
Unit Award

 

An Award described in Article 11.

 

(ee)                            Participant

 

Each (i) Employee or
(ii) Non-Employee Director,  who is selected
by the Committee to receive an Award under the Plan

 

(ff)                                Performance
Award

 

An award described in Article 10.

 

(gg)                          Performance
Period

 

That period, established by the Committee at or after the time any Performance
Award is granted, during which any performance goals specified by the Committee
with respect to such Award are to be measured.

 

7

 

(hh)                          Person

 

Any individual, corporation,
partnership, association, joint-stock company, trust, unincorporated organization,
limited liability company, other entity or government or political subdivision.

 

(ii)                                Plan

 

The Avaya Inc. 2004 Long Term Incentive Plan (formerly known as the Long
Term Incentive Plan for Management Employees).

 

(jj)                                Restricted
Stock

 

An Award described in Article 9.

 

(kk)                        Retainer

 

The retainer paid to a Non-Employee
Director as compensation for services as a member of the Board or any committee
of the Board with respect to each Annual Term, but shall not include any reimbursement
for expenses.

 

(ll)                                Retirement

 

Termination of the
employment of an Employee with the Company or any Subsidiary under circumstances
where the Employee qualifies for benefits under a retirement plan as provided in
the Employee’s Award Agreement.

 

(mm)                    Share

 

A share of the common stock of the Company, par value $.01 per share.

 

(nn)                          Stock Appreciation Right

 

An Award described in Article 8.

 

(oo)                            Stock Award
Committee

 

A committee of one
or more directors appointed by the Committee pursuant to Article 4.

 

(pp)                            Stock Retainer

 

That portion of a Non-Employee Director’s Retainer that, pursuant to Article
19(a) of this Plan, such Non-Employee Director has elected, or is required, to receive
in Shares.

 

8

 

(qq)                            Subsidiary

 

A “subsidiary corporation”
of the Company as defined in Section 424(f) of the Code, an entity in which the
Company directly or indirectly owns 50% or more of the voting interests or an entity
in which the Company has a significant equity interest, as determined by the Committee.

 

(rr)                            Substitute
Award

 

An Award granted in
lieu of an Option, Restricted Stock or Stock Appreciation Right pursuant to Article
17.

 

(ss)                            Term

 

The period beginning on the date this Plan is approved by the stockholders
of the Company, and ending on October 1, 2013.

 

Article 3 - Shares Available
for Awards; Adjustments

 

(a)  Subject to adjustment as provided in Article 3(b)
and the remainder of this Article 3(a), the aggregate number of Shares which may
be made subject to Awards granted under this Plan shall not exceed 29,000,000.  Any Shares granted as Options (other than Discounted
Options) or Stock Appreciation Rights shall be counted against this limit as one
(1) Share for every one (1) Share granted. 
Any Shares granted as Awards other than Options or Stock Appreciation Rights
shall be counted against this limit as one and thirty-five hundredths (1.35) Share
for every one (1) Share granted. For each Discounted Option granted, the number
of full Shares representing the aggregate value of the discount on the date of grant
shall reduce the number of Shares that may be available for the grant of Awards
by one and thirty-five hundredths (1.35) Share for every one (1) Share granted.  If any Shares are subject to an Award, including
an award under any of the Existing Plans that was made prior to and remains outstanding
as of the Effective Date, that is forfeited, settled in cash, expires, or is otherwise
terminated without issuance of Shares, such Shares shall again be available for
Awards under the Plan if no Participant shall have received any benefits of ownership
in respect thereof.  In addition, the number
of shares available for Awards under the Plan shall be increased by (i) that number
of Shares which the Company repurchases in the open market or otherwise with proceeds
received from Option exercises, (ii) Shares that are tendered or withheld to pay
the exercise or purchase price of an Award or to settle tax withholding or other
obligations arising in connection with an Award, and (iii) Shares that are not otherwise
issued pursuant to an Award, in each case including with respect to awards made
under any of the Existing Plans prior to and remaining outstanding as of the Effective
Date.  In addition, the number of Shares available
for grants under the Plan or to a Participant in any fiscal year shall not be reduced
by Awards granted or Shares issued by the Company through the assumption of, or
in substitution or exchange for awards or the right or obligation to make future
grants of awards in connection with the acquisition of another corporation or business
entity.  Any Shares issued under the Plan
may consist, in whole or in part, of authorized and unissued Shares, Shares purchased
in the open market or otherwise, treasury Shares, or any combination of the foregoing,
as the Board or the Committee may from time to time determine.

 

9

 

(b)  In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, stock split, reverse stock split, spin-off or
similar transaction or other change in corporate structure affecting the Shares,
such adjustments and other substitutions shall be made to the Plan, and to Awards
as the Committee in its sole discretion deems equitable or appropriate, including,
without limitation:  such adjustments in the
aggregate number, class and kind of Shares or other consideration which may be delivered
under the Plan, in the aggregate or to any one Participant; in the number, class,
kind and option or exercise price of Shares subject to outstanding Awards granted
under the Plan; and in the number, class and kind of Shares subject to Awards granted
under the Plan (including, if the Committee deems appropriate, the substitution
of similar options to purchase the shares of, or other awards denominated in the
shares of, another company); provided, however, that the number of
Shares or other securities subject to any Award shall always be a whole number.

 

(c)  Except as provided in Article 22, the Committee
shall be authorized to make adjustments in Performance Award criteria or in the
terms and conditions of other Awards in recognition of unusual or nonrecurring events
affecting the Company or its financial statements, or changes in applicable laws,
regulations or accounting principles.  The
Committee may correct any defect, supply any omission or reconcile any inconsistency
in the Plan or any Award in the manner and to the extent it shall deem desirable.  In the event the Company shall assume outstanding
employee benefit awards or the right or obligation to make future such awards in
connection with the acquisition of another corporation or business entity, the Committee
may, in its discretion, make such adjustments in the terms of Awards under the Plan
as it shall deem appropriate.

 

Article 4 - Administration

 

The Plan shall be administered
by the Committee.  The Committee shall have
full power and authority, subject to such resolutions not inconsistent with the
provisions of the Plan as may from time to time be adopted by the Board, to (i)
interpret and administer the Plan and any instrument or agreement entered into under
the Plan; (ii) establish such rules and regulations and appoint such agents as it
shall deem appropriate for the proper administration and interpretation of the Plan,
including a Stock Award Committee to make grants of Awards and discharge the duties
of the Committee; and (iii) make any other determination and take any other action
that the Committee deems necessary or desirable for administration of the Plan.  The Committee or the Stock Award Committee may
appoint a Delegate to administer and interpret the provisions of the Plan, promulgate
rules and regulations under the Plan, discharge the duties of the Committee under
Articles 12 and 17, designate employees to perform ministerial functions under this
Plan and execute documents on behalf of the Company; provided, however,
that any Delegate appointed pursuant to this Article 4 who is a Participant in the
Plan shall not participate in making any decision that would benefit such Delegate,
except to the extent such decision would only incidentally benefit the Delegate
and would also generally benefit a larger class of Participants.

 

10

 

The interpretations
and construction of any provision of the Plan by the Committee, the Stock Award
Committee, or the Delegate, as the case may be, as well as any factual determinations,
shall be final, unless otherwise determined by the Board.  No member of the Board, the Committee, the Stock
Award Committee or any Delegate shall be liable for any action or determination
made by him or her in good faith.

 

Article 5 - Eligibility

 

The Committee,
in its sole discretion, may grant an Award to (i) any Employee who is actively employed
by the Company or a Subsidiary and (ii) to any Non-Employee Director.  The adoption of this Plan shall not be deemed
to give any Employee or Non-Employee Director any right to be granted an Award,
except and to the extent and upon such terms and conditions as may be determined
by the Committee.

 

Article 6 – Awards – General

 

(a)  Awards may be granted to Participants either alone,
in tandem with or in addition to any other type of Award granted under the Plan.  Awards may be granted for no consideration, for
such minimum consideration as is required by applicable law or for such other consideration
as the Committee may determine.  Any Award
granted under the Plan shall be evidenced by an Award Agreement.  The prospective recipient of any Award shall not,
with respect to such Award, be deemed to have become a Participant, or to have any
rights with respect to such Award, until and unless such recipient has complied
with the then applicable terms and conditions of the related Award Agreement.  The term of each Award shall be for such period
of months or years from date of its grant as may be determined by the Committee;
provided  that in no event shall the term of any Option exceed a period
of seven (7) years from its Grant Date.  The
Committee may impose such conditions on the exercise or vesting of any Award as
it shall deem appropriate.

 

(b)  Subject to the provisions of this Plan and any
Award Agreement, the recipient of an Award (including, without limitation, any deferred
award) may, if so determined by the Committee, be entitled to receive, currently
or on a deferred basis, interest or dividends, or interest or dividend equivalents
(collectively, “Dividend Equivalents”), with respect to the number of Shares covered
by the Award, as determined by the Committee, in its sole discretion, and the Committee
may provide that such amounts (if any) shall be deemed to have been reinvested in
additional Shares or otherwise reinvested.

 

Article 7
- Options

 

An Option is a right
to purchase Shares subject to the following terms and conditions and to such additional
terms and conditions, not inconsistent with the provisions of the Plan, as the Committee
shall deem desirable; provided, however, that in no event shall any Option granted

 

11

 

under this Plan be
an “incentive stock option” as such term is defined under Section 422 of the Code:

 

(a)  Option Price.  The exercise price per Share under an Option shall
be determined by the Committee in its sole discretion; provided  that
such exercise price shall not be less than 75% of the Fair Market Value of a Share
on the date of the grant.

 

(b)  Exercisability.  Options shall be exercisable at such time or times
as determined by the Committee at or subsequent to grant.

 

(c)  Method Of Exercise.  Subject to the other provisions of the Plan and
any applicable Award Agreement, any Option may be exercised by the Participant in
whole or in part at such time or times, and the Participant may make payment of
the option price in such form or forms, including, without limitation, payment by
delivery of cash or Shares (whether through actual delivery or attestation of sufficient
ownership)  or by any combination of cash
or Shares.  Subject to the other provisions
of the Plan and any applicable Award Agreement, if permitted by the Committee, applicable
accounting rules and applicable law, the Company may withhold Shares as payment
of the exercise price for any Option.

 

(d)  Form Of Settlement.  In its sole discretion, the Committee may provide,
at the time of grant, that the Shares to be issued upon an Option’s exercise shall
be in the form of Restricted Stock or other similar securities, or may reserve the
right so to provide after the time of grant.

 

(e)  Repricing.  Any repricing (as such term is defined under the
listing standards of the New York Stock Exchange) of Options that are granted pursuant
to the terms of this Plan shall be subject to the approval of the Company’s shareholders.

 

Article
8 - Stock Appreciation Rights

 

A Stock Appreciation Right
is a right to receive in cash the difference between the Fair Market Value of a
Share on the exercise date and the Grant Date. 
Stock Appreciation Rights may be granted alone (“freestanding”) or may be
related to an Option or other Award.  A freestanding
Stock Appreciation Right shall otherwise have the same terms and conditions as an
Option.  Any Stock Appreciation Right related
to an Option may be granted at the same time such Option is granted or at any time
thereafter before exercise or expiration of such Option.  In the case of any Stock Appreciation Right related
to any Option, the Stock Appreciation Right or applicable portion thereof shall
terminate and no longer be exercisable upon the termination or exercise of the related
Option, except that a Stock Appreciation Right granted with respect to less than
the full number of Shares covered by a related Option shall not be reduced until
the exercise or termination of the related Option exceeds the number of Shares not
covered by the Stock Appreciation Right. 
Any Option related to any Stock Appreciation Right shall no longer be exercisable
to the extent the related Stock Appreciation Right has been exercised.

 

12

 

Article 9 - Restricted
Stock

 

Restricted Stock is an Award
in the form of Shares issued with the restriction that the Participant may not sell,
transfer, pledge or assign the Shares and with any other restrictions that the Committee
may impose (including restrictions on the right to vote or receive cash dividends
on the Shares) which restrictions may lapse separately or in combination at such
time or times, in installments or otherwise, as the Committee shall determine.

 

Article 10 - Performance
Awards

 

A Performance Award is an
Award of Performance Units or Performance Shares which vests and becomes non-forfeitable
based on performance criteria determined by the Committee to be achieved over a
prescribed Performance Period.  An Award of
Performance Shares is a number of units valued by reference to a designated number
of Shares, and an Award of Performance Units is a number of units valued by reference
to a designated amount of property other than Shares.  The performance criteria to be achieved during
any Performance Period and the length of the Performance Period shall be determined
by the Committee upon the grant of each Performance Award.  Except as provided in Articles 12 and 14, Performance
Awards will be distributed only after the end of the relevant Performance Period.  A Performance Period shall not be less than twelve
months nor greater than five years.

 

Performance Awards may be
paid in cash, Shares, other property or any combination of the foregoing, in the
sole discretion of the Committee upon the grant of the Performance Award.  The performance levels which have been achieved
for each Performance Period and the amount of the Award to be distributed shall
be conclusively determined by the Committee. 
Performance Awards may be paid in a lump sum or in installments following
the close of the Performance Period.

 

Article 11 – Other Stock Unit
Awards

 

Other Awards of Shares
and other Awards that are valued in whole or in part by reference to, or are otherwise
based on, Shares (“Other Stock Unit Awards”) may be paid in Shares, other securities
of the Company, cash or any other form of property as the Committee shall determine
upon the grant of the Other Stock Unit Award. 
Other Stock Unit Awards may be issued with such restrictions that the Committee
may impose, which restrictions may lapse separately or in combination at such time
or times, in installments or otherwise, as the Committee shall determine.  Shares purchased pursuant to Other Stock Unit
Awards shall be purchased for such consideration as the Committee shall in its sole
discretion determine, which shall not be less than the Fair Market Value of such
Shares as of the Grant Date of such Award.

 

 

Article 12 - Termination of
Employment

 

Except as
otherwise provided in Article 19 or in an Award Agreement, the provisions of this
Article 12 shall govern the rights of Participants to exercise Options following
termination of employment.  If a Participant
terminates employment for any reason other than Retirement,

 

13

 

Disability
or death (i) any portion of the Participant’s Options which are exercisable on the
date employment terminates may be exercised until the earlier of ninety days following
termination of employment or the original Expiration Date of the Option, and (ii)
any portion of an Option that is not exercisable on the date employment terminates
shall be forfeited and canceled, except that if the reason for the termination of
employment is a Company Action, then the Option shall become immediately exercisable
for the period specified in clause (i) with respect to the number of Shares determined
by the following formula, and shall be forfeited and canceled with respect to the
remaining Shares:

 

	
  Shares

  	
   

  	
  Original
  Shares

  	
   

  	
  Number of Completed Months Prior to

  	
   

  
	
  Exercisable

  =

  	
   

  	
  Granted

  	
  X

  	
  Termination of Employment Since

  Granted

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Number of Complete Months from Grant Date

  to Full Exercisability of Option

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  Minus:  Number
  of Shares Exercisable Prior to

  Termination of Employment

  	
   

  

 

Upon termination
of employment by reason of Retirement or Disability, any portion of a Participant’s
Option that is then outstanding shall, to the extent not then exercisable, be immediately
forfeited and canceled in its entirety. To the extent that an Option is exercisable
on the date of a Participant’s Retirement or Disability, the Option will remain
exercisable until the original Expiration Date of the Option. Notwithstanding the
foregoing, if a Participant terminates employment pursuant to a Company Action under
circumstances that also constitute Retirement for such Participant, then any portion
of any Option of the Participant which becomes exercisable by reason of this Article
12 along with any portion of any Option of the Participant which is exercisable
on the date of termination of employment shall be exercisable, until the original
Expiration Date of the relevant Option. Upon the death of a Participant, the outstanding
portion of such Participant’s Option shall, to the extent not then exercisable,
become immediately exercisable in full and the Option shall remain exercisable until
the original Expiration Date of the Option. 
The Committee or its Delegate may, in its sole discretion, waive or modify
the application of this Article 12 in the case of any individual Participant.  This Article 12 applies only to Options; however
the Committee may provide for similar treatment of other forms of Awards at the
time that the Award is granted.

 

 

Article 13 – Nonassignability/Deferral

 

(i)             No Award shall be assigned
or transferred by a Participant who is an Employee other than by will or the laws
of descent and distribution, and during the lifetime of the Participant may be exercised
only by such Participant or his or her guardian or legal representative; provided,
however, that an Option granted under the Plan to an Employee may be assigned or

 

14

 

transferred
to the extent determined by the Committee and set forth in the applicable Award
Agreement.

 

(iii)       To the extent permitted by the Deferral Plan, a Participant
may elect to have all or a portion of any Award deliverable under this Plan credited
to the deferred compensation account of such Participant under the Deferral Plan
to be held in, respectively, the Company Shares and cash portions of such account.

 

Article 14 - Change in Control
Provisions

 

Notwithstanding
any other provision of the plan to the contrary, but, with respect to Non-Employee
Directors, subject to Article 19, unless the Committee shall determine otherwise
at the time of grant with respect to a particular Award, in the event of a Change
in Control any Options and Stock Appreciation Rights outstanding as of the date
such Change in Control is determined to have occurred, and which are not then exercisable
and vested, shall become fully exercisable and vested to the full extent of the
original grant and any Restricted Stock and Other Stock Unit Awards which are not
then vested shall become vested and non-forfeitable to the full extent of the original
grant.  If a Change in Control occurs or is
to occur during a Performance Period, the Committee shall determine the extent to
which Performance Awards shall vest or shall be adjusted in accordance with Article
3(c) in the event of a Change in Control. 
This determination shall be made by individuals who are members of the Incumbent
Board, as defined in the definition of Change in Control in Article 1(h).

 

Article 15 - Reservation of
Shares

 

The Company,
during the term of this Plan, will at all times reserve and keep available, and
will seek or obtain from any regulatory body having jurisdiction any requisite authority
necessary to issue and to sell, the number of Shares that shall be sufficient to
satisfy the requirements of this Plan. The inability of the Company to obtain from
any regulatory body having jurisdiction the authority deemed necessary by counsel
for the Company for the lawful issuance and sale of Shares shall relieve the Company
of any liability in respect of the failure to issue or sell Shares as to which the
requisite authority has not been obtained.

 

Article 16- Taxes

 

Where permitted
by the Committee and set forth in the applicable Award Agreement, a Participant
may request that the Company satisfy any applicable taxes in connection with an
Award by withholding from payment to the Participant Shares (at minimum statutory
rates only), or the Participant may deliver Shares (whether through actual delivery
or attestation of sufficient ownership) to the Company to satisfy those obligations,  In addition, the Company and any Subsidiary shall
have the right to condition the grant or exercise of any Award on a Participant’s
payment of any applicable amounts required by a governmental agency to be withheld
from payment to the Participant or paid or deducted by the Company or a Subsidiary
in connection

 

15

 

with an
Award (“withholding tax”).  The Company and
any Subsidiary shall also have the right to deduct any withholding tax from a Participant’s
other compensation or to make any other arrangements to satisfy withholding tax
obligations, including arrangements with one or more brokerage firms pursuant to
cashless exercise procedures.  The Company
and any Subsidiary shall further have the right to deduct from any payment under
an Award under the Plan or from a Participant’s other compensation any tax or social
insurance payment imposed on the Company or Subsidiary in connection with such Award.

 

Article 17 - Employees Based
Outside of the United States

 

Notwithstanding
any provision of the Plan to the contrary, in order to foster and promote achievement
of the purposes of the Plan or to comply with the provisions of laws in other countries
in which the Company and its Subsidiaries operate or have Employees, the Committee
or its Delegate, in its sole discretion, shall have the power and authority to (1)
determine which Employees that are subject to the tax, employment and securities
laws of nations other than the United States are eligible to participate in the
Plan, (2) modify the terms and conditions of any Awards granted to such Employees
(including the grant of Restricted Stock, Stock Appreciation Rights or some other
comparable form of award (“Substitute Award”) in lieu of Options), and (3) establish
subplans, modified Option exercise procedures and other terms and procedures to
the extent such actions may be necessary or advisable; provided, however,
that the Committee may not grant such Awards that do not comply with the limitations
of Article 3.  Any subplans established under
this Article 17 shall be attached to this Plan as Appendices.  The terms of this Plan applicable to Options shall
apply with like effect to Stock Appreciation Rights, Restricted Stock Awards, Performance
Awards, Other Stock Unit Awards and Substitute Awards to the extent legally permissible.

 

Article 18 - Rights to Continued
Employment or Directorship

 

Neither this Plan nor any Award shall
be construed as giving any person the right to be retained in the employ of the
Company or any Subsidiary.  No Participant
shall have any claim to be granted any Award under the Plan or to include any Award
or its value in any form of severance or similar pay, or in any benefit plan or
program which by its terms does not specifically include the value of the Award.  There is no obligation of uniformity of treatment
of Participants under the Plan.  This Plan
is of limited duration and creates no ongoing obligation of the Company to provide
any future benefit of similar nature or value. 
Nothing in the Plan shall be deemed to create any obligation on the part
of the Board or the Company to nominate any Director for reelection by the Company’s
shareholders or to limit the rights of the shareholders to remove any Director.

 

Article 19 – Non-Employee
Director Awards

 

Notwithstanding any provision in the Plan to the contrary, the following terms
shall apply with respect to Awards granted to Non-Employee Directors under the Plan:

 

16

 

(a)          Inaugural
Grants

 

Non-employee Directors may receive such inaugural
grants of Awards in the form of Shares, Restricted Stock or Options upon commencement
of service on the Board as the Committee shall determine.

 

(b)          Retainer.

 

(i)                                     Commencing
with the Annual Term beginning March 1, 2004, each Participant will receive fifty
percent (50%) of his or her Retainer for each Annual Term in the form of a Stock
Retainer, Restricted Stock or Option, as determined by the Committee, and may elect
to receive all or any portion of the remaining fifty percent (50%) of such Retainer
in the form of either a Stock Retainer or in cash; provided, that, to the extent
deemed permissible by the Committee, each Non-Employee Director may elect to receive
in lieu of any or all of any amount to be paid as a Stock Retainer a payment in
the form of an Option for the number of Shares determined pursuant to Article 19(c).  Any such election shall be filed on a form prescribed
by the Committee for this purpose and such election (or failure to elect) shall
be irrevocable as of the last date by which such election was due to be filed with
the Company.

 

(ii)                                  If
any Non-Employee Director fails to notify the Secretary of the Company in writing
by December 31 of the preceding Annual Term of the desired form of payment of the
Retainer for the next Annual Term, then such Participant shall be deemed to have
elected a Stock Retainer for fifty percent (50%) of the value of such Retainer,
with the remaining 50% in cash

 

(iii)                               Any Shares constituting a
Stock Retainer shall be payable automatically on March 1 of each Annual Term (or,
if March 1 is not a Business Day, on the next succeeding Business Day), commencing
March 1, 2004.  Payments for the cash portion,
if any, of the Annual Retainer shall be made on the same day.  A Participant’s Stock Retainer shall consist of
the largest number of whole Shares having a Fair Market Value, as of the date of
payment, equal to the portion of the Retainer to be paid in Shares.  The Fair Market Value of any fractional share
shall be paid in cash.

 

(iv)                              This
Article 19 shall apply to any person who becomes a Non-Employee Director Participant
other than at the beginning of an Annual Term (or the immediately preceding Annual
Meeting) with respect to the Retainer determined by the Committee to be payable
for such portion of such Annual Term which follows his or her appointment to the
Board.  Such person shall make the election
prescribed by Article 19(b)(i) no later than the 30th day following the effective
date of his or her appointment to the Board. 
The payment date for any cash portion of the Retainer and the date of grant
for any Option or Stock Retainer shall be the first Business Day which occurs at
least fifteen (15) calendar days after receipt by the Company of such election.

 

17

 

(c)                                  Options.

 

(i)                                     In
the event that the Committee determines that a Non-Employee Director may elect to
receive payment of all or any portion of the Retainer in the form of an Option,
an Option shall be granted, on the terms and conditions described in this Plan,
to purchase the largest number of whole Shares obtained by applying the following
formula:

 

	
  Number of

  Shares =

  	
  Multiplier  X

  	
  Dollar Amount of Retainer to be paid as an Option

  Fair Market Value of a Share on March 1*

  

 

*or, if
March 1 is not a Business Day, on the next succeeding Business Day.

 

“Multiplier”
shall be a number (but need not be a whole number) to be determined by the Committee
in its discretion in order to provide that any grant to a Director is equitable
under the circumstances, including without limitation, prior grants awarded to such
Director and grants awarded to other Directors; provided, however, that the Multiplier
shall not be less than 1 nor greater than 5.

 

The value of any fractional share
shall be paid in cash.

 

(ii)                                  Options
shall be subject to the terms and conditions set forth in this Plan and to such
additional terms and conditions, not inconsistent with the provisions of this Plan,
as the Committee shall deem desirable.

 

(iii)                               The exercise price per Share
under an Option shall be the Fair Market Value of a Share on the date of grant,
subject to adjustment as prescribed in Article 3(b).

 

(iv)                              Options
shall be vested and non-forfeitable on the Grant Date and be fully exercisable on
the earliest of (i) the date which is six (6) months after the Grant Date, (ii)
the occurrence of a Change in Control and (iii) the death of a Participant (any
of the foregoing the “Exercise Date”).

 

(v)                                 Except
as provided in this Article 19(c)(v) or as otherwise determined by the Committee
and set forth in the applicable Award Agreement, an Option is not transferable other
than by will or the laws of descent and distribution, and during the lifetime of
the Non-Employee Director, may be exercise only by such Non-Employee Director or
his or her guardian or legal representative. 
Notwithstanding the foregoing, an Award may be transferred by the Non-Employee
Director, in accordance with rules established by the Company, to one or more members
of the Non-Employee Director’s immediate family, to a partnership of which the only
partners are members of such immediate family or

 

18

 

to a trust
established by the Non-Employee Director for the benefit of one or more members
of such immediate family (each such transferee a “Permitted Transferee”).  For purposes of this Article 19, “immediate family”
means a Non-Employee Director’s spouse, parents, children, grandchildren and spouses
of children and grandchildren (including adopted children and grandchildren, as
the case may be).  A Permitted Transferee
may not further transfer the Award.  An Award
transferred pursuant to this Article 19 shall remain subject to all of the provisions
of the Plan and any Award Agreement with respect to such Award and may not be exercised
by a Permitted Transferee unless and until all legal or regulatory approvals, listings,
registrations, qualifications or other clearances as determined by the Company to
be required or appropriate have been obtained.

 

(vi)                              A
Non-Employee Director may, in accordance with procedures established by the Company,
designate one or more beneficiaries to receive all of his or her rights to any unexercised
Award and may change or revoke such designation at any time.  In the event of the death of the Non-Employee
Director, any Award or portion thereof which is subject to such a designation shall
be exercisable (to the extent such designation is determined by the Company to be
valid, effective and enforceable) by the designated person or persons in accordance
with this Plan and any Award Agreement.  Such
determination by the Company shall be final and binding on all Persons, and the
Company shall have no liability with respect to any Person with respect to such
determination.

 

 

(vii)                                                                           Any
Option may be exercised by the Participant in whole or in part at any time on or
after the Exercise Date and before the expiration of such Option.  The Participant shall make payment of the Option
price in cash or in Shares (whether through actual delivery or attestation of sufficient
ownership) with a Fair Market Value equivalent to the exercise price for all of
the Shares to be purchased upon exercise of the Option.  Subject to the other provisions of the Plan and
any applicable Award Agreement, if permitted by the Committee, applicable accounting
rules and applicable law, the Company may withhold Shares as payment of the exercise
price for any Option.

 

Article 20 - Amendment of Plan

 

The Board may amend the Plan
at any time and from time to time.  The Board
may, at any time or from time to time, suspend or terminate this Plan in whole or
in part.

 

No such amendment, suspension
or termination of the Plan may, however, impair any Award granted prior to such
amendment, suspension or termination, without the written consent of the affected
Participant.

 

19

 

Shareholder approval of amendments
to the Plan will be obtained where required to comply with applicable law and New
York Stock Exchange regulations.

 

Article 21 - Term of Plan

 

The Plan
shall become effective upon approval of the Plan by the stockholders of the Company
(the “Effective Date”).

 

The Plan
shall terminate on October 1, 2013 or at such earlier date as may be determined
by the Board of Directors.  Termination of
the Plan, however, shall not affect the rights of Participants under Awards previously
granted to them, and all unexpired Awards shall continue in force and operation
after termination of the Plan except as they may lapse or be terminated pursuant
to this Plan.

 

Article 22 - Code Section
162(m) Provisions

 

(a)  Notwithstanding any other provision of this Plan,
if the Committee determines at the time Restricted Stock, a Performance Award or
an Other Stock Unit Award is granted to a Participant that such Participant is,
or may be as of the end of the tax year for which the Company would claim a tax
deduction in connection with such Award, a Covered Employee, then the Committee
may provide that this Article 22 is applicable to such Award under such terms as
the Committee shall determine.  Notwithstanding
any provision of the Plan other than Article 3(b), no Participant may receive, in
any 36-month period during the Term beginning with the Effective Date, Awards with
respect to more than, in each case in the aggregate, (i) 1,500,000 Shares, (ii)
$15 million in cash, other securities of the Company or other forms of property,
or (iii) Options or Stock Appreciation Rights on more than 5,000,000 Shares.

 

(b) If an Award, other than
an Option or Stock Appreciation Right with an exercise price not less than 100%
of the Fair Market Value of a Share on the date of grant, is subject to this Article
22, then the grant of cash, Shares or other property shall be subject to the Company
attaining specified levels of one or any combination of the following for the Performance
Period:  Net Income; net cash provided by
operating activities; earnings per Share from continuing operations; operating income;
revenues; gross margin; return on operating assets; return on equity; economic value
added; stock price appreciation; total shareholder return (measured in terms of
stock price appreciation and dividend growth); or cost control, of the Company or
the Subsidiary or division of the Company for or within which the Covered Employee
is primarily employed (collectively, the “Performance Goals”).  The Committee shall establish the Performance
Goals within 90 days following the date of commencement of the applicable Performance
Period, or by such earlier time as is prescribed by Section 162(m) of the Code or
the regulations thereunder in order for the level to be considered “pre-established.”
The Committee, may, in its discretion, reduce the amount of any Award subject to
this Article 22 based on such criteria as it shall determine, including but not
limited to individual merit.

 

20

 

(c)  Notwithstanding any contrary provision of the
Plan other than Article 14, the Committee may not adjust upwards the amount payable
pursuant to any Award subject to this Article 22, nor may it waive the achievement
of the applicable Performance Goal contained in Article 22(b), except in the case
of the death or disability of a Participant.

 

(d)  Prior to the payment of any Award subject to this
Article 22, the Committee shall certify in writing that the applicable Performance
Goal applicable to such Award was met.

 

(e)  The Committee shall have the power to impose such
other restrictions on Awards subject to this Article 22 as it may deem necessary
or appropriate to ensure that such Awards satisfy all requirements for “performance-based
compensation” within the meaning of Section 162(m)(4)(C) of the Code, the regulations
promulgated thereunder, and any successors thereto.

 

Article 23 – Form of
Shares and Restricted Stock Awards

 

Shares issued or delivered
under the Plan and any Restricted Stock Award may be evidenced in such manner as
the Committee in its sole discretion shall deem appropriate, including, without
limitation, book-entry registration or issuance of a stock certificate or certificates.
In the event any stock certificate is issued in respect of a Restricted Stock Award,
such certificate shall be registered in the name of the Participant, and shall bear
an appropriate legend referring to the terms, conditions, and restrictions applicable
to such Award.  All shares delivered under
the Plan shall be subject to such stop-transfer orders and other restrictions as
the Company may deem advisable under the rules, regulations, and other requirements
of the Securities and Exchange Commission, any stock exchange upon which the Shares
are then listed, and any applicable Federal or state securities law, and the Company
may cause a legend or legends to be put on any such certificates to make appropriate
reference to such restrictions.

 

Article 24 – Postponement
of Issuance and Delivery

 

The issuance or delivery
of any Shares under this Plan may be postponed by the Company for such period as
may be required to comply with any applicable requirements under Federal securities
laws, any applicable listing requirements of any national securities exchange, and
requirements under any other law or regulation applicable to the issuance or delivery
of such Shares, and the Company shall not be obligated to issue or deliver any Shares
if the issuance or delivery of such Shares shall constitute a violation of any provision
of any law or of any regulation of any governmental authority or any national securities
exchange.

 

Article 25 - Severability

 

If any provision of
this Plan is or becomes or is deemed invalid, illegal or unenforceable in any jurisdiction,
or would disqualify the Plan or any Award under any law deemed applicable by the
Company, such provision shall be construed or deemed amended to conform to applicable
laws or if it cannot be construed or deemed amended without, in the determination
of the Company, materially altering the intent of the Plan, it shall be stricken
and the remainder of the Plan shall remain in full force and effect.

 

21

 

Article 26 - Governing
Law

 

The Plan and the validity
and construction of any Awards granted hereunder shall be governed by the laws of
the State of Delaware without regard to principles of conflicts of law.

 

 

IN WITNESS
WHEREOF, the Company has caused this Plan to be executed on this
26th day of February, 2004.

 

 

For
Avaya Inc.

 

	
  By:

  	
   

  	
   

  
	
   

  	
  Maryanne DiMarzo

  
	
   

  	
  Senior Vice President
  - Human Resources

  
	
   

  	
   

  
	
   

  	
   

  
	
  Attest:

  	
   

  	
   

  
	
   

  	
  Pamela Craven

  
	
   

  	
  Senior Vice President,
  General Counsel & Secretary

  

 

22

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