AVAYA INC - FORM 10-Q - May 12, 2011

Attached files

file	filename
EX-10.2 - FORM OF AWARD AGREEMENT - AVAYA INC	dex102.htm
EX-31.1 - CERTIFICATION OF KEVIN J. KENNEDY PURSUANT TO SECTION 302 - AVAYA INC	dex311.htm
EX-32.2 - CERTIFICATION OF ANTHONY J. MASSETTI PURSUANT TO SECTION 906 - AVAYA INC	dex322.htm
EX-32.1 - CERTIFICATION OF KEVIN J. KENNEDY PURSUANT TO SECTION 906 - AVAYA INC	dex321.htm
EX-31.2 - CERTIFICATION OF ANTHONY J. MASSETTI PURSUANT TO SECTION 302 - AVAYA INC	dex312.htm
EX-10.1 - AVAYA INC. EXECUTIVE COMMITTEE 2011-2013 PERFORMANCE RECOGNITION PLAN - AVAYA INC	dex101.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-15951

AVAYA INC.

(Exact name of registrant as specified in its charter)


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

211 Mount Airy Road Basking Ridge, New Jersey		07920
(Address of principal executive offices)		(Zip Code)

(908) 953-6000

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

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

*See Explanatory Note in Part II, Item 5

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated

filer ¨

Accelerated

filer ¨

Non-accelerated

filer x

Smaller Reporting Company ¨

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of May 6, 2011, 100 shares of Common Stock, $.01 par value, of the registrant were outstanding.

TABLE OF CONTENTS


Item		Description	Page

		PART I—FINANCIAL INFORMATION
	1.	Financial Statements		1
	2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		41
	3.	Quantitative and Qualitative Disclosures About Market Risk		64
	4.	Controls and Procedures		64

		PART II—OTHER INFORMATION
	1.	Legal Proceedings		65
	1A.	Risk Factors		65
	2.	Unregistered Sales of Equity Securities and Use of Proceeds		73
	3.	Defaults Upon Senior Securities		73
	5.	Other Information		73
	6.	Exhibits		74
		Signatures		75

This Quarterly Report on Form 10-Q contains trademarks, service marks and registered marks of Avaya Inc. and its subsidiaries and other companies, as indicated. Unless otherwise provided in this Quarterly Report on Form 10-Q, trademarks identified by ^® and ™ are registered trademarks or trademarks, respectively, of Avaya Inc. or its subsidiaries. All other trademarks are the properties of their respective owners.

PART I—FINANCIAL INFORMATION

Item 1.

Financial Statements.

Avaya Inc.

Consolidated Statements of Operations (Unaudited)

(In millions)


	Three months ended March 31,						Six months ended March 31,
	2011			2010			2011			2010
REVENUE
Products	$	757		$	680		$	1,479		$	1,193
Services		633			640			1,277			1,187

		1,390			1,320			2,756			2,380

COSTS
Products:
Costs (exclusive of amortization of technology intangible assets)		343			325			675			548
Amortization of technology intangible assets		66			83			133			142
Services		339			376			687			644

		748			784			1,495			1,334

GROSS MARGIN		642			536			1,261			1,046

OPERATING EXPENSES
Selling, general and administrative		470			467			931			833
Research and development		121			116			236			197
Amortization of intangible assets		56			57			112			107
Impairment of long-lived assets		—			—			—			16
Restructuring charges, net		42			68			64			83
Acquisition-related costs		—			2			4			19

		689			710			1,347			1,255

OPERATING LOSS		(47	)		(174	)		(86	)		(209	)

Interest expense		(113	)		(127	)		(240	)		(229	)
Loss on extinguishment of debt		(246	)		—			(246	)		—
Other (expense) income, net		(7	)		1			1			5

LOSS BEFORE INCOME TAXES		(413	)		(300	)		(571	)		(433	)
Provision for (benefit from) income taxes		19			(19	)		41			(16	)

NET LOSS		(432	)		(281	)		(612	)		(417	)
Less net income attributable to noncontrolling interests		—			1			—			2

NET LOSS ATTRIBUTABLE TO AVAYA INC.	$	(432	)	$	(282	)	$	(612	)	$	(419	)

The accompanying notes to consolidated financial statements are an integral part of these statements.

Avaya Inc.

Consolidated Balance Sheets (Unaudited)

(In millions, except per share and shares amounts)


	March 31, 2011			September 30, 2010
ASSETS
Current assets:
Cash and cash equivalents	$	453		$	579
Accounts receivable, net		734			792
Inventory		311			234
Deferred income taxes, net		4			3
Other current assets		307			276

TOTAL CURRENT ASSETS		1,809			1,884

Property, plant and equipment, net		423			450
Deferred income taxes, net		20			22
Intangible assets, net		2,367			2,603
Goodwill		4,080			4,075
Other assets		206			227

TOTAL ASSETS	$	8,905		$	9,261

LIABILITIES
Current liabilities:
Debt maturing within one year	$	37		$	48
Accounts payable		519			464
Payroll and benefit obligations		313			311
Deferred revenue		653			650
Business restructuring reserves, current portion		91			113
Other current liabilities		390			430

TOTAL CURRENT LIABILITIES		2,003			2,016

Long-term debt		6,139			5,880
Benefit obligations		2,270			2,275
Deferred income taxes, net		163			154
Business restructuring reserves, non-current portion		49			52
Other liabilities		299			312

TOTAL NON-CURRENT LIABILITIES		8,920			8,673

Commitments and contingencies

STOCKHOLDER’S DEFICIENCY
Common stock, par value $.01 per share; 100 shares authorized, issued and outstanding		—			—
Additional paid-in capital		2,688			2,682
Accumulated deficit		(3,641	)		(3,029	)
Accumulated other comprehensive loss		(1,065	)		(1,081	)

TOTAL STOCKHOLDER’S DEFICIENCY		(2,018	)		(1,428	)

TOTAL LIABILITIES AND STOCKHOLDER’S DEFICIENCY	$	8,905		$	9,261

The accompanying notes to consolidated financial statements are an integral part of these statements.

Avaya Inc.

Consolidated Statements of Cash Flows (Unaudited)

(In millions)


	Six months ended March 31,
	2011			2010
OPERATING ACTIVITIES:
Net loss	$	(612	)	$	(417	)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization		335			342
Share-based compensation		6			11
Amortization of debt issuance costs		11			11
Accretion of debt discount		17			11
Repayment of B-2 term loans related to cumulative accretion of debt discount		(50	)		—
Non-cash charge for debt issuance costs upon redemption of incremental B-2 term loans		5			—
Third-party fees expensed in connection with the debt modification		9			—
Payment in kind interest		—			42
Provision for uncollectible receivables		2			2
Deferred income taxes, net		8			4
Gain on sale of long-lived assets		(1	)		—
Impairment of long-lived and intangible assets		—			16
Unrealized (gains) losses on foreign currency exchange		(29	)		23
Changes in operating assets and liabilities:
Accounts receivable		62			(83	)
Inventory		(73	)		(5	)
Accounts payable		52			110
Payroll and benefit obligations		3			(7	)
Business restructuring reserve		(28	)		(7	)
Deferred revenue		(9	)		71
Other assets and liabilities		(57	)		(126	)

NET CASH USED FOR OPERATING ACTIVITIES		(349	)		(2	)

INVESTING ACTIVITIES:
Capital expenditures		(35	)		(30	)
Capitalized software development costs		(14	)		(23	)
Acquisition of businesses, net of cash acquired		(14	)		(805	)
Return of funds held in escrow from the NES acquisition		6			—
Liquidation of securities available for sale		—			2
Proceeds from sale of long-lived assets		3			8
Purchase of securities available for sale		—			(3	)
Restricted cash		24			1

NET CASH USED FOR INVESTING ACTIVITIES		(30	)		(850	)

FINANCING ACTIVITIES:
Net proceeds from B-2 term loans and warrants		—			783
Repayment of B-2 term loans		(696	)		—
Capital contribution from Parent		—			125
Debt issuance and modification costs		(42	)		(5	)
Proceeds from senior secured notes		1,009			—
Repayment of long-term debt		(22	)		(24	)
Other financing activities, net		(1	)		(1	)

NET CASH PROVIDED BY FINANCING ACTIVITIES		248			878

Effect of exchange rate changes on cash and cash equivalents		5			(17	)

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(126	)		9
Cash and cash equivalents at beginning of period		579			567

Cash and cash equivalents at end of period	$	453		$	576

The accompanying notes to consolidated financial statements are an integral part of these statements.

AVAYA INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Background, Merger and Basis of Presentation

Background

Avaya Inc. (the “Company” or “Avaya”) is a global leader in business communications systems. The Company provides world-class unified communications solutions, contact center solutions, data networking and related services directly and through its channel partners to leading businesses and organizations around the world. Enterprises of all sizes depend on Avaya for state-of-the-art communications that help improve efficiency, collaboration, customer service and competitiveness.

Avaya is helping to shape the future of business communications by integrating voice, video, mobility, conferencing, collaboration and networking technologies into business applications that provide organizations with the opportunity to be more responsive and successful. Avaya’s open communications products and services help to simplify the complex communications challenges of our customers while enabling them to leverage their existing investments.

At the core of the Company’s business is a large and diverse global installed customer base. Customers range in size from small enterprises with only a few employees to large government agencies and multinational companies with over 100,000 employees. Avaya sells solutions directly and through its channel partners. As of March 31, 2011, Avaya has approximately 9,900 channel partners worldwide, including system integrators, service providers, value-added resellers and business partners that provide sales and service support.

Acquisition of the Enterprise Solutions Business of Nortel Networks Corporation

On December 18, 2009, Avaya acquired certain assets and assumed certain liabilities of the enterprise solutions business (“NES”) of Nortel Networks Corporation (“Nortel”), including all the shares of Nortel Government Solutions Incorporated, for $943 million in cash consideration. The Company and Nortel were required to determine the final purchase price post-closing based upon the various purchase price adjustments included in the acquisition agreements. During the first quarter of fiscal 2011, the Company and Nortel agreed on a final purchase price of $933 million, and the Company received $6 million, representing all remaining amounts due to Avaya from funds held in escrow. The terms of the acquisition do not include any significant contingent consideration arrangements. These unaudited consolidated financial statements include the operating results of NES as of December 19, 2009.

Merger

On June 4, 2007, Avaya entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Sierra Holdings Corp., a Delaware corporation (“Parent”), and Sierra Merger Corp., a Delaware corporation and wholly owned subsidiary of Parent (“Merger Sub”), pursuant to which Merger Sub was merged with and into the Company, with the Company continuing as the surviving corporation and a wholly owned subsidiary of Parent (the “Merger”). Parent was formed by affiliates of two private equity firms, Silver Lake Partners (“Silver Lake”) and TPG (“TPG”) (collectively, the “Sponsors”), solely for the purpose of entering into the Merger Agreement and consummating the Merger. The Merger Agreement provided for a purchase price of $8.4 billion for Avaya’s common stock. The Merger was completed on October 26, 2007.

Basis of Presentation

The consolidated financial statements include the accounts of Avaya and its subsidiaries. The accompanying unaudited interim consolidated financial statements as of March 31, 2011 and for the three and six months ended March 31, 2011 and 2010 have been prepared in accordance with accounting principles generally accepted in the

United States of America (“GAAP”) and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim financial statements, and should be read in conjunction with the consolidated financial statements and other financial information for the fiscal year ended September 30, 2010, which were included in the Company’s Annual Report on Form 10-K filed with the SEC on December 7, 2010. The significant accounting policies used in preparing these unaudited interim consolidated financial statements are the same as those described in Note 2 to those audited consolidated financial statements except for recently adopted accounting guidance as discussed in Note 2 “Recent Accounting Pronouncements.” In management’s opinion, these unaudited interim consolidated financial statements reflect all adjustments, consisting of normal and recurring adjustments, necessary for a fair statement of the financial condition, results of operations and cash flows for the periods indicated.

Certain prior period amounts have been reclassified to conform to the current period’s presentation. The consolidated results of operations for the interim periods reported are not necessarily indicative of the results to be experienced for the entire fiscal year.

2. Recent Accounting Pronouncements

New Accounting Guidance Recently Adopted

Revenue Recognition

In April 2010, the Financial Accounting Standards Board (“FASB”) issued accounting guidance on the milestone method of revenue recognition. The guidance defines the term “milestone” and the prescribed criteria that should be met to apply the milestone method of revenue recognition for research or development transactions. The guidance requires that the milestone should meet all criteria to be considered substantive to recognize consideration that is contingent upon the achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved. This accounting guidance became effective for the Company beginning October 1, 2010. The adoption of this accounting guidance did not have an impact on the Company’s consolidated financial statements.

In October 2009, the FASB amended the accounting standards for revenue recognition to remove tangible products containing software components and non-software components that function together to deliver the product’s essential functionality from the scope of industry specific software revenue recognition guidance. In October 2009, the FASB also amended the accounting standards for multiple deliverable revenue arrangements (formerly Emerging Issues Task Force No. 08-1) to: (i) provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the consideration should be allocated; (ii) require an entity to allocate revenue in an arrangement using estimated selling prices (“ESP”) of deliverables if a vendor does not have vendor-specific objective evidence of selling price (“VSOE”) or third-party evidence of selling price (“TPE”); and (iii) eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method. The Company adopted the new guidance on a prospective basis as of the beginning of fiscal 2011 for revenue arrangements entered into or materially modified after October 1, 2010.

The new guidance generally did not change the units of accounting for the Company’s revenue transactions as products and services qualified as separate units of accounting in most transactions under the historical guidance. The new guidance does affect the timing of revenue recognition for multiple deliverable arrangements that include delivered products and undelivered items for which the Company is unable to demonstrate fair value pursuant to the historical guidance. In such cases, under the historical guidance, the delivered products were combined with the undelivered items to form a single unit of accounting and, revenue for the delivered and undelivered items was recognized on a straight-line basis or deferred until the earlier of when the fair value requirements were met or when the last item was delivered. In addition, under the historical guidance, the Company used the residual method to allocate arrangement consideration for multiple deliverable transactions where objective and reliable evidence of fair value of the delivered items could not be determined. Under the new

guidance, the Company allocates the total arrangement consideration to each separable deliverable of an arrangement based upon the relative selling price of each deliverable and revenue is recognized upon delivery or completion of those units of accounting. As a result of adopting the new guidance, net revenues for the six months ended March 31, 2011 were not materially different from the net revenues that would have been recorded under the historical accounting guidance. The Company cannot reasonably estimate the effect of adopting the new guidance on future financial periods as the impact will vary depending on the nature and volume of new or materially modified multiple deliverable arrangements in any given period.

The Company derives revenue primarily from the sale of products, software, and services for communications systems and applications. The Company’s products are sold directly through its worldwide sales force and indirectly through its global network of distributors, dealers, value-added resellers and systems integrators. Services includes (i) supplemental maintenance service, including services provided under contracts to monitor and optimize customers’ communications network performance, and on a time-and-materials basis; (ii) professional services for implementation and integration of converged voice and data networks, network security and unified communications; and (iii) operations services. Maintenance contracts typically have terms that range from one to five years. Contracts for professional services typically have terms that range from two to four weeks for standard solutions and from six months to one year for customized solutions. Contracts for operations services typically have terms that range from one to seven years.

In accordance with GAAP, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, collectability is reasonably assured, contractual obligations have been satisfied and title and risk of loss have been transferred to the customer. In instances where final acceptance of the product, system or solution is specified by the customer, revenue is deferred until all acceptance criteria have been met.

The Company’s indirect sales to distribution partners are generally recognized at the time of shipment if all contractual obligations have been satisfied. The Company accrues a provision for estimated sales returns and other allowances and deferrals relating to inventory levels held by distributors, promotional marketing programs, etc. as a reduction of revenue at time of revenue recognition as required by FASB Accounting Standard Codification (“ASC”) Topic 605, “Revenue Recognition” (“ASC 605”).

The Company enters into multiple deliverable arrangements, which may include any combination of products, software and services. Most product and service deliverables qualify as separate units of accounting and can be sold standalone or in various combinations across the Company’s geographies or customer markets. A deliverable constitutes a separate unit of accounting when it has standalone value and there are no customer-negotiated refunds or return rights for the delivered items. If the arrangement includes a customer-negotiated refund or return right relative to the delivered items, and the delivery and performance of the undelivered item is considered probable and substantially in the Company’s control, the delivered item constitutes a separate unit of accounting.

Most all of the Company’s solutions have both software and non-software components that function together to deliver the products’ essential functionality. For multiple deliverable arrangements that contain both software and non-software components that function together to deliver a products’ essential functionality, the Company allocates revenue to all deliverables based on their relative selling prices. In such circumstances, the Company uses a hierarchy of VSOE, TPE and ESP to determine the selling price to be used for allocating revenue to the deliverables. The Company then recognizes revenue on each deliverable in accordance with its policies for product and service revenue recognition.

VSOE is based on the price charged when the deliverable is sold separately. TPE of selling price is established by evaluating largely interchangeable competitor products or services in standalone sales to similarly situated customers. As the Company is unable to reliably determine what competitors products’ selling prices are on a standalone basis, the Company is not typically able to determine TPE. ESP is based on the Company’s best

estimates of what the selling prices of deliverables would be if they were sold regularly on a standalone basis. The ESP is established considering multiple factors including, but not limited to pricing practices in different geographies, through different sales channels, major product and services groups, and customer classifications. The Company limits the amount of revenue recognition for delivered items to the amount that is not contingent on the future delivery of products or services, future performance obligations, or subject to customer-specific return or refund privileges. Support services and operations services revenues are deferred and recognized ratably over the period during which the services are to be performed. Professional services arrangements are generally recognized upon delivery or completion of performance. For services performed on a time and materials basis, revenue is recognized upon performance.

Standalone or subsequent sales of software or software-related products are recognized in accordance with FASB ASC Topic 985, “Software”. In multiple deliverable arrangements that only include standalone software and software-related products, the Company uses the residual method to allocate arrangement consideration. Under the residual method, the amount of consideration allocated to the delivered items equals the total arrangement consideration less the fair value of the undelivered items. Where VSOE of the undelivered items cannot be determined, the Company defers revenue until all items are delivered and services have been performed, or until VSOE can be determined for the undelivered items.

Fair Value Measures

In January 2010, the FASB issued revised guidance intended to improve disclosures related to fair value measurements. This guidance requires new disclosures and clarifies certain existing disclosure requirements. New disclosures under this guidance require separate information about significant transfers into and out of Level 1 and Level 2 and the reasons for such transfers, and also require purchases, sales, issuances, and settlements information for Level 3 measurements to be included in the rollforward of activity on a gross basis. The guidance also clarifies the requirement to determine the level of disaggregation for fair value measurement disclosures and the requirement to disclose valuation techniques and inputs used for both recurring and nonrecurring fair value measurements in either Level 2 or Level 3. This accounting guidance became effective for the Company beginning in the second quarter of fiscal 2010, except for the rollforward of activity on a gross basis for Level 3 fair value measurements, which will be effective for the Company in the first quarter of fiscal 2012. The adoption of this accounting guidance is reflected in Note 9, “Fair Value Measures” and did not have a material impact on the Company’s financial statement disclosures.

Variable Interest Entities

In December 2009, the FASB issued revised guidance for the accounting of variable interest entities. The revised guidance replaces the quantitative-based risks and rewards approach with a qualitative approach that focuses on which enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance. The accounting guidance also requires an entity to perform an ongoing analysis to determine whether the entity’s variable interest or interests give it a controlling financial interest in a variable interest entity. This accounting guidance became effective for the Company beginning October 1, 2010 and did not have an impact on the Company’s consolidated financial statements.

Transfers of Financial Assets

In December 2009, the FASB issued revised guidance for the accounting of transfers of financial assets. This guidance eliminates the concept of a qualifying special-purpose entity; removes the scope exception for qualifying special-purpose entities when applying the accounting guidance related to the consolidation of variable interest entities; changes the requirements for derecognizing financial assets; and requires enhanced disclosure. This accounting guidance became effective for the Company beginning October 1, 2010 and did not have an impact on the Company’s consolidated financial statements.

Own-share Lending Arrangements

In October 2009, the FASB issued revised accounting guidance for own-share lending arrangements. This accounting guidance amends accounting for share-lending arrangements entered into by an entity with an underwriter in contemplation of convertible debt issuance or other financing by an entity. This accounting guidance became effective for the Company beginning October 1, 2010 and did not have an impact on the Company’s consolidated financial statements.

Recent Accounting Guidance Not Yet Effective

In December 2010, the FASB issued revised guidance which requires that if a company presents pro forma comparative financial statements for business combinations, the company should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. This guidance also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. This accounting guidance is effective for the Company on a prospective basis beginning in fiscal 2012. The adoption of this guidance is not expected to have a material impact on the Company’s financial statement disclosures.

In December 2010, the FASB issued revised guidance on when a company should perform step two of the goodwill impairment test for reporting units with zero or negative carrying amounts. This guidance requires that for reporting units with zero or negative carrying amounts, a company is required to perform step two of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. This accounting guidance is effective for the Company beginning in fiscal 2012. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

3. Business Combinations and Other Transactions

Acquisition of the Enterprise Solutions Business of Nortel Networks Corporation

On September 16, 2009, the Company emerged as the winning bidder in bankruptcy court proceedings to acquire NES for $900 million in cash consideration subject to certain purchase price adjustments as set forth in the acquisition agreements (the “Acquisition”). On December 18, 2009 (the “acquisition date”), Avaya acquired certain assets and assumed certain liabilities of NES, including all the shares of Nortel Government Solutions Incorporated, for an initial purchase price of $943 million in cash consideration, which included a preliminary working capital adjustment of $43 million primarily related to the cash and securities owned by Nortel Government Solutions Incorporated. The Company and Nortel were required to determine the final purchase price post-closing based upon the various purchase price adjustments included in the acquisition agreements. During the first quarter of fiscal 2011, the Company and Nortel agreed to a final purchase price of $933 million and the Company received $6 million, representing all remaining amounts due to Avaya from funds held in escrow. The terms of the Acquisition do not include any significant contingent consideration arrangements. During the three and six months ended March 31, 2010, the Company expensed $2 million and $19 million, respectively, of acquisition costs as incurred. The acquisition of NES expanded Avaya’s global customer base, enhanced its technology portfolio, broadened its indirect sales channel and provided greater ability to compete globally.

The purchase price of NES and the payment of related fees and expenses (including integration expenses) were funded with (i) cash proceeds of $783 million received by Avaya from its issuance of $1,000 million in aggregate principal amount of term loans and detachable warrants to purchase up to 61.5 million shares of common stock in Parent (see Note 7, “Financing Arrangements”), (ii) a capital contribution to Avaya from Parent in the amount of $125 million from the Parent’s issuance of Series A preferred stock and warrants to purchase common stock of Parent, and (iii) approximately $112 million of Avaya’s existing cash.

In connection with the $125 million capital contribution received from Parent, funds affiliated with Silver Lake and TPG invested an aggregate of $78 million to fund the capital contribution from Parent to Avaya, with each sponsor-affiliated group of investors investing $39 million of such amount. In consideration for such investment, the Silver Lake and TPG funds received an aggregate of 77,728 shares of Series A preferred stock of Parent and warrants to purchase 23,916,384 shares of Parent common stock at an exercise price of $3.25 per share.

The acquisition of NES has been accounted for under the acquisition method, which requires an allocation of the purchase price of the acquired entity to the assets acquired and liabilities assumed based on their estimated fair values from a market-participant perspective at the date of acquisition. The allocation of the purchase price was finalized as of December 18, 2010 as reflected within these consolidated financial statements. The fair values of the assets acquired and liabilities assumed were determined using the income, cost, and market approaches. The fair values of acquired technologies and customer relationships were estimated using the income approach, which values the subject asset using the projected cash flows to be generated by the asset, discounted at a required rate of return that reflects the relative risk of achieving the cash flow and the time value of money. The cost approach was used to estimate the fair values of property, plant, and equipment and reflects the estimated reproduction or replacement cost for the asset, less an allowance for loss in value due to depreciation. The market approach was utilized in combination with the income approach to estimate the fair values of most working capital accounts.

The following table summarizes the consideration paid and the final allocation of the purchase price to the assets acquired and the liabilities assumed in the Acquisition based on their estimated fair values as of the close of the Acquisition.


In millions
Cash and cash equivalents	$	38
Accounts receivable		47
Inventory		115
Property, plant and equipment		103
Intangible assets		476
Accounts payable		(17	)
Payroll and benefit obligations		(124	)
Deferred revenue		(79	)
Other assets and liabilities		(51	)

Net assets acquired		508
Goodwill		425

Purchase price	$	933

Adjustments to the preliminary purchase price allocation have been made to reflect revised estimates of the fair value of the assets acquired and liabilities assumed at December 18, 2009. The most significant revisions were associated with valuations of property, plant, and equipment and identifiable intangible assets, and the resulting changes to goodwill. Providing for these adjustments in previous periods would not have a material impact on the reported operating results for the three month periods ended December 31, 2009, March 31, 2010, June 30, 2010 and September 30, 2010 and therefore such amounts were recorded in the period in which the adjustments were identified.

Intangible assets include existing technologies of $188 million and customer relationships of $288 million, respectively. The existing technologies and customer relationships are being amortized over a weighted average useful life of five years and twelve years, respectively, on a straight-line basis. No in-process research and development was acquired in the Acquisition.

The excess of the purchase price over the net tangible and intangible assets acquired resulted in goodwill of $425 million, which is attributable to the synergies and economies of scale provided to a market participant including marketing efforts principally located within the Company’s primary operating jurisdiction. The tax-deductible portion of goodwill was $383 million.

In connection with the acquisition of NES, management has identified certain technologies that were acquired, that, based on their functionality, overlapped the Company’s pre-existing technologies. In order to take advantage of synergies and reduce expenditures on research and development and marketing, management identified certain pre-existing technologies associated with the Company’s Global Communications Solutions segment which it will no longer aggressively develop and market and will eventually phase out. The net book value of these technologies was $16 million and, based on management’s plans, these technologies have a minimal estimated net realizable value. The Company recorded an impairment charge of $16 million in the three months ended December 31, 2009 to reflect these technologies at their net realizable values.

These unaudited consolidated financial statements include the operating results of the NES business as of December 19, 2009. Revenues specific to the NES business for the three months ended March 31, 2010 were $375 million and for the period from December 19, 2009 through March 31, 2010 were $418 million. Because the Company has eliminated overlapping processes and expenses and integrated its products and sales efforts with those of the acquired NES business, it is impractical to determine the earnings specific to the NES business for the three and six months ended March 31, 2010 included in the Consolidated Statements of Operations.

Unaudited Pro Forma Financial Information

The following unaudited pro forma financial information presents certain information of the combined results of operations of the Company as though the Acquisition and related financing had been consummated as of the beginning of the earliest period presented. The unaudited pro forma financial information reflects certain adjustments associated with the Acquisition and related financing, including increases in amortization and depreciation expenses related to intangible assets and property, plant and equipment acquired, additional interest expense associated with the financing relating to the Acquisition and incremental employee compensation costs. No adjustments to the unaudited pro forma financial information have been made related to conforming Avaya and NES accounting policies. The unaudited pro forma financial information is not necessarily indicative of the results of operations that would have been realized if the Acquisition and related financing were completed on October 1, 2009, nor is it indicative of future operating results.

The unaudited pro forma financial information for the six months ended March 31, 2010 combines the historical results of Avaya for the six months ended March 31, 2010 and the historical results of NES for the period October 1 to December 18, 2009, and the effects of the pro forma adjustments listed above.

The unaudited pro forma revenue and net loss for the six months ended March 31, 2010 were $2,796 million and $551 million, respectively.

Sale of AGC Networks Ltd.

On May 30, 2010, Avaya entered into a Share Purchase Agreement with Essar Services Holdings Limited (“Essar”) to sell its 59.13% ownership interest in AGC Networks Limited (formerly Avaya GlobalConnect Ltd.) (“AGC”), a publicly-traded Indian reseller of the Company’s products and services in the Indian and Australian markets, for $44.5 million in cash. The sale was consummated August 31, 2010. As a result of the sale, a $7 million gain was recognized and included in other income, net during the year ended September 30, 2010.

Other Acquisitions

Acquisition of Konftel AB

On January 3, 2011, the Company acquired all outstanding shares of Konftel AB (“Konftel”), for $14 million in cash consideration, inclusive of a working capital adjustment. Konftel is a Swedish-based vendor of conference room terminals, offering analog, internet protocol, soft, cellular, and session initiation protocol terminals.

The acquisition of Konftel has been accounted for under the acquisition method, which requires an allocation of the purchase price of the acquired entity to the assets acquired and liabilities assumed based on their estimated fair values from a market-participant perspective at the date of acquisition. The allocation of the purchase price

as reflected within these consolidated financial statements is based on the best information available to management at the time these consolidated financial statements were issued and is provisional pending the completion of the valuation analysis of Konftel’s assets and liabilities. During the measurement period (which is not to exceed one-year from the acquisition date), the Company will be required to retrospectively adjust the provisional amounts recognized to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. Further, during the measurement period, the Company is also required to recognize additional assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets or liabilities as of that date.

The fair values of the assets acquired and liabilities assumed were preliminarily determined using the income and market approaches. The fair values of acquired technologies and customer relationships were estimated using the income approach which values the subject asset using the projected cash flows to be generated by the asset, discounted at a required rate of return that reflects the relative risk of achieving the cash flow and the time value of money. The market approach was utilized in combination with the income approach to estimate the fair values of most working capital accounts.

The following table summarizes the consideration paid and the preliminary allocation of the purchase price to the assets acquired and the liabilities assumed in the acquisition based on their estimated fair values as of the close of the acquisition:


In millions
Accounts receivable	$	5
Inventory		2
Intangible assets		5
Accounts payable		(2	)
Payroll and benefit obligations		(1	)

Net assets acquired		9
Goodwill		5

Purchase price	$	14

Intangible assets include existing technologies of $3 million and customer relationships of $2 million, respectively. The existing technologies and customer relationships are being amortized over a weighted average useful life of 5 years, on a straight-line basis. No in-process research and development was acquired in the Konftel acquisition. Pro forma financial information was not prepared as the acquisition was not material.

The excess of the purchase price over the net tangible and intangible assets acquired resulted in goodwill of $5 million. The premiums paid by the Company in the transaction are largely attributable to the acquisition of an assembled workforce and the synergies and economies of scale provided to a market participant, particularly as it pertains to marketing efforts and customer base. None of the goodwill is deductible for tax purposes.

4. Goodwill and Intangible Assets

Goodwill

The changes in the carrying amount of goodwill for the six months ended March 31, 2011 by operating segment are as follows:


In millions	Global Communications Solutions			Data		Avaya Global Services			Total
September 30, 2010	$	1,421		$	—	$	2,654		$	4,075
Acquisition of Konftel AB		5			—		—			5
Adjustments		—			—		(1	)		(1	)
Impact of foreign currency fluctuations		1			—		—			1

March 31, 2011	$	1,427		$	—	$	2,653		$	4,080

Balance as of March 31, 2011:
Goodwill	$	2,561		$	—	$	2,653		$	5,214
Accumulated Impairment		(1,134	)		—		—			(1,134	)

	$	1,427		$	—	$	2,653		$	4,080

Goodwill is not amortized but is subject to periodic testing for impairment in accordance with GAAP at the reporting unit level which is one level below the Company’s operating segments. The test for impairment is conducted annually each September 30th or more frequently if events occur or circumstances change indicating that the fair value of a reporting unit may be below its carrying amount. The Company determined that no events occurred or circumstances changed during the six months ended March 31, 2011 and 2010 that would indicate that the fair value of a reporting unit may be below its carrying amount.

Intangible Assets

Intangible assets include technology, customer relationships, trademarks and trade-names and other intangibles. Intangible assets with finite lives are amortized using straight-line and accelerated amortization methods in a manner which reflects the pattern in which the economic benefits of the tangible assets are consumed over the estimated economic lives of the assets.

The Company’s intangible assets consist of:


	March 31, 2011								September 30, 2010
In millions	Gross Carrying Amount		Accumulated Amortization		Accumulated Impairment		Net		Gross Carrying Amount		Accumulated Amortization		Accumulated Impairment		Net
Acquired technology, patents and licenses	$	1,368	$	901	$	—	$	467	$	1,371	$	777	$	—	$	594
Customer relationships and other intangibles		2,261		716		—		1,545		2,258		604		—		1,654
Trademarks and trade names		545		—		190		355		545		—		190		355

Total intangible assets	$	4,174	$	1,617	$	190	$	2,367	$	4,174	$	1,381	$	190	$	2,603

Acquired technology, patents and licenses does not include capitalized software development costs. Unamortized capitalized software developments costs of $46 million and $55 million at March 31, 2011 and September 30, 2010, respectively, are included in other assets.

Long-lived assets, including intangible assets with finite lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Intangible assets determined to have indefinite useful lives are not amortized but are tested for impairment annually, or more frequently if events or changes in circumstances indicate the asset may be impaired. The Company determined that no events occurred or circumstances changed during the six months ended March 31, 2011 and 2010 that would indicate that its indefinite-lived intangible assets may be impaired.

Future expected amortization expense of intangible assets for the years ending September 30 is as follows:


In millions	Estimated future amortization expense
Remainder of fiscal 2011	$	237
2012		409
2013		276
2014		266
2015		243
2016 and thereafter		581

Total	$	2,012

5. Supplementary Financial Information

Consolidated Statements of Operations Information


In millions	Three months ended March 31,						Six months ended March 31,
In millions	2011			2010			2011			2010
OTHER INCOME, NET
Interest income	$	1		$	1		$	2		$	3
Gain on foreign currency transactions		1			1			9			2
Costs incurred in connection with debt modification		(9	)		—			(9	)		—
Other, net		—			(1	)		(1	)		—

Total other income, net	$	(7	)	$	1		$	1		$	5


COMPREHENSIVE LOSS
Net loss	$	(432	)	$	(281	)	$	(612	)	$	(417	)
Other comprehensive income (loss):
Pension, postretirement and postemployment benefit-related items, net of tax of $13 for the three and six months ended March 31, 2011 and $0 for the three and six months ended March 31, 2010		2			8			18			15
Cumulative translation adjustment		(16	)		43			(21	)		67
Unrealized gain on term loan interest rate swap, net of tax of $12 for the three and six months ended March 31, 2011 and $0 for the three and six months ended March 31, 2010		(4	)		8			18			29
Unrealized gain on investments, net		1			1			1			1

Total comprehensive loss	$	(449	)	$	(221	)	$	(596	)	$	(305	)

Consolidated Balance Sheet Information


In millions	March 31, 2011			September 30, 2010
PROPERTY, PLANT AND EQUIPMENT, NET
Land and improvements	$	38		$	37
Buildings and improvements		287			279
Machinery and equipment		263			247
Rental equipment		165			157
Assets under construction		2			3
Internal use software		132			129

Total property, plant and equipment		887			852
Less: Accumulated depreciation and amortization		(464	)		(402	)

Property, plant and equipment, net	$	423		$	450

Included in buildings and improvements is $22 million under a capital lease related to an office facility acquired in the Acquisition.

6. Business Restructuring Reserves and Programs

Fiscal 2011 Restructuring Program

During the first six months of fiscal 2011, the Company continued to identify opportunities to streamline operations and generate cost savings which include exiting facilities and terminating employees. Restructuring charges recorded during the three and six months ended March 31, 2011 associated with these initiatives, net of adjustments to previous periods, were $42 million and $64 million, respectively, and include employee separation costs primarily associated with employee severance actions in Germany, as well as in the Europe, Middle East and Africa (“EMEA”) and U.S. regions. The headcount reductions identified in this action are expected to be completed in fiscal 2011, with related payments expected to be completed in fiscal 2013. Future rental payments, net of estimated sublease income, related to operating lease obligations for unused space in connection with the closing or consolidation of facilities are expected to continue through fiscal 2020. As the Company continues to evaluate and identify additional operational synergies, additional cost saving opportunities may be identified.

The following table summarizes the components of the fiscal 2011 restructuring program during the six months ended March 31, 2011:


In millions	Employee Separation Costs			Lease Obligations			Total
2011 restructuring charges	$	56		$	11		$	67
Cash payments		(9	)		(2	)		(11	)
Impact of foreign currency fluctuations		1			—			1

Balance as of March 31, 2011	$	48		$	9		$	57

Fiscal 2010 Restructuring Program

During fiscal 2010, in response to the global economic climate and in anticipation of the acquisition of NES, the Company began implementing initiatives designed to streamline the operations of the Company and generate cost savings and developed initiatives to eliminate overlapping processes and expenses associated with that acquisition. During the second and third quarters of fiscal 2010, the Company exited certain facilities and terminated or relocated certain employees. Restructuring charges recorded during fiscal year ended September 30, 2010, net of adjustments to previous periods, were $171 million, and include employee separation

costs associated with involuntary employee severance actions primarily in EMEA and the U.S., as well as costs associated with closing and consolidating facilities. The headcount reductions associated with this restructuring program were completed in fiscal 2011 and related payments identified in this action are expected to be completed in fiscal 2013. Future rental payments, net of estimated sublease income, related to operating lease obligations for unused space in connection with the closing or consolidation of facilities are expected to continue through fiscal 2020.

The following table summarizes the components of the fiscal 2010 restructuring program during the six months ended March 31, 2011:


In millions	Employee Separation Costs			Lease Obligations			Total
Balance as of September 30, 2010	$	76		$	24		$	100
Adjustments (1)		(5	)		1			(4	)
Cash payments		(53	)		(7	)		(60	)
Impact of foreign currency fluctuations		—			(1	)		(1	)

Balance as of March 31, 2011	$	18		$	17		$	35

(1)	Included in adjustments are changes in estimates, whereby all increases and decreases in costs related to the fiscal 2010 restructuring program are recorded to the restructuring charges line item in operating expenses in the period of the adjustment.

Fiscal 2009 Restructuring Program

During fiscal 2009, as a response to the global economic downturn, the Company began implementing initiatives designed to streamline the operations of the Company and generate cost savings, which include exiting facilities and terminating or relocating employees. Restructuring charges recorded during fiscal 2009 associated with these initiatives were $160 million and include employee separation costs primarily associated with involuntary employee severance actions in Germany, as well as in the EMEA and U.S. regions. The headcount reductions associated with this restructuring program were completed in fiscal 2010 and related payments identified in this action are expected to be completed in fiscal 2011. Future rental payments, net of estimated sublease income, related to operating lease obligations for unused space in connection with the closing or consolidation of facilities are expected to continue through fiscal 2020.

The following table summarizes the components of the fiscal 2009 restructuring program during the six months ended March 31, 2011:


In millions	Employee Separation Costs			Lease Obligations			Total
Balance as of September 30, 2010	$	12		$	5		$	17
Adjustments (1)		1			—			1
Cash payments		(10	)		(2	)		(12	)
Impact of foreign currency fluctuations		(1	)		2			1

Balance as of March 31, 2011	$	2		$	5		$	7

(1)	Included in adjustments are changes in estimates, whereby all increases and decreases in costs related to the fiscal 2009 restructuring program are recorded to the restructuring charges line item in operating expenses in the period of the adjustment.

Fiscal 2008 Restructuring Reserve

In connection with the Merger, Avaya’s management and board of directors developed various plans and initiatives designed to streamline the operations of the Company and generate cost savings, which include exiting facilities and terminating or relocating employees. As a result, the Company recorded approximately $251 million of liabilities associated with involuntary employee severance actions and approximately $79 million established for future lease payments on properties expected to be closed or consolidated as part of these initiatives. These amounts include the remaining payments associated with the restructuring reserves of periods prior to the Merger. The headcount reductions associated with this restructuring program were substantially completed in 2009 and the related payments are expected to be completed in fiscal 2013. Cash payments associated with the lease obligations, net of sub-lease income, are expected to continue through 2020.

The following table summarizes the components of this reserve during the six months ended March 31, 2011:


In millions	Employee Separation Costs			Lease Obligations			Total
Balance as of September 30, 2010	$	14		$	34		$	48
Adjustments (1)		(1	)		—			(1	)
Cash payments		(7	)		(2	)		(9	)
Impact of foreign currency fluctuations		2			1			3

Balance as of March 31, 2011	$	8		$	33		$	41

(1)	Included in adjustments are changes in estimates, whereby all increases in costs related to the fiscal 2008 restructuring program are recorded to the restructuring charges line item in operating expenses in the period of the adjustment and decreases in costs are recorded as adjustments to goodwill.

7. Financing Arrangements

In connection with the Merger, on October 26, 2007, the Company entered into financing arrangements consisting of a senior secured credit facility, a senior unsecured credit facility, and a senior secured multi-currency asset based revolving credit facility. These arrangements were amended December 18, 2009 in connection with the Acquisition. On February 11, 2011, the Company amended and extended its senior secured credit facility and issued senior secured notes, the proceeds of which were used to repay the senior secured incremental term B-2 loans in full that were outstanding under the Company’s senior secured credit facility and related fees and expenses. Long-term debt consists of the following:


In millions	March 31, 2011			September 30, 2010
Senior secured term B-1 loans	$	1,457		$	3,662
Senior secured incremental term B-2 loans		—			732
Senior secured term B-3 loans		2,176			—
Senior secured notes		1,009			—
9.75% senior unsecured cash pay notes due 2015		700			700
10.125%/10.875% senior unsecured PIK toggle notes due 2015		834			834

		6,176			5,928
Debt maturing within one year		(37	)		(48	)

Long-term debt	$	6,139		$	5,880

Senior Secured Credit Facility

Prior to refinancing on February 11, 2011, the senior secured credit facility consisted of (a) a senior secured multi-currency revolver allowing for borrowings of up to $200 million, (b) a $3,800 million senior secured term loan (the “term B-1 loans”), which was drawn in full on the closing date of the Merger, and (c) a $1,000 million incremental senior secured term loan (the “incremental term B-2 loans”), which was drawn in full at an original issue discount of 20.0% on December 18, 2009.

On February 11, 2011, the Company amended and restated the senior secured credit facility to reflect modifications to certain provisions thereof. The modified terms of the senior secured credit facility include (1) an extension of the maturity of a portion of the term B-1 loans representing outstanding principal amounts of $2.2 billion from October 26, 2014 to October 26, 2017 (potentially springing to July 26, 2015, under the circumstances described below) by converting such loans into a new tranche of senior secured B-3 loans (the “term B-3 loans”); (2) permission, at the election of the Company, to apply prepayments of term loans to the incremental term B-2 loans prior to the term B-1 loans and term B-3 loans and thereafter to the class of term loans with the next earliest maturity; (3) permission to issue indebtedness (including the senior secured notes described below) to refinance a portion of the term loans under the senior secured credit facility and to secure such indebtedness (including the senior secured notes) on a pari passu basis with the obligations under the senior secured credit facility, (4) permission for future refinancing of the term loans under the senior secured credit facility, and (5) permission for future extensions of the term loans and revolving credit commitments (including, in the case of the revolving credit commitments, by obtaining new revolving credit commitments) under the senior secured credit facility.

The new tranche of term B-3 loans bears interest at a rate per annum equal to either a base rate or a LIBOR rate, in each case plus an applicable margin. The base rate is determined by reference to the higher of (1) the prime rate of Citibank, N.A. and (2) the federal funds effective rate plus ¹/2 of 1%. The applicable margin for borrowings of term B-3 loans is 3.50% per annum with respect to base rate borrowings and 4.50% per annum with respect to LIBOR borrowings. No changes were made to the maturity date or interest rates payable with respect to the non-extended term B-1 loans.

The maturity of the term B-3 loans will automatically become due July 26, 2015 unless (i) the total net leverage ratio as tested on that date based upon the most recent financial statements provided to the lenders under the senior secured credit facility is no greater than 5.0 to 1.0 or (ii) on or prior to such date, either (x) an initial public offering of the Company shall have occurred or (y) at least $750 million in aggregate principal amount of the Company’s senior unsecured cash-pay notes and/or senior unsecured paid-in-kind (“PIK”) toggle notes have been repaid or refinanced or their maturity has been extended to a date no earlier than 91 days after October 26, 2017.

The amendment and restatement of the senior secured credit facility represents a debt modification for accounting purposes. Accordingly, third party expenses of $9 million incurred in connection with the transaction were expensed as incurred and included in other income, net. Avaya’s financing sources that held term B-1 loans and/or revolving credit commitments under the senior secured credit facility and consented to the amendment and restatement of the senior secured credit facility received in aggregate a consent fee of $10 million. Fees paid to or on behalf of the creditors in connection with the modification were recorded as a discount to the face value of the debt and will be accreted over the term of the debt as interest expense.

Additionally, as discussed more fully below, on February 11, 2011, the Company completed a private placement of $1,009 million of senior secured notes, the proceeds of which were used to repay in full the incremental term B-2 loans outstanding under the Company’s senior secured credit facility.

Funds affiliated with Silver Lake and TPG were holders of incremental term B-2 loans. Similar to other holders of senior secured incremental term B-2 loans, those senior secured incremental term B-2 loans held by TPG and Silver Lake were repaid in connection with the issuance of the senior secured notes.

The senior secured multi-currency revolver, which allows for borrowings of up to $200 million, was not impacted by the refinancing. The senior secured multi-currency revolver includes capacity available for letters of credit and for short-term borrowings, and is available in euros in addition to dollars. Borrowings are guaranteed by Parent and substantially all of the Company’s U.S. subsidiaries. The facility is secured by substantially all assets of Parent, the Company and the subsidiary guarantors. As of March 31, 2011 there were no amounts outstanding under the senior secured multi-currency revolver.

As a result of the refinancing transaction, the term loans outstanding under the senior secured credit facility include term B-1 loans and term B-3 loans with remaining face values as of March 31, 2011 (after all principal payments to date) of $1,457 million and $2,186 million, respectively. The Company is required to make scheduled principal payments under the term B-1 loans and the term B-3 loans, equal to $10 million in the aggregate on a quarterly basis.

As of March 31, 2011 affiliates of Silver Lake held $54 million and $124 million in outstanding principal amounts of term B-1 loans and term B-3 loans, respectively. As of September 30, 2010 affiliates of Silver Lake held $194 million and $274 million in outstanding principal amounts of term B-1 loans and incremental term B-2 loans, respectively.

As of March 31, 2011 affiliates of TPG held $144 million in outstanding principal amounts of term B-1 loans. As of September 30, 2010, affiliates of TPG held $145 million and $274 million in outstanding principal amounts of term B-1 loans and incremental term B-2 loans, respectively.

Senior Unsecured Notes

The Company issued $700 million of senior unsecured cash-pay notes and $750 million of senior unsecured PIK toggle notes. The interest rate for the cash-pay notes is fixed at 9.75% and the interest rates for the cash interest and PIK interest portions of the PIK-toggle notes are fixed at 10.125% and 10.875%, respectively. The Company may prepay the senior unsecured notes commencing November 1, 2011 at 104.875% of the cash pay note and at 105.0625% of PIK toggle note principal amount, which decreases to 102.4375% and 102.5313%, respectively, on November 1, 2012 and to 100% of each on or after November 1, 2013.

Substantially all of the Company’s U.S. 100%-owned subsidiaries are guarantors of the senior unsecured notes. For the periods May 1, 2009 through October 31, 2009 and November 1, 2009 through April 30, 2010, the Company elected to pay interest in kind on its senior PIK toggle notes. PIK interest of $41 million and $43 million was added, for these periods, respectively, to the principal amount of the senior unsecured notes effective November 1, 2009 and May 1, 2010, respectively, and will be payable when the senior unsecured notes become due. For the period of May 1, 2010 through October 31, 2010 and November 1, 2010 through April 30, 2011, the Company has elected to make such payments in cash interest. On April 29, 2011, the Company delivered notice to its creditors that, with respect to the interest period of May 1, 2011 to October 31, 2011, the Company will make such payments in cash interest.

Senior Secured Asset-Based Credit Facility

The Company’s senior secured multi-currency asset-based revolving credit facility allows for borrowings of up to $335 million, subject to availability under a borrowing base, of which $150 million may be in the form of letters of credit. The borrowing base at any time equals the sum of 85% of eligible accounts receivable plus 85% of the net orderly liquidation value of eligible inventory, subject to certain reserves and other adjustments. The Company and substantially all of its U.S. subsidiaries are borrowers under this facility, and borrowings are guaranteed by Parent, the Company and substantially all of the Company’s U.S. subsidiaries. The facility is secured by substantially all assets of Parent, the Company and the subsidiary guarantors. The senior secured multi-currency asset based revolving credit facility also provides the Company with the right to request up to $100 million of additional commitments under this facility. The principal amount outstanding under this facility is payable in full on October 26, 2013. At March 31, 2011 and September 30, 2010, there were no borrowings

under this facility. At March 31, 2011 and September 30, 2010 there were $72 million and $53 million, respectively, of letters of credit issued in the ordinary course of business under the senior secured multi-currency revolver resulting in remaining availability of $205 million and $237 million, respectively.

Senior Secured Notes

On February 11, 2011, the Company completed a private placement of $1,009 million of senior secured notes. The senior secured notes were issued at par, bear interest at a rate of 7% per annum and mature on April 1, 2019. The senior secured notes were sold through a private placement to qualified institutional buyers pursuant to Rule 144A (and outside the United States in reliance on Regulation S) under the Securities Act of 1933, as amended (the “Securities Act”) and have not been, and will not be, registered under the Securities Act or applicable state securities laws.

The Company may redeem the senior secured notes commencing April 1, 2015 at 103.5% of the principal amount redeemed, which decreases to 101.75% on April 1, 2016 and to 100% on or after April 1, 2017. The Company may redeem all or part of the notes at any time prior to April 1, 2015 at 100% of the principal amount redeemed plus a “make-whole” premium. In addition, the Company may redeem up to 35% of the original aggregate principal balance of the senior secured notes at any time prior to April 1, 2014 with the net proceeds of certain equity offerings at 107% of the aggregate principal amount of senior secured notes redeemed. Upon the occurrence of specific kinds of changes of control, the Company will be required to make an offer to purchase the senior secured notes at 101% of their principal amount. If the Company or any of its restricted subsidiaries engages in certain asset sales, under certain circumstances the Company will be required to use the net proceeds to make an offer to purchase the senior secured notes at 100% of their principal amount.

Substantially all of the Company’s U.S. 100%-owned subsidiaries are guarantors of the senior secured notes. The facilities are secured by substantially all of the assets of the Company and the subsidiary guarantors.

The proceeds from the senior secured notes were used to repay in full the senior secured incremental term B-2 loans outstanding under the Company’s senior secured credit facility (representing $988 million in aggregate principal amount and $12 million in accrued and unpaid interest) and to pay related fees and expenses.

The issuance of the senior secured notes and repayment of the incremental term B-2 loans was accounted for as an extinguishment of the incremental term B-2 loans and issuance of new debt. Accordingly, the difference between the reacquisition price of the incremental term B-2 loans (including consent fees paid by Avaya to the holders of the incremental term B-2 loans that consented to the amendment and restatement of the senior secured credit facility of $1 million) and the carrying value of the incremental term B-2 loans (including unamortized debt discount and debt issue costs) of $246 million was recognized as a loss upon debt extinguishment during the quarter ended March 31, 2011. In connection with the issuance of the senior secured notes, the Company capitalized financing costs of $23 million during fiscal 2011 and is amortizing these costs over the term of the senior secured notes.

Our senior secured credit facility, senior secured multi-currency asset-based revolving credit facility, and the indentures governing our senior secured notes, senior unsecured cash-pay notes and senior unsecured PIK toggle notes contain a number of covenants, that, among other things and subject to certain exceptions, restrict the Company’s ability and the ability of certain of its subsidiaries to: (a) incur or guarantee additional debt and issue or sell certain preferred stock; (b) pay dividends on, redeem or repurchase the Company’s capital stock; (c) make certain acquisitions or investments; (d) incur or assume certain liens; (e) enter into transactions with affiliates; (f) merge or consolidate with another company; (g) transfer or otherwise dispose of assets; (h) redeem subordinated debt; (i) incur obligations that restrict the ability of the Company’s subsidiaries to make dividends or other payments to us; and (j) create or designate unrestricted subsidiaries. They also contain customary affirmative covenants and events of default. As of March 31, 2011, the Company was not in default under its senior secured credit facility, the indenture governing its senior secured notes, the indenture governing its senior unsecured notes or its senior secured multi-currency asset-based revolving credit facility.

The weighted average interest rate of the Company’s outstanding debt as of March 31, 2011 was 6.0% excluding the impact of the interest rate swaps described in Note 8, “Derivatives and Other Financial Instruments”.

Annual maturities of long-term debt for the next five years ending September 30 and thereafter consist of:


In millions
Remainder of fiscal 2011		19
2012		38
2013		38
2014		38
2015		1,442
2016 and thereafter		4,611

Total	$	6,186

Capital Lease Obligations

Included in other liabilities is $24 million of capital lease obligations, primarily associated with an office facility assumed in the acquisition of NES.

8. Derivatives and Other Financial Instruments

Interest Rate Swaps

The Company uses interest rate swaps to manage the amount of its floating rate debt in order to reduce its exposure to variable rate interest payments associated with certain borrowings under the senior secured credit facility. The interest rate swaps are designated as cash flow hedges. The fair values of the interest rate swaps are reflected as an asset or liability in the Consolidated Balance Sheets, reported as a component of other comprehensive loss and reclassified to earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on derivative instruments representing hedge ineffectiveness are recognized in current earnings. The fair values of the interest rate swaps are estimated as the net present value of their projected cash flows at the balance sheet date.

The details of these swaps are as follows:

In millions

Effective Date

Maturity Date

Notional
Amount

Floating Rate
Received by Avaya

Fixed Rate
Paid by Avaya

4-year swap

November 26, 2007

November 26, 2011

200

3-month LIBOR

4.485

5-year swap

November 26, 2007

November 26, 2012

300

3-month LIBOR

4.591

Notional amount—2007 swaps

500

3-year swap

August 26, 2010

August 26, 2013

750

3-month LIBOR

1.160

3-year swap

August 26, 2010

August 26, 2013

750

3-month LIBOR

1.135

Notional amount—2010 swaps

1,500

Notional amount—Total

2,000

The following table summarizes the (gains) and losses of the interest rate contracts qualifying and designated as cash flow hedging instruments:


	Three months ended March 31,						Six months ended March 31,
In millions	2011			2010			2011			2010
(Gain) loss on interest rate swaps
Recognized in other comprehensive loss	$	(8	)	$	(8	)	$	(30	)	$	(29	)

Reclassified from accumulated other comprehensive loss into interest expense	$	9		$	17		$	25		$	41

Recognized in operations (ineffective portion)	$	—		$	—		$	—		$	—

The Company expects to reclassify approximately $28 million from accumulated other comprehensive loss into expense in the next twelve months related to the Company’s interest rate swaps based on the projected borrowing rates at March 31, 2011.

Foreign Currency Forward Contracts

The Company utilizes foreign currency forward contracts primarily to manage short-term exchange rate exposures on certain receivables, payables and intercompany loans residing on foreign subsidiaries’ books, which are denominated in currencies other than the subsidiary’s functional currency. When those items are revalued into the subsidiaries’ functional currencies at the month-end exchange rates, the fluctuations in the exchange rates are recognized in the Consolidated Statements of Operations as other income (expense), net. Changes in the fair value of the Company’s foreign currency forward contracts used to offset these exposed items are also recognized in the Consolidated Statements of Operations as other income (expense), net in the period in which the exchange rates change.

The gains and (losses) of the foreign currency forward contracts included in other income (expense), net were $5 million and $22 million for the three months ended March 31, 2011 and 2010, respectively, and $(3) million and $30 million for the six months ended March 31, 2011 and 2010, respectively.

The following table summarizes the estimated fair value of derivatives:


In millions	March 31, 2011									September 30, 2010
Balance Sheet Location	Total			Foreign Currency Forward Contracts			Interest Rate Swaps			Total			Foreign Currency Forward Contracts			Interest Rate Swaps
Other current assets	$	1		$	1		$	—		$	5		$	5		$	—
Other non-current assets		2			—			2			—			—			—
Other current liabilities		(30	)		(1	)		(29	)		(67	)		(23	)		(44	)
Other non-current liabilities		—			—			—			(18	)		—			(18	)

Net Liability	$	(27	)	$	—		$	(27	)	$	(80	)	$	(18	)	$	(62	)

9. Fair Value Measures

Pursuant to the accounting guidance for fair value measurements and its subsequent updates, fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.

Fair Value Hierarchy

The accounting guidance for fair value measurement also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The inputs are prioritized into three levels that may be used to measure fair value:

Level 1: Inputs that reflect quoted prices for identical assets or liabilities in active markets that are observable.

Level 2: Inputs that reflect quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

Level 3: Inputs that are unobservable to the extent that observable inputs are not available for the asset or liability at the measurement date.

Asset and Liabilities Measured at Fair Value on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis as of March 31, 2011 and September 30, 2010 were as follows:


	March 31, 2011
	Fair Value Measurements Using
In millions	Total		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Other Current Assets:
Foreign currency forward contracts	$	1	$	—	$	1	$	—

Other Non-Current Assets:
Investments	$	11	$	11	$	—	$	—
Interest rate swaps		2		—		2		—

	$	13	$	11	$	2	$	—

Other Current Liabilities:
Foreign currency forward contracts	$	1	$	—	$	1	$	—
Interest rate swaps		29		—		29		—

	$	30	$	—	$	30	$	—


	September 30, 2010
	Fair Value Measurements Using
In millions	Total		Quoted Prices in Active Markets for Identical Instruments (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Other Current Assets:
Foreign currency forward contracts	$	5	$	—	$	5	$	—

Other Non-Current Assets:
Investments	$	10	$	10	$	—	$	—

Other Current Liabilities:
Foreign currency forward contracts	$	23	$	—	$	23	$	—
Interest rate swaps		44		—		44		—

	$	67	$	—	$	67	$	—

Other Non-Current Liabilities:
Interest rate swaps	$	18	$	—	$	18	$	—

Interest Rate Swaps

Interest rate swaps classified as Level 2 assets and liabilities are priced using non-binding market prices that are corroborated by observable market data, or discounted cash flow techniques. Significant inputs to the discounted cash flow model include projected future cash flows based on projected 3-month LIBOR rates, and the average margin for companies with similar credit ratings and similar maturities. These are classified as Level 2 as they are not actively traded and are valued using pricing models that use observable market inputs.

Foreign Currency Forward Contracts

Foreign currency forward contracts classified as Level 2 assets and liabilities are priced using quoted market prices for similar assets or liabilities in active markets.

Fair Value of Financial Instruments

The fair values of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, to the extent the underlying liability will be settled in cash, approximate carrying values because of the short-term nature of these instruments.

The estimated fair values of the amounts borrowed under the Company’s credit facilities and indentures at March 31, 2011 and September 30, 2010 were determined using quoted prices for such debt. The fair value of our debt is as follows:


	March 31, 2011				September 30, 2010
In millions	Carrying Amount		Fair Value		Carrying Amount		Fair Value
In millions	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Senior secured term B-1 loans	$	1,457	$	1,410	$	3,662	$	3,250
Senior secured incremental term B-2 loans		—		—		732		1,018
Senior secured term B-3 loans		2,176		2,134		—		—
Senior secured notes		1,009		985		—		—
9.75% senior unsecured cash pay notes due 2015		700		712		700		665
10.125%/10.875% senior unsecured PIK toggle notes due 2015		834		850		834		792

Total	$	6,176	$	6,091	$	5,928	$	5,725

10. Income Taxes

The provision for income taxes for the three months ended March 31, 2011 was $19 million, as compared to the benefit from income taxes for the three months ended March 31, 2010 of $19 million. The effective tax rate for the three months ended March 31, 2011 was 4.6% and the benefit rate for the three months ended March 31, 2010 was 6.3%, and differs from the U.S. Federal tax rate primarily due to the effect of taxable income in non-U.S. jurisdictions and due to the valuation allowance established against the Company’s U.S. deferred tax assets.

The provision for income taxes for the six months ended March 31, 2011 was $41 million, as compared to the benefit from income taxes for the six months ended March 31, 2010 of $16 million. The effective tax rate for the six months ended March 31, 2011 was 7.2% and the benefit rate for the six months ended March 31, 2010 was 3.7%, and differs from the U.S. Federal tax rate primarily due to the effect of taxable income in non-U.S. jurisdictions and due to the valuation allowance established against the Company’s U.S. deferred tax assets. The tax benefit for the six months ended March 31, 2010 includes a $10 million reduction in the Company’s unrecognized tax benefits due to the settlement of a global tax issue plus the reversal of interest in the amount of $5 million.

11. Benefit Obligations

The Company sponsors non-contributory defined benefit pension plans covering a portion of its U.S. employees and retirees, and postretirement benefit plans for U.S. retirees that include healthcare benefits and life insurance coverage. The Company froze benefit accruals and additional participation in the pension and postretirement plan for its U.S. management employees effective December 31, 2003. Effective May 24, 2009, the Company entered into a new three-year collective bargaining agreement (the “2009 Agreement”) with the Communications Workers of America (“CWA”) and the International Brotherhood of Electrical Workers (“IBEW”). The 2009 Agreement affects the level of pension and postretirement benefits available to U.S. employees of the Company who are represented by the CWA or IBEW (“represented employees”).

Certain non-U.S. operations have various retirement benefit programs covering substantially all of their employees. Some of these programs are considered to be defined benefit pension plans for accounting purposes.

The components of the pension and postretirement net periodic benefit cost (credit) for the three and six months ended March 31, 2011 and 2010 are provided in the table below:


	Pension Benefits - U.S.						Pension Benefits - Non-U.S.					Postretirement Benefits - U.S.
	Three months ended March 31,						Three months ended March 31,					Three months ended March 31,
In millions	2011			2010			2011			2010		2011			2010
Components of Net Periodic Benefit Cost
Service cost	$	1		$	2		$	3		$	2	$	1		$	1
Interest cost		37			40			5			6		8			9
Expected return on plan assets		(43	)		(46	)		(1	)		—		(3	)		(3	)
Amortization of unrecognized prior service cost		1			—			—			—		1			1
Amortization of previously unrecognized net actuarial loss		16			9			1			—		1			1

Net periodic benefit cost	$	12		$	5		$	8		$	8	$	8		$	9


	Pension Benefits - U.S.						Pension Benefits - Non-U.S.					Postretirement Benefits - U.S.
	Six months ended March 31,						Six months ended March 31,					Six months ended March 31,
In millions	2011			2010			2011			2010		2011			2010
Components of Net Periodic Benefit Cost (Credit)
Service cost	$	3		$	4		$	5		$	4	$	2		$	2
Interest cost		75			80			11			12		16			19
Expected return on plan assets		(87	)		(91	)		(1	)		—		(6	)		(6	)
Amortization of unrecognized prior service cost		1			—			—			—		2			2
Amortization of previously unrecognized net actuarial loss		32			17			1			—		1			1

Net periodic benefit cost (credit)	$	24		$	10		$	16		$	16	$	15		$	18

The Company’s general funding policy with respect to its U.S. qualified pension plans is to contribute amounts at least sufficient to satisfy the minimum amount required by applicable law and regulations. For the six month period ended March 31, 2011, the Company made contributions of $6 million to satisfy minimum statutory funding requirements. Estimated payments to satisfy minimum statutory funding requirements for the remainder of fiscal 2011 are $65 million.

The Company provides certain pension benefits for U.S. employees, which are not pre-funded, and certain pension benefits for non-U.S. employees, the majority of which are not pre-funded. Consequently, the Company makes payments as these benefits are disbursed or premiums are paid. For the six month period ended March 31, 2011, the Company made payments for these U.S. and non-U.S. pension benefits totaling $3 million and $15 million, respectively. Estimated payments for these U.S. and non-U.S. pension benefits for the remainder of fiscal 2011 are $4 million and $9 million, respectively.

During the first six months of fiscal 2011, the Company contributed $27 million to the represented employees’ post-retirement health trust to fund current benefit claims and costs of administration in compliance with the terms of the 2009 Agreement between the Company and the CWA and IBEW. Estimated contributions under the terms of the 2009 Agreement are $20 million for the remainder of fiscal 2011.

The Company also provides certain retiree medical benefits for U.S. employees, which are not pre-funded. Consequently, the Company makes payments as these benefits are disbursed. For the six month period ended March 31, 2011, the Company made payments totaling $7 million for these retiree medical benefits. Estimated payments for these retiree medical benefits for the remainder of fiscal 2011 are $7 million.

12. Share-based Compensation

The Sierra Holdings Corp. Amended and Restated 2007 Equity Incentive Plan (“2007 Plan”) governs the issuance of equity awards, including restricted stock units (“RSUs”) and stock options, to eligible plan participants. Key employees, directors, and consultants of the Company may be eligible to receive awards under the 2007 Plan. Each stock option, when vested and exercised, and each RSU, when vested, entitles the holder to receive one share of the Parent’s stock, subject to certain restrictions on their transfer and sale as defined in the 2007 Plan and the related award agreements. As of March 31, 2011, the Parent had authorized the issuance of up to 49,848,157 shares of its stock under the 2007 Plan, in addition to 2,924,125 shares underlying certain continuation awards that were permitted to be issued at the time of the Merger. There remained 4,305,201 shares available for grant under the 2007 Plan as of March 31, 2011.

Option Awards

During the six months ended March 31, 2011, the Company granted 2,616,250 time-based and 1,408,750 multiple-of-money options in the ordinary course of business. All of the options have an exercise price of $3.00 per share and expire ten years from the date of grant or upon cessation of employment, in which event there are limited exercise provisions allowed for vested options.

Time-based options granted during the six months ended March 31, 2011 vest over their performance periods, generally four years. Compensation expense equal to the fair value of the option measured on the grant date is recognized utilizing graded attribution over the requisite service period.

Multiple-of-money options vest upon the achievement of defined returns on the Sponsors’ initial investment (a “triggering event”) in the Parent. Because vesting of the multiple-of-money market-based options is outside the control of the Company and the award recipients, vesting and resulting compensation expense relative to the multiple-of-money options must only be recognized upon the occurrence of a triggering event (e.g., sale or initial public offering of Parent).

The fair value of option awards is determined at the date of grant utilizing the Cox-Ross Rubinstein (“CRR”) binomial option pricing model which is affected by the fair value of the Parent’s stock as well as a number of complex and subjective assumptions. Expected volatility is based primarily on a combination of the Company’s peer group’s historical volatility and estimates of implied volatility of the Company’s peer group. The risk-free interest rate assumption was derived from reference to the U.S. Treasury Spot rates for the expected term of the stock options. The dividend yield assumption is based on the Parent’s current intent not to issue a dividend under its dividend policy. The expected holding period assumption was estimated based on the Company’s historical experience.

For the six months ended March 31, 2011 and 2010, the Company recognized share-based compensation associated with options issued under the 2007 Plan of $5 million and $10 million, respectively, which is included in costs and operating expenses. For the three months ended March 31, 2011 and 2010, the Company recognized share-based compensation associated with options issued under the 2007 Plan of $2 million and $4 million, respectively, which is included in costs and operating expenses.

Restricted Stock Units

The Company has “RSUs” which represent the right to receive one share of the Parent’s stock when fully vested. The fair value of the RSUs is estimated by the Board of Directors on the respective dates of grant.

During the six months ended March 31, 2011, the Company awarded 115,000 RSUs in the ordinary course of business. The fair market value (as defined in the 2007 Plan) of these awards at the date of grant was $3.00 per share.

At March 31, 2011, there were 1,470,000 awarded RSUs outstanding under the 2007 Plan, of which 660,000 were fully vested. For each of the six months ended March 31 2011 and 2010, the Company recognized share-based compensation associated with RSUs granted under the 2007 Plan of $1 million.

13. Reportable Segments

Avaya conducts its business operations in three segments. Two of those segments, Global Communications Solutions (“GCS”) and Data Networking (“Data”), make up Avaya’s product portfolio. The third segment contains Avaya’s services portfolio and is called Avaya Global Services (“AGS”).

The Company acquired its Data business as part of the acquisition of NES on December 18, 2009 and, prior to the fourth quarter of fiscal 2010, included the results of the Data business within the reported results of the GCS segment. During the fourth quarter of fiscal 2010, the Company changed the manner in which it organizes and

reports its segments to present the Data business as a separate reportable segment and no longer includes its results as a part of the GCS segment. To be consistent with this reporting structure, the revenues and gross margins of the Data business for the period December 18, 2009 through March 31, 2010 have been reclassified from the GCS segment to the Data segment.

The GCS segment primarily develops, markets, and sells unified communications and contact center solutions by integrating multiple forms of communications, including telephone, e-mail, instant messaging and video. Avaya’s Data segment’s portfolio of products offers integrated networking solutions which are scalable across customer enterprises. The AGS segment develops, markets and sells comprehensive end-to-end global service offerings that allow customers to evaluate, plan, design, implement, monitor, manage and optimize complex enterprise communications networks.

For internal reporting purposes the Company’s chief operating decision maker makes financial decisions and allocates resources based on segment margin information obtained from the Company’s internal management systems. Management does not include in its segment measures of profitability selling, general, and administrative expenses, research and development expenses, amortization of intangible assets, and certain discrete items, such as charges relating to restructuring actions, impairment charges, and merger-related costs as these costs are not core to the measurement of segment management’s performance, but rather are controlled at the corporate level.

Summarized financial information relating to the Company’s reportable segments is shown in the following table:


	Three months ended March 31,						Six months ended March 31,
In millions	2011			2010			2011			2010
REVENUE
Global Communications Solutions	$	681		$	588		$	1,325		$	1,089
Data Networking		76			93			155			107
Avaya Global Services		634			643			1,279			1,190
Unallocated Amounts (1)		(1	)		(4	)		(3	)		(6	)

	$	1,390		$	1,320		$	2,756		$	2,380

GROSS MARGIN
Global Communications Solutions	$	379		$	316		$	736		$	604
Data Networking		35			37			67			45
Avaya Global Services		296			272			599			553
Unallocated Amounts (1)		(68	)		(89	)		(141	)		(156	)

		642			536			1,261			1,046

OPERATING EXPENSES
Selling, general and administrative		470			467			931			833
Research and development		121			116			236			197
Amortization of intangible assets		56			57			112			107
Impairment of long-lived assets		—			—			—			16
Restructuring charges, net		42			68			64			83
Acquisition-related costs		—			2			4			19

		689			710			1,347			1,255

OPERATING LOSS		(47	)		(174	)		(86	)		(209	)
INTEREST EXPENSE AND OTHER INCOME, NET		(366	)		(126	)		(485	)		(224	)

LOSS BEFORE INCOME TAXES	$	(413	)	$	(300	)	$	(571	)	$	(433	)

(1)

Unallocated Amounts in Gross Margin include the amortization of technology intangible assets that are not identified with a specific segment. Unallocated Amounts in Revenue and Gross Margin also include the impacts of certain fair value adjustments recorded in purchase accounting in connection with the Merger.

14. Commitments and Contingencies

Legal Proceedings

In the ordinary course of business, the Company is involved in litigation, claims, government inquiries, investigations and proceedings, including, but not limited to, those identified below, relating to intellectual property, commercial, securities, employment, employee benefits, environmental and regulatory matters.

Other than as described below, the Company believes there is no litigation pending or environmental and regulatory matters against the Company that could have, individually or in the aggregate, a material adverse effect on the Company’s financial position, results of operations or cash flows.

Government Subpoenas

On May 3, 2005, the Company received a subpoena from the Office of Inspector General, U.S. General Services Administration, relating to a federal investigation of the Company’s billing for telecommunications equipment and maintenance services. In January 2011, the Company settled this matter, as well as ancillary state matters, for approximately $16 million, including legal fees for plaintiffs’ lawyers.

Antitrust Litigation

In 2006, the Company instituted an action in the U.S. District Court, District of New Jersey, against defendants Telecom Labs, Inc., TeamTLI.com Corp. and Continuant Technologies, Inc. and subsequently amended its complaint to include certain individual officers of these companies as defendants. Defendants purportedly provide maintenance services to customers who have purchased or leased the Company’s communications equipment. The Company asserts in its amended complaint that, among other things, defendants, or each of them, have engaged in tortious conduct and/or violated federal intellectual property laws by improperly accessing and utilizing the Company’s proprietary software, including passwords, logins and maintenance service permissions, to perform certain maintenance services on the Company’s customers’ equipment. Defendants have filed a counterclaim against the Company, alleging a number of tort claims and alleging that the Company has violated the Sherman Act’s prohibitions against anticompetitive conduct through the manner in which the Company sells its products and services. The Company filed a motion to dismiss the federal anticompetitive claims, which the court granted in part and denied in part. Defendants filed a motion to dismiss the Company’s claims to the extent they assert violations of the federal Digital Millennium Copyright Act. The court denied Defendants’ motion in its entirety. Defendants also filed a motion to amend their complaint, which was denied in part and affirmed in part. The parties have engaged in extensive discovery and motion practice to, among other things, amend pleadings and compel and oppose discovery requests. A trial date has been set for September 2011. At this point in the proceeding, discovery on the Company’s claims and the defendants’ surviving counter-claims continues. Therefore, at this time an outcome cannot be predicted and, as a result, the Company cannot be assured that this case will not have a material adverse effect on the manner in which it does business, its financial position, results of operations or cash flows.

Intellectual Property

In the ordinary course of business, the Company is involved in litigation alleging it has infringed upon third parties’ intellectual property rights, including patents. These matters are on-going and the outcomes are subject to inherent uncertainties. As a result, the Company cannot be assured that any such matter will not have a material adverse effect on its financial position, results of operations or cash flows. However, management does provide

for estimated losses if and when it believes the facts and circumstances indicate that a loss is probable and the loss can be reasonably estimated. While it is not possible at this time to determine with certainty the ultimate outcome of these cases, the Company believes there are no such infringement matters that could have, individually or in aggregate, a material adverse effect on the Company’s financial position, results of operations or cash flows.

Other

Since November 2008, OpenLink Software Inc. (“OpenLink”), a former supplier of software utilized by Avaya in its Call Management System, has alleged that the Company breached the terms of software licenses in an OEM agreement dated June 23, 1997, as amended from time to time. In April 2011, the Company settled this matter without the Company admitting wrongdoing and for an amount that did not have a material adverse effect on the Company’s financial position, results of operations, or cash flows.

In October 2009, a former supplier in France, Combel, made a claim for improper termination of the Company’s relationship under French law seeking damages of at least €10 million and a provisional (interim) indemnity by the Company of €5 million. The Company disputes that Combel is entitled to any such damages and that it has not improperly terminated the relationship. In December 2010, the court rejected all claims of Combel based on the allegedly improper termination of the commercial relationship and only a claim with respect to the buyback of inventory remains open. To assess the value of the remaining inventory, the court appointed an expert. Combel has filed an appeal against the Court decision. The next hearing is scheduled in September 2011. An outcome cannot be predicted and, as a result, the Company cannot be assured that this case will not have a material adverse effect on its financial position, results of operations or cash flows.

In October 2009, a group of 85 former employees of Avaya’s former Shreveport, Louisiana manufacturing facility brought suit in Louisiana state court, naming as defendants Alcatel-Lucent USA, Inc., Lucent Technologies Services Company, Inc., and AT&T Technologies, Inc. The former employees allege hearing loss due to hazardous noise exposure from the facility dating back over forty years, and stipulate that the total amount of each individual’s damages does not exceed fifty thousand dollars. In February 2010 plaintiffs amended their complaint and added an additional 10 former employees as plaintiffs, raising the total number of plaintiffs to 95, and added Avaya Inc. as a named defendant. In April 2010, plaintiffs sought leave of court to add an additional 10 plaintiffs. In April 2011, nine plaintiffs were dismissed from this action without prejudice. This matter is in the early phases of discovery. The Company cannot determine if this matter will have an effect on our business, or, if it does, whether its outcome will have a material adverse effect on our financial position, results of operations or cash flow.

Product Warranties

The Company recognizes a liability for the estimated costs that may be incurred to remedy certain deficiencies of quality or performance of the Company’s products. These product warranties extend over a specified period of time generally ranging up to two years from the date of sale depending upon the product subject to the warranty. The Company accrues a provision for estimated future warranty costs based upon the historical relationship of warranty claims to sales. The Company periodically reviews the adequacy of its product warranties and adjusts, if necessary, the warranty percentage and accrued warranty reserve, which is included in other current liabilities in the Consolidated Balance Sheets, for actual experience.


In millions
Balance as of September 30, 2010	$	45
Reductions for payments and costs to satisfy claims		(22	)
Accruals for warranties issued during the period		13
Adjustments		(2	)

Balance as of March 31, 2011	$	34

The Company provides indemnifications of varying scope to certain customers against claims of intellectual property infringement made by third parties arising from the use of Avaya’s products. The Company has not incurred any losses as a result of such obligations and it has not accrued any liabilities related to such indemnifications.

Guarantees of Indebtedness and Other Off-Balance Sheet Arrangements

Letters of Credit

The Company has uncommitted credit facilities of $50 million, of which the Company had entered into letters of credit totaling $48 million as of March 31, 2011, that vary in term for the purpose of securing third party financial guarantees, such as letters of credit, which ensure the Company’s performance or payment to third parties. As of March 31, 2011, the Company had outstanding an aggregate of $120 million in irrevocable letters of credit under its committed and uncommitted credit facilities (including $72 million under its $535 million committed credit facilities).

Surety Bonds

The Company arranges for the issuance of various types of surety bonds, such as license, permit, bid and performance bonds, which are agreements under which the surety company guarantees that the Company will perform in accordance with contractual or legal obligations. These bonds vary in duration although most are issued and outstanding from nine months to three years. These bonds are backed by $12 million of the Company’s letters of credit. If the Company fails to perform under its obligations, the maximum potential payment under these surety bonds is $24 million as of March 31, 2011.

Purchase Commitments and Termination Fees

The Company purchases components from a variety of suppliers and uses several contract manufacturers to provide manufacturing services for its products. During the normal course of business, in order to manage manufacturing lead times and to help assure adequate component supply, the Company enters into agreements with contract manufacturers and suppliers that allow them to produce and procure inventory based upon forecasted requirements provided by the Company. If the Company does not meet these specified purchase commitments, it could be required to purchase the inventory, or in the case of certain agreements, pay an early termination fee. As of March 31, 2011, the maximum potential payment under these commitments was approximately $153 million. Historically, the Company has not been required to pay a charge for not meeting its designated purchase commitments with these suppliers.

The Company’s outsourcing agreement with its most significant contract manufacturer expires in July 2013. After the initial term, the outsourcing agreement is automatically renewed for successive periods of twelve months each, subject to specific termination rights for the Company and the contract manufacturer. All manufacturing of the Company’s products is performed in accordance with either detailed requirements or specifications and product designs furnished by the Company, and is subject to rigorous quality control standards.

Product Financing Arrangements

The Company sells products to various resellers that may obtain financing from certain unaffiliated third-party lending institutions. For the Company’s product financing arrangement with resellers outside the U.S., in the event participating resellers default on their payment obligations to the lending institution, the Company is obligated under certain circumstances to guarantee repayment to the lending institution. The repayment amount fluctuates with the level of product financing activity. The guaranteed repayment amount was approximately $3 million as of March 31, 2011. The Company reviews and sets the maximum credit limit for each reseller participating in this financing arrangement. Historically, there have not been any guarantee repayments by the

Company. The Company has estimated the fair value of this guarantee as of March 31, 2011, and has determined that it is not significant. There can be no assurance that the Company will not be obligated to repurchase inventory under this arrangement in the future.

Long-Term Cash Incentive Plan

The Parent has established a long-term incentive cash bonus plan (“LTIP”). Under the LTIP, the Parent will make cash awards available to compensate certain key employees upon the achievement of defined returns on the Sponsors’ initial investment in the Parent (a “triggering event”). The Parent has issued LTIP awards covering a total of $60 million, of which $43 million in awards were outstanding as of March 31, 2011. Compensation expense relative to the LTIP awards will be recognized upon the occurrence of a triggering event (e.g., a sale or initial public offering). As of March 31, 2011, no compensation expense associated with the LTIP has been recognized.

Performance Guarantee

In connection with the sales of certain businesses, the Company has assigned its rights and obligations under several real estate leases to the acquiring companies (the “assignees”). The remaining terms of these leases vary from one year to four years. While the Company is no longer the primary obligor under these leases, the lessors have not completely released the Company from its obligations, and hold it secondarily liable in the event that the assignees default on these leases. The maximum potential future payments the Company could be required to make, if all of the assignees were to default as of March 31, 2011, would be approximately $3 million. The Company has assessed the probability of default by the assignees and has determined it to be remote.

Credit Facility Indemnification

In connection with its obligations under the credit facilities described in Note 7, “Financing Arrangements,” the Company has agreed to indemnify the third-party lending institutions for costs incurred by the institutions related to changes in tax law or other legal requirements. While there have been no amounts paid to the lenders pursuant to this indemnity in the past, there can be no assurance that the Company will not be obligated to indemnify the lenders under this arrangement in the future.

Transactions with Alcatel-Lucent

Pursuant to the Contribution and Distribution Agreement effective October 1, 2000, Lucent Technologies, Inc. (now Alcatel-Lucent) contributed to the Company substantially all of the assets, liabilities and operations associated with its enterprise networking businesses (the “Company’s Businesses”) and distributed the Company’s stock pro-rata to the shareholders of Lucent. The Contribution and Distribution Agreement, among other things, provides that, in general, the Company will indemnify Alcatel-Lucent for all liabilities including certain pre-distribution tax obligations of Alcatel-Lucent relating to the Company’s Businesses and all contingent liabilities primarily relating to the Company’s Businesses or otherwise assigned to the Company. In addition, the Contribution and Distribution Agreement provides that certain contingent liabilities not allocated to one of the parties will be shared by Alcatel-Lucent and the Company in prescribed percentages. The Contribution and Distribution Agreement also provides that each party will share specified portions of contingent liabilities based upon agreed percentages related to the business of the other party that exceed $50 million. The Company is unable to determine the maximum potential amount of other future payments, if any, that it could be required to make under this agreement.

The Tax Sharing Agreement governs Alcatel-Lucent’s and the Company’s respective rights, responsibilities and obligations after the distribution with respect to taxes for the periods ending on or before the distribution. Generally, pre-distribution taxes or benefits that are clearly attributable to the business of one party will be borne solely by that party, and other pre-distribution taxes or benefits will be shared by the parties based on a formula

set forth in the Tax Sharing Agreement. The Company may be subject to additional taxes or benefits pursuant to the Tax Sharing Agreement related to future settlements of audits by state and local and foreign taxing authorities for the periods prior to the Company’s separation from Alcatel-Lucent.

15. Guarantor—Non Guarantor financial information

Borrowings by Avaya Inc. under the senior secured credit facility are jointly and severally, fully, and unconditionally guaranteed by all wholly owned U.S. subsidiaries of Avaya Inc. (with certain agreed-upon exceptions) (collectively, the “Guarantors”) and Parent. The senior secured notes, the senior unsecured cash-pay notes and the senior unsecured PIK toggle notes issued by Avaya Inc. are jointly and severally, fully and unconditionally guaranteed by the Guarantors. None of the other subsidiaries of Avaya Inc., either directly or indirectly, guarantees the senior secured credit facility, the senior secured notes, the senior unsecured cash-pay notes or the senior unsecured PIK toggle notes (“Non-Guarantors”).

Avaya Inc. and each of the Guarantors are authorized to borrow under the senior secured asset-based credit facility. Borrowings under that facility are jointly and severally, fully, and unconditionally guaranteed by Avaya Inc. and the Guarantors. Additionally these borrowings are fully and unconditionally guaranteed by the Parent.

The senior secured notes and the related guarantees are secured equally and ratably (other than with respect to real estate) with the senior secured credit facility and any future first lien obligations by (i) a first-priority lien on substantially all of Avaya Inc.’s and the Guarantors’ assets, other than (x) any real estate and (y) collateral that secures the senior secured multi-currency asset based revolving credit facility on a first-priority basis (the “ABL Priority Collateral”), and (ii) a second-priority lien on the ABL Priority Collateral, subject to certain limited exceptions.

The following tables present the financial position, results of operations and cash flows of Avaya Inc., the Guarantors , the Non-Guarantors and Eliminations as of March 31, 2011 and 2010, and for the three and six months ended March 31, 2011 and 2010 to arrive at the information for Avaya Inc. on a consolidated basis.

Supplemental Condensed Consolidating Schedule of Operations


	Three months ended March 31, 2011
In millions	Avaya Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
REVENUE	$	751		$	107		$	659		$	(127	)	$	1,390

COST		414			93			368			(127	)		748

GROSS MARGIN		337			14			291			—			642

OPERATING EXPENSES
Selling, general and administrative		197			25			248			—			470
Research and development		71			4			46			—			121
Amortization of intangible assets		53			1			2			—			56
Restructuring charges, net		7			(1	)		36			—			42

		328			29			332			—			689

OPERATING INCOME (LOSS)		9			(15	)		(41	)		—			(47	)

Interest expense		(109	)		(4	)		—			—			(113	)
Loss on extinguishment of debt		(246	)		—			—			—			(246	)
Other income, net		3			1			(11	)		—			(7	)

LOSS BEFORE INCOME TAXES		(343	)		(18	)		(52	)		—			(413	)

(Benefit from) provision for income taxes		(14	)		—			33			—			19
Equity in net loss of consolidated subsidiaries		(103	)		—			—			103			—

NET LOSS		(432	)		(18	)		(85	)		103			(432	)

Less net income attributable to noncontrolling interests		—			—			—			—			—

NET LOSS ATTRIBUTABLE TO AVAYA INC.	$	(432	)	$	(18	)	$	(85	)	$	103		$	(432	)

Supplemental Condensed Consolidating Schedule of Operations


	Three months ended March 31, 2010
In millions	Avaya Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
REVENUE	$	708		$	92		$	638		$	(118	)	$	1,320

COST		445			67			390			(118	)		784

GROSS MARGIN		263			25			248			—			536

OPERATING EXPENSES
Selling, general and administrative		186			27			254			—			467
Research and development		57			3			56			—			116
Amortization of intangible assets		56			1			—			—			57
Restructuring charges, net		21			—			47			—			68
Acquisition-related costs		2			—			—			—			2

		322			31			357			—			710

OPERATING LOSS		(59	)		(6	)		(109	)		—			(174	)

Interest expense		(121	)		(5	)		(1	)		—			(127	)
Other income, net		(4	)		(1	)		6			—			1

LOSS BEFORE INCOME TAXES		(184	)		(12	)		(104	)		—			(300	)

Provision for (benefit from) income taxes		2			1			(22	)		—			(19	)
Equity in net income of consolidated subsidiaries		(95	)		—			—			95			—

NET LOSS		(281	)		(13	)		(82	)		95			(281	)

Less net income attributable to noncontrolling interests		—			—			1			—			1

NET LOSS ATTRIBUTABLE TO AVAYA INC.	$	(281	)	$	(13	)	$	(83	)	$	95		$	(282	)

Supplemental Condensed Consolidating Schedule of Operations


	Six months ended March 31, 2011
In millions	Avaya Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
REVENUE	$	1,497		$	217		$	1,270		$	(228	)	$	2,756

COST		838			191			694			(228	)		1,495

GROSS MARGIN		659			26			576			—			1,261

OPERATING EXPENSES
Selling, general and administrative		405			48			478			—			931
Research and development		140			7			89			—			236
Amortization of intangible assets		104			2			6			—			112
Restructuring charges, net		14			(1	)		51			—			64
Acquisition-related costs		1			—			3			—			4

		664			56			627			—			1,347

OPERATING LOSS		(5	)		(30	)		(51	)		—			(86	)

Interest expense		(232	)		(9	)		—			1			(240	)
Loss on extinguishment of debt		(246	)		—			—			—			(246	)
Other income (expense), net		(2	)		2			2			(1	)		1

LOSS BEFORE INCOME TAXES		(485	)		(37	)		(49	)		—			(571	)

(Benefit from) provision for income taxes		(8	)		—			49			—			41
Equity in net loss of consolidated subsidiaries		(135	)		—			—			135			—

NET LOSS		(612	)		(37	)		(98	)		135			(612	)

Less net income attributable to noncontrolling interests		—			—			—			—			—

NET LOSS ATTRIBUTABLE TO AVAYA INC.	$	(612	)	$	(37	)	$	(98	)	$	135		$	(612	)

Supplemental Condensed Consolidating Schedule of Operations


	Six months ended March 31, 2010
In millions	Avaya Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
REVENUE	$	1,292		$	126		$	1,148		$	(186	)	$	2,380

COST		791			83			646			(186	)		1,334

GROSS MARGIN		501			43			502			—			1,046

OPERATING EXPENSES
Selling, general and administrative		337			37			459			—			833
Research and development		103			6			88			—			197
Amortization of intangible assets		106			1			—			—			107
Impairment of long-lived assets		7			—			9			—			16
Restructuring charges, net		28			—			55			—			83
Acquisition-related costs		19			—			—			—			19

		600			44			611			—			1,255

OPERATING LOSS		(99	)		(1	)		(109	)		—			(209	)

Interest expense		(219	)		(9	)		(1	)		—			(229	)
Other income (expense), net		(2	)		(1	)		8			—			5

LOSS BEFORE INCOME TAXES		(320	)		(11	)		(102	)		—			(433	)

Provision for (benefit from) income taxes		5			1			(22	)		—			(16	)
Equity in net loss of consolidated subsidiaries		(94	)		—			—			94			—

NET LOSS		(419	)		(12	)		(80	)		94			(417	)

Less net income attributable to noncontrolling interests		—			—			2			—			2

NET LOSS ATTRIBUTABLE TO AVAYA INC.	$	(419	)	$	(12	)	$	(82	)	$	94		$	(419	)

Supplemental Condensed Consolidating Balance Sheet


	March 31, 2011
In millions	Avaya Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	163		$	19		$	271		$	—		$	453
Accounts receivable, net—external		247			44			443			—			734
Accounts receivable—internal		626			191			87			(904	)		—
Inventory		167			11			133			—			311
Deferred income taxes, net		—			—			4			—			4
Other current assets		98			93			116			—			307
Internal notes receivable, current		1,551			113			(16	)		(1,648	)		—

TOTAL CURRENT ASSETS		2,852			471			1,038			(2,552	)		1,809
Property, plant and equipment, net		249			29			145			—			423
Deferred income taxes, net		—			—			20			—			20
Intangible assets, net		2,093			38			236			—			2,367
Goodwill		4,074			—			6			—			4,080
Other assets		179			7			20			—			206
Investment in consolidated subsidiaries		(1,684	)		7			24			1,653			—

TOTAL ASSETS	$	7,763		$	552		$	1,489		$	(899	)	$	8,905

LIABILITIES
Current liabilities:
Debt maturing within one year—external	$	37		$	—		$	—		$	—		$	37
Debt maturing within one year—internal		117			363			1,168			(1,648	)		—
Accounts payable—external		314			21			184			—			519
Accounts payable—internal		177			248			479			(904	)		—
Payroll and benefit obligations		132			16			165			—			313
Deferred revenue		539			40			74			—			653
Business restructuring reserve, current portion		22			4			65			—			91
Other current liabilities		260			4			126			—			390

TOTAL CURRENT LIABILITIES		1,598			696			2,261			(2,552	)		2,003

Long-term debt		6,139			—			—			—			6,139
Benefit obligations		1,788			—			482			—			2,270
Deferred income taxes, net		162			—			1			—			163
Business restructuring reserve, non-current portion		23			1			25			—			49
Other liabilities		71			23			205			—			299

TOTAL NON-CURRENT LIABILITIES		8,183			24			713			—			8,920

TOTAL STOCKHOLDER’S DEFICIENCY		(2,018	)		(168	)		(1,485	)		1,653			(2,018	)

TOTAL LIABILITIES AND STOCKHOLDER’S DEFICIENCY	$	7,763		$	552		$	1,489		$	(899	)	$	8,905

Supplemental Condensed Consolidating Balance Sheet


	September 30, 2010
In millions	Avaya Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	348		$	26		$	205		$	—		$	579
Accounts receivable, net—external		326			46			420			—			792
Accounts receivable—internal		530			184			67			(781	)		—
Inventory		108			15			111			—			234
Deferred income taxes, net		—			—			3			—			3
Other current assets		95			80			101			—			276
Internal notes receivable, current		1,423			89			(16	)		(1,496	)		—

TOTAL CURRENT ASSETS		2,830			440			891			(2,277	)		1,884
Property, plant and equipment, net		266			31			153			—			450
Deferred income taxes, net		—			—			22			—			22
Intangible assets, net		2,300			39			264			—			2,603
Goodwill		4,075			—			—			—			4,075
Other assets		178			8			41			—			227
Investment in consolidated subsidiaries		(1,527	)		7			23			1,497			—

TOTAL ASSETS	$	8,122		$	525		$	1,394		$	(780	)	$	9,261

LIABILITIES
Current liabilities:
Debt maturing within one year—external	$	48		$	—		$	—		$	—		$	48
Debt maturing within one year—internal		92			355			1,049			(1,496	)		—
Accounts payable—external		252			30			182			—			464
Accounts payable—internal		155			181			445			(781	)		—
Payroll and benefit obligations		145			20			146			—			311
Deferred revenue		548			32			70			—			650
Business restructuring reserve, current portion		26			4			83			—			113
Other current liabilities		296			5			129			—			430

TOTAL CURRENT LIABILITIES		1,562			627			2,104			(2,277	)		2,016

Long-term debt		5,880			—			—			—			5,880
Benefit obligations		1,814			—			461			—			2,275
Deferred income taxes, net		153			—			1			—			154
Business restructuring reserve, non-current portion		25			4			23			—			52
Other liabilities		116			23			173			—			312

TOTAL NON-CURRENT LIABILITIES		7,988			27			658			—			8,673

TOTAL STOCKHOLDER’S DEFICIENCY		(1,428	)		(129	)		(1,368	)		1,497			(1,428	)

TOTAL LIABILITIES AND STOCKHOLDER’S DEFICIENCY	$	8,122		$	525		$	1,394		$	(780	)	$	9,261

Supplemental Condensed Consolidating Schedule of Cash Flows


	Six months ended March 31, 2011
In millions	Avaya Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
OPERATING ACTIVITIES:
Net loss	$	(612	)	$	(37	)	$	(98	)	$	135		$	(612	)
Adjustments to reconcile net loss to net cash (used for) provided by operating activities		251			6			56			—			313
Changes in operating assets and liabilities		(84	)		43			(9	)		—			(50	)
Equity in net loss of consolidated subsidiaries		135			—			—			(135	)		—

NET CASH (USED FOR) PROVIDED BY OPERATING ACTIVITIES		(310	)		12			(51	)		—			(349	)

INVESTING ACTIVITIES:
Capital expenditures		(16	)		—			(19	)		—			(35	)
Capitalized software development costs		(12	)		(2	)		—			—			(14	)
Return of funds held in escrow from the NES acquisition		6			—			—			—			6
Acquisition of businesses, net of cash acquired		—			—			(14	)		—			(14	)
Proceeds from sale of long-lived assets		1			—			2			—			3
Restricted cash		—			—			24			—			24

NET CASH USED FOR INVESTING ACTIVITIES		(21	)		(2	)		(7	)		—			(30	)

FINANCING ACTIVITIES:
Repayment of B-2 term loans		(696	)		—			—			—			(696	)
Debt issuance and modification costs		(42	)		—			—			—			(42	)
Proceeds from senior secured notes		1,009			—			—			—			1,009
Repayment of long-term debt		(22	)		—			—			—			(22	)
Net (repayments) borrowings of intercompany debt		(103	)		(16	)		119			—			—
Other financing activities, net		—			(1	)		—			—			(1	)

NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES		146			(17	)		119			—			248

Effect of exchange rate changes on cash and cash equivalents		—			—			5			—			5

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(185	)		(7	)		66			—			(126	)
Cash and cash equivalents at beginning of period		348			26			205			—			579

Cash and cash equivalents at end of period	$	163		$	19		$	271		$	—		$	453

Supplemental Condensed Consolidating Schedule of Cash Flows


	Six months ended March 31, 2010
In millions	Avaya Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
OPERATING ACTIVITIES:
Net loss	$	(419	)	$	(12	)	$	(80	)	$	94		$	(417	)
Adjustments to reconcile net loss to net cash provided by (used for) operating activities		376			4			82			—			462
Changes in operating assets and liabilities		(45	)		(4	)		2			—			(47	)
Equity in net loss of consolidated subsidiaries		94			—			—			(94	)		—

NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES		6			(12	)		4			—			(2	)

INVESTING ACTIVITIES:
Capital expenditures		(13	)		(1	)		(16	)		—			(30	)
Capitalized software development costs		(20	)		(3	)		—			—			(23	)
Acquisition of businesses, net of cash acquired		(534	)		37			(308	)		—			(805	)
Liquidation of securities of long-lived assets		—			2			—			—			2
Proceeds from sale of long-lived assets		2			—			6			—			8
Purchase of securities available for sale		—			—			(3	)		—			(3	)
Restricted cash		—			—			1			—			1

NET CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES		(565	)		35			(320	)		—			(850	)

FINANCING ACTIVITIES:
Net proceeds from B-2 term loans and warrants		783			—			—			—			783
Capital contribution from Parent		125			—			—			—			125
Debt issuance costs		(5	)		—			—			—			(5	)
Repayment of long-term debt		(24	)		—			—			—			(24	)
Net (repayments) borrowings of intercompany debt		(218	)		(14	)		232			—			—
Internal capital contribution from Parent Company		(100	)		—			100			—			—
Other financing activities, net		—			—			(1	)		—			(1	)

NET CASH PROVIDED BY FINANCING ACTIVITIES		561			(14	)		331			—			878

Effect of exchange rate changes on cash and cash equivalents		—			—			(17	)		—			(17	)

NET INCREASE IN CASH AND CASH EQUIVALENTS		2			9			(2	)		—			9
Cash and cash equivalents at beginning of period		376			2			189			—			567

Cash and cash equivalents at end of period	$	378		$	11		$	187		$	—		$	576

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Unless the context otherwise indicates, as used in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, the terms “we,” “us,” “our,” “the Company,” “Avaya” and similar terms refer to Avaya Inc. and its subsidiaries. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with the unaudited interim consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q. The matters discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. See “Forward Looking Statements” at the end of this discussion.

Our accompanying unaudited interim consolidated financial statements as of March 31, 2011 and for the three and six months ended March 31, 2011 and 2010, have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the United States Securities and Exchange Commission, or the SEC, for interim financial statements, and should be read in conjunction with our consolidated financial statements and other financial information for the fiscal year ended September 30, 2010, which were included in our Annual Report on Form 10-K filed with the SEC on December 7, 2010. In our opinion, the unaudited interim consolidated financial statements reflect all adjustments, consisting of normal and recurring adjustments, necessary for a fair statement of the financial condition, results of operations and cash flows for the periods indicated.

Certain prior period amounts have been reclassified to conform to the current interim period presentation. The consolidated results of operations for the interim periods reported are not necessarily indicative of the results to be experienced for the entire fiscal year.

Overview

Avaya is a global leader in business communications systems. The Company provides world-class unified communications solutions, contact center solutions, data networking and related services directly and through its channel partners to leading businesses and organizations around the world. Enterprises of all sizes depend on Avaya for state-of-the-art communications that help improve efficiency, collaboration, customer service and competitiveness.

Avaya is a wholly-owned subsidiary of Sierra Holdings Corp., a Delaware corporation (“Parent”). Parent was formed by affiliates of two private equity firms, Silver Lake Partners (“Silver Lake”) and TPG (“TPG”) (collectively, the “Sponsors”). Silver Lake and TPG, through Parent, acquired Avaya in a transaction that was completed on October 26, 2007 (the “Merger”).

Acquisition of the Enterprise Solutions Business of Nortel Network Corporation

On December 18, 2009, Avaya acquired certain assets and assumed certain liabilities of the enterprise solutions business (“NES”) of Nortel Networks Corporation (“Nortel”), including all the shares of Nortel Government Solutions Incorporated, for $943 million in cash consideration (the “Acquisition”). The Company and Nortel were required to determine the final purchase price post-closing based upon the various purchase price adjustments included in the acquisition agreements. During the first quarter of fiscal 2011, the Company and Nortel agreed on a final purchase price of $933 million, and we received $6 million, representing all remaining amounts due to Avaya from funds held in escrow. The terms of the acquisition did not include any significant

contingent consideration arrangements. The acquisition of NES expanded Avaya’s technology portfolio, enhanced its customer base, broadened its indirect sales channel, and provided greater ability to compete globally. Please refer to Note 3, “Business Combinations and Other Transactions,” to our unaudited interim consolidated financial statements for further details.

Refinancing of Debt

On February 11, 2011 the Company completed a refinancing of certain debt which deferred principal payments of $2.1 billion and $950 million originally due October 26, 2014 through October 26, 2017 and April 1, 2019, respectively.

The Company amended and restated its senior secured credit facility to, among other things, permit the extension of the maturity of a portion of the senior secured term B-1 loans representing outstanding principal amounts of $2.1 billion from October 26, 2014 to October 26, 2017 by converting such loans into a new tranche of senior secured B-3 loans (potentially springing to July 26, 2015, under certain circumstances) and changing the applicable interest rate for that extended portion.

The Company also completed a private placement of $1,009 million of senior secured notes. The senior secured notes were issued at par, bear interest at a rate of 7% per annum and mature on April 1, 2019. The proceeds from the senior secured notes were used to repay in full the senior secured incremental term B-2 loans outstanding under the Company’s senior secured credit facility (representing $988 million in aggregate principal amount and $12 million in accrued and unpaid interest) and to pay related fees and expenses. The private placement effectively defers $950 million of principal payments that would have been due in October 2014 under the senior secured credit facility to April 2019. Please refer to Note 7, “Financing Arrangements,” to our unaudited interim consolidated financial statements for further details.

Sale of AGC Networks Limited

On August 31, 2010, Avaya sold its 59.13% ownership interest in AGC Networks Limited (formerly Avaya GlobalConnect Ltd.) (“AGC”), a publicly-traded Indian company that is a reseller of Avaya products and services in the Indian and Australian markets, for $44.5 million in cash. As a result of the sale, a $7 million gain was recognized and included in other income, net during the year ended September 30, 2010.

The sale of its AGC stake will help enable Avaya to drive additional focus on two of its strategic imperatives: the development of the Avaya business in India and the growth and extension of its channel coverage model through Avaya’s global channel program. AGC remains a key channel partner of Avaya serving customers in the India market, one of the fastest growing enterprise communications markets in the world, and in Australia.

Major Business Areas

Products

Global Communications Solutions

Within GCS, we focus primarily on unified communications, contact center solutions and small and medium enterprise communications.

Unified Communications

Avaya’s unified communications solutions help companies increase employee productivity, improve customer service and reduce costs by integrating multiple forms of communications, including telephony, e-mail, instant messaging and video. With Avaya unified communications solutions, customers can communicate effectively regardless of location or device. Avaya’s unified communications products are widely recognized as some of the most reliable, secure and comprehensive offerings in the industry.

Among other things, Avaya’s unified communications portfolio provides:

•

centralized call control for distributed networks of media gateways and a wide range of analog, digital, and IP-based communication devices, giving enterprises the flexibility to introduce advanced IP telephony solutions as needed while retaining their existing infrastructure investments;

•

applications and collaboration tools to support communications across a wide range of platforms, including desktop and laptop computers, mobile devices, and dedicated IP deskphones, allowing business users to work from any location using a variety of public and private networks;

•

messaging platforms enabling migration from traditional voice messaging systems to IP messaging with enterprise-class features, scalability and reliability;

•

audio conferencing solutions that combine reservation-less, attended, scheduled meet-me and event-based capabilities, as well as sub-conferencing, dial out, blast dial, recording, billing and reporting features; and

•

video conferencing solutions that comprise a wide suite of high-definition, low-bandwidth, SIP-based video endpoints to enable enterprises to deliver video throughout their organizations. Avaya video endpoints scale to serve individual desktop users and small workgroups as well as large conference rooms.

We believe we are well-positioned to deliver strategic value through the development, deployment and management of applications across multi-vendor, multi-location and multi-modal businesses. The Company’s Avaya Aura^® architecture simplifies complex communications networks, reduces infrastructure costs and delivers voice, video, messaging, presence, web applications and more to users. Using that architecture, organizations are able to develop and deploy communications applications just once because the architecture allows every user access to any application no matter where they are or what communications device or network they use.

These develop-once, extend-anywhere applications and vendor- and premise-agnostic capabilities come on a simple, scalable, secure infrastructure. This helps enterprises to simultaneously reduce costs and increase user productivity and choice.

We recently unveiled the Avaya Flare^® Experience, a family of real-time, enterprise video communications and collaboration products and services. The Avaya Flare^® Experience helps break down the barriers between today’s communications and collaboration tools with a distinctive user interface for quick, easy access to desktop voice and video, social media, presence and instant messaging, audio/video/web conferencing, a consolidated view of multiple directories, context history and more. These capabilities deliver a simpler, more compelling experience to end-users using video, voice and text.

As discussed in Note 3, “Business Combinations and Other Transactions,” to our unaudited interim consolidated financial statements, we acquired Konftel AB (“Konftel”) a Swedish-based provider of high-definition audio collaboration devices that includes desktop conference units, conference room systems, and large auditorium implementations. The Konftel portfolio offers OmniSound’s^® sound quality on multiple communications standards, complementing Avaya’s leadership in Session Initiation Protocol-based endpoints. In addition to acquiring Konftel’s product line, we intend to leverage Konftel’s technology to enhance our multi-modal

technologies and user experiences to deliver innovative and differentiated capabilities that reach across Avaya’s platforms, creating common, scalable solutions with streamlined management, compelling economics and an enhanced experience.

Contact Centers

We are a global leader in the contact center market and offer highly reliable, scalable communications solutions that can improve customer service and help companies compete more effectively. The Avaya Aura^® Contact Center Suite is designed to enable end-to-end experience management. The components of the suite are organized in three categories: Assisted Experience Management, Automated Experience Management, and Performance Management. The Assisted and Automated Experience categories include multi-channel intelligent routing, self-service and proactive contact applications that help drive effective communications and transactions with customers via voice, email, web chat, SMS, or social media. The Performance Management category includes Avaya’s analytics, reporting and workforce optimization platforms, Avaya Call Management System and Avaya IQ that provide companies with detailed customer information that helps to improve profitability and customer retention.

Small and Medium Enterprise Communications

Avaya’s Small and Medium Enterprise Communications unit is focused on enterprises with up to 250 employees. We offer complete solutions that bring together telephony, messaging, networking, conferencing and customer management designed for the requirements of small and medium enterprises. The products and services are sold primarily through Avaya’s global channel partners.

Data Networking

Our Data business was acquired as part of the acquisition of NES. Avaya’s data networking portfolio of products offers integrated networking solutions which are scalable across customer enterprises.

Our data networking portfolio includes:

•

Ethernet Switching—a range of Local Area Network switches for data center, core, edge, and branch applications;

•

Unified Branch—a range of routers and Virtual Private Network appliances that provide a secure connection for branches;

•

Wireless Networking—a cost-effective and scalable solution enabling enterprises to deploy wireless coverage;

•

Access Control—solutions that provide policy decision to enforce role-based access control to the network;

•

Unified Management—providing support for data and voice networks by simplifying the requirements associated across functional areas; and

•

Avaya Virtual Enterprise Network Architecture (“Avaya VENA”)—In November 2010, we launched Avaya VENA, an end-to-end virtualization strategy and architecture that helps simplify data center and campus networking and optimizes business applications and service deployments in and between data centers and campuses, while helping to reduce costs and improve time to service.

Avaya has recently expanded and refreshed most of its key data networking offerings. The portfolio is sold globally into enterprises of all types with particular strength in healthcare, education, hospitality, financial services and local and state government.

Services

AGS evaluates, plans, designs, implements, supports, manages and optimizes enterprise communications networks to help customers achieve enhanced business results. The Company’s services portfolio includes product support, integration and professional and managed services that enable customers to optimize and manage their converged communications networks worldwide supported by patented design and management tools and network operations and technical support centers around the world.

The portfolio of AGS services includes:

•

Support Services—Avaya monitors and improves customers’ communication network performance, including helping to ensure network availability and keeping communication networks current with the latest software releases.

•

Professional Services—Avaya planning, design and integration specialists and communications consultants provide solutions that help reduce costs and enhance business agility. Avaya also provides vertical solutions designed to leverage existing product environments, contact centers and unified communication networks.

•

Operations Services—Avaya manages complex multi-vendor, multi-technology networks, optimizes network performance, and manages customers’ communications environments and related assets.

Financial Results Summary

Our revenues for the six months ended March 31, 2011 increased 16% as compared to the six months of the corresponding period in the prior year, primarily as a result of the contributions by the NES business. The operation of the NES business was for the entire six months ended March 31, 2011 as compared to the six months ended March 31, 2010, which included the results for NES for only the period of December 19, 2009 through March 31, 2010. The increase in revenues also included an increase in sales volume of unified communications products, partially offset by lower revenues resulting from customers reducing spending on maintenance contracts.

We incurred operating losses for the six months ended March 31, 2011 and 2010 of $86 million and $209 million, respectively. Operating loss for the six months ended March 31, 2011 and 2010 includes non-cash expenses for depreciation and amortization of $335 million and $342 million and share-based compensation of $6 million and $11 million, respectively. Operating income before non-cash depreciation and amortization and share-based compensation was $255 million and $144 million for the six months ended March 31, 2011 and 2010, respectively.

Matters affecting the comparability of our operating results for the first six months of fiscal 2011 and 2010 include, among other things:

•

an increase in revenue and gross margin associated with the operation of the NES business for the entire six months ended March 31, 2011 as compared to results for the six months ended March 31, 2010, which included the NES business for only the period of December 19, 2009 through March 31, 2010; and

•

an increase in selling, general and administrative (“SG&A”) and research and development (“R&D”) expenses associated with the operations of the NES business for the entire six months ended March 31, 2011 as compared to results for the six months ended March 31, 2010, which included the NES business for only the period of December 19, 2009 through March 31, 2010, partially offset by expense savings associated with cost control initiatives and the transition of resources to lower-cost geographies.

Our net loss for the six months ended March 31, 2011 and 2010 was $612 million and $417 million, respectively. The increase in our net loss is primarily attributable to the early extinguishment of debt related to the Company’s

debt refinancing and to a lesser extent, the incremental interest expense associated with the additional financing associated with the Acquisition and higher income taxes. The increase in our net loss was partially offset by a lower operating loss as described above.

Results From Operations

Three Months Ended March 31, 2011 Compared with Three Months Ended March 31, 2010

Revenue

Our revenue for the three months ended March 31, 2011 and 2010 was $1,390 million and $1,320 million, respectively, an increase of $70 million or 5%. The following table sets forth a comparison of revenue by portfolio:


	Three months ended March 31,
Dollars in millions	2011			2010			Mix						Yr. to Yr. Percent Change			Yr. to Yr. Percent Change, net of Foreign Currency Impact
Dollars in millions	2011			2010			2011			2010			Yr. to Yr. Percent Change
GCS	$	681		$	588			49	%		44	%		16	%		15	%
Purchase accounting adjustments		—			(1	)		0	%		0	%		⁽¹	⁾		⁽¹	⁾
Data		76			93			5	%		7	%		-18	%		-19	%

Total product revenue		757			680			54	%		51	%		11	%		11	%

AGS		634			643			46	%		49	%		-1	%		-2	%
Purchase accounting adjustments		(1	)		(3	)		0	%		0	%		⁽¹	⁾		⁽¹	⁾

Total service revenue		633			640			46	%		49	%		-1	%		-2	%

Total revenue	$	1,390		$	1,320			100	%		100	%		5	%		5	%

⁽¹⁾	Not meaningful

GCS revenue for the three months ended March 31, 2011 and 2010 was $681 million and $588 million, respectively. GCS revenue increased $93 million or 16% primarily due to an increase in sales volume for our unified communications products and contact center solutions, as well as a favorable impact of foreign currency. The increase in unified communications revenues is predominantly the result of the introduction of new product offerings in the fourth quarter of 2010 and an increase in new Avaya Aura^® licenses sold. The additional functionality created by our Avaya Aura^® technology has also resulted in increased demand for most of our unified communications product lines. The increase in contact center solutions revenues was driven by new product offerings. These increases were partially offset by the impact of our divestiture of AGC in August 2010. Although we currently utilize AGC as a business partner to sell our product lines, such sales generally generate lower top line revenue due to volume discounts.

Data revenue for the three months ended March 31, 2011 and 2010 was $76 million and $93 million, respectively, a decrease of $17 million or 18%. Our data business was acquired as part of the acquisition of NES on December 18, 2009. The addition of NES has given Avaya a position within the global data networking industry, one in which Avaya had not previously participated. For the three months ended March 31, 2010, our data revenues included orders from our newly acquired NES customers. We believe these customers held back their orders until the Acquisition was complete and the continuity of the NES data product offerings was assured. This incremental increase of revenue in fiscal 2010 was not repeated in the three months March 31, 2011.

AGS revenue for the three months ended March 31, 2011 and 2010 was $634 million and $643 million, respectively. AGS revenue decreased $9 million or 1% primarily due to the impact of our divestiture of AGC in August 2010. This decrease was partially offset by an increase in implementation and professional services, as well as the favorable impact of foreign currency. As a result of the increase in product revenues, associated revenues for certain product support and implementation and professional services have increased.

The following table sets forth a comparison of revenue by location:


	Three months ended March 31,
Dollars in millions	2011		2010		Mix						Yr. to Yr. Percent Change			Yr. to Yr. Percent Change, net of Foreign Currency Impact
Dollars in millions	2011		2010		2011			2010			Yr. to Yr. Percent Change
U.S.	$	740	$	705		53	%		53	%		5	%		5	%
International:
Germany		119		140		8	%		11	%		-15	%		-12	%
EMEA (excluding Germany)		258		222		19	%		17	%		16	%		15	%

Total EMEA		377		362		27	%		28	%		4	%		4	%
APAC—Asia Pacific		137		125		10	%		9	%		10	%		7	%
Americas International—Canada and
Central and Latin America		136		128		10	%		10	%		6	%		2	%

Total International		650		615		47	%		47	%		6	%		5	%

Total revenue	$	1,390	$	1,320		100	%		100	%		5	%		5	%

Revenue in the U.S. for the three months ended March 31, 2011 and 2010 was $740 million and $705 million, respectively. Revenue in the U.S. increased $35 million or 5% primarily due to an increase in sales volume of our unified communications products and contact center solutions, as well as revenues for certain product support and implementation and professional services. This increase was partially offset by decreases resulting from customers reducing spending on maintenance contracts. Revenue in EMEA for the three months ended March 31, 2011 and 2010 was $377 million and $362 million, respectively. Revenue in EMEA increased $15 million or 4% primarily due to an increase in sales volume for our unified communications products. The increase of revenue in EMEA was partially offset by a decrease of revenue in Germany attributable to decreases resulting from customers reducing spending on maintenance contracts and the decline in our rental base. The increase in revenue in APAC was due to an increase in sales volume for our unified communications products and the favorable impact of foreign currency, partially offset by the impact of our divestiture of AGC in August 2010. Although we continue to market to end users using AGC as a business partner, sales through our indirect channel generally generate lower top line revenue due to volume discounts. The increase in revenue in Americas International was due to an increase in sales volume for our unified communications products and the favorable impact of foreign currency.

We continue to expand our market coverage by investing more in the indirect channel, which includes our global network of alliance partners, distributors, dealers, value-added resellers, telecommunications service providers and system integrators. The following table sets forth a comparison of revenue from sales of products by channel:


	Three months ended March 31,
Dollars in millions	2011		2010		Mix						Yr. to Yr. Percent Change			Yr. to Yr. Percent Change, net of Foreign Currency Impact
Dollars in millions	2011		2010		2011			2010			Yr. to Yr. Percent Change
Direct	$	165	$	202		22	%		30	%		-18	%		-18	%
Indirect		592		478		78	%		70	%		24	%		23	%

Total sales of products	$	757	$	680		100	%		100	%		11	%		11	%

The percentage of product sales through the indirect channel increased by 8 percentage points to 78% in the second quarter of fiscal 2011 as compared to 70% in the corresponding period in fiscal 2010. The increase in sales through the indirect channel was predominantly due to the impact of our divestiture of AGC in August

2010. As a result of our divestiture of AGC, we continue to market to end users through AGC and those sales in fiscal 2011 are included in our indirect revenues. During most of fiscal 2010, AGC was our subsidiary and its sales to end users were included in our direct revenues. Due to higher volume discounts, sales through the indirect channel generally generate lower margins than direct sales. However, our use of the indirect channel lowers selling expenses and allows us to reach more end users.

Gross Margin

The following table sets forth a comparison of gross margin by segment:


	Three months ended March 31,
							Percent of Revenue
Dollars in millions	2011			2010			2011			2010			Change
GCS margin	$	379		$	316			55.7	%		53.7	%	$	63		20	%
Data margin		35			37			46.1	%		39.8	%		(2	)	-5	%
AGS margin		296			272			46.7	%		42.3	%		24		9	%
Amortization of technology intangible assets and the impact of purchase accounting adjustments		(68	)		(89	)		⁽¹	⁾		⁽¹	⁾		21		⁽¹	⁾

Total gross margin	$	642		$	536			46.2	%		40.6	%	$	106		20	%

⁽¹⁾	Not meaningful

Gross margin for the three months ended March 31, 2011 and 2010 was $642 million and $536 million, respectively. Gross margin increased by $106 million or 20%. The gross margin percentage increased to 46.2% for the three months ended March 31, 2011 from 40.6% for the three months ended March 31, 2010. The increase in gross margin percentage is primarily due to higher gross margin percentage in all of our segments, as well as the impact of lower amortization of technology intangible assets on higher sales volume. These increases in gross margin percentages are partially offset by lower margins in the indirect channel, which generally generate lower margins than the direct channel, and higher costs associated with our employee incentive programs.

GCS gross margin for the three months ended March 31, 2011 and 2010 was $379 million and $316 million, respectively. GCS gross margin increased $63 million or 20% primarily due to the increase in sales volume for our unified communications products and the favorable impact of foreign currency. The GCS gross margin percentage increased to 55.7% for the three months ended March 31, 2011 from 53.7% for the three months ended March 31, 2010. The increase in gross margin percentage is primarily due to the increase in sales volume which leveraged our fixed costs.

Data gross margin for the three months ended March 31, 2011 and 2010 was $35 million and $37 million, respectively. Data gross margin decreased slightly due to lower revenues, partially offset by higher margin product offerings and reductions in the costs of our products. The gross margin percentage increased to 46.1% for the three months ended March 31, 2011 from 39.8% for the three months ended March 31, 2010 primarily due to the higher margin product offerings and reduction in costs of our products.

AGS gross margin for the three months ended March 31, 2011 and 2010 was $296 million and $272 million, respectively, an increase of $24 million or 9%. The AGS gross margin percentage increased to 46.7% for the three months ended March 31, 2011 from 42.3% for the three months ended March 31, 2010. The increase in gross margin percentage is primarily due to the continued benefit from cost savings initiatives, which include the benefit of productivity improvements from reducing the workforce and relocating positions to lower-cost geographies.

Total gross margin for the three months ended March 31, 2011 and 2010 included the effect of certain acquisition adjustments including the amortization of acquired technology intangibles and the amortization of the inventory step-up related to the acquisition of NES and the Merger.

Operating expenses


	Three months ended March 31,
					Percent of Revenue
Dollars in millions	2011		2010		2011			2010			Change
Selling, general and administrative	$	470	$	467		33.8	%		35.4	%	$	3		1	%
Research and development		121		116		8.7	%		8.8	%		5		4	%
Amortization of intangible assets		56		57		4.0	%		4.3	%		(1	)	-2	%
Restructuring charges, net		42		68		3.0	%		5.2	%		(26	)	-38	%
Acquisition-related costs		—		2		0.0	%		0.2	%		(2	)	⁽¹	⁾

Total operating expenses	$	689	$	710		49.5	%		53.9	%	$	(21	)	-3	%

⁽¹⁾	Not meaningful

SG&A expenses for the three months ended March 31, 2011 and 2010 were $470 million and $467 million, respectively, an increase of $3 million. The increase is primarily due to higher costs in our employee incentive programs, partially offset by a decrease in integration costs incurred in the current period. Integration costs were $23 million and $30 million for the three months ended March 31, 2011 and 2010, respectively. Integration costs primarily represent third-party consulting fees and other administrative costs associated with consolidating and coordinating the operations of Avaya and NES. These costs were incurred in connection with, among other things, the on-boarding of NES personnel, developing compatible IT systems and internal processes, and developing and implementing a strategic operating plan to enable a smooth transition with minimal disruption to NES customers. These costs were partially offset by the continued benefit from cost savings initiatives implemented in prior periods, which included exiting facilities and reducing the workforce and relocating positions to lower-cost geographies.

R&D expenses for the three months ended March 31, 2011 and 2010 were $121 million and $116 million, respectively, an increase of $5 million. The increase in R&D expenses was primarily due to higher costs in our employee incentive programs, partially offset by reductions resulting from continued focus on cost saving initiatives and the re-prioritization of projects.

Amortization of intangible assets for the three months ended March 31, 2011 and 2010 was $56 million and $57 million, respectively, a decrease of $1 million.

Restructuring charges, net, for the three months ended March 31, 2011 and 2010 were $42 million and $68 million, respectively, a decrease of $26 million. During fiscal 2010, we continued our focus on controlling costs. In response to the global economic climate and in anticipation of the acquisition of NES, we began implementing additional initiatives designed to streamline our operations, generate cost savings, and eliminate overlapping processes and expenses associated with the NES business. These initiatives include exiting facilities and reducing the workforce or relocating positions to lower cost geographies. Restructuring charges recorded during the three months ended March 31, 2011 and 2010 include employee separation costs primarily associated with involuntary employee severance actions in EMEA and the U.S. As we continue to evaluate our operational synergies, margins and cost structure, we may identify additional cost savings opportunities in future periods.

Acquisition-related costs for the three months ended March 31, 2010 was $2 million and include legal and other costs related to the acquisition of NES in fiscal 2010.

Operating Loss

Operating loss for the three months ended March 31, 2011 was $47 million compared to $174 million for the three months ended March 31, 2010.

Results for the three months ended March 31, 2011 include integration costs (included in SG&A) of $23 million, as described above. For the three months ended March 31, 2010, we incurred integration costs of $30 million and acquisition-related costs of $2 million.

Operating loss for the three months ended March 31, 2011 and 2010 includes non-cash expenses for depreciation and amortization of $167 million and $185 million and share-based compensation of $3 million and $4 million, respectively. Operating income before non-cash depreciation and amortization and share-based compensation was $123 million and $15 million for the three months ended March 31, 2011 and 2010, respectively.

Interest Expense

Interest expense for the three months ended March 31, 2011 and 2010 was $113 million and $127 million, which includes non-cash interest expense of $10 million and $37 million, respectively. Non-cash interest expense for the three months ended March 31, 2011 includes (1) amortization of debt issuance costs, (2) accretion of debt discount attributable to our senior secured incremental term B-2 loans through February 11, 2011 the date on which the loans were repaid in full, and (3) accretion of debt discount attributable to our senior secured term B-3 loans which were issued on February 11, 2011 as a result of the modification to certain provisions of the senior secured credit facility. Non-cash interest expense for the three months ended March 31, 2010 includes: (1) amortization of debt issuance costs, (2) accretion of debt discount attributable to our senior secured incremental term B-2 loans issued in connection with the Acquisition, and (3) paid-in-kind (“PIK”) interest which we elected to finance through our senior unsecured PIK toggle notes for the period of November 1, 2009 through April 30, 2010.

Cash interest expense for the three months ended March 31, 2011 increased as a result of the Company’s election to pay cash interest on our senior unsecured PIK toggle notes for the period of November 1, 2010 through April 30, 2011 and as a result of the amendment and restatement of the senior secured credit facility. The amendment and restatement of the senior secured credit facility resulted in the creation of a new tranche of senior secured B-3 loans which bear interest at a higher rate per annum than the senior secured term B-1 loans that they replaced. This increase was partially offset by a decrease in interest expense that occurred because certain unfavorable interest rate swap contracts associated with our senior secured credit facility expired and as a result of the issuance of the senior secured notes and the related payment of the senior secured incremental term B-2 loans. The senior secured notes bear interest at a lower rate per annum than the previously outstanding senior secured incremental term B-2 loans. See Note 7, “Financing Arrangements” to our unaudited interim consolidated financial statements for further details on the amendment and extension of the senior secured credit facility and the issuance of the senior secured notes.

Loss on Extinguishment of Debt

In connection with the issuance of our senior secured notes and the payment in full of our senior secured incremental term B-2 loans, we recognized a loss on extinguishment of debt during the three months ended March 31, 2011 of $246 million. The loss represents the difference between the reacquisition price of the incremental term B-2 loans (including consent fees paid by Avaya to the holders of the incremental term B-2 loans that consented to the amendment and restatement of the senior secured credit facility of $1 million) and the carrying value of the incremental term B-2 loans (including unamortized debt discount and debt issue costs). See Note 7, “Financing Arrangements” to our unaudited interim consolidated financial statements for further details on the issuance of our senior secured notes and the repayment of our senior secured incremental term B-2 loans.

Other (Expense) Income, Net

Other expense, net, for the three months ended March 31, 2011 was $7 million as compared to other income, net of $1 million for the three months ended March 31, 2010. This difference primarily represents fees paid to third parties in connection with the modification of the senior secured term B-1 loan of $9 million and net foreign

currency transaction gains of $1 million during the three months ended March 31, 2011 and $1 million of net foreign currency transaction gains for the three months ended March 31, 2010.

Provision for (Benefit from) Income Taxes

The provision for income taxes for the three months ended March 31, 2011 was $19 million as compared to a benefit from taxes of $19 million for the three months ended March 31, 2010. The effective tax rate for the three months ended March 31, 2011 was 4.6% and the benefit rate for the three months ended March 31, 2010 was 6.3%, and differs from the U.S. Federal tax rate primarily due to the effect of taxable income in non-U.S. jurisdictions and due to the valuation allowance established against the Company’s U.S. deferred tax assets.

Six Months Ended March 31, 2011 Compared with Six Months Ended March 31, 2010

Revenue

Our revenue for the six months ended March 31, 2011 and 2010 was $2,756 million and $2,380 million, respectively, an increase of $376 million or 16%. The following table sets forth a comparison of revenue by portfolio:


	Six months ended March 31,
Dollars in millions	2011			2010			Mix						Yr. to Yr. Percent Change			Yr. to Yr. Percent Change, net of Foreign Currency Impact
Dollars in millions	2011			2010			2011			2010			Yr. to Yr. Percent Change
GCS	$	1,325		$	1,089			48	%		46	%		22	%		22	%
Purchase accounting adjustments		(1	)		(3	)		0	%		0	%		⁽¹	⁾			⁽¹⁾
Data		155			107			6	%		4	%		45	%		44	%

Total product revenue		1,479			1,193			54	%		50	%		24	%		24	%

AGS		1,279			1,190			46	%		50	%		7	%		8	%
Purchase accounting adjustments		(2	)		(3	)		0	%		0	%		⁽¹	⁾			⁽¹⁾

Total service revenue		1,277			1,187			46	%		50	%		8	%		8	%

Total revenue	$	2,756		$	2,380			100	%		100	%		16	%		16	%

⁽¹⁾	Not meaningful

GCS revenue for the six months ended March 31, 2011 and 2010 was $1,325 million and $1,089 million, respectively. GCS revenue increased $236 million or 22% primarily due to incremental revenue from the NES business for the entire six months ended March 31, 2011 as compared to results for the six months ended March 31, 2010, which included the results of the NES business for only the period of December 19, 2009 through March 31, 2010. The increase in GCS revenue included an increase in unified communications revenues, which was predominantly the result of the introduction of new product offerings in the fourth quarter of 2010 and an increase in new Avaya Aura^® licenses sold. The additional functionality created by our Avaya Aura^® technology has also resulted in increased demand for most of our unified communications product lines. The increase in contact center solutions revenues was driven by new product offerings. These increases were partially offset by the impact of our divestiture of AGC in August 2010. Although we currently utilize AGC as a business partner to sell our product lines, such sales generally generate lower top line revenue due to volume discounts.

Data revenue for the six months ended March 31, 2011 and 2010 was $155 million and $107 million, respectively. Data revenue increased $48 million or 45% primarily due to incremental revenue from the NES business for the entire six months ended March 31, 2011 as compared to results for the six months ended March 31, 2010, which included the results of the NES business for only the period of December 19, 2009 through March 31, 2010. Our data business was acquired as part of the acquisition of NES on December 18, 2009. The addition of the NES businesses has given Avaya a position within the global data networking industry, one in which Avaya had not previously participated.

AGS revenue for the six months ended March 31, 2011 and 2010 was $1,279 million and $1,190 million, respectively. AGS revenues increased $89 million or 7% primarily due to incremental revenue from the NES business for the entire six months ended March 31, 2011 as compared to results for the six months ended March 31, 2010, which included the results of the NES business for only the period of December 19, 2009 through March 31, 2010. The increase in AGS revenue was partially offset by lower revenues due to customers reducing their spending on maintenance contracts in response to economic conditions and the impact of our divestiture of AGC in August 2010.

The following table sets forth a comparison of revenue by location:


	Six months ended March 31,
Dollars in millions	2011		2010		Mix						Yr. to Yr. Percent Change			Yr. to Yr. Percent Change, net of Foreign Currency Impact
Dollars in millions	2011		2010		2011			2010			Yr. to Yr. Percent Change
U.S.	$	1,494	$	1,289		54	%		54	%		16	%		16	%
International:
Germany		251		285		9	%		12	%		-12	%		-6	%
EMEA (excluding Germany)		491		383		18	%		16	%		28	%		28	%

Total EMEA		742		668		27	%		28	%		11	%		14	%
APAC—Asia Pacific		254		217		9	%		9	%		17	%		14	%
Americas International—Canada and
Central and Latin America		266		206		10	%		9	%		29	%		26	%

Total International		1,262		1,091		46	%		46	%		16	%		16	%

Total revenue	$	2,756	$	2,380		100	%		100	%		16	%		16	%

Revenue in the U.S. for the six months ended March 31, 2011 and 2010 was $1,494 million and $1,289 million, respectively. Revenue in the U.S. increased $205 million or 16% primarily due to incremental revenue from the NES business for the entire six months ended March 31, 2011 as compared to results for the six months ended March 31, 2010, which included the results of the NES business for only the period of December 19, 2009 through March 31, 2010. This increase included an increase in sales volume of unified communications products, partially offset by decreases resulting from lower sales associated with customers reducing spending on maintenance contracts. Revenue in EMEA for the six months ended March 31, 2011 and 2010 was $742 million and $668 million, respectively. Revenue in EMEA increased $74 million or 11% primarily due to incremental revenue from the NES business for the entire six months ended March 31, 2011 as compared to results for the six months ended March 31, 2010, which included the results of the NES business for only the period of December 19, 2009 through March 31, 2010 and an increase in sales volume of unified communications products. The increase of revenue in EMEA was partially offset by a decrease of revenue in Germany attributable to decreases resulting from customers reducing spending on maintenance contracts and the decline in our rental base. Revenue in APAC and Americas International increased $37 million and $60 million, respectively, primarily due to incremental revenue from the NES business for the entire six months ended March 31, 2011 as compared to results for the six months ended March 31, 2010, which included the results of the NES business for only the period of December 19, 2009 through March 31, 2010. The increase in revenue in APAC and Americas International included an increase in sales volume for our unified communications products, as well as the favorable impact of foreign currency. The increase in revenue in APAC was partially offset by the impact of our divestiture of AGC in August 2010. Although we continue to market to end users through the indirect channel using AGC as a business partner, sales through our indirect channel generally generate lower top line revenue due to volume discounts.


	Six months ended March 31,
Dollars in millions	2011		2010		Mix						Yr. to Yr. Percent Change			Yr. to Yr. Percent Change, net of Foreign Currency Impact
Dollars in millions	2011		2010		2011			2010			Yr. to Yr. Percent Change
Direct	$	339	$	395		23	%		33	%		-14	%		-13	%
Indirect		1,140		798		77	%		67	%		43	%		42	%

Total sales of products	$	1,479	$	1,193		100	%		100	%		24	%		24	%

The percentage of product sales through the indirect channel increased by 10 percentage points to 77% in the first six months of fiscal 2011 as compared to 67% in the corresponding period in fiscal 2010. The increase was predominantly attributable to the incremental product sales from the NES business which, prior to the Acquisition, was substantially generated through the indirect channel and the impact of the sale of AGC in August 2010. As a result of our divestiture of AGC, we continue to market to end users through AGC and those sales in fiscal 2011 are included in our indirect revenues. During most of fiscal 2010, AGC was our subsidiary and its sales to end users were included in our direct revenues. Due to higher volume discounts, sales through the indirect channel generally generate lower margins than direct sales. However, our use of the indirect channel lowers selling expenses and allows us to reach more end users.

Gross Margin

The following table sets forth a comparison of gross margin by segment:


	Six months ended March 31,
Dollars in millions	2011			2010			Percent of Revenue
Dollars in millions	2011			2010			2011			2010			Change
GCS margin	$	736		$	604			55.5	%		55.5	%	$	132	22	%
Data margin		67			45			43.2	%		42.1	%		22	49	%
AGS margin		599			553			46.8	%		46.5	%		46	8	%
Amortization of technology intangible assets and the impact of purchase accounting adjustments		(141	)		(156	)		⁽¹	⁾		⁽¹	⁾		15	⁽¹	⁾

Total gross margin	$	1,261		$	1,046			45.8	%		43.9	%	$	215	21	%

⁽¹⁾	Not meaningful

Gross margin for the six months ended March 31, 2011 and 2010 was $1,261 million and $1,046 million, respectively. Gross margin increased by $215 million or 21% primarily due to the incremental margin from the NES business for the entire six months ended March 31, 2011 as compared to results for the six months ended March 31, 2010, which included the results of the NES business for only the period of December 19, 2009 through March 31, 2010. The gross margin percentage increased to 45.8% for the six months ended March 31, 2011 from 43.9% for the six months ended March 31, 2010. The increase in gross margin and gross margin percentage is primarily due to the impact of lower amortization of technology intangible assets on higher sales volume, partially offset by higher costs associated with our employee incentive programs.

GCS gross margin for the six months ended March 31, 2011 and 2010 was $736 million and $604 million, respectively. GCS gross margin increased $132 million or 22% primarily due to incremental margin provided by the NES business for the entire six months ended March 31, 2011 as compared to results for the six months ended March 31, 2010, which included the results of the NES business for only the period of December 19, 2009

through March 31, 2010. The increase in GCS gross margin also included an increase in sales volume of unified communications products. The GCS gross margin was 55.5% for the six months ended March 31, 2011 and 2010. The gross margin percentage remained flat primarily due to the increase in sales volume which leveraged our fixed costs, offset by the impact of the acquisition of the NES business, which historically experienced lower margin percentages.

Data gross margin for the six months ended March 31, 2011 and 2010 was $67 million and $45 million, respectively. Our data business was acquired as part of the acquisition of NES on December 18, 2009. Results for the six months ended March 31, 2011 include the impact for the entire six months as compared to results for the six months ended March 31, 2010, which included the results of the NES business for the only the period of December 19, 2009 through March 31, 2010.

AGS gross margin for the six months ended March 31, 2011 and 2010 was $599 million and $553 million, respectively. AGS gross margin increased $46 million or 8% primarily due to the incremental margin provided by the NES business for the entire six months ended March 31, 2011 as compared to results for the six months ended March 31, 2010, which included the results of the NES business for only the period of December 19, 2009 through March 31, 2010. The increase in AGS gross margin was partially offset by lower revenues due to customers reducing their spending on maintenance contracts in response to economic conditions. The AGS gross margin percentage increased to 46.8% for the six months ended March 31, 2011 from 46.5% for the six months ended March 31, 2010. The change in gross margin percentage is primarily attributable to the continued benefit from cost saving initiatives, which include the benefit of productivity improvements from reducing the workforce and relocating positions to lower cost geographies offset by the effects of the acquired NES business for the period December 19, 2009 through March 31, 2010. The acquired NES business historically experienced lower services margins prior to the acquisition. Accordingly, the acquisition of NES negatively impacts the gross margin percentage of AGS for the period presented.

Total gross margin for the six months ended March 31, 2011 and 2010 included the effect of certain acquisition adjustments including the amortization of acquired technology intangibles and the amortization of the inventory step-up related to the acquisition of NES and the Merger.

Operating expenses


	Six months ended March 31,
					Percent of Revenue
Dollars in millions	2011		2010		2011			2010			Change
Selling, general and administrative	$	931	$	833		33.8	%		35.0	%	$	98		12	%
Research and development		236		197		8.6	%		8.3	%		39		20	%
Amortization of intangible assets		112		107		4.1	%		4.5	%		5		5	%
Impairment of long-lived assets		—		16		0.0	%		0.7	%		(16	)	⁽¹	⁾
Restructuring charges, net		64		83		2.3	%		3.5	%		(19	)	-23	%
Acquisition-related costs		4		19		0.1	%		0.8	%		(15	)	⁽¹	⁾

Total operating expenses	$	1,347	$	1,255		48.9	%		52.8	%	$	92		7	%

⁽¹⁾	Not meaningful

SG&A expenses for the six months ended March 31, 2011 and 2010 were $931 million and $833 million, respectively, an increase of $98 million. The increase in expenses was due to incremental SG&A expenses incurred by the NES business for the entire six months ended March 31, 2011 as compared to results for the six months ended March 31, 2010, which included the results of the NES business for only the period of December 19, 2009 through March 31, 2010, as well as higher costs associated with our employee incentive programs. Integration costs were $47 million for each of the six months ended March 31, 2011 and 2010. Integration costs primarily represent third-party consulting fees and other administrative costs associated with

consolidating and coordinating the operations of Avaya and NES. These costs were incurred in connection with, among other things, the on-boarding of NES personnel, developing compatible IT systems and internal processes, and developing and implementing a strategic operating plan to enable a smooth transition with minimal disruption to NES customers. These costs were partially offset by the continued benefit from cost savings initiatives implemented in prior periods, which included exiting facilities and reducing the workforce and relocating positions to lower-cost geographies.

R&D expenses for the six months ended March 31, 2011 and 2010 were $236 million and $197 million, respectively, an increase of $39 million. The increase in R&D expenses was due to incremental R&D expenses from the acquired NES business for the entire six months ended March 31, 2011 as compared to results for the six months ended March 31, 2010, which included the results of the NES business for only the period of December 19, 2009 through March 31, 2010, as well as higher costs from associated with our employee incentive programs. This increase was partially offset by reductions resulting from continued focus on cost saving initiatives and the re-prioritization of projects.

Amortization of intangible assets for the six months ended March 31, 2011 and 2010 was $112 million and $107 million, respectively, an increase of $5 million. The increase was due to amortization related to intangible assets acquired in connection with the acquisition of NES for the entire six months ended March 31, 2011 as compared to results for the six months ended March 31, 2010, which included the results of the NES business for only the period of December 19, 2009 through March 31, 2010.

Our acquisition of NES provided us with access to several proprietary technologies that previously were not available to Avaya. Some of these technologies, based on their functionality, overlap with our pre-existing technologies. In order to realize synergies and reduce our expenditures on research and development and marketing, the number of technologies Avaya supports is being reduced. As a result, we identified certain technologies associated with our GCS products segment that are redundant to others that Avaya will no longer aggressively develop and market. The Company recorded an impairment charge of $16 million in the three months ended December 31, 2009 associated with these technologies. The Company determined that no events or circumstances changed during the six months ended March 31, 2011 that would indicate that other technologies are impaired.

Restructuring charges, net for the six months ended March 31, 2011 and 2010 were $64 million and $83 million, respectively, a decrease of $19 million. During fiscal 2010, we continued our focus on controlling costs. In response to the global economic climate and in anticipation of the acquisition of NES, we began implementing additional initiatives designed to streamline our operations, generate cost savings, and eliminate overlapping processes and expenses associated with the NES business. These initiatives include exiting facilities and reducing the workforce or relocating positions to lower cost geographies. Restructuring charges recorded during the six months ended March 31, 2011 and 2010 include employee separation costs primarily associated with involuntary employee severance actions in EMEA and the U.S. As we continue to evaluate our operational synergies, margins and cost structure, we may identify additional cost savings opportunities in future periods.

Acquisition-related costs for the six months ended March 31, 2011 and 2010 were $4 million and $19 million, respectively, and include third-party legal and other costs related to the acquisitions of Konftel in fiscal 2011 and NES in fiscal 2010.

Operating Loss

Operating loss for the six months ended March 31, 2011 was $86 million compared to $209 million for the six months ended March 31, 2010.

Results for the six months ended March 31, 2011 include the impact of the operating results associated with the NES business, which includes the effect of certain acquisition adjustments and the amortization of acquired technology and customer intangibles, for the entire six months ended March 31, 2011 as compared to results for

the six months ended March 31, 2010, which included the results of the NES business for only the period of December 19, 2009 through March 31, 2010. In addition, for the six months ended March 31, 2011, we incurred integration costs (included in SG&A) of $47 million and acquisition-related costs of $4 million, as described above. For the six months ended March 31, 2010, we incurred integration costs of $47 million, acquisition-related costs of $19 million and an impairment of $16 million to our long-lived assets.

Operating loss for the six months ended March 31, 2011 and 2010 includes non-cash expenses for depreciation and amortization of $335 million and $342 million and share-based compensation of $6 million and $11 million, respectively. Operating income before non-cash depreciation and amortization and share-based compensation was $255 million and $144 million for the six months ended March 31, 2011 and 2010, respectively.

Interest Expense

Interest expense for the six months ended March 31, 2011 and 2010 was $240 million and $229 million, which includes non-cash interest expense of $28 million and $64 million, respectively. Non-cash interest expense for the six months ended March 31, 2011 includes (1) amortization of debt issuance costs, (2) accretion of debt discount attributable to our senior secured incremental term B-2 loans through February 11, 2011 the date on which the loans were repaid in full, and (3) accretion of debt discount attributable to our senior secured term B-3 loans which were issued on February 11, 2011 as a result of the modification to certain provisions of the senior secured credit facility. Non-cash interest expense for the six months ended March 31, 2010 includes: (1) amortization of debt issuance costs, (2) accretion of debt discount attributable to our senior secured incremental term B-2 loans issued in connection with the Acquisition, and (3) paid-in-kind (“PIK”) interest which we elected to finance through our senior unsecured PIK toggle notes for the period of May 1, 2010 through October 31, 2010 and November 1, 2010 through April 30, 2010.

Cash interest expense for the six months ended March 31, 2011 increased as a result of (1) the Company’s election to pay cash interest on our senior unsecured PIK toggle notes for the period of May 1, 2010 through October 31, 2010 and November 1, 2010 through April 30, 2011, (2) cash interest expense attributable to the financing associated with the Acquisition, and (3) the amendment and restatement of the senior secured credit facility. The senior secured incremental term B-2 loans were issued on December 18, 2009 in connection with the Acquisition and repaid in full on February 11, 2011 with the proceeds from the issuance of the senior secured notes. As a result, financing associated with the Acquisition was outstanding for a longer period during the six months ended March 31, 2011 as compared to the six months ended March 31, 2010. The amendment and restatement of the senior secured credit facility resulted in an extension of the maturity of a portion of the senior secured term B-1 loans representing outstanding principal amounts of $2.2 billion from October 26, 2014 to October 26, 2017 by converting such loans into a new tranche of senior secured B-3 loans which bear interest at a higher rate per annum than the senior secured term B-1 loans that they replaced. This increase was partially offset by decreased cash interest expense as a result of the expiration of certain interest rate swap contracts associated with our senior secured credit facility. See Note 7, “Financing Arrangements” to our unaudited interim consolidated financial statements for further details on the amendment and extension of the senior secured credit facility and the issuance of the senior secured notes.

Loss on Extinguishment of Debt

In connection with the issuance of our senior secured notes and the payment in full of our senior secured incremental term B-2 loans, we recognized a loss on extinguishment of debt for the six months ended March 31, 2011 of $246 million. The loss represents the difference between the reacquisition price of the incremental term B-2 loans (including consent fees paid by Avaya to the holders of the incremental term B-2 loans that consented to the amendment and restatement of the senior secured credit facility of $1 million) and the carrying value of the incremental term B-2 loans (including unamortized debt discount and debt issue costs). See Note 7, “Financing Arrangements” to our unaudited interim consolidated financial statements for further details on the issuance of our senior secured notes and repayment of our senior secured incremental term B-2 loans.

Other Income, Net

Other income, net for the six months ended March 31, 2011 was $1 million as compared to $5 million for the six months ended March 31, 2010. This difference primarily represents fees paid to third parties in connection with the modification of the senior secured term B-1 loan of $9 million and net foreign currency transaction gains of $9 million during the six months ended March 31, 2011 and $2 million of net foreign currency transaction gains for the six months ended March 31, 2010.

Provision for (Benefit from) Income Taxes

Liquidity and Capital Resources

Cash and cash equivalents decreased by $126 million to $453 million at March 31, 2011 from $579 million at September 30, 2010. Cash and cash equivalents at March 31, 2011 and September 30, 2010 does not include restricted cash of $2 million and $28 million, respectively. The restricted cash balance at September 30, 2010 related primarily to the securing of a standby letter of credit related to a facility lease in Germany, which was classified as other non-current assets, and is now secured by a letter of credit issued under our senior secured multi-currency asset-based revolving credit facility as of March 31, 2011.

Sources and Uses of Cash

A condensed statement of cash flows for the six months ended March 31, 2011 and 2010 follows:


	Six months ended March 31,
In millions	2011			2010
Net cash (used for) provided by:
Net loss	$	(612	)	$	(417	)
Adjustments to reconcile net loss to net cash used for operating activities		313			462
Changes in operating assets and liabilities		(50	)		(47	)

Operating activities		(349	)		(2	)
Investing activities		(30	)		(850	)
Financing activities		248			878
Effect of exchange rate changes on cash and cash equivalents		5			(17	)

Net (decrease) increase in cash and cash equivalents		(126	)		9
Cash and cash equivalents at beginning of period		579			567

Cash and cash equivalents at end of period	$	453		$	576

Operating Activities

Cash used for operating activities was $349 million and $2 million for the six months ended March 31, 2011 and 2010, respectively. Cash used for operating activities for the six months ended March 31, 2011 includes the repayment of the discount upon redemption of the incremental term B-2 loans of $291 million.

The changes in our operating assets and liabilities resulted in a net decrease in cash and cash equivalents of $50 million for the six months ended March 31, 2011. The net decrease was primarily driven by the timing of the payment of accrued interest, payments associated with our business restructuring reserves and a decrease in foreign exchange contracts due to the settlement of foreign exchange contracts and changes in foreign currency exchange rates. These decreases in our cash balances were partially offset by improvements in the collections of our accounts receivable combined with increases in cash due to the timing of payment of accounts payable.

The changes in our operating assets and liabilities resulted in a net decrease in cash and cash equivalents of $47 million for the six months ended March 31, 2010 and were primarily due to increases in accounts receivable and deferred costs offset by the increase in accounts payable associated with the acquired NES business. The acquisition of NES included only a limited amount of working capital. Therefore, the increases in accounts receivable and accounts payable were expected as the acquired balance of these accounts were not sufficient to sustain the existing business needs at the date of Acquisition. The increase in deferred costs is associated with certain projects of the Avaya Government Solutions business that began ramping up in January 2010.

Investing Activities

Cash used for investing activities was $30 million and $850 million for the six months ended March 31, 2011 and 2010, respectively. Cash used for investing activities in the period ended March 31, 2011 included capital expenditures and capitalized software development costs of $35 million and $14 million, respectively. Further, during the first quarter of fiscal 2011, the Company and Nortel agreed on a final purchase price of $933 million for the acquisition of NES and we received $6 million representing all remaining amounts due to Avaya from funds held in escrow. In addition, restricted cash of $24 million that formerly secured a standby letter of credit related to a facility lease in Germany is included in cash and cash equivalents, as the standby letter of credit is now secured by a letter of credit issued under our senior secured multi-currency asset-based revolving credit facility. We also used $14 million for the acquisition of Konftel during the second quarter of fiscal 2011. The primary use of cash in the six months ended March 31, 2010 was related to payments in connection with the acquisition of NES of $805 million (net of cash acquired of $38 million and the application of the $100 million good-faith deposit made in fiscal 2009). In addition, during that period we used cash for capital expenditures and capitalized software development costs of $30 million and $23 million, respectively.

Financing Activities

Net cash provided by financing activities was $248 million for the six months ended March 31, 2011, as compared $878 million for the six months ended March 31, 2010. Activity for the current period included proceeds from the issuance of our senior secured notes of $1,009 million which were used to repay in full the senior secured incremental term B-2 loans including $696 million for the repayment of principal, net of discount included as a cash out flow for financing activities and $291 million for the repayment of debt discount as discussed under “Operating Activities” above. Additionally, activity for the current period included $42 million in associated debt issuance and modification costs and $22 million in scheduled debt payments. Net cash used for financing activities for the corresponding prior year period included net proceeds of $783 million from the issuance of incremental term B-2 loans with detachable warrants to purchase 61.5 million shares of Parent’s common stock and a capital contribution to Avaya from Parent in the amount of $125 million. This was partially offset by $24 million in debt payments and debt issuance costs of $5 million.

Future Cash Requirements and Sources of Liquidity

Our primary future cash requirements will be to fund debt service, capital expenditures, restructuring payments, integration costs and benefit obligations. In addition, we may use cash in the future to make strategic acquisitions.

Specifically, we expect our primary cash requirements for the remainder of fiscal 2011 to be as follows:

•

Debt service—As discussed in Note 7, “Financing Arrangements” to our unaudited interim consolidated financial statements, on February 11, 2011, the Company amended its senior secured credit facility and extended the maturity date for a portion of the term loans outstanding under that facility through October 2017. In addition, the Company issued senior secured notes. We expect to make payments of $187 million during the remainder of fiscal 2011 for principal and interest associated with our long-term debt, as refinanced. We will also make payments associated with our interest rate swaps used to reduce the Company’s exposure to variable-rate interest payments. Currently, we do not foresee the need to repatriate earnings of foreign subsidiaries in order to make our scheduled debt payments.

•

Capital expenditures—We expect to spend approximately $79 million for capital expenditures and capitalized software development costs during the remainder of fiscal 2011.

•

Restructuring payments—We expect to make payments of approximately $67 million during the remainder of fiscal 2011 for employee separation costs and lease termination obligations associated with restructuring actions we have implemented through March 31, 2011.

•

Transition service agreement (“TSA”) payments and integration costs—We expect to make payments of approximately $67 million during the remainder of fiscal 2011 for payments under the TSA and integration costs associated with the acquisition of NES. Our TSA is due to expire in June 2011.

•

Benefit obligations—We estimate we will make payments under our pension and postretirement obligations totaling $105 million. These payments include: $65 million to satisfy the minimum statutory funding requirements of our U.S. qualified plans, $4 million of payments under our U.S. benefit plans which are not pre-funded, $9 million under our non-U.S. benefit plans which are predominately not pre-funded, $7 million under our U.S. retiree medical benefit plan which is not pre-funded and $20 million under the 2009 collective bargaining agreement to the Communications Workers of America and the International Brotherhood of Electrical Workers post-retirement health trusts. See discussion in Note 11, “Benefit Obligations” to our unaudited interim consolidated financial statements for further details of our benefit obligations.

We and our subsidiaries, affiliates and significant shareholders may from time to time seek to retire or purchase our outstanding debt (including publicly issued debt) through cash purchases and/or exchanges, in open market purchases, privately negotiated transactions, by tender offer or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

Future Sources of Liquidity

We expect our primary source of cash to be positive net cash flows provided by operating activities. We expect that profitable revenues and continued focus on accounts receivable, inventory management and cost containment will enable us to generate positive net cash from operating activities. Further, we continue to focus on cost reductions and have initiated restructuring plans during fiscal 2011 designed to reduce overhead and provide cash savings.

We and a syndicate of lenders are currently party to two revolving credit facilities providing for up to $535 million of borrowings in the aggregate (see Note 7, “Financing Arrangements” to our unaudited interim consolidated financial statements), each of which matures on October 26, 2013. Our existing cash and cash equivalents and net cash provided by operating activities may be insufficient if we face unanticipated cash needs such as the funding of a future acquisition or other capital investment. Furthermore, if we acquire a business in the future that has existing debt, our debt service requirements may increase.

If we do not generate sufficient cash from operations, face unanticipated cash needs such as the need to fund significant strategic acquisitions or do not otherwise have sufficient cash and cash equivalents, we may need to

incur additional debt or issue equity. In order to meet our cash needs we may, from time to time, borrow under our credit facilities or issue long-term or short-term debt or equity, if the market and our credit facilities and the indenture governing our senior unsecured notes permit us to do so.

Based on past performance and current expectations, we believe that our existing cash and cash equivalents of $453 million as of March 31, 2011 and future cash provided by operating activities will be sufficient to meet our future cash requirements described above. Our ability to meet these requirements will depend on our ability to generate cash in the future, which is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

Debt Ratings

As of March 31, 2011, we had a long-term corporate family rating of B3 with a stable outlook from Moody’s and a corporate credit rating of B- with a stable outlook from Standard & Poor’s. Our ability to obtain additional external financing and the related cost of borrowing may be affected by our debt ratings, which are periodically reviewed by the major credit rating agencies. The ratings are subject to change or withdrawal at any time by the respective credit rating agencies.

Credit Facilities

In connection with the Merger on October 26, 2007, we entered into borrowing arrangements with several financial institutions, certain of which arrangements were amended December 18, 2009 in connection with the Acquisition.

As fully discussed in Note 7, “Financing Arrangements,” to our unaudited interim consolidated financial statements, on February 11, 2011, the Company amended and restated its senior secured credit facility to, among other things, permit the extension of the maturity of a portion of the senior secured term B-1 loans representing outstanding principal amounts of $2.2 billion from October 26, 2014 to October 26, 2017 (potentially springing to July 26, 2015, under the certain circumstances) and changes the applicable interest rate for such extended portion. The Company also completed a private placement of $1,009 million of senior secured notes which bear interest at a rate of 7% per annum and mature on April 1, 2019. The proceeds of the private placement were used to repay in full the senior secured incremental term B-2 loans outstanding under the Company’s senior secured credit facility (representing an aggregate par amount of $988 million and $12 million in accrued and unpaid interest through February 11, 2011) and to pay related fees and expenses.

Critical Accounting Policies and Estimates

Management has reassessed the critical accounting policies as disclosed in our Annual Report on Form 10-K filed with the SEC on December 7, 2010 and determined that there were no significant changes to our critical accounting policies in the six months ended March 31, 2011 except for recently adopted accounting guidance as discussed in Note 2, “Recent Accounting Pronouncements” to our unaudited interim consolidated financial statements. Also, there were no significant changes in our estimates associated with those policies.

New Accounting Pronouncements

See discussion in Note 2, “Recent Accounting Pronouncements” to our unaudited interim consolidated financial statements for further details.

EBITDA and Adjusted EBITDA

EBITDA is defined as net income (loss) before income taxes, interest expense, and depreciation and amortization. EBITDA provides us with a measure of operating performance that excludes the results of decisions that are outside the control of operating management which can differ significantly from company to

company depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments. In addition, we believe EBITDA provides more comparability between our historical results and results that reflect purchase accounting and our new capital structure following the Merger. Accordingly, EBITDA measures our financial performance based on operational factors that management can impact in the short-term, namely the Company’s pricing strategies, volume, costs and expenses of the organization.

We are not in default under our senior secured credit facility, the indenture governing our senior secured notes, the indenture governing our senior unsecured notes or our senior secured multi-currency asset-based revolving credit facility. Under our debt agreements, our ability to draw on our revolving credit facilities or engage in activities such as incurring additional indebtedness, making investments and paying dividends is tied to ratios based on Adjusted EBITDA. As defined in our debt agreements, Adjusted EBITDA is a non-GAAP measure of EBITDA further adjusted to exclude certain charges and other adjustments permitted in calculating covenant compliance under our debt agreements. We believe that including supplementary information concerning Adjusted EBITDA is appropriate to provide additional information to investors to demonstrate compliance with our debt agreements.

EBITDA and Adjusted EBITDA have limitations as analytical tools. Adjusted EBITDA does not represent net income (loss) or cash flow from operations as those terms are defined by GAAP and does not necessarily indicate whether cash flows will be sufficient to fund cash needs. While Adjusted EBITDA and similar measures are frequently used as measures of operations and the ability to meet debt service requirements, these terms are not necessarily comparable to other similarly titled captions of other companies due to the potential inconsistencies in the method of calculation. Adjusted EBITDA does not reflect the impact of earnings or charges resulting from matters that we consider not to be indicative of our ongoing operations. In particular, the definition of Adjusted EBITDA in our debt agreements allows us to add back certain non-cash charges that are deducted in calculating net income (loss). Our debt agreements also allow us to add back restructuring charges, pension costs, other postemployment benefits costs, nonretirement postemployment benefits costs and Sponsor fees as defined in the agreements. However, these are expenses that may recur, may vary and are difficult to predict. Further, our debt agreements require that Adjusted EBITDA be calculated for the most recent four fiscal quarters. As a result, the measure can be disproportionately affected by a particularly strong or weak quarter. Further, it may not be comparable to the measure for any subsequent four-quarter period or any complete fiscal year.

The unaudited reconciliation of net loss, which is a GAAP measure, to EBITDA and Adjusted EBITDA is presented below:


	Three months ended March 31,						Six months ended March 31,
(In millions)	2011			2010			2011			2010
Net loss	$	(432	)	$	(281	)	$	(612	)	$	(417	)
Interest expense		113			127			240			229
Interest income		(1	)		(1	)		(2	)		(3	)
Income tax expense		19			(19	)		41			(16	)
Depreciation and amortization		167			185			335			342

EBITDA		(134	)		11			2			135
Impact of purchase accounting adjustments (1)		(1	)		3			(2	)		2
Restructuring charges, net		42			68			64			83
Sponsors’ fees (2)		2			2			4			4
Acquisition-related costs (3)		—			2			4			19
Integration-related costs (4)		39			59			87			83
Debt registration fees		—			1			—			1
Loss on extinguishment of debt (5)		246			—			246			—
Third-party fees expensed in connection with the debt modification (6)		9			—			9			—
Strategic initiative costs (7)		—			1			—			4
Non-cash share-based compensation		3			4			6			11
Write-down of held for sale assets to net realizable value		—			—			1			—
(Gain) loss on sale of long-lived assets		(1	)		1			(1	)		—
Impairment of long-lived assets		—			—			—			16
Net income of unrestricted subsidiaries, net of dividends received		—			(2	)		—			(4	)
Gain on foreign currency transactions		(1	)		(1	)		(9	)		(2	)
Pension/OPEB/nonretirement postemployment benefits and long-term disability costs		16			8			31			15

Adjusted EBITDA	$	220		$	157		$	442		$	367

(1)

For the three and six months ended March 31, 2011 and 2010, represents adjustments to eliminate the impact of certain purchase accounting adjustments recorded as a result of the Acquisition and the Merger, including the recognition of the amortization of business partner commissions, which were eliminated in purchase accounting, the recognition of revenue and costs that were deferred in prior periods and eliminated in purchase accounting and the elimination of the impact of estimated fair value adjustments for certain assets and liabilities, such as inventory.

(2)	Sponsors’ fees represent monitoring fees payable to affiliates of Silver Lake and TPG pursuant to a management services agreement entered into at the time of the Merger.

(3)	Acquisition-related costs include third-party legal and other costs related to the acquisitions of NES and Konftel.

(4)

Integration costs primarily represent third-party consulting fees and other administrative costs associated with consolidating and coordinating the operations of Avaya and NES. These costs were incurred in connection with, among other things, the on-boarding of NES personnel, developing compatible IT systems and internal processes and developing and implementing a strategic operating plan to help enable a smooth transition with minimal disruption to NES customers. Such costs also include fees paid to Nortel for logistics and other support functions being performed on a temporary basis according to a transition services agreement.

(5)

Loss on extinguishment of debt represents the loss recognized in connection with the issuance of our senior secured notes and the payment in full of our senior secured incremental term B-2 loans. The loss is based on the difference between the reacquisition price and the carrying value of the senior secured incremental term B-2 loans. See Note 7, “Financing Arrangements” to our unaudited interim consolidated financial statements for further details.

(6)	Term loan modification fees represent fees paid to third parties in connection with the modification of the senior secured credit facility. See Note 7, “Financing Arrangements” to our unaudited interim consolidated financial statements for further details.

(7)	Strategic initiative costs represent consulting fees in connection with Management’s cost-savings actions, which commenced subsequent to the Merger.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements.” All statements other than statements of historical fact are “forward-looking” statements for purposes of the U.S. federal and state securities laws. These statements may be identified by the use of forward looking terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “should” or “will” or the negative thereof or other variations thereon or comparable terminology. In particular, statements about our expectations, beliefs, plans, objectives, assumptions or future events or performance contained in this report under Part II, Item 1A, “Risk Factors,” and Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are forward-looking statements.

We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control. These and other important factors, including those discussed in this report, may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. Some of the key factors that could cause actual results to differ from our expectations include:

•

our leverage and its effect on our ability to raise additional capital and to react to changes in the economy or our industry;

•

liquidity and our access to capital markets;

•

our ability to develop and sell advanced communications products and services, including unified communications, data networking solutions and contact center solutions;

•

our ability to develop our indirect sales channel;

•

economic conditions and the willingness of enterprises to make capital investments;

•

the market for advanced communications products and services, including unified communications solutions;

•

our ability to remain competitive in the markets we serve;

•

our ability to manage our supply chain and logistics functions;

•

the ability to protect our intellectual property and avoid claims of infringement;

•

our ability to effectively integrate NES and other acquired businesses into ours;

•

our ability to maintain adequate security over our information systems and recover critical systems;

•

environmental, health and safety laws, regulations, costs and other liabilities;

•

our ability to mitigate risks associated with climate change;

•

the ability to retain and attract key employees;

•

risks relating to the transaction of business internationally; and

•

pension and post-retirement healthcare and life insurance liabilities.

We caution you that the foregoing list of important factors may not contain all of the material factors that are important to you. In addition, in light of these risks and uncertainties, the matters referred to in the forward-looking statements contained in this report may not in fact occur. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosure About Market Risk” in Avaya’s Annual Report on Form 10-K for the fiscal year ended September 30, 2010 filed with the SEC on December 7, 2010. As of March 31, 2011, there has been no material change in this information.

Item 4.

Controls and Procedures.

a)	Evaluation of Disclosure Controls and Procedures.

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

b)	Changes in Internal Control Over Financial Reporting.

On December 18, 2009, the Company completed the acquisition of the enterprise solutions business of Nortel Networks Corporation (the “NES business”). The Company is in the process of integrating the NES business. The Company relies in part upon services provided by Nortel and its affiliates under a transition services agreement to support many of these integration activities. The Company is analyzing, evaluating and, where possible, implementing changes in controls and procedures relating to the NES business as integration proceeds. As a result, this process may result in additions or changes to our internal control over financial reporting. Otherwise, there were no changes in our internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings.

See Note 14, “Commitments and Contingencies” to the unaudited Consolidated Financial Statements.

Item 1A.

Risk factors

You should carefully consider the following risk factors as well as the other information contained in this report. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not currently known to us or those we currently view to be immaterial may also materially and adversely affect our business, financial condition or results of operations. Any of the following risks could materially and adversely affect our business, financial condition or results of operations.

On February 11, 2011, the Company issued 7% Senior Secured Notes due 2019 (the “senior secured notes”). As a result of the issuance of the senior secured notes and the entry into the agreements governing those notes, risk factors set forth in 1A of our Annual Report on Form 10-K for the year ended September 30, 2010 that describe the Company’s indebtedness should be read to give effect to the entry by the Company into an indenture governing the senior secured notes, the issuance of the senior secured notes and the security interests granted to the holders of the senior secured notes. We also include below additional risk factors that are relevant to holders of the senior secured notes. Otherwise, there have been no material changes to the Risk Factors disclosed in Item 1A of our Annual Report on Form 10-K for the year ended September 30, 2010. Terms included in this Item 1A such as “our,” “we” and “the Company” refer to Avaya Inc. References in this Item 1A to our “notes” are to our senior secured notes together with our senior unsecured cash pay notes due 2015 and our senior unsecured PIK toggle notes due 2015.

The secured indebtedness under our senior secured multi-currency asset-based revolving credit facility will be effectively senior to our senior secured notes to the extent of the value of the collateral securing such facility on a first-priority basis and the secured indebtedness under our senior secured credit facility will be effectively senior to our senior secured notes to the extent of the value of the real estate securing such facility.

Our senior secured multi-currency asset-based revolving credit facility has a first priority lien in certain of our personal property and that of the subsidiary guarantors, with certain exceptions. Our senior secured credit facility and our senior secured notes have a second priority lien in that property. The indenture governing the senior secured notes permits us to incur additional indebtedness secured on a first-priority basis by such property in the future. The first priority liens in the collateral securing indebtedness under our senior secured multi-currency asset-based revolving credit facility and any such future indebtedness will be higher in priority as to such collateral than the security interests securing our senior secured notes and the guarantees thereof. Holders of the indebtedness under our senior secured multi-currency asset-based revolving credit facility and any other indebtedness secured by higher priority liens on such collateral will be entitled to receive proceeds from the realization of value of such collateral to repay such indebtedness in full before a holder of the senior secured notes will be entitled to any recovery from such collateral. As a result, holders of our senior secured notes will only be entitled to receive proceeds from the realization of value of assets securing our senior secured multi-currency asset-based revolving credit facility on a higher priority basis after all indebtedness and other obligations under our senior secured multi-currency asset-based revolving credit facility and any other obligations secured by higher priority liens on such assets are repaid in full. Our senior secured notes will be effectively junior in right of payment to indebtedness under our senior secured multi-currency asset-based revolving credit facility and any other indebtedness secured by higher priority liens on such collateral to the extent of the realizable value of such collateral.

Our senior secured credit facility has a first priority lien in certain of our real estate and that of the subsidiary guarantors, with certain exceptions. Our senior secured multi-currency asset-based revolving credit facility has a second priority lien in that property. The indenture governing our senior secured notes permits us to incur additional indebtedness secured on a first-priority basis by such property in the future. Our senior secured notes

and the guarantees thereof are not secured by a lien on such property. Holders of the indebtedness under our senior credit facility and any other indebtedness secured by liens on such collateral will be entitled to receive proceeds from the realization of value of such collateral to repay such indebtedness in full before a holder of our senior secured notes will be entitled to any recovery from such collateral. As a result, holders of our senior secured notes will only be entitled to receive proceeds from the realization of value of such collateral after all indebtedness and other obligations secured by liens on such assets are repaid in full. Our senior secured notes will be effectively junior in right of payment to indebtedness under our senior secured credit facility and any other indebtedness secured by higher priority liens on such collateral to the extent of the realizable value of such collateral.

The right of holders of our senior secured notes to receive proceeds from the sale of collateral securing our senior secured notes will be pari passu with (and junior with respect to real estate collateral to) the claims of lenders and counterparties under our senior secured credit facility and certain future indebtedness.

The loans under our senior secured credit facility and our senior secured notes are, and certain future indebtedness may be, secured on a pari passu basis by the same collateral consisting of a first priority perfected lien and security interest in substantially all of our and the guarantors’ assets (except for cash, accounts, accounts receivable, deposit accounts, securities accounts, chattel paper, inventory and proceeds thereof, as to which the senior secured notes and the senior secured credit facility will be secured by a second priority lien and except for real estate, as to which the senior secured notes will not be secured), subject to certain exceptions. As a result, holders of our senior secured notes will receive distributions from any foreclosure proceeds of any of our and the guarantors’ assets constituting collateral (other than real estate) for the senior secured notes on a pro rata basis with the lenders under our senior secured credit facility and certain future indebtedness and holders of our senior secured notes will only be entitled to receive proceeds from the realization of value of real estate collateral after all indebtedness and other obligations secured by liens on such assets are repaid in full.

The collateral securing our senior secured notes may not be valuable enough to satisfy all the obligations secured by the collateral.

We have secured our obligations under our senior secured notes by the pledge of certain of our assets. The value of the pledged assets in the event of a liquidation will depend upon market and economic conditions, the availability of buyers and similar factors. No independent appraisals of any of the pledged property were prepared by or on behalf of us in connection with the offering of our senior secured notes. Accordingly, we cannot assure holders of our senior secured notes that the proceeds of any sale of the pledged assets following an acceleration to maturity with respect to our senior secured notes would be sufficient to satisfy, or would not be substantially less than, amounts due on our senior secured notes and the other debt secured thereby.

If the proceeds of any sale of the pledged assets were not sufficient to repay all amounts due on our senior secured notes after satisfying the obligations to pay any creditors with prior liens, holders of our senior secured notes (to the extent such notes were not repaid from the proceeds of the sale of the pledged assets) would have only an unsecured claim against our remaining assets. By their nature, some or all of the pledged assets may be illiquid and may have no readily ascertainable market value. Likewise, we cannot assure a holder of senior secured notes that the pledged assets will be saleable or, if saleable, that there will not be substantial delays in their liquidation. To the extent that liens securing obligations under our credit facilities, pre-existing liens, liens permitted under the indenture governing our senior secured notes and other rights, including liens on excluded assets, encumber any of the collateral securing our senior secured notes and the guarantees, those parties have or may exercise rights and remedies with respect to the collateral (including rights to require marshalling of assets) that could adversely affect the value of the collateral and the ability of the collateral agent, the trustee under the indenture or the holders of our senior secured notes to realize or foreclose on the collateral.

Our senior secured notes and the related guarantees will be secured, subject to certain exceptions and to permitted liens, by a first priority lien in the collateral that secures our senior secured credit facility on a first-priority basis and will share equally in right of payment to the extent of the value of such collateral securing such

senior secured credit facility on a first-priority basis. The indenture governing our senior secured notes permits us, subject to compliance with certain financial tests, to issue additional indebtedness secured by a lien that ranks equally with our senior secured notes. This would reduce amounts payable to holders of our senior secured notes from the proceeds of any sale of the collateral.

The collateral securing our senior secured notes may be diluted under certain circumstances.

The collateral that secures the senior secured notes also secures the senior secured credit facility and obligations under our senior secured multi-currency asset-based revolving credit facility. The collateral may also secure additional indebtedness that we incur in the future, subject to restrictions on our ability to incur debt and liens under our senior secured multi-currency asset based revolving credit facility, senior secured credit facility, and the indentures governing our notes. The rights of holders of our senior secured notes to the collateral would be diluted by any increase in the indebtedness secured by this collateral or portions thereof.

The rights of holders of our senior secured notes with respect to the ABL Priority Collateral will be substantially limited by the terms of the ABL Intercreditor Agreement.

The collateral agent for the senior secured notes, the collateral agent for the senior secured credit facility and the collateral agent under our senior secured multi-currency asset-based revolving credit facility are party to the intercreditor agreement, entered into on October 26, 2007, between Citicorp USA, Inc. and Citibank, N.A., as it may be amended, amended and restated, supplemented or modified from time to time (the “ABL Intercreditor Agreement”). The ABL Intercreditor Agreement (as so amended) significantly restricts any action that may be taken by the collateral agent for the senior secured notes with respect to the collateral over which the holders of senior secured multi-currency asset based revolving credit facility loans have a first-priority lien (“ABL Priority Collateral”), even during an event of default. Under the terms of the ABL Intercreditor Agreement, at any time that obligations under our senior secured multi-currency asset-based revolving credit facility are outstanding, any actions that may be taken with respect to (or in respect of) the ABL Priority Collateral that secures obligations under our senior secured multi-currency asset-based revolving credit facility on a first-priority basis, including the ability to cause the commencement of enforcement proceedings against such ABL Priority Collateral and to control the conduct of such proceedings, and the approval of amendments to, releases of such ABL Priority Collateral from the lien of, and waivers of past defaults under, such documents relating to such ABL Priority Collateral, will be at the direction of the holders of the obligations under our senior secured multi-currency asset-based revolving credit facility, and the holders of the senior secured notes and the lenders under our senior secured credit facility, which are secured on a second-priority basis by such ABL Priority Collateral, may be adversely affected. The ABL Priority Collateral so released will no longer secure our and the guarantors’ obligations under the senior secured notes and the guarantees. In addition, because the holders of the indebtedness under our senior secured multi-currency asset-based revolving credit facility control the disposition of such ABL Priority Collateral, such holders could decide not to proceed against such ABL Priority Collateral, regardless of whether there is a default under the documents governing such indebtedness or under the indenture governing the senior secured notes. In such event, the only remedy available to holders of our senior secured notes would be to sue for payment on those notes and the related guarantees. In addition, under the ABL Intercreditor Agreement, the collateral agent for the senior secured notes may not assert any right of marshalling that may be available under applicable law with respect to such ABL Priority Collateral. Without this waiver of the right of marshalling, holders of indebtedness secured by first priority liens in the ABL Priority Collateral would likely be required to liquidate collateral on which the senior secured notes did not have a lien, if any, prior to liquidating the collateral, thereby maximizing the proceeds of the collateral (due to the reductions in the amount of the indebtedness with a prior claim on such collateral) that would be available to repay our obligations under the senior secured notes.

As a result of this waiver, the proceeds of sales of such ABL Priority Collateral could be applied to repay any indebtedness secured by first priority liens in such ABL Priority Collateral before applying proceeds of other collateral securing indebtedness, and a holder of senior secured notes may recover less than it would have if such proceeds were applied in the order most favorable to it.

The indenture governing the senior secured notes and the ABL Intercreditor Agreement contain certain provisions benefiting holders of indebtedness under our senior secured multi-currency asset-based revolving credit facility, including provisions prohibiting the collateral agent for the senior secured notes and the collateral agent for the senior secured credit facility from objecting following the filing of a bankruptcy petition to a number of important matters regarding the collateral and the financing to be provided to us. After such filing, the value of this collateral could materially deteriorate and a holder of senior secured notes would be unable to raise an objection. In addition, the right of holders of obligations secured by first priority liens to foreclose upon and sell such collateral upon the occurrence of an event of default also would be subject to limitations under applicable bankruptcy laws if we or any of our subsidiaries become subject to a bankruptcy proceeding. The ABL Intercreditor Agreement also gives the holders of first priority liens on the ABL Priority Collateral the right to access and use the collateral that secures the senior secured notes to allow those holders to protect the ABL Priority Collateral and to process, store and dispose of the ABL Priority Collateral.

The ABL Priority Collateral will also be subject to any and all exceptions, defects, encumbrances, liens and other imperfections as may be accepted by the lenders under our senior secured multicurrency asset-based revolving credit facility and other creditors that have the benefit of first priority liens on such collateral from time to time, whether on or after the date the senior secured notes and guarantees were issued. The existence of any such exceptions, defects, encumbrances, liens and other imperfections could adversely affect the value of the collateral securing the senior secured notes as well as the ability of the collateral agent for the senior secured notes or the collateral agent for the senior secured credit facility to realize or foreclose on such collateral.

The rights of holders of our senior secured notes in the collateral securing such notes may be adversely affected by the first lien intercreditor agreement.

The rights of the holders of our senior secured notes with respect to the collateral that secures such notes is subject to a first lien intercreditor agreement among all holders of obligations secured by that collateral on a pari passu basis (“first lien obligations”), including the obligations under the senior secured notes and our senior secured credit facility. Under that intercreditor agreement, any actions that may be taken with respect to such collateral, including the ability to cause the commencement of enforcement proceedings against such collateral, to control such proceedings and to approve amendments to releases of such collateral from the lien of, and waive past defaults under, such documents relating to such collateral, may be taken solely by the collateral agent for the senior secured credit facility until (1) our obligations under the senior secured credit facility are discharged (which discharge does not include certain refinancings of the senior secured credit facility) or (2) 90 days after the occurrence of an event of default under the indenture governing the senior secured notes or any other agreement governing first lien obligations. Under the circumstances described in clause (2) of the preceding sentence, the authorized representative of the holders of the indebtedness that represents the largest outstanding principal amount of indebtedness secured by the collateral on a pari passu basis with the other first lien obligations (other than the senior secured credit facility) and has complied with the applicable notice provisions gains the right to take actions with respect to the collateral.

Even if the authorized representative of the senior secured notes gains the right take actions with respect to the collateral in the circumstances described in clause (2) above, the authorized representative must stop doing so (and those powers with respect to the collateral would revert to the authorized representative of the lenders under the senior secured credit facility) if such lenders’ authorized representative has commenced and is diligently pursuing enforcement action with respect to the collateral or the grantor of the security interest in that collateral (i.e., we or the applicable subsidiary guarantor) is then a debtor under or with respect to (or otherwise subject to) an insolvency or liquidation proceeding.

In addition, the senior secured credit facility and the indenture governing the senior secured notes permit us to issue additional series of obligations that also have a pari passu lien on the same collateral with the other first lien obligations. As explained above, any time that the collateral agent for the senior secured credit facility does not have the right to take actions with respect to the collateral pursuant to the first lien intercreditor agreement, that

right passes to the authorized representative of the holders of the next largest outstanding principal amount of indebtedness secured by a pari passu lien on the collateral with the other first lien obligations. If we issue or incur additional first lien obligations in the future in a greater principal amount than the senior secured notes, then the authorized representative for that additional indebtedness would be earlier in line to exercise rights under the first lien intercreditor agreement than the authorized representative for the senior secured notes.

Under the first lien intercreditor agreement, the authorized representative of the holders of the senior secured notes may not object following the filing of a bankruptcy petition to any debtor-in- possession financing or to the use of the common collateral to secure that financing, subject to conditions and limited exceptions. After such a filing, the value of this collateral could materially deteriorate, and holders of the senior secured notes would be unable to raise an objection.

The collateral that secures and will secure the senior secured notes and related guarantees also is and will be subject to any and all exceptions, defects, encumbrances, liens and other imperfections as may be accepted by the authorized representative of the lenders under our senior secured credit facility during any period that such authorized representative controls actions with respect to the collateral pursuant to the first lien intercreditor agreement. The existence of any such exceptions, defects, encumbrances, liens and other imperfections could adversely affect the value of the collateral securing the senior secured notes as well as the ability of the collateral agent for the senior secured notes to realize or foreclose on such collateral for the benefit of the holders of the senior secured notes.

The lenders under the credit facilities have the discretion to release the guarantors under the credit facilities in a variety of circumstances, which will cause those guarantors to be released from their guarantees of the senior secured notes.

While any obligations under the credit facilities remain outstanding, any guarantee of the senior secured notes may be released without action by, or consent of, any holder of the senior secured notes or the trustee under the indenture governing the senior secured notes, at the discretion of lenders under the credit facilities, or if the related guarantor is no longer a guarantor of obligations under the credit facilities or any other indebtedness. The lenders under the credit facilities have the discretion to release the guarantees under the credit facilities in a variety of circumstances. Holders of our senior secured notes will not have a claim as creditors against any subsidiary that is no longer a guarantor of our senior secured notes, and the indebtedness and other liabilities, including trade payables, whether secured or unsecured, of those subsidiaries will effectively be senior to the claims of holders of our senior secured notes.

There are circumstances other than repayment or discharge of our senior secured notes under which the collateral securing such notes and the related guarantees will be released automatically, without the consent of the holders of our senior secured notes or the consent of the trustee.

Under various circumstances, collateral securing the senior secured notes will be released automatically, including:

•

a sale, transfer or other disposal of such collateral in a transaction not prohibited under the indenture governing the senior secured notes;

•

with respect to collateral held by a guarantor, upon the release of such guarantor from its guarantee;

•

with respect to collateral that is capital stock, upon the dissolution of the issuer of such capital stock in accordance with the indenture governing the senior secured notes;

•

with respect to any collateral in which the senior secured notes have a second priority lien, upon any release by the lenders under our senior secured multi-currency asset-based revolving credit facility of their first-priority security interest in such collateral; provided that, if the release occurs in connection with a foreclosure or exercise of remedies by the collateral agent for the lenders under our senior

secured multi-currency asset-based revolving credit facility, the lien on that collateral will be automatically released but any proceeds thereof not used to repay the obligations under our senior secured multi-currency asset-based revolving credit facility will be subject to lien in favor of the collateral agent for the noteholders and our senior secured credit facility; and

•

with respect to the collateral upon which the senior secured notes have a first priority lien, upon any release in connection with a foreclosure or exercise of remedies with respect to that collateral directed by the authorized representative of the lenders under our senior secured credit facility during any period in which such authorized representative controls actions with respect to the collateral pursuant to the first lien intercreditor agreement. Even though holders of our senior secured notes share ratably with the lenders under our senior secured credit facility, the authorized representative of the lenders under our senior secured credit facility will initially control actions with respect to the collateral, whether the holders of our senior secured notes agree or disagree with those actions.

The imposition of certain permitted liens will cause the assets on which such liens are imposed to be excluded from the collateral securing our senior secured notes and the related guarantees. There are also certain other categories of property that are also excluded from the collateral securing our senior secured notes.

The indenture governing our senior secured notes permits liens in favor of third parties to secure additional debt, including purchase money indebtedness and capitalized lease obligations, and any assets subject to such liens will be automatically excluded from the collateral securing our senior secured notes and the related guarantees to the extent the agreements governing such indebtedness prohibit additional liens. In addition, certain categories of assets are excluded from the collateral securing our senior secured notes and the guarantees. Excluded assets include, but are not limited to, among other things, the assets of our non-guarantor subsidiaries, certain capital stock and other securities of our subsidiaries and equity investees, leaseholds or other non-fee simple interests in real property, fee simple interests in real property having a fair market value of less than $25.0 million, and the proceeds from any of the foregoing. If an event of default occurs and our senior secured notes are accelerated, such notes and the related guarantees will rank equally with the holders of other unsubordinated and unsecured indebtedness of the relevant entity with respect to such excluded property.

Sales of assets by us or our subsidiary guarantors could reduce the pool of assets securing the senior secured notes and the related guarantees.

The security documents relating to our senior secured notes allow us and the guarantors to remain in possession of, retain exclusive control over, freely operate and collect, invest and dispose of any income from, the collateral securing the senior secured notes. To the extent we sell any assets that constitute such collateral, the proceeds from such sale will be subject to the liens securing our senior secured notes only to the extent such proceeds would otherwise constitute “collateral” securing such notes and the guarantees under the security documents.

The rights of holders of our senior secured notes in the collateral securing such notes may be adversely affected by the failure to perfect security interests in collateral.

Applicable law requires that a security interest in certain tangible and intangible assets can only be properly perfected and its priority retained through certain actions undertaken by the secured party. The liens in the collateral securing our senior secured notes may not be perfected with respect to the claims of such notes if and to the extent that the collateral agent was not able to take the actions necessary to perfect any of these liens on or prior to the date of the indenture governing our senior secured notes. There can be no assurance that the lenders under the senior secured credit facility will have taken all actions necessary to create properly perfected security interests, which may result in the loss of the priority of the security interest in favor of holders of our senior secured notes to which they would otherwise have been entitled. In addition, applicable law requires that certain property and rights acquired after the grant of a general security interest, such as equipment subject to a certificate of title and certain proceeds, can only be perfected at the time such property and rights are acquired

and identified. We and the guarantors have limited obligations to perfect the security interest of holders of our senior secured notes in specified collateral. There can be no assurance that the trustee or the collateral agent for our senior secured notes will monitor, or that we will inform such trustee or collateral agent of, the future acquisition of property and rights that constitute collateral, and that the necessary action will be taken to properly perfect the security interest in such after-acquired collateral. Neither the trustee nor the collateral agent for our senior secured notes has an obligation to monitor the acquisition of additional property or rights that constitute collateral or the perfection of any security interest. Such failure may result in the loss of the security interest in the collateral or the priority of the security interest in favor of our senior secured notes against third parties.

The collateral securing our senior secured notes is subject to casualty risks.

We intend to maintain insurance or otherwise insure against hazards in a manner appropriate and customary for our business. There are, however, some losses, including losses resulting from terrorist acts, that may be either uninsurable or not economically insurable, in whole or in part. As a result, we cannot assure holders of our senior secured notes that the insurance proceeds will compensate us fully for our losses. If there is a total or partial loss of any of the pledged assets, we cannot assure holders of our senior secured notes that the proceeds received by us in respect thereof will be sufficient to satisfy all the secured obligations, including our senior secured notes and the related guarantees.

Bankruptcy laws may limit the ability of holders of our senior secured notes to realize value from the collateral securing such notes.

The right of the collateral agent to repossess and dispose of the pledged assets upon the occurrence of an event of default under the indenture governing our senior secured notes is likely to be significantly impaired by applicable bankruptcy law if a bankruptcy case were to be commenced by or against us before the collateral agent repossessed and disposed of the pledged assets. For example, under Title 11 of the United States Code, pursuant to the automatic stay imposed upon the bankruptcy filing, a secured creditor is prohibited from repossessing its security from a debtor in a bankruptcy case, or from disposing of security repossessed from such debtor, or taking other actions to levy against a debtor, without bankruptcy court approval. Moreover, the United States Bankruptcy Code permits the debtor to continue to retain and to use collateral even though the debtor is in default under the applicable debt instruments, provided that the secured creditor is given “adequate protection.” The meaning of the term “adequate protection” may vary according to circumstances (and is within the discretion of the bankruptcy court), but it is intended in general to protect the value of the secured creditor’s interest in the collateral and may include cash payments or the granting of additional security, if and at such times as the court in its discretion determines, for any diminution in the value of the collateral as a result of the automatic stay of repossession or disposition or any use of the collateral by the debtor during the pendency of the bankruptcy case. Generally, adequate protection payments, in the form of interest or otherwise, are not required to be paid by a debtor to a secured creditor unless the bankruptcy court determines that the value of the secured creditor’s interest in the collateral is declining during the pendency of the bankruptcy case. Due to the imposition of the automatic stay, the lack of a precise definition of the term “adequate protection” and the broad discretionary powers of a bankruptcy court, it is impossible to predict (1) how long payments under our senior secured notes could be delayed following commencement of a bankruptcy case, (2) whether or when the collateral agent could repossess or dispose of the pledged assets or (3) whether or to what extent a holder of senior secured notes would be compensated for any delay in payment or loss of value of the pledged assets through the requirement of “adequate protection.”

In the event of a bankruptcy of the Company or any of the guarantors of our indebtedness, holders of our senior secured notes may be deemed to have an unsecured claim to the extent that our obligations in respect of those notes exceed the fair market value of the collateral securing those notes.

In any bankruptcy proceeding with respect to us or any of the guarantors, it is possible that the bankruptcy trustee, the debtor-in-possession or competing creditors will assert that the fair market value of the collateral with respect to our senior secured notes on the date of the bankruptcy filing was less than the then current principal

amount of such notes. Upon a finding by the bankruptcy court that our senior secured notes are under-collateralized, the claims in the bankruptcy proceeding with respect to such notes would be bifurcated between a secured claim and an unsecured claim, and the unsecured claim would not be entitled to the benefits of security in the collateral. In such event, the secured claims of holders of our unsecured notes would be limited to the value of the collateral.

Other consequences of a finding of under-collateralization would be, among other things, a lack of entitlement on the part of the holders of our senior secured notes to receive post-petition interest and a lack of entitlement on the part of the unsecured portion of our senior secured notes to receive other “adequate protection” under federal bankruptcy laws. In addition, if any payments of post-petition interest had been made at the time of such a finding of under-collateralization, those payments could be recharacterized by the bankruptcy court as a reduction of the principal amount of the secured claim with respect to our senior secured notes.

Any future pledge of collateral in favor of a holder of senior secured notes might be voidable in bankruptcy.

Any future pledge of collateral in favor of our lenders or holders of our senior secured indebtedness, including pursuant to security documents delivered after the date of the indenture governing the senior secured notes, might be voidable by the pledgor (as debtor in possession) or by its trustee in bankruptcy if certain events or circumstances exist or occur, including, under the United States Bankruptcy Code, if the pledgor is insolvent at the time of the pledge, the pledge permits a holder of our senior secured notes to receive a greater recovery than if the pledge had not been given and a bankruptcy proceeding in respect of the pledgor is commenced with 90 days following the pledge, or, in certain circumstances, a longer period.

We do not intend to offer to register the senior secured notes or to exchange the senior secured notes in a registered exchange offer.

We do not intend to register the senior secured notes under the Securities Act or to offer to exchange those notes in an exchange offer registered under the Securities Act. We will not be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with respect to those notes. As a result, holders of our senior secured notes will only be entitled to receive certain information about us specified in the indenture governing the senior secured notes and information required by Rule 144A(d)(4) under the Securities Act. Except as included in the reports filed with the SEC, information about our company will be provided to holders of our senior secured notes on a confidential basis and may not be copied or reproduced, nor may it be distributed or any of its contents disclosed, to anyone other than holders of our senior secured notes and prospective purchasers of those notes pursuant to Rule 144A(d)(4). In addition, the indenture governing the senior secured notes will not be qualified under the Trust Indenture Act and we will not be required to comply with any provision of the Trust Indenture Act.

A holder’s ability to transfer our notes may be limited by the absence of an active trading market, and an active trading market for such notes may not develop.

The senior secured notes are new securities for which there is no established market and the senior unsecured notes are relatively new securities for which there is no established market. Accordingly, the development or liquidity of any market for the notes is uncertain. We do not intend to apply for a listing of the notes on a securities exchange or any automated dealer quotation system. We cannot assure a holder of our notes as to the liquidity of markets that may develop for the notes, such holder’s ability to sell the notes or the price at which such holder would be able to sell such notes. If such markets were to exist, the notes could trade at prices that may be lower than their principal amount or purchase price depending on many factors, including prevailing interest rates, the market for similar notes, our financial and operations performance and other factors. Historically, the market for noninvestment grade debt has been subject to disruptions that have caused substantial volatility in the prices of securities similar to the notes. The market, if any, for the notes may experience similar disruptions, and any such disruptions may adversely affect the prices at which a holder of notes may sell its notes.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3.

Defaults Upon Senior Securities.

None.

Item 5.

Other Information.

Pursuant to Section 15(d) of the Securities Exchange Act of 1934, the Company’s obligations to file periodic and current reports ended as of October 1, 2010. Nevertheless, the Company continues to file periodic reports and current reports with the SEC voluntarily to comply with the terms of the indentures governing its senior secured notes and senior unsecured notes.

Subsequent to the quarter ended March 31, 2011, the following event took place that is required to be disclosed in a report on Form 8-K:

Item 5.02.

Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.

Executive Committee 2011-2013 Performance Recognition Plan

On February 18, 2011, Avaya Inc. (the “Company”) disclosed in a Form 8-K filing the material terms and conditions of a plan to provide cash incentives to certain executive officers, including its named executive officers, to help promote the long-term value of the Company (the “EC LTIP”). The EC LTIP had been approved on December 22, 2010, by the Compensation Committee of the Board of Directors of the Company, which currently serves as that plan’s administrator. The final plan document and form of award agreement were not filed at the time of that Form 8-K filing as they had not yet been finalized.

On May 11, 2011, the Compensation Committee approved the final plan document and form of award agreement. In addition, the terms and conditions of the plan were amended:

•

to clarify that Company performance under the plan would be measured based upon actual Management EBITDA (as defined in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2010), excluding the impact of payments under the Avaya Inc. Short-term Incentive Plan or any successor plan (“STIP”), instead of being measured based upon EBITDA (earnings before interest, taxes, depreciation and amortization) excluding the impact of payments under the STIP; and

•

to provide that, if during the one year period following a Change of Control, a participant in the plan is involuntarily terminated other than for Cause or voluntarily terminates for Good Reason, a pro rata portion of the Targeted Award for such fiscal year shall be credited to the participant’s account for that year (capitalized terms used in this paragraph have the meanings ascribed to them in the EC LTIP plan document).

The foregoing descriptions of the EC LTIP and the related award agreement are qualified in their entirety by reference to the full text thereof. They are attached as Exhibits 10.1 and 10.2, respectively, to this Quarterly Report on Form 10-Q.

Item 6.

Exhibits.


Exhibit Number

10.1		Avaya Inc. Executive Committee 2011-2013 Performance Recognition Plan*

10.2		Form of Award Agreement for the Avaya Inc. Executive Committee 2011-2013 Performance Recognition Plan*

31.1		Certification of Kevin J. Kennedy pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

31.2		Certification of Anthony J. Massetti pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

32.1		Certification of Kevin J. Kennedy pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

32.2		Certification of Anthony J. Massetti pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

*	Filed herewith.

SIGNATURES

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


AVAYA INC.

By:		/S/ KEVIN J. MACKAY
		Kevin J. MacKay Vice President, Controller & Chief Accounting Officer (Principal Accounting Officer)

May 12, 2011

AVAYA INC - FORM 10-Q - May 12, 2011

Attached files

AVAYA INC Reports

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