TMCNet:  AVAYA INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

[December 12, 2012]

AVAYA INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) This "Management's Discussion and Analysis of Financial Condition and Results of Operations" should be read in conjunction with the audited consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K.


Overview We are a leading global provider of real-time business collaboration and communications solutions that bring people together with the right information at the right time in the right context, enabling businesses to improve their efficiency and quickly solve critical business challenges. Our solutions are designed to enable business users to work together more effectively internally and with their customers and suppliers, to accelerate decision-making and achieve business outcomes. These industry leading solutions are also designed to be highly flexible, reliable and secure, enabling simplified management and cost reduction while providing a platform for next-generation collaboration from Avaya.

Our solutions address the needs of a diverse range of customers, including large multinational enterprises, small- and medium-sized businesses and government organizations. As of September 30, 2012, we had over 300,000 customers, including more than 95% of the Fortune 500 companies and installations in over one million customer locations worldwide. Our customers operate in a broad range of industries, including financial services, manufacturing, retail, transportation, energy, media and communications, health care, education and government.

We sell solutions directly and through our channel partners. As of September 30, 2012, we had approximately 9,900 channel partners worldwide, including system integrators, service providers, value-added resellers and business partners that provide sales and service support.

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

Acquisitions RADVISION Ltd.

On June 5, 2012, Avaya acquired RADVISION Ltd. ("Radvision") for $230 million in cash. Radvision is a global provider of videoconferencing and telepresence technologies over internet protocol ("IP") and wireless networks.

Through this acquisition, Avaya expanded its technology portfolio and now provides customers a highly integrated and interoperable suite of cost-effective, easy to use, high-definition video collaboration products, with the ability to interoperate with multiple mobile devices including Apple iPad and Google Android. We are integrating Radvision's enterprise video infrastructure and high value endpoints with Avaya's award winning Avaya Aura® Unified Communications ("UC") platform to create a compelling and differentiated solution designed to accelerate the adoption of video collaboration. Radvision brings to Avaya a portfolio which includes a full range of videoconferencing products, technologies and expertise serving large enterprises, small businesses, and service providers. It includes standards-based applications, open infrastructure and endpoints for ad-hoc and scheduled videoconferencing with room-based systems, desktop, and mobile consumer devices. Radvision will help enable Avaya to provide a Cloud offering through hosted solutions by service providers. The integrated Avaya and Radvision portfolios will extend intra-company business to business and business to consumer video communications, and also support internal "Bring Your Own Device" ("BYOD") initiatives.

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 $933 million in cash consideration. 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 4, "Business Combinations and Other Transactions," to our audited consolidated financial statements for further details.

37 -------------------------------------------------------------------------------- Initial Registration Statement of Parent On June 9, 2011, Parent filed with the SEC a registration statement on Form S-1 (as it may be amended from time to time, the "registration statement") relating to a proposed initial public offering of its common stock. As contemplated in the registration statement, the net proceeds of the proposed offering are expected to be used, among other things, to repay a portion of our long-term indebtedness. The registration statement remains under review by the SEC and shares of common stock registered thereunder may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective.

This document shall not constitute an offer to sell or the solicitation of any offer to buy nor shall there be any sale of those securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. Further, there is no way to predict whether or not Parent will be successful in completing the offering as contemplated and if it is successful, we cannot be certain if, or how much of, the net proceeds will be used for the purposes identified above.

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. The sale of its stake in AGC enabled 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.

Products and Services For a description of our products and services, please see "Business-Our Products" and "Business-Our Services." Customers and Competitive Advantages For a discussion of our customers and competitive advantages, please see "Business-Customers, Sales, Partners and Distribution" and "Business-Our Competitive Strengths." 38 -------------------------------------------------------------------------------- Financial Results Summary The following table sets forth for fiscal 2012, 2011, and 2010, our results of operations as reported in our audited consolidated financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP") located elsewhere in this Annual Report on Form 10-K.

Fiscal years ended September 30, In millions 2012 2011 2010 STATEMENT OF OPERATIONS DATA: REVENUE Products $ 2,672 $ 2,976 $ 2,602 Services 2,499 2,571 2,458 5,171 5,547 5,060 COSTS Products: Costs (exclusive of amortization of intangibles) 1,145 1,314 1,243 Amortization of technology intangible assets 192 257 291 Services 1,248 1,344 1,354 2,585 2,915 2,888 GROSS PROFIT 2,586 2,632 2,172 OPERATING EXPENSES Selling, general and administrative 1,630 1,845 1,721 Research and development 464 461 407 Amortization of intangible assets 226 226 218 Restructuring and impairment charges, net 147 189 187 Acquisition-related costs 4 5 20 2,471 2,726 2,553 OPERATING INCOME (LOSS) 115 (94 ) (381 ) Interest expense (431 ) (460 ) (487 ) Loss on extinguishment of debt - (246 ) - Other (expense) income, net (20 ) 5 15 LOSS BEFORE INCOME TAXES (336 ) (795 ) (853 ) Provision for income taxes 8 68 18 NET LOSS (344 ) (863 ) (871 ) Less net income attributable to noncontrolling interests - - 3 NET LOSS ATTRIBUTABLE TO AVAYA INC. $ (344 ) $ (863 ) $ (874 ) Summary of the Fiscal Year Ended September 30, 2012 versus 2011 Our fiscal 2012 revenue decreased 7% as compared to fiscal 2011, primarily as a result of lower IT infrastructure spend and investment levels by our end customers, quality issues on certain product/solution integration transitions primarily in the second quarter of fiscal 2012, as well as the unfavorable impact of foreign currency. Incremental revenue from the Radvision business for the period June 5, 2012 through September 30, 2012 was $31 million.

We earned operating income for fiscal 2012 of $115 million which includes non-cash depreciation and amortization of $564 million and share-based compensation of $8 million. We incurred an operating loss for fiscal 2011 of $94 million which includes non-cash depreciation and amortization of $653 million and share-based compensation of $12 million.

The increase in operating income is attributable to the continued benefit from cost savings initiatives, the substantial completion of the integration of the operations of Avaya and NES, lower costs associated with employee incentive plans and a decrease in restructuring charges, partially offset by the decrease in products revenue.

In addition to the changes in our revenues discussed above, our fiscal 2012 operating results compared to our fiscal 2011 results reflect, among other things: • a decrease in gross profit primarily as a result of decreased revenues, while gross margin increased to 50.0% in fiscal 2012 as compared to 47.4% in fiscal 2011; 39--------------------------------------------------------------------------------• a decrease in selling, general and administrative ("SG&A") expense primarily due to reductions in integration-related costs related to the acquisition of the NES business, a favorable impact of foreign currency, the continued benefit associated with our cost savings initiatives and lower expenses associated with our employee incentive plans, which are driven by our actual financial results relative to established targets; and • a decrease in restructuring charges in fiscal 2012.

Our net loss for fiscal 2012 and 2011 was $344 million and $863 million, respectively. The decrease in our net loss is primarily attributable to the early extinguishment of debt related to the Company's debt refinancing in the prior year, an increase in operating income as described above, a decrease in the provision for income taxes and a decrease in interest expense for fiscal 2012 as compared to fiscal 2011.

Summary of the Fiscal Year Ended September 30, 2011 versus 2010 Our fiscal 2011 revenue increased 10% as compared to fiscal 2010, primarily as a result of the contributions by the NES business. Our operation of the NES business was for the entire fiscal 2011 as compared to fiscal 2010, which included results of NES for only the period of December 19, 2009 through September 30, 2010. The increase in revenue also included an increase in sales volume of unified communications and contact center products. The increase in our revenue was partially offset by lower revenue resulting from customers reducing spending on maintenance contracts and our divestiture of our 59.13% ownership interest in AGC. Until August 31, 2010, AGC was our majority-owned subsidiary and its sales to end users were included in our revenues. 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 offered to business partners.

We incurred an operating loss for fiscal 2011 of $94 million which includes non-cash depreciation and amortization of $653 million and share-based compensation of $12 million. We incurred an operating loss for fiscal 2010 of $381 million which includes non-cash depreciation and amortization of $691 million and share-based compensation of $19 million.

In addition to the changes in our revenues discussed above, our fiscal 2011 operating results compared to our fiscal 2010 results reflect, among other things: • an increase in gross profit associated with our operation of the NES business for the entire fiscal 2011 as compared to fiscal 2010, which included the NES business for only the period December 19, 2009 through September 30, 2010; • an increase in SG&A and research and development ("R&D") expenses associated with the operations of the NES business for the entire fiscal 2011 as compared to fiscal 2010, which included the NES business for only the period December 19, 2009 through September 30, 2010, partially offset by expense savings associated with cost control initiatives and the transition of resources to lower-cost geographies; and • an increase in restructuring charges as the Company continues to implement initiatives designed to streamline its operations and generate cost savings including $56 million of costs associated with the elimination of 210 positions in Germany announced in June 2011.

Our net loss for fiscal 2011 and 2010 was $863 million and $871 million, respectively. The decrease in our net loss is primarily attributable to the decrease in our operating loss as described above offset by the loss on extinguishment of debt of $246 million related to the refinancing of certain debt and a higher provision for income taxes.

Financial Operations Overview The following describes certain components of our statement of operations and considerations impacting those results.

Revenue. We derive our revenue primarily from the sale and service of business collaboration and communications systems and applications. Our product revenue includes the sale of unified communications, contact center, small and medium enterprise communications, video and data networking solutions. Product revenue accounted for 52%, 54% and 51% of our total revenue for fiscal 2012, 2011, and 2010, respectively. Our services revenue includes product maintenance and support, professional services, including design and integration, and operations, or managed services.

Our indirect sales channel includes, as of September 30, 2012, approximately 9,900 channel partners, including a global network of alliance partners, distributors, dealers, value-added resellers, telecommunications service providers and system integrators. Our indirect sales channel represented 75% of our product revenues for fiscal 2012, 76% of our product revenues for fiscal 2011, and 71% of our product revenues for fiscal 2010. Our revenue outside the United States represented 46%, 46% and 45% of our total revenue in fiscal 2012, 2011, and 2010, respectively.

Because we sell our products to end-users in a wide range of industries and geographies, demand for our products is generally driven more by the level of general economic activity than by conditions in one particular industry or geographic region.

Cost of Revenue. Cost of product revenue consists primarily of hardware costs, royalties and license fees for third-party software included in our systems, personnel and related overhead costs of operation including but not limited to current 40 -------------------------------------------------------------------------------- engineering, freight, warranty costs, amortization of technology intangible assets and provisions for excess inventory. We outsource substantially all of our manufacturing operations to several EMS providers. Our EMS providers produce the vast majority of our products in facilities located in southern China, with other products produced in facilities located in Israel, Mexico, Malaysia, Taiwan, Germany, Indonesia, the United Kingdom and the U.S. The majority of these costs vary with the unit volumes of product sold. We expect over time to increase the software content of our products, decrease our product costs and improve product gross profits. Cost of services revenue consists of salaries and related overhead costs of personnel engaged in support and services. As we continue to realize the benefit of cost saving initiatives, which include productivity improvements from automation of customer service, reducing the workforce and relocating positions to lower cost geographies, we expect our cost of services revenue will decrease as a percentage of services revenue.

Selling, General and Administrative Expenses. Sales and marketing expenses primarily include personnel costs, sales commissions, travel, marketing promotional and lead generation programs, trade shows, professional services fees and related overhead expenses. We plan to continue to invest in development of our distribution channels by increasing the size of our field sales force and continue to develop the capabilities of our channel partners to enable us to expand into new geographies and further increase our sales to small and medium enterprises across the world.

General and administrative expenses consist primarily of salary and benefit costs for executive and administrative staff, the use and maintenance of administrative offices, including depreciation expense, logistics, information systems and legal, financial, human resources, and other corporate functions.

Administrative expenses generally do not increase or decrease directly with changes in sales volume.

Research and Development Expenses. Research and development expenses primarily include personnel costs, outside engineering costs, professional services, prototype costs, test equipment, software usage fees and related overhead expenses. Research and development expenses are recognized when incurred. The level of research and development expense is related to the number of products in development, the stage of development process, the complexity of the underlying technology, the potential scale of the product upon successful commercialization and the level of our exploratory research. We conduct such activities in areas we believe will accelerate our longer term net revenue growth.

We are devoting substantial resources to the development of additional functionality for existing products and the development of new products and related software applications. We intend to continue to make significant investments in our research and development efforts because we believe they are essential to maintaining and improving our competitive position. Accordingly, we expect research and development expenses to continue to increase.

Amortization of Intangible Assets. As a result of the Merger, the acquisitions of NES and Radvision, and other acquisitions, significant amounts were recognized in purchase accounting for the estimated fair values of customer relationships associated with the businesses acquired. The fair value of these intangible assets was estimated by independent valuations at the time of acquisition and is amortized into our operating expenses over their estimated useful lives.

Restructuring and Impairment Charges, net. In response to the global economic climate, the acquisition of NES and the Company's commitment to control costs, the Company implemented initiatives designed to streamline the operations of the Company and generate cost savings. The Company exited and consolidated facilities and terminated or relocated certain job functions. The expenses associated with these actions are reflected in our operating results. As the Company continues to evaluate and identify additional operational synergies, additional cost saving opportunities may be identified and future restructuring charges may be incurred.

Interest Expense. Interest expense consists primarily of interest on indebtedness under our credit facilities, our senior secured notes, and on our unsecured notes. Interest expense also includes the amortization of deferred financing costs, the amortization of debt discount associated with our incremental B-2 term loans that we refinanced in February 2011, amortization of the debt discount on our term B-3 loans, and the expense associated with interest rate derivative instruments we use to minimize our exposure to variable rate interest payments associated with our debt. We regularly evaluate market conditions, our liquidity profile, and various financing alternatives for opportunities to enhance our capital structure. If market conditions are favorable, we may refinance existing debt or issue additional debt securities.

Loss on Extinguishment of Debt. In connection with the issuance of the senior secured notes and the payment in full of the senior secured incremental term B-2 loans, we recognized a loss on extinguishment of debt in fiscal 2011 of $246 million. The loss represents the difference between the reacquisition price of the senior secured incremental term B-2 loans (including consent fees paid by Avaya to the holders of the senior secured 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 senior secured incremental term B-2 loans (including unamortized debt discount and debt issue costs). See Note 9, "Financing Arrangements" to our audited 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.

41 -------------------------------------------------------------------------------- Business Trends There are a number of trends and uncertainties affecting our business. For example, the effect that general economic conditions have on our customers' willingness to spend on information technology, and particularly enterprise communications technology, impacts the demand for our products and, as a result, our revenue. The global economic downturn during 2008 through 2010 as well as the recent economic uncertainties associated with Europe negatively affected most of the markets we serve. However, despite the negative affect of these uncertainties during this period we maintained our focus on profitability levels and investing in our future results. We also invested significantly in research and development, introducing 130 new product offerings to the market since the beginning of fiscal 2010. We implemented various initiatives designed to streamline our operations, generate cost savings, and eliminate overlapping processes and expenses associated with the NES business. We acquired NES in order to further expand our technology portfolio, enhance our customer base, broaden our indirect sales channel and provide us greater ability to compete globally. In June 2012, we acquired Radvision, a global provider of videoconferencing and telepresence technologies over IP and wireless networks.

The integrated Avaya and Radvision portfolios will extend intra-company business to business and business to consumer video communications, and also support internal BYOD initiatives. We believe the investments in NES, Radvision, and other acquisitions, as well as our ongoing investments in research and development are helping us to capitalize on the increasing focus of enterprises on deploying collaboration solutions in order to increase productivity, reduce costs and complexity and gain competitive advantage, which is being further accelerated by a trend toward a more mobile workforce and the associated proliferation of devices. In addition, we believe that the limitations of traditional collaboration solutions present an opportunity for differentiated vendors to gain market share.

We have also successfully expanded our indirect channel. Since fiscal 2009 and the acquisition of NES, our indirect channel has grown from 53% to 75% of our product revenues. We believe this expansion of our indirect channel favorably impacts our financial results by reducing selling expenses and allowing us to reach more end users and grow our business, although sales through the indirect channel generally generate lower profits than direct sales due to higher discounts. In furtherance of our effort to maintain an effective business partner program, we continue to refine and expand our global coverage. For example, in August 2010 we sold our 59.13% ownership interest in AGC, a publicly traded reseller of our products and services in India, which allowed us to pursue additional channel partners in India while continuing to sell through AGC.

Certain trends and uncertainties also impact our global services organization, which provides us a large recurring revenue stream. Due to advances in technology, our customers continue to expect to pay less for traditional services. In addition, despite the benefits of a robust indirect channel, our channel partners have direct contact with our customers that may foster independent relationships between them and a loss of certain services agreements for us. We have been able to offset these impacts by focusing on other types of services not traditionally provided by our channel partners, such as professional and managed or operations services.

We expect our gross profit and gross margin to continue to improve in the foreseeable future as we implement various initiatives such as increasing our focus on sales of higher margin software, securing more favorable pricing with our contract manufacturers and lower transportation costs, optimizing design of products and services productivity to drive efficiencies, executing on certain cost savings initiatives and achieving greater economies of scale. We have also redesigned the Avaya support website and are transitioning our customers from an agent-based support model to a self-service/web-based support model. These improvements have allowed us to reduce the workforce and relocate positions to lower-cost geographies and improve our services gross margins. Historically, lower profits experienced by the acquired NES business and competitor and customer pricing pressures have been challenges to improving the gross margins of our business. However, we continue to apply our business model discipline to the acquired NES business to accomplish our gross margin initiatives.

For fiscal 2012, 2011 and 2010, revenue outside of the U.S. represented 46%, 46% and 45% of total revenue, respectively. Foreign currency exchange rates and fluctuations have had an impact on our revenue, costs and cash flows from our international operations. Our primary currency exposures are to the euro, British pound, Indian rupee, Japanese yen, Canadian dollar and Brazilian real.

These exposures may change over time as business practices evolve and as the geographic mix of our business changes and we are not able to predict the impact that foreign currency fluctuations will have on future periods.

Focus on Cost Structure In connection with the Merger in fiscal 2008, Avaya's management and board of directors developed and began implementing various plans and initiatives designed to streamline the operations of the Company and generate cost savings.

Additionally, in response to the global economic downturn and in connection with its acquisition of NES, the Company identified and initiated cost savings programs throughout fiscal 2010, 2011, and 2012. These cost savings programs include: (1) reducing headcount, (2) relocating certain job functions to lower cost geographies, including service delivery, customer care, research and development, human resources and finance and (3) eliminating real estate costs associated with unused or under-utilized facilities.

Reductions in headcount included the elimination of redundancies by re-defining and consolidating job functions, reductions in 42 -------------------------------------------------------------------------------- management and in back-office headcount of our sales organization, reduced headcount in our services business, the use of remote monitoring of customer systems, which made our services segment more efficient, and a shift in the mix of the Company's distribution channels toward the indirect channel which reduced our personnel needs. We were also able to attain additional salary savings as the Company placed greater emphasis on shifting job functions to its shared service centers in India and Argentina, as well as the automation of customer service.

Reductions in real estate costs were achieved by: (1) eliminating redundant facilities, particularly research and development facilities, in similar geographic areas as part of transitioning and integrating the operations of NES, (2) reductions in headcount, which decreased our real estate needs, and (3) reducing operating costs through more efficient facilities management. These initiatives enabled us to vacate and consolidate facilities without affecting the quality or distribution of our products and services, and reduce our real estate costs.

Restructuring charges were $142 million, $189 million and $171 million for fiscal 2012, 2011 and 2010, respectively.

Restructuring charges for fiscal 2012 and 2011, net of adjustments to previous periods, include employee separation costs of $123 million and $153 million, respectively. Employee separation costs include $70 million and $56 million associated with the elimination of 327 and 210 positions in Germany in fiscal 2012 and 2011, respectively. The employee separation costs consist of severance and employment benefits payments and include, but are not limited to, social pension fund payments and health care and unemployment insurance costs to be paid to or on behalf of the affected employees. Real estate charges, net of adjustments to previous periods in fiscal 2012 and 2011 were $19 million and $36 million, respectively.

Restructuring charges for fiscal 2010, net of adjustments to previous periods, include employee separation costs primarily in EMEA and the U.S. of $147 million. As part of the acquisition of NES, the Company acquired a workforce of approximately 5,900. The Company's workforce at September 30, 2009 and 2010 was approximately 15,500 and 18,900, respectively, excluding AGC, which we sold in August 2010. In fiscal 2010, real estate charges, net of adjustments to previous periods, were $24 million and included the costs of consolidating utilized or under-utilized facilities primarily located in the U.S. as part of transitioning and integrating the operations of NES, including certain facilities under leases assumed in the acquisition.

The Company continues to evaluate opportunities to streamline its operations and identify cost savings globally. Although a specific plan does not exist at this time, the Company may take additional restructuring actions in the future and the costs of those actions could be material. All costs associated with such actions would be recognized in accordance with authoritative accounting guidance and the Company's accounting policies as outlined in Note 2, "Summary of Significant Accounting Policies - Restructuring Programs" to our audited consolidated financial statements. See Note 8, "Business Restructuring Reserves and Programs" to our audited consolidated financial statements for further details on our restructuring programs.

Refinancing of Debt On February 11, 2011, we completed a debt refinancing that deferred the maturity of $3.18 billion of senior secured loans. As part of the transaction, $2.2 billion outstanding par value of the senior secured term B-1 loans was converted into a new tranche of senior secured term B-3 loans, extending the maturity of that indebtedness from October 26, 2014 to October 25, 2017, and $988 million par value of senior secured incremental term B-2 loans was repaid with the proceeds from a private placement of $1,009 million of senior secured notes, extending the maturity of that indebtedness from October 26, 2014 to April 1, 2019.

On August 8, 2011, the Company amended the terms of the multi-currency revolvers available under its senior secured credit facility and its senior secured multi-currency asset-based revolving credit facility to extend the final maturity of each from October 26, 2013 to October 26, 2016. All other terms and conditions of the senior secured credit facility and the senior secured multi-currency asset-based revolving credit facility remain unchanged.

On October 29, 2012, we completed a debt refinancing that deferred the maturity of $135 million of senior secured term B-1 loans from October 26, 2014 to October 26, 2017 by converting such loans into a new tranche of senior secured term B-4 loans.

See Note 9, "Financing Arrangements" to our audited consolidated financial statements for further details on our financing arrangements.

Selected Segment Information The Company conducts its business operations in three segments. Two of those segments, Global Communications Solutions ("GCS") and Avaya Networking ("Networking"), make up Avaya's Enterprise Collaboration Solutions ("ECS") product portfolio. The third segment contains the Company's services portfolio and is called Avaya Global Services ("AGS").

In GCS, we deliver business collaboration and communications solutions primarily for IT infrastructure, unified communications, and contact center solutions. Our infrastructure and UC application solutions are designed to promote collaboration, innovation, productivity and real-time decision-making by providing business users a highly intuitive and personalized user experience that enables them to collaborate seamlessly across various modes of communication, including 43 -------------------------------------------------------------------------------- voice, video, email, instant messaging, text messaging, web conferencing, voicemail and social networking. Our contact center application solutions are highly reliable, scalable communications-centric applications suites designed to optimize customer service.

Our Networking segment provides a broad range of internet protocol networking infrastructure products including ethernet switches, routers and Virtual Private Network appliances, wireless networking routers, access control solutions, unified management solutions and end-to-end virtualization strategies and architectures.

Through our AGS segment we help our customers evaluate, plan, design, implement, support, manage and optimize their enterprise communications networks to help them achieve enhanced business results. Our award-winning service portfolio includes product support, integration and professional and operations, or managed services that enable customers to optimize and manage their converged communications networks worldwide.

Deferred Tax Assets Our deferred tax assets are primarily a result of deductible temporary differences related to net operating loss ("NOL's") carryforwards, benefit obligations, tax credit carryforwards, and other accruals which are available to reduce taxable income in future periods. As of September 30, 2012, the Company had tax-effected NOL carryforwards of $1,037 million, comprised of $542 million for U.S. Federal, state and local taxes and $495 million for foreign taxes including $180 million, $255 million and $24 million, in Germany, Luxembourg and France, respectively. U.S. Federal and state NOL carryforwards expire through the year 2031, with the majority expiring in excess of 10 years. The majority of foreign NOL carryforwards have no expiration. Additionally, the Company has various other tax credit carryforwards totaling $73 million. Of this total, $17 million expire within five years, $21 million expire between five and 15 years and $35 million expire in excess of 15 years.

The Internal Revenue Code contains certain provisions which may limit the use of U.S. Federal net operating losses and U.S. Federal tax credits upon a change in ownership (determined under very broad and complex direct and indirect ownership rules) in the Company within a three-year testing period. As a result of the Merger, a significant change in the ownership of the Company occurred that limits, on an annual basis, the Company's ability to utilize its U.S. Federal NOL's and U.S. Federal tax credits. The Company's NOL's and tax credits will continue to be available to offset taxable income and tax liabilities (until such NOL's and tax credits are either used or expire) subject to the annual limitation. If the annual limitation amount is not fully utilized in a particular tax year, then the unused portion from that particular tax year will be added to the annual limitation in subsequent years. On June 9, 2011, Parent filed with the SEC a registration statement on Form S-1 (as it may be amended from time to time) relating to a proposed initial public offering of its common stock. We do not believe that this share issuance will itself, or when aggregated with other prior shareholder ownership changes during the applicable testing period, cause an ownership change that would further limit, on an annual basis, our ability to utilize our current U.S. Federal net operating losses and U.S. Federal tax credits.

In fiscal 2008 and 2009, we recognized significant impairments of our intangible assets and goodwill which contributed to a significant book taxable loss in the U.S. We also incurred and expect to continue to incur significant interest expense related to our debt and amortization and depreciation expense associated with the step-up in basis of our assets in purchase accounting associated with the Merger and the acquisition of NES. As a result of continuing pre-tax losses incurred subsequent to the Merger, as of September 30, 2012, excluding the U.S.

deferred tax liabilities on indefinite-lived intangible assets, our deferred tax assets exceed our deferred tax liabilities in the U.S. and we are in a three-year cumulative book taxable loss position in the U.S.

Further, as a result of operational losses and continued business restructuring accruals in Germany, Spain and France as well as intercompany interest expense in Luxembourg, the Company's subsidiaries in Germany, Luxembourg, Spain and France are in a three year cumulative book taxable loss position.

In assessing the realization of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company considered the scheduled reversal of deferred tax assets and liabilities, projected future taxable income, and certain tax planning strategies in making this assessment. Based on this assessment in fiscal 2010, 2011, and 2012 the Company determined that it is more likely than not that the U.S., German, Luxembourg, Spanish and French deferred tax assets will not be realized to the extent they exceed the scheduled reversal of deferred tax liabilities. Accordingly, we have provided a valuation allowance against our U.S., German, Luxembourg, Spanish and French net deferred tax assets which has and will continue to adversely affect our effective income tax rate.

At September 30, 2012, the valuation allowance of $1,523 million is comprised of $958 million relating to U.S. deferred tax assets and $565 million relating to foreign deferred tax assets for which $260 million, $255 million and $24 million relates to our German, Luxembourg and French subsidiaries, respectively. In fiscal 2012, the Company recorded an increase of $113 million to its valuation allowance. The increase in the valuation allowance is comprised of a $56 million charge included in the 44 -------------------------------------------------------------------------------- provision for income taxes (which includes $131 million charge for federal and international income taxes, $56 million release of valuation allowance associated with federal tax expense on net gains in other comprehensive income and $19 million benefit for state income taxes) and a $57 million change to net deferred tax assets related to other changes in other comprehensive income.

Results of Operations Fiscal Year Ended September 30, 2012 Compared with Fiscal Year Ended September 30, 2011 Revenue Our revenue for fiscal 2012 and 2011 was $5,171 million and $5,547 million, respectively, a decrease of $376 million or 7%. Incremental revenue from the Radvision business for the period June 5, 2012 through September 30, 2012 was $31 million. The following table sets forth a comparison of revenue by portfolio: Fiscal years ended September 30, Percentage of Yr. to Yr. Yr. to Yr. Percent Total Revenue Percent Change, net of Foreign In millions 2012 2011 2012 2011 Change Currency Impact GCS $ 2,390 $ 2,675 46 % 49 % (11 )% (10 )% Purchase accounting adjustments (2 ) (3 ) - % - % (1) (1) Networking 284 304 6 % 5 % (7 )% (6 )% Total product revenue 2,672 2,976 52 % 54 % (10 )% (9 )% AGS 2,499 2,573 48 % 46 % (3 )% (1 )% Purchase accounting adjustments - (2 ) - % - % (1) (1) Total service revenue 2,499 2,571 48 % 46 % (3 )% (1 )% Total revenue $ 5,171 $ 5,547 100 % 100 % (7 )% (6 )% (1) Not meaningful GCS revenue for fiscal 2012 and 2011 was $2,390 million and $2,675 million, respectively, a decrease of $285 million or 11%. The decrease in GCS revenue was driven by lower IT infrastructure spend by our end customers, limited quality issues on product/solution integration transitions, pricing pressures and an unfavorable impact of foreign currency, particularly in EMEA. The Company continues to make progress addressing the limited quality issues in its infrastructure solutions product portfolio through patches issued to end-users and applied to inventories held by our contract manufacturers.

Networking revenue for fiscal 2012 and 2011 was $284 million and $304 million, respectively, a decrease of $20 million or 7%. The decrease in Networking revenue is primarily a result of higher demand in fiscal 2011 due to our new product offerings, primarily in the U.S.

AGS revenue for fiscal 2012 and 2011 was $2,499 million and $2,573 million, respectively, a decrease of $74 million or 3%. The decrease in AGS revenue was primarily due to an unfavorable impact of foreign currency, particularly in EMEA, as well as customers reducing their spending on maintenance contracts.

These decreases in maintenance contracts revenue were partially offset by an increase in professional services.

45 --------------------------------------------------------------------------------The following table sets forth a comparison of revenue by location: Fiscal years ended September 30, Yr. to Yr.

Percentage Percentage of Yr. to Yr. Change, net of Total Revenue Percentage Foreign Dollars in millions 2012 2011 2012 2011 Change Currency Impact U.S. $ 2,786 $ 2,998 54 % 54 % (7 )% (7 )% International: Germany 461 505 9 % 9 % (9 )% (3 )% EMEA (Excluding Germany) 888 983 17 % 18 % (10 )% (8 )% Total EMEA 1,349 1,488 26 % 27 % (9 )% (6 )% APAC-Asia Pacific 497 515 10 % 9 % (3 )% (3 )% Americas International-Canada and Latin America 539 546 10 % 10 % (1 )% 2 % Total International 2,385 2,549 46 % 46 % (6 )% (4 )% Total revenue $ 5,171 $ 5,547 100 % 100 % (7 )% (6 )% Revenue in the U.S. for fiscal 2012 and 2011 was $2,786 million and $2,998 million, respectively, a decrease of $212 million million or 7%. The decrease in U.S. revenue was primarily due to lower revenues associated with our infrastructure solutions portfolio, maintenance services particularly in the government sector, and networking products, partially offset by higher sales associated with contact center applications and professional services. Revenue in EMEA for fiscal 2012 and 2011 was $1,349 million and $1,488 million, respectively, a decrease of $139 million or 9%. The decrease in EMEA revenues was primarily due to lower revenues associated with our infrastructure solutions portfolio, German rental base and maintenance services associated with our infrastructure solutions portfolio, as well as an unfavorable impact of foreign currency, partially offset by an increase in sales of our new networking product offerings. Within EMEA, revenue in Germany decreased due to a decline in our rental base as lease renewals are typically at lower rates, which is expected to continue into fiscal 2013. Revenue in APAC for fiscal 2012 and 2011 was $497 million and $515 million, respectively, a decrease of $18 million. The decrease in APAC revenue is primarily attributable to lower revenues associated with our infrastructure solutions portfolio, partially offset by higher maintenance services and professional services. Revenue in Americas International was $539 million and $546 million for fiscal 2012 and 2011, respectively, a decrease of $7 million or 1%. The decrease in Americas International revenue was primarily due to lower revenues associated with our infrastructure solutions and contact center portfolios and an unfavorable impact of foreign currency, partially offset by an increase in Networking revenues.

We sell our solutions both directly and through an indirect sales channel. The following table sets forth a comparison of revenue from sales of products by channel: Fiscal years ended September 30, Yr. to Yr.

Percentage of Yr. to Yr. Percentage ECS Product Revenue Percentage Change, net of Foreign Dollars in millions 2012 2011 2012 2011 Change Currency Impact Direct $ 662 $ 700 25 % 24 % (5 )% (3 )% Indirect 2,010 2,276 75 % 76 % (12 )% (11 )% Total ECS product revenue $ 2,672 $ 2,976 100 % 100 % (10 )% (9 )% The percentage of product sales through the indirect channel decreased by 1 percentage point to 75% in fiscal 2012 as compared to 76% in fiscal 2011. The decrease in sales volume in the indirect channel was a result of the revenue declines and factors causing those declines discussed above and due to inventory working capital management by distributors. The percentage of total revenue derived from indirect channels decreased relative to the percentage derived from direct sales due to the continuing transition from legacy NES products to the newer Avaya platforms. Sales from the NES business, prior to its acquisition by Avaya, were substantially generated through the indirect channel.

46 -------------------------------------------------------------------------------- Gross Profit The following table sets forth a comparison of gross profit by segment: Fiscal years ended September 30, Gross Profit Gross Margin Dollars in millions 2012 2011 2012 2011 Change GCS $ 1,387 $ 1,532 58.0 % 57.3 % $ (145 ) (9 )% Networking 115 131 40.5 % 43.1 % (16 ) (12 )% ECS 1,502 1,663 56.2 % 55.9 % (161 ) (10 )% AGS 1,224 1,222 49.0 % 47.5 % 2 - % Unallocated amounts (140 ) (253 ) (1) (1) 113 (1) Total $ 2,586 $ 2,632 50.0 % 47.4 % $ (46 ) (2 )% (1) Not meaningful Gross profit for fiscal 2012 and 2011 was $2,586 million and $2,632 million, respectively. Gross profit decreased by $46 million or 2% and includes incremental gross profit from the Radvision business for the period June 5, 2012 through September 30, 2012 of $22 million. The decrease is attributable to decreased sales volumes, pricing pressures and an unfavorable impact of foreign currency. These decreases were partially offset by the success of our gross margin improvement initiatives as discussed below, the impact of lower amortization of technology intangible assets, reductions in integration-related costs related to the acquisition of the NES business, a favorable change in our product mix as we had lower sales of lower margin products and lower costs associated with our employee incentive plans, which are driven by our actual financial results relative to established targets. Gross margin increased to 50.0% for fiscal 2012 from 47.4% for fiscal 2011. The increase in gross margin is primarily due to the success of our gross margin improvement initiatives as discussed above, the impact of lower amortization of technology intangible assets, reductions in integration-related costs related to the acquisition of the NES business and lower costs associated with our employee incentive plans.

GCS gross profit for fiscal 2012 and 2011 was $1,387 million and $1,532 million, respectively. GCS gross profit decreased $145 million or 9%. The decrease in GCS gross profit is primarily due to the decrease in sales volume, pricing pressures and the unfavorable impact of foreign currency. These decreases were partially offset by the success of our gross margin improvement initiatives discussed above. The decreases were also offset by the reductions in integration-related costs related to the acquisition of the NES business and a favorable change in our product mix as we had lower sales of lower margin products. GCS gross margin increased to 58.0% for fiscal 2012 compared to 57.3% for fiscal 2011. The increase is primarily due to the positive effect of our gross margin improvement initiatives described above and a favorable change in our product mix as we had lower sales of lower margin products partially offset by lower sales volume, which reduced the leverage on our fixed costs.

Networking gross profit for fiscal 2012 and 2011 was $115 million and $131 million, respectively. Networking gross margin decreased to 40.5% for fiscal 2012 from 43.1% for fiscal 2011. The decreases in Networking gross profit and margin were due to lower revenues which did not allow us to leverage our fixed costs.

AGS gross profit for fiscal 2012 and 2011 was $1,224 million and $1,222 million and gross margin was 49.0% and 47.5%, respectively. The increases in AGS gross profit and gross margin are primarily due to the continued benefit from cost savings initiatives discussed above, as well as lower costs associated with our employee incentive plans. We have redesigned the Avaya support website and are transitioning our customers from an agent-based support model to a self-service/web-based support model. These improvements have allowed us to reduce the workforce and relocate positions to lower-cost geographies. These increases in AGS gross profit were partially offset by a decrease in services revenue.

Unallocated amounts for fiscal 2012 and 2011 include the effect of the amortization of acquired technology intangibles related to the acquisition of NES and the Merger, costs that are not core to the measurement of segment management's performance, but rather are controlled at the corporate level, and certain purchase accounting adjustments in connection with the Merger.

Unallocated costs for fiscal 2012 also included the effect of the amortization of acquired technology intangible assets related to the acquisition of Radvision in June 2012. The decrease in unallocated costs is primarily due to the impact of lower amortization associated with technology intangible assets acquired prior to fiscal 2012.

47 -------------------------------------------------------------------------------- Operating expenses Fiscal years ended September 30, Percentage of Revenue Dollars in millions 2012 2011 2012 2011 Change Selling, general and administrative $ 1,630 $ 1,845 31.5 % 33.3 % $ (215 ) (12 )% Research and development 464 461 9.0 % 8.3 % 3 1 % Amortization of intangible assets 226 226 4.4 % 4.1 % - - % Restructuring and impairment charges, net 147 189 2.8 % 3.4 % (42 ) (22 )% Acquisition-related costs 4 5 0.1 % 0.1 % (1 ) (20 )% Total operating expenses $ 2,471 $ 2,726 47.8 % 49.2 % $ (255 ) (9 )% SG&A expenses for fiscal 2012 and 2011 were $1,630 million and $1,845 million, respectively, a decrease of $215 million. The decrease was primarily due to reductions in integration-related costs related to the acquisition of the NES business, a favorable impact of foreign currency, lower expenses as a result of our cost savings initiatives discussed above and lower expenses associated with our employee incentive plans, which are driven by our actual financial results relative to established targets. Integration-related costs included in SG&A were $19 million and $103 million for fiscal 2012 and 2011, respectively. In fiscal 2011, integration-related 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. Such costs include fees paid to certain Nortel-controlled entities for logistic and other support functions being performed on a temporary basis pursuant to a transition services agreement which expired in June 2011. For fiscal 2012, integration-related costs are primarily associated with the continued development of compatible IT systems.

R&D expenses for fiscal 2012 and 2011 were $464 million and $461 million, respectively, an increase of $3 million. The increase was primarily due to an increase in costs of new product development, as well as the incremental expenses associated with the acquisition of Radvision. The increase in these costs was partially offset by lower expenses associated with our employee incentive plans, which are driven by our actual financial results relative to established targets, and a favorable impact of foreign currency. Capitalized software development costs for fiscal 2012 and 2011 were $35 million and $42 million, respectively, a decrease of $7 million. Because the projects in our product development portfolio for fiscal 2011 were generally further along in the development cycle than those for fiscal 2012, we capitalized a lower portion of our current period R&D spend.

Amortization of intangible assets was $226 million for fiscal 2012 and 2011.

Restructuring and impairment charges, net, for fiscal 2012 and 2011 were $147 million and $189 million, respectively, a decrease of $42 million. The Company continues to focus on controlling costs and, as a result, implemented additional initiatives designed to streamline its operations and generate cost savings. These initiatives include exiting facilities and reducing the workforce or relocating positions to lower cost geographies. Restructuring charges recorded during fiscal 2012 include employee separation costs of $123 million and lease obligations of $19 million. Employee separation costs for fiscal 2012 include $70 million associated with a plan presented to the works council on February 13, 2012 representing employees of certain of the Company's German subsidiaries to eliminate 327 positions. The costs consist of severance and employment benefits payments and include, but are not limited to, social pension fund payments and health care and unemployment insurance costs to be paid to or on behalf of the affected employees. In addition to the restructuring charges related to Germany, the company had employee separation costs in the US, Canada and EMEA, excluding Germany. Costs related to lease obligations include facilities partially or totally vacated during the period primarily located in the United Kingdom and the U.S. Restructuring charges recorded during fiscal 2011 include employee separation costs of $153 million and lease obligations of $36 million. Employee separation charges for this period include $56 million associated with an agreement reached with the Germany works council representing employees of certain of Avaya's German subsidiaries for the elimination of 210 employee positions. For fiscal 2011, lease obligations included in restructuring charges represent the remaining lease obligations associated with facilities partially or totally vacated during the period primarily in Ireland and the U.S.

The Company continues to evaluate opportunities to streamline its operations and identify cost savings globally and may take additional restructuring actions in the future and the costs of those actions could be material.

The Company has initiated a plan to dispose of a Company owned facility in Munich, Germany and relocate to a new facility. Accordingly, the Company has written the value of this asset down to its net realizable value of $3 million and has reclassified this asset as held for sale. Included in restructuring and impairment charges, net in the Statement of Operations is an impairment charge of $5 million for fiscal 2012.

48 -------------------------------------------------------------------------------- Acquisition-related costs for fiscal 2012 and 2011 were $4 million and $5 million, and include third-party legal and other costs related to the acquisition of Radvision and other business acquisitions in fiscal 2012 and 2011.

Operating Income (Loss) Fiscal 2012 operating income was $115 million compared to an operating loss of $94 million for fiscal 2011.

Results for fiscal 2012 include the impact of integration-related costs (included in SG&A and elsewhere) of $19 million and acquisition-related costs of $4 million. In addition, in fiscal 2012, the Company incurred impairment charges of $5 million related to the write-down of the Munich, Germany facility. For fiscal 2011, we incurred integration-related costs (included in SG&A and elsewhere) of $132 million and acquisition-related costs of $5 million.

Operating income (loss) for fiscal 2012 and 2011 includes non-cash expenses for depreciation and amortization of $564 million and $653 million and share-based compensation of $8 million and $12 million, respectively.

Interest Expense Interest expense for fiscal 2012 and 2011 was $431 million and $460 million, respectively, which includes non-cash interest expense of $22 million and $41 million, respectively. Non-cash interest expense for fiscal 2012 includes (1) amortization of debt issuance costs and (2) 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 fiscal 2011 includes: (1) amortization of debt issuance costs and (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.

Cash interest expense for fiscal 2012 decreased $10 million. The decrease was a result of the expiration of certain unfavorable interest rate swap contracts combined with the impact of the issuance of the senior secured notes and the related repayment of the senior secured incremental 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. This decrease was partially offset by an increase in interest expense due to the impact 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 term B-3 loans which bear interest at a higher rate per annum than the senior secured term B-1 loans that they replaced.

See Note 9, "Financing Arrangements" to our audited 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 fiscal 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 9, "Financing Arrangements" to our audited 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 (Expense) Income, Net Other expense, net, for fiscal 2012 was $20 million as compared to other income, net of $5 million for fiscal 2011. During fiscal 2012, other expense, net primarily related to net foreign currency transaction losses of $21 million.

During fiscal 2011, net foreign currency transaction gains and interest income were partially offset by fees paid to third parties in connection with the modification of the senior secured term B-1 loan of $9 million.

Provision for Income Taxes For fiscal 2012 and 2011 the provision for income taxes was $8 million and $68 million and the effective income tax rate was 2% and 9%, respectively.

The effective income tax rate for fiscal 2012 differs from the U.S. Federal tax rate primarily due to (1) the effect of taxable income in certain non-U.S.

jurisdictions, (2) the valuation allowance established against the Company's deferred tax assets, (3) $62 million release of valuation allowance associated with tax expense on net gains in other comprehensive income, (4) $17 million of income tax expense related to undistributed foreign earnings, and (5) $9 million of income tax benefit related to the correction of prior year deferred tax assets and liabilities for certain non-U.S. legal entities.

In fiscal 2012, the Company recorded a tax charge of $62 million to other comprehensive income and a decrease in deferred tax assets primarily relating to post-employment benefits. The charge to other comprehensive income and decrease in deferred tax 49 -------------------------------------------------------------------------------- assets resulted in the recording of a $56 million federal and a $6 million state income tax benefit in continuing operations related to the release of the corresponding valuation allowance. In fiscal 2011, the Company recorded a tax benefit to other comprehensive income. Therefore, there was no adjustment to the income tax provision in continuing operations.

As of September 30, 2012, the Company changed its indefinite reinvestment of undistributed foreign earnings assertion with respect to its non-U.S.

subsidiaries. As a result the Company recorded fiscal 2012 income tax expense of $17 million relating to non-U.S. taxes. In the future, the Company will continue to evaluate whether or not to indefinitely reinvest future undistributed foreign earnings.

During the fourth quarter of fiscal 2012, the Company recorded a correction to prior year deferred tax assets and liabilities for certain non-U.S. legal entities. This adjustment decreased the provision for income taxes by $9 million. Without this adjustment the Company's provision for income taxes and effective income tax rate would have been $17 million and (5%), respectively for fiscal 2012. The Company evaluated the correction in relation to the current quarter and fiscal 2012, as well as the periods in which the adjustment originated, and concluded that the adjustment is not material to the current year and any prior quarter or year.

The effective income tax rate for fiscal 2011 differs from the U.S. Federal tax rate primarily due to the effect of taxable income in certain non-U.S.

jurisdictions and due to the valuation allowance established against the Company's U.S. deferred tax assets.

See Note 12, "Income Taxes" to our audited consolidated financial statements for further details and a reconciliation of the Company's loss before income taxes at the U.S. Federal statutory rate to the provision for income taxes.

Fiscal Year Ended September 30, 2011 Compared with Fiscal Year Ended September 30, 2010 Revenue Our revenue for fiscal 2011 and 2010 was $5,547 million and $5,060 million, respectively, an increase of $487 million or 10%. The following table sets forth a comparison of revenue by segment: Fiscal years ended September 30, Percentage of Yr. to Yr. Yr. to Yr. Percent Total Revenue Percent Change, net of Foreign In millions 2011 2010 2011 2010 Change Currency Impact GCS $ 2,675 $ 2,329 49 % 46 % 15 % 14 % Purchase accounting (1) (1) adjustments (3 ) (7 ) - % - % Networking 304 280 5 % 5 % 9 % 8 % Total product revenue 2,976 2,602 54 % 51 % 14 % 13 % AGS 2,573 2,463 46 % 49 % 4 % 3 % Purchase accounting (1) (1) adjustments (2 ) (5 ) - % - % Total service revenue 2,571 2,458 46 % 49 % 5 % 3 % Total revenue $ 5,547 $ 5,060 100 % 100 % 10 % 8 % (1) Not meaningful GCS revenue for fiscal 2011 and 2010 was $2,675 million and $2,329 million, respectively. GCS revenue increased $346 million or 15% primarily due to incremental revenue from the NES business and increased sales volume. The NES business is included in our results for the full fiscal 2011 as compared to results for fiscal 2010, which included the results of the NES business for only the period of December 19, 2009 through September 30, 2010. In 2011, GCS revenue also benefited from the introduction of new product offerings during the second half of fiscal 2010 and throughout fiscal 2011 and an increase in new Avaya Aura licenses sold. We believe the additional functionality created by our Avaya Aura technology also resulted in increased demand across many of our infrastructure solutions. The increase in contact center application solutions revenues was driven by new product offerings. These increases were partially offset by the impact of our divestiture of our 59.13% ownership interest in AGC in August 2010. Until August 31, 2010 AGC was our majority-owned subsidiary and its sales to end users were included in our revenues. Our divestiture of AGC allowed us to pursue additional channel partners in India while continuing to sell through AGC.

Networking revenue for fiscal 2011 and 2010 was $304 million and $280 million, respectively. Networking revenue increased $24 million or 9% primarily due to incremental revenue from the NES business for fiscal 2011 as compared to results for fiscal 2010, which included the results of the NES business for only the period of December 19, 2009 through September 30, 2010. Our networking business was acquired as part of the acquisition of NES on December 18, 2009. The addition of the NES businesses has given us a position within the global data networking industry, one in which we did not participate immediately 50 -------------------------------------------------------------------------------- prior to the acquisition.

AGS revenue for fiscal 2011 and 2010 was $2,573 million and $2,463 million, respectively. AGS revenues increased $110 million or 4% primarily due to incremental revenue from the NES business for fiscal 2011 as compared to fiscal 2010, which included the results of the NES business for only the period of December 19, 2009 through September 30, 2010.

The following table sets forth a comparison of revenue by location: Fiscal years ended September 30, Yr. to Yr.

Percentage Percentage of Yr. to Yr. Change, net of Total Revenue Percentage Foreign Dollars in millions 2011 2010 2011 2010 Change Currency Impact U.S. $ 2,998 $ 2,764 54 % 55 % 8 % 8 % International: Germany 505 537 9 % 10 % (6 )% (7 )% EMEA (Excluding Germany) 983 846 18 % 17 % 16 % 14 % Total EMEA 1,488 1,383 27 % 27 % 8 % 6 % APAC-Asia Pacific 515 464 9 % 9 % 11 % 8 % Americas International-Canada and Latin America 546 449 10 % 9 % 22 % 18 % Total International 2,549 2,296 46 % 45 % 11 % 9 % Total revenue $ 5,547 $ 5,060 100 % 100 % 10 % 8 % Revenue in the U.S. for fiscal 2011 and 2010 was $2,998 million and $2,764 million, respectively. Revenue in the U.S. increased $234 million or 8% primarily due to incremental revenue from the NES business for fiscal 2011 as compared to results for fiscal 2010, which included the results of the NES business for only the period of December 19, 2009 through September 30, 2010.

This increase also included an increase in sales volume driven by new product offerings. Revenue in EMEA for fiscal 2011 and 2010 was $1,488 million and $1,383 million, respectively. Revenue in EMEA increased $105 million or 8% primarily due to incremental revenue from the NES business for fiscal 2011 as compared to results for fiscal 2010, which included the results of the NES business for only the period of December 19, 2009 through September 30, 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 customers reducing spending on maintenance contracts and the decline in our rental base as lease renewals are typically at lower rates, which is expected to continue in fiscal 2012. Revenue in APAC and Americas International increased $51 million and $97 million, respectively. The increases were due to incremental revenue from the NES business for fiscal 2011 as compared to results for fiscal 2010, which included the results of the NES business for only the period of December 19, 2009 through September 30, 2010, increased sales volume driven by new product offerings and an increase in professional services, 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 in the APAC region 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.

The following table sets forth a comparison of revenue from sales of products by channel: Fiscal years ended September 30, Yr. to Yr.

Percentage of Yr. to Yr. Percentage ECS Product Revenue Percentage Change, net of Foreign Dollars in millions 2011 2010 2011 2010 Change Currency Impact Direct $ 700 $ 763 24 % 29 % (8 )% (10 )% Indirect 2,276 1,839 76 % 71 % 24 % 23 % Total ECS product revenue $ 2,976 $ 2,602 100 % 100 % 14 % 13 % The percentage of product sales through the indirect channel increased by 5 percentage points to 76% in fiscal 2011 as compared to 71% in fiscal 2010. The increase was primarily attributable to 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. Until August 31, 2010 AGC was our majority-owned subsidiary and its sales to end users were included in our direct revenues. In addition, the increase is also attributable to the incremental product sales from the NES business, 51 -------------------------------------------------------------------------------- which, prior to the acquisition of NES, were substantially generated through the indirect channel. 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 Profit The following table sets forth a comparison of gross profit by segment: Fiscal years ended September 30, Gross Profit Gross Margin Dollars in millions 2011 2010 2011 2010 Change GCS $ 1,532 $ 1,249 57.3 % 53.6 % $ 283 23 % Networking 131 117 43.1 % 41.8 % 14 12 % ECS 1,663 1,366 55.9 % 52.5 % 297 22 % AGS 1,222 1,119 47.5 % 45.4 % 103 9 % Unallocated amounts (253 ) (313 ) (1) (1) 60 (1) Total $ 2,632 $ 2,172 47.4 % 42.9 % $ 460 21 % (1) Not meaningful Gross profit for fiscal 2011 and 2010 was $2,632 million and $2,172 million, respectively. Gross profit increased by $460 million or 21% primarily due to the incremental margin from the NES business for fiscal 2011 as compared to results for fiscal 2010, which included the results of the NES business for only the period of December 19, 2009 through September 30, 2010 and an increase in sales volume. Gross margin increased to 47.4% for fiscal 2011 from 42.9% for the fiscal 2010. The increase in gross profit and gross margin is primarily due to higher sales volume which leveraged our fixed costs, prior period cost saving initiatives including exiting facilities and reducing the workforce and relocating positions to lower-cost geographies and lower amortization of technology intangible assets, partially offset by higher costs associated with our employee incentive programs, which are driven by our actual financial results relative to established targets.

GCS gross profit for fiscal 2011 and 2010 was $1,532 million and $1,249 million, respectively. GCS gross profit increased $283 million or 23% primarily due to the incremental margin provided by the NES business for fiscal 2011 as compared to results for fiscal 2010, which included the results of the NES business for only the period of December 19, 2009 through September 30, 2010 and an increase in sales volume driven by new product offerings. GCS gross margin increased to 57.3% for fiscal 2011 from 53.6% for fiscal 2010. The increase in gross margin is primarily due to the increase in sales volume which leveraged our fixed costs and prior period cost saving initiatives including exiting facilities and reducing the workforce and relocating positions to lower-cost geographies.

Networking gross profit for the fiscal 2011 and 2010 was $131 million and $117 million, respectively. Our networking business was acquired as part of the acquisition of NES on December 18, 2009. Results for fiscal 2011 includes the impact of the NES business for the entire year as compared to fiscal 2010, which included the results of the NES business for only the period of December 19, 2009 through September 30, 2010. Gross margin increased to 43.1% for fiscal 2011 from 41.8% in fiscal 2010. The increase in gross margin is primarily due to a reduction in costs of our networking products, partially offset by pricing pressures impacting revenues.

AGS gross profit for fiscal 2011 and 2010 was $1,222 million and $1,119 million, respectively. AGS gross profit increased $103 million or 9% primarily due to an increase in revenues from professional services. The increase in AGS gross margin also included the incremental margin provided by the NES business for fiscal 2011 as compared to results for fiscal 2010, which included the results of the NES business for only the period of December 19, 2009 through September 30, 2010. AGS gross margin increased to 47.5% for fiscal 2011 from 45.4% for fiscal 2010. The change in gross margin 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 partially offset by the effects of the acquired NES business for the period December 19, 2009 through September 30, 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 profit for fiscal 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.

52 -------------------------------------------------------------------------------- Operating expenses Fiscal years ended September 30, Percentage of Revenue Dollars in millions 2011 2010 2011 2010 Change Selling, general and administrative $ 1,845 $ 1,721 33.3 % 34.0 % $ 124 7 % Research and development 461 407 8.3 % 8.0 % 54 13 % Amortization of intangible assets 226 218 4.1 % 4.3 % 8 4 % Restructuring and impairment charges, net 189 187 3.4 % 3.7 % 2 1 % Acquisition-related costs 5 20 0.1 % 0.4 % (15 ) (75 )% Total operating expenses $ 2,726 $ 2,553 49.2 % 50.4 % $ 173 7 % SG&A expenses for fiscal 2011 and 2010 were $1,845 million and $1,721 million, respectively, an increase of $124 million. The increase in expenses was due to incremental SG&A expenses incurred by the NES business for fiscal 2011 as compared to results for fiscal 2010, which included the results of the NES business for only the period of December 19, 2009 through September 30, 2010. In addition, the increases included unfavorable impacts of foreign currency, as well as higher costs under our employee incentive plans, which are driven by actual results versus established targets. These increases were partially offset by decreases in integration-related costs. Integration-related costs included in SG&A were $103 million and $154 million for fiscal 2011 and 2010, respectively.

Integration-related 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.

Such costs also include fees paid to certain Nortel-controlled entities for logistics and other support functions being performed on a temporary basis pursuant to a transition services agreement. SG&A also decreased as a result of 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 and the impact of our divestiture of AGC in August 2010. Until August 31, 2010 AGC was our majority-owned subsidiary and its SG&A expenses were included in our SG&A expenses.

R&D expenses for fiscal 2011 and 2010 were $461 million and $407 million, respectively, an increase of $54 million. The increase in R&D expenses was due to incremental R&D expenses from the acquired NES business for fiscal 2011 as compared to results for fiscal 2010, which included the results of the NES business for only the period of December 19, 2009 through September 30, 2010, as well as higher costs under 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 fiscal 2011 and 2010 was $226 million and $218 million, respectively, an increase of $8 million.

Restructuring and impairment charges, net, for fiscal 2011 and 2010 were $189 million and $187 million, respectively, an increase of $2 million. During fiscal 2011 and 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 fiscal 2011 include employee separation costs of $153 million and lease obligations of $36 million. Employee separation charges for this period include $56 million associated with an agreement reached with the works council representing employees of certain of the Company's German subsidiaries for the elimination of 210 employee positions. Severance and employment benefits payments associated with this action are expected to be paid through fiscal 2014, and include, but are not limited to, social pension fund payments and health care and unemployment insurance costs to be paid to or on behalf of the affected employees. For fiscal 2011, lease obligations included in restructuring charges represent the remaining lease obligations associated with facilities vacated during the period primarily in Ireland and the U.S.

Restructuring charges recorded during fiscal 2010 include employee separation costs of $147 million and lease obligations of $24 million and primarily include costs associated with involuntary employee severance actions in EMEA and the U.S. and facilities vacated during the period primarily in the U.S. and United Kingdom.

In addition, during fiscal 2010, we recorded an impairment charge of $16 million associated with certain technologies in the NES acquisition. 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, overlapped 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 no longer aggressively develops and markets. The Company determined that no events or 53 -------------------------------------------------------------------------------- circumstances changed during fiscal 2011 that would indicate that any technologies were impaired.

Acquisition-related costs for fiscal 2011 and 2010 were $5 million and $20 million, respectively, a decrease of $15 million, and include third-party legal and other costs related to business acquisitions in fiscal 2011 and the acquisition of NES in fiscal 2010.

Operating Loss Operating loss for fiscal 2011 was $94 million compared to $381 million for fiscal 2010.

Results for fiscal 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 fiscal 2011 as compared to results for fiscal 2010, which included the results of the NES business for only the period of December 19, 2009 through September 30, 2010. In addition, for fiscal 2011, we incurred integration-related costs (included in SG&A and elsewhere) of $132 million and acquisition-related costs of $5 million, as described above. For fiscal 2010, we incurred integration-related costs (included in SG&A and elsewhere) of $208 million, acquisition-related costs of $20 million and an impairment of $16 million to our long-lived assets.

Our operating loss for fiscal 2011 and 2010 includes non-cash expenses for depreciation and amortization of $653 million and $691 and share-based compensation of $12 million and $19 million, respectively.

Interest Expense Interest expense for fiscal 2011 and 2010 was $460 million and $487 million, which includes non-cash interest expense of $41 million and $105 million, respectively. Non-cash interest expense for fiscal 2011 includes (1) amortization of debt issuance costs, (2) accretion of debt discount attributable to our senior secured incremental term B-2 loans, which were issued in connection with the acquisition of NES, through February 11, 2011, the date on which those 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 fiscal 2010 includes (1) amortization of debt issuance costs, (2) accretion of debt discount attributable to our senior secured incremental term B-2 loans and (3) PIK interest, which we elected to finance through our senior unsecured PIK toggle notes for the period of May 1, 2009 through October 31, 2009 and November 1, 2009 through April 30, 2010.

Cash interest expense for fiscal 2011 increased as a result of (1) our election to pay cash interest on our senior unsecured PIK toggle notes for the periods of May 1, 2010 through October 31, 2010, November 1, 2010 through April 30, 2011, and May 1, 2011 through October 31, 2011, and (2) the amendment and restatement of the senior secured credit facility. The amendment and restatement of the senior secured credit facility permitted 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 by converting such loans into a new tranche of senior secured B-3 loans that 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 9, "Financing Arrangements" to our audited consolidated financial statements for further details on the amendment and extension of the senior secured credit facility.

Loss on Extinguishment of Debt In connection with the issuance of the senior secured notes and the payment in full of the senior secured incremental term B-2 loans, we recognized a loss on extinguishment of debt for fiscal 2011 of $246 million. The loss represents the difference between the reacquisition price of the senior secured incremental term B-2 loans (including $1 million of consent fees paid to the holders of the senior secured incremental term B-2 loans that consented to the amendment and restatement of the senior secured credit facility) and the carrying value of the senior secured incremental term B-2 loans (including unamortized debt discount and debt issue costs). See Note 9, "Financing Arrangements" to our audited consolidated financial statements for further details on the issuance of our senior secured notes and repayment of the senior secured incremental term B-2 loans.

Other Income, Net Other income, net for fiscal 2011 and 2010 was $5 million and $15 million, respectively, a decrease of $10 million. For fiscal 2011 other income, net includes fees paid to third parties in connection with the modification of the senior secured term B-1 loan of $9 million offset by interest income and net foreign currency transaction gains. For fiscal 2010 other income, net includes interest income and a $7 million gain on our divestiture of AGC.

Provision for Income Taxes The provision for income taxes was $68 million and $18 million for fiscal 2011 and 2010, respectively. The effective tax rate for fiscal 2011 and 2010 was 8.5% and 2.1%, respectively, and differs from the U.S. Federal tax rate primarily due to the effect of taxable income in non-U.S. jurisdictions and the valuation allowance principally established against our U.S. deferred tax 54 -------------------------------------------------------------------------------- assets. Additionally, the tax provision for fiscal 2011 includes an $8 million benefit for the reversal of a valuation allowance related to NOLs, which are now expected to be utilized by a non-U.S. entity and a $5 million benefit for a reduction in unrecognized tax benefits due to reduction of uncertain tax positions plus the reversal of interest in the amount of $3 million. The tax benefit for fiscal 2010 includes a $10 million reduction in our unrecognized tax benefits due to the settlement of a tax issue plus the reversal of interest in the amount of $5 million.

See Note 12, "Income Taxes" to our audited consolidated financial statements for further details and a reconciliation of the Company's loss before income taxes at the U.S. Federal statutory rate to the provision for income taxes.

Liquidity and Capital Resources We expect our existing cash balance, cash generated by operations and borrowings available under our credit facilities to be our primary sources of short-term liquidity. Based on our current level of operations, we believe these sources will be adequate to meet our liquidity needs for at least the next twelve months. As part of our analysis, we have assessed the implications of the recent financial events on our current business and determined that these market conditions have not resulted in an inability to meet our obligations as they come due in the ordinary course of business and have not had a significant impact on our liquidity as of September 30, 2012. However, we cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under our credit facilities in an amount sufficient to enable us to repay our indebtedness, or to fund our other liquidity needs.

Sources and Uses of Cash The following table provides the condensed statements of cash flows for the periods indicated: Fiscal years ended September 30, In millions 2012 2011 2010 Net cash (used for) provided by: Net loss $ (344 ) $ (863 ) $ (871 ) Adjustments to reconcile net loss to net cash used for operating activities 610 637 880 Changes in operating assets and liabilities (222 ) (74 ) 33 Operating activities 44 (300 ) 42 Investing activities (271 ) (101 ) (864 ) Financing activities 157 228 853 Effect of exchange rate changes on cash and cash equivalents 7 (6 ) (19 ) Net (decrease) increase in cash and cash equivalents (63 ) (179 ) 12 Cash and cash equivalents at beginning of year 400 579 567 Cash and cash equivalents at end of year $ 337 $ 400 $ 579 Operating Activities Cash provided by (used for) operations was $44 million, ($300) million, and $42 million for fiscal 2012, 2011 and 2010, respectively. In fiscal 2011, cash used for operations included $291 million in payments associated with the refinancing of our incremental term B-2 loans. In connection with this refinancing the Company recognized a $241 million cash loss on the extinguishment of debt (excluding $5 million of non-cash charges for debt issuance costs) and paid $50 million of amortized discount. See Note 9, "Financing Arrangements" to our audited 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.

Adjustments to reconcile net loss to net cash provided by (used for) operations for fiscal 2012, 2011 and 2010 were $610 million, $637 million, and $880 million, and consisted of depreciation and amortization of $564 million, $653 million, and $691 million, unrealized loss (gain) on foreign currency exchange of $29 million, ($38) million, and $41 million, non-cash interest expense of $22 million, $41 million and $105 million and share based compensation of $8 million, $12 million, and $19 million, respectively. In addition to these adjustments, as discussed above we paid $50 million of amortized discount in connection with the repayment of our incremental B-2 loans in fiscal 2011.

Cash provided by (used for) changes in operating assets and liabilities for fiscal 2012, 2011 and 2010 were ($222) million, ($74) million, and $33 million, respectively.

In fiscal 2012 the decrease in net cash associated with the changes in our operating assets and liabilities was predominantly driven by payments associated with our business restructuring reserves established in prior years, reductions in the Company's accounts payable and deferred revenue balances and payment of previously established employee payroll and benefit 55 -------------------------------------------------------------------------------- obligations, the most significant of which were payments under our pension and employee incentive plans. These decreases were partially offset by a decrease in inventory levels.

In fiscal 2011 the decrease in net cash associated with the changes in our operating assets and liabilities was predominantly driven by a decrease in foreign exchange contracts due to settlement and changes in foreign currency exchange rates associated with these contracts, an increase in inventory and a decrease in payroll and benefit obligations. These decreases in operating assets and liabilities were partially offset by the increase in accrued interest as a result of the issuance of the senior secured notes and repayment of the senior secured incremental term B-2 loans, which resulted in a change in the timing of when our interest payments are due. The decreases in operating asset and liabilities were also partially offset by efforts to closely manage the timing of our payments to vendors, improvements in the collections of accounts receivable and the effects of non-cash business restructuring reserves net of cash payments against our reserves.

In fiscal 2010 the increase in net cash associated with the changes in our operating assets and liabilities was predominantly due to increases in accounts payable and deferred revenues partially offset by increases in accounts receivable and deferred costs and payments made in connection with our restructuring activities.

Investing Activities Net cash used for investing activities for fiscal 2012, 2011 and 2010 was $271 million, $101 million, and $864 million, and consisted primarily of cash used for the acquisition of businesses of $212 million, $16 million and $805 million, capital expenditures of $92 million, $83 million and $79 million and payments to develop capitalized software of $35 million, $42 million and $43 million, respectively. Cash used for the acquisition of businesses in fiscal 2012 includes $208 million of payments (net of cash acquired of $22 million) related to our acquisition of Radvision. Cash for the acquisition of businesses in fiscal 2010 includes payments in connection with the acquisition of NES of $800 million (net of cash acquired of $38 million, the application of the $100 million good-faith deposit made in fiscal 2009 and the return of funds held in escrow of $5 million). In fiscal 2012 the cash used for investing activities was partially offset by $74 million of cash proceeds from the sale of investments primarily related to marketable securities acquired in the acquisition of Radvision. In fiscal 2010, cash used for investing activities was partially offset by $32 million in net proceeds received from the divestiture of our 59.13% ownership in AGC (net of cash sold of $13 million) and $18 million in proceeds from the liquidation of auction rate securities acquired in connection with the acquisition of NES.

Financing Activities Net cash provided by financing activities for fiscal 2012, 2011 and 2010 was $157 million, $228 million, and $853 million, respectively, and primarily included proceeds from our financing agreements (net of repayments), capital contributions received from Parent and payments for debt issuance and modification costs.

In fiscal 2012 net cash provided by financing activities included a capital contribution from Parent in the amount of $196 million from the Parent's issuance of Series B preferred stock and warrants to purchase common stock of Parent and $60 million borrowed by the Company under its senior secured asset-based credit facility. The capital contribution from Parent and the amounts borrowed under our senior secured asset-based credit facility were used to finance, in part, the acquisition of Radvision. Following the completion of the acquisition, all amounts borrowed under the senior secured asset-based credit facility were repaid in full.

In fiscal 2011 net cash provided by financing activities included proceeds of $967 million from the issuance of $1,009 million of senior secured notes net of $42 million of cash paid for debt issuance and debt modification costs. The proceeds from the issuance of the senior secured notes were used, to repay in full the Company's senior secured incremental term B-2 loans which had a discounted carrying value of $696 million. In addition to the discounted carrying value of $696 million, the total payment of $987 million included $241 million of unamortized loan discount recognized as a cash loss on extinguishment of debt (excluding $5 million of non-cash charges for debt issuance costs) and $50 million of amortized loan discount as discussed in Sources and Uses of Cash - Operating Activities above. See Note 9, "Financing Arrangements" to our audited 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.

In fiscal 2010 net cash provided by financing activities included net proceeds of $783 million from the issuance of senior secured incremental term B-2 loans with detachable warrants to purchase 61.5 million shares of the Parent's common stock and a capital contribution to Avaya from Parent in the amount of $125 million. The net proceeds of the senior secured incremental term B-2 loans and the capital contribution were used to finance, in part, the acquisition of NES.

Net cash provided by financing activities was partially offset by the scheduled repayments of our long-term debt of $37 million, $42 million and $48 million in fiscal 2012, 2011 and 2010, respectively.

56 -------------------------------------------------------------------------------- Contractual Obligations and Sources of Liquidity Contractual Obligations The following table summarizes our contractual obligations as of September 30, 2012: Payments due by period Less than 1-3 3-5 More than In millions Total 1 year years years 5 years Capital lease obligations (1) $ 24 $ 3 $ 8 $ 7 $ 6 Operating lease obligations (2) 499 101 153 108 137 Purchase obligations with contract manufacturers and suppliers (3) 61 61 - - - Other purchase obligations (4) 114 40 66 8 - Senior secured term B-1 loans (5) 1,434 15 1,419 - - Senior secured term B-3 loans (5) 2,152 23 46 46 2,037 Senior secured notes (6) 1,009 - - - 1,009 9.75% senior unsecured notes due 2015 (7) 700 - - 700 - 10.125%/10.875% senior PIK toggle unsecured notes due 2015 (7) 834 - 15 819 - Interest payments due on long-term debt (8) 1,734 389 717 464 164 Pension benefit obligations (9) 178 178 - - - Total $ 8,739 $ 810 $ 2,424 $ 2,152 $ 3,353 (1) The payments due for capital lease obligations do not include future payments for interest.

(2) Contractual obligations for operating leases include $64 million of future minimum lease payments that have been accrued for in accordance with GAAP pertaining to restructuring and exit activities.

(3) We purchase components from a variety of suppliers and use several contract manufacturers to provide manufacturing services for our products. During the normal course of business, in order to manage manufacturing lead times and to help assure adequate component supply, we enter into agreements with contract manufacturers and suppliers that allow them to produce and procure inventory based upon forecasted requirements provided by us. If we do not meet these specified purchase commitments, we could be required to purchase the inventory. See Note 17, "Commitments and Contingencies," to our audited consolidated financial statements for further details on our purchase commitments.

(4) Other purchase obligations represent an estimate of contractual obligations in the ordinary course of business, other than commitments with contract manufacturers and suppliers, for which we have not received the goods or services as of September 30, 2012. Although contractual obligations are considered enforceable and legally binding, the terms generally allow us the option to cancel, reschedule and adjust our requirements based on our business needs prior to the delivery of goods or performance of services.

(5) The contractual cash obligations for the senior secured credit facility represent the minimum principal payments owed per year. The contractual cash obligations do not reflect a potential springing of the term B-3 loans to July 26, 2015 (as described in Note 9, "Financing Arrangements" to our audited consolidated financial statements) or any contingent mandatory annual principal repayments that may be required to be made upon us achieving certain excess cash flow targets, as defined in our senior secured credit facility.

On October 29, 2012, we completed a debt refinancing that deferred the maturity of $135 million of senior secured term B-1 loans from October 26, 2014 to October 26, 2017 by converting such loans into a new tranche of senior secured term B-4 loans. See Note 20, "Subsequent Event" to our audited consolidated financial statements for further details on this refinancing arrangement.

(6) The contract obligations for the senior secured notes, which mature on April 1, 2019, represent principal payments only.

(7) The contractual cash obligations for the 9.75% senior unsecured notes due 2015 and 10.125%/10.875% senior PIK toggle unsecured notes due 2015 (see Note 9, "Financing Arrangements," to our audited consolidated financial statements) represent principal payments only.

(8) The contractual cash obligations for interest payments represent the related interest payments on long-term debt and the contractual obligations associated with the related interest rate swaps which hedge approximately 50% of the floating rate interest risk associated with the senior secured credit facility. The interest payments for the senior secured term B-1 loans and senior secured term B-3 loans were calculated by applying an applicable margin to a projected 3-month LIBOR rate. The interest payments were calculated using a 7% rate for the senior secured notes. The interest payments 57-------------------------------------------------------------------------------- were calculated using a 9.75% and 10.125% rate for the cash-pay notes and PIK toggle notes, respectively.

(9) The Company sponsors non-contributory defined pension and postretirement plans covering certain employees and retirees. The Company's general funding policy with respect to qualified pension plans is to contribute amounts at least sufficient to satisfy the minimum amount required by applicable law and regulations, or to directly pay benefits where appropriate. Most postretirement medical benefits are not pre-funded.

Consequently, the Company makes payments as these retiree medical benefits are disbursed.

Additionally, as of September 30, 2012, the Company had gross unrecognized tax benefits of $248 million. Also, included in non-current liabilities is $9 million relating to audits by state and local and foreign taxing authorities for the periods prior to the Company's separation from Lucent Technologies Inc. (now Alcatel-Lucent) pursuant to the Tax Sharing Agreement between the Company and Lucent. Further, an additional $37 million for gross interest and penalties relating to these amounts had been classified as non-current liabilities. At this time, the Company is unable to make a reasonably reliable estimate of the timing of payments in connection with these tax liabilities; therefore, such amounts are not included in the above contractual obligation table.

On October 29, 2012, we completed a debt refinancing that effectively deferred the maturity of $135 million of senior secured term B-1 loans from October 26, 2014 to October 26, 2017 by converting such loans into a new tranche of senior secured term B-4 loans and increased the applicable interest for the new tranche of senior secured term B-4 loans. See Note 20, "Subsequent Event" to our audited consolidated financial statements.

Our primary future cash requirements will be to fund working capital, debt service, capital expenditures, restructuring payments and benefit obligations.

In addition, we may use cash in the future to make strategic acquisitions.

In addition to our working capital requirements, we expect our primary cash requirements for fiscal 2013 to be as follows: • Debt service-We expect to make payments of approximately $431 million during fiscal 2013 for principal and interest associated with long-term debt, as refinanced.

• Restructuring payments-We expect to make payments of approximately $84 million during fiscal 2013 for employee separation costs and lease termination obligations associated with restructuring actions we have taken through September 30, 2012.

• Capital expenditures-We expect to spend approximately $126 million for capital expenditures and capitalized software development costs during fiscal 2013.

• Benefit obligations-We estimate we will make payments under our pension and postretirement obligations totaling $185 million during fiscal 2013. These payments include: $102 million to satisfy the minimum statutory funding requirements of our U.S. qualified pension plans, $7 million of payments under our U.S. benefit plans that are not pre-funded, $27 million under our non-U.S. benefit plans that are predominately not pre-funded and $49 million under our U.S. retiree medical benefit plan that is not pre-funded.

See discussion in Note 13, "Benefit Obligations," to our audited 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 existing cash balance, cash generated by operations and borrowings available under our credit facilities to be our primary sources of short-term liquidity. We expect that revenues from higher margin products and services 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 2012 designed to reduce overhead and provide cash savings. The Company currently has two revolving credit facilities providing for borrowings of up to an aggregate of $535 million subject to certain contractual limitations. Our senior secured multi-currency asset-based revolving credit facility provides senior secured revolving financing of up to $335 million, subject to availability under a borrowing base which, 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. In addition, although the senior secured multi-currency asset-based revolving credit facility does not require us to comply with any financial ratio maintenance covenants, if we have Excess Availability under the facility of less than $33.5 million at any time, we will not be permitted to borrow any additional amounts thereunder unless our pro forma Consolidated Fixed Charge Coverage Ratio (each such term as defined in the credit agreement governing the facility) is at least 1.0 to 1.0. At September 30, 2012 there were no borrowings under the facility, however there were letters of credit issued in the ordinary course of business which reduce the amount of borrowings available.

Based on the borrowing base as calculated at September 30, 2012, the remaining availability under the 58 -------------------------------------------------------------------------------- facility was $258 million which is net of $77 million in issued letters of credit. We also have a senior secured multi-currency revolver, which allows for borrowings of up to $200 million. At September 30, 2012, there were no amounts outstanding under the senior secured multi-currency revolver and the $200 million was available in full. Both revolving credit facilities include other customary conditions that, if not complied with, could restrict our availability to borrow.

On August 8, 2011, the Company amended the terms of the multi-currency revolvers available under its senior secured credit facility and its senior secured multi-currency asset-based revolving credit facility to extend the final maturity of each from October 26, 2013 to October 26, 2016. All other terms and conditions of the senior secured credit facility and the senior secured multi-currency asset-based revolving credit facility remained unchanged. For more information on the revolving credit facilities, the restrictions on borrowing thereunder, and amendments entered into in October 2012 see Note 9, "Financing Arrangements" and Note 20, "Subsequent Event," to our audited consolidated financial statements.

On June 9, 2011, Parent filed with the SEC a registration statement on Form S-1 (as it may be amended from time to time, the "registration statement") relating to a proposed initial public offering of its common stock. As contemplated in the registration statement, the net proceeds of the proposed offering are expected to be used, among other things, to repay a portion of our long-term indebtedness. The registration statement remains under review by the SEC and shares of common stock registered thereunder may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This document shall not constitute an offer to sell or the solicitation of any offer to buy nor shall there be any sale of those securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State.

Further, there is no way to predict whether or not Parent will be successful in completing the offering as contemplated and if it is successful, we cannot be certain if, or how much of, the net proceeds will be used for the purposes identified above.

During the fourth quarter of fiscal 2012, the Company changed its indefinite reinvestment of undistributed foreign earnings assertion with respect to its non-U.S. subsidiaries. This change in assertion reflects the Company's intention and ability to maintain flexibility with respect to sourcing of funds from non-U.S. locations.

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 additional 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 indentures governing our notes permit us to do so. Furthermore, if we acquire a business in the future that has existing debt, our debt service requirements may increase. We regularly evaluate market conditions, our liquidity profile, and various financing alternatives for opportunities to enhance our capital structure. If market conditions are favorable, we may refinance our existing debt or issue additional securities.

Based on past performance and current expectations, we believe that our existing cash and cash equivalents of $337 million as of September 30, 2012 and future cash provided by operating activities will be sufficient to meet our future cash requirements described above for at least the next twelve months. 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.

Uncertainties Regarding Our Liquidity We believe the following uncertainties exist regarding our liquidity: • Revenues-Our ability to generate net cash from operating activities has been a primary source of our liquidity. If our revenues and gross profits were to decline significantly during this economic downturn and challenging market conditions, particularly in the U.S. and Europe, our ability to generate net cash from operating activities in a sufficient amount to meet our cash needs could be adversely affected. Furthermore, our 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.

• Cost Saving Initiatives-Our ability to reduce costs through cost saving initiatives will have a direct effect on our cash flows and available cash balances, as certain restructuring charges are recorded in the current year but are paid in future periods. Further, although we may identify additional cost saving initiatives in the future, we may be unsuccessful in these actions or the amount required for severance payments may be so prohibitive as to preclude the implementation of such cost savings initiatives, which could negatively impact our future cash flows.

• Debt Ratings-Our ability to obtain external financing and the related cost of borrowing are affected by our debt ratings. See "Debt Ratings." • Future Acquisitions-We may from time to time in the future make acquisitions. Such acquisitions may require significant amounts of cash or may result in increased debt service requirements to the extent we assume or incur debt in connection with such acquisitions.

59--------------------------------------------------------------------------------• Litigation-In the ordinary course of business, the Company is involved in litigation, claims, government inquiries, investigations, charges and proceedings. See Note 17, "Commitments and Contingencies," to our audited consolidated financial statements. Our ability to successfully defend the Company against future litigation may impact cash flows.

Debt Ratings As of September 30, 2012, we had a long-term corporate family rating of B3 with a negative outlook from Moody's and a corporate credit rating of B- with a stable outlook from Standard & Poor's. Although a change in debt rating would have no impact on our existing borrowing arrangements, 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.

Debt Service Obligations As a result of the Merger and the acquisition of NES, our level of indebtedness increased. As of September 30, 2012, principal payments due under our indebtedness were $6,129 million, excluding capital lease obligations of $24 million. Our interest expense for fiscal 2012, 2011, and 2010 was $431 million, $460 million and $487 million, respectively, and includes $22 million, $41 million and $105 million of non-cash interest expense, respectively.

Our leverage requires that a substantial portion of our cash flows from operations be dedicated to the payment of principal and interest on our indebtedness.

We continually monitor our exposure to the risk of increased interest rates as portions of our borrowings under our credit facilities are at variable rates of interest. We use interest rate swap agreements to manage the amount of our floating rate debt to the extent we deem appropriate. At September 30, 2012 the outstanding notional amount of these swap agreements was $1.8 billion.

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 unsecured PIK toggle notes. As a result, payment in kind interest of $41 million and $43 million was added to the principal amount of the notes effective November 1, 2009 and May 1, 2010, respectively, and will be payable when the notes become due. For the interest periods of May 1, 2010 to October 31, 2011, the Company made such payments in cash interest. Under the terms of the debt agreements, after November 1, 2011, the Company is required to make all interest payments on the senior unsecured PIK toggle notes entirely in cash. The Company has made all scheduled payments timely under the senior secured credit facility, the indenture governing its senior secured notes, and the indenture governing its senior unsecured notes.

Strategic Uses of Cash and Cash Equivalents As further discussed in "Liquidity and Capital Resources," our cash and cash equivalents decreased by $63 million to $337 million at September 30, 2012 from $400 million at September 30, 2011.

Our cash and cash equivalents balance at September 30, 2011 and 2010 was $400 million and $579 million, respectively, a decrease of $179 million. Cash and cash equivalents at September 30, 2011 and September 30, 2010 do not include restricted cash of $1 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 was secured by a letter of credit issued under Avaya Inc.'s senior secured multi-currency asset-based revolving credit facility as of September 30, 2011.

Credit Facilities In connection with the Merger on October 26, 2007, the Company entered into borrowing arrangements with several financial institutions, certain of which arrangements were amended December 18, 2009 in connection with the acquisition of NES and amended on February 11, 2011 in connection with the refinancing.

Long-term debt under our borrowing arrangements includes a senior secured credit facility consisting of term loans and a revolving credit facility, a senior secured multi-currency asset based revolving credit facility, senior secured notes and senior unsecured notes. On August 8, 2011, the Company amended the terms of the multi-currency revolvers available under its senior secured credit facility and its senior secured multi-currency asset-based revolving credit facility to extend the final maturity of each from October 26, 2013 to October 26, 2016. All other terms and conditions of the senior secured credit facility and the senior secured multi-currency asset-based revolving credit facility remained unchanged. We are not in default under the senior secured credit facility, the indentures governing our notes or our senior secured multi-currency asset-based revolving credit facility. See Note 9, "Financing Arrangements" and Note 20, "Subsequent Event," to our audited consolidated financial statements for further details, including information regarding amendments to our credit facilities that were entered into in October 2012.

Guarantees of Indebtedness and Other Off-Balance Sheet Arrangements We are party to several types of agreements, including surety bonds, purchase commitments, product financing arrangements 60 -------------------------------------------------------------------------------- and performance guarantees, which are fully discussed in Note 17, "Commitments and Contingencies," to our audited consolidated financial statements.

Legal Proceedings and Environmental, Health and Safety Matters We are subject to certain legal proceedings, which are fully discussed in Note 17, "Commitments and Contingencies" to our audited consolidated financial statements.

EBITDA and Adjusted EBITDA EBITDA is defined as net income (loss) before income taxes, interest expense, interest income and depreciation and amortization. EBITDA provides us with a measure of operating performance that excludes items that are outside the control of management, which can differ significantly from company to company depending on capital structure, the tax jurisdictions in which companies operate and capital investments. Under the Company's debt agreements, the ability to draw down on the revolving credit facilities or engage in activities such as incurring additional indebtedness, making investments and paying dividends is tied in part 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 and because it serves as a basis for determining management compensation. In addition, we believe Adjusted EBITDA provides more comparability between our historical results and results that reflect purchase accounting and our new capital structure following the Merger. Accordingly, Adjusted 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.

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, based on our debt agreements the definition of Adjusted EBITDA 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, Sponsor monitoring fees and other specific cash costs and expenses as defined in the agreements and that portion of our pension costs, other post-employment benefit costs, and non-retirement post-employment benefit costs representing the amortization of pension service costs and actuarial gain or loss associated with these employment benefits. 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.

61 --------------------------------------------------------------------------------The unaudited reconciliation of net loss, which is a GAAP measure, to EBITDA and Adjusted EBITDA is presented below: Fiscal years ended September 30, In millions 2012 2011 2010 Net loss $ (344 ) $ (863 ) $ (871 ) Interest expense 431 460 487 Interest income (3 ) (5 ) (5 ) Income tax expense 8 68 18 Depreciation and amortization 564 653 691 EBITDA 656 313 320 Impact of purchase accounting adjustments (a) 3 - 5 Restructuring charges, net 142 189 171 Sponsors' fees (b) 7 7 7 Acquisition-related costs (c) 4 5 20 Integration-related costs (d) 19 132 208 Debt registration fees - - 1 Loss on extinguishment of debt (e) - 246 - Third-party fees expensed in connection with the debt modification (f) - 9 - Strategic initiative costs (g) - - 6 Non-cash share-based compensation 8 12 19 Write-down of assets held for sale to net realizable value 5 1 - Loss (gain) on investments and sale of long-lived assets, net 3 1 (4 ) Impairment of long-lived assets 6 - 16 Reversal of contingent liability related to acquisition (1 ) - - Net income of unrestricted subsidiaries, net of dividends received - - (6 ) Loss (gain) on foreign currency transactions 21 (12 ) 1 Pension/OPEB/nonretirement postemployment benefits and long-term disability costs (h) 98 68 31 Adjusted EBITDA $ 971 $ 971 $ 795 (a) For fiscal 2012, 2011 and 2010, represents adjustments to eliminate the impact of certain purchase accounting adjustments recorded as a result of certain acquisitions including Radvision, NES, and other acquisitions 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.

(b) Sponsors' fees represent monitoring fees payable to affiliates of the Sponsors pursuant to a management services agreement entered into at the time of the Merger. See Item 13, "Certain Relationships and Related Transactions and Director Independence." (c) Acquisition-related costs include legal and other costs related to Radvision, NES and other acquisitions.

(d) Integration-related costs primarily represent third-party consulting fees and other administrative costs associated with consolidating and coordinating the operations of Avaya with Radvision and NES. In fiscal 2012, the costs associated with Radvision primarily relate to consolidating and coordinating the operations of Avaya and Radvision and the costs associated with NES, primarily related to developing compatible IT systems and internal processes. In fiscal 2011, integration 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. Integration-related costs also include fees paid to certain Nortel-controlled entities for logistics and other support functions being performed on a temporary basis pursuant to a transition services agreement.

(e) Loss on extinguishment of debt represents the loss recognized in connection with the payment in full of the 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 9, "Financing Arrangements," to our audited consolidated financial statements.

62--------------------------------------------------------------------------------(f) The third-party fees expensed in connection with debt modification represent fees paid to third parties in connection with the modification of the senior secured credit facility. See Note 9, "Financing Arrangements," to our audited consolidated financial statements.

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

(h) Represents that portion of our pension costs, other post-employment benefit costs and non-retirement post-employment benefit costs representing the amortization of prior service costs and net actuarial gains/losses associated with these employment benefits. For fiscal 2012 and 2011, the amounts include a curtailment charge of $5 million associated with workforce reduction in Germany and the U.S. and $7 million associated with workforce reductions in Germany, respectively.

Use of Estimates and Critical Accounting Policies Our consolidated financial statements are based on the selection and application of accounting principles generally accepted in the United States of America, which require us to make estimates and assumptions about future events that affect the amounts reported in our financial statements and the accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results could differ from those estimates, and any such differences may be material to the financial statements. We believe that the following policies may involve a higher degree of judgment and complexity in their application and represent the critical accounting policies used in the preparation of our financial statements. If different assumptions or conditions were to prevail, the results could be materially different from our reported results.

Acquisition Accounting The Company accounts for business combinations using the acquisition method, which requires an allocation of the purchase price of an acquired entity to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. Goodwill represents the excess of the purchase price over the net tangible and intangible assets acquired.

Revenue Recognition 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; (ii) professional services for implementation and integration of converged voice and data networks, network security and unified communications; and (iii) operations, or managed services.

Maintenance contracts have terms that range from one to five years. Contracts for professional services typically have terms that range from four to six weeks for standard solutions and from six months to one year for customized solutions.

Contracts for operations services 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, and collectability is reasonably assured. For arrangements that require acceptance of the product, system, or solution as specified by the customer, revenue is deferred until the acceptance criteria have been met.

The Company's indirect sales to channel 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, including promotional marketing programs and other incentives as a reduction of revenue at time of sale. When estimating returns, the Company considers customary inventory levels held by distributors.

Multiple deliverable arrangements beginning in fiscal 2011 In October 2009, the Financial Accounting Standards Board ("FASB") amended the software revenue recognition guidance to remove from its scope tangible products containing software components and non-software components that function together to deliver the product's essential functionality. The FASB also amended the guidance for multiple deliverable revenue arrangements to: (i) provide updated guidance on how the deliverables in an arrangement should be separated and how the consideration should be allocated; and (ii) change the term "fair value" to "selling price" and require an entity to allocate revenue using the estimated selling prices of the deliverables when a vendor does not have vendor-specific or third-party evidence of selling price. 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 on or after October 1, 2010.

The new guidance did not generally change the units of accounting for the Company's revenue transactions as delivered and undelivered items generally qualified as separate units of accounting under the historical guidance. The new guidance affects the timing of revenue recognition for multiple deliverable arrangements that included delivered items and undelivered items for 63 -------------------------------------------------------------------------------- which the Company was unable to demonstrate fair value pursuant to the historical guidance. In such cases, the delivered items were combined with the undelivered items to form a single unit of accounting and revenue was recognized either on a straight-line basis over the services period or deferred until the earlier of when the fair value requirements were met or when the last item was delivered. In addition, the Company previously used the residual method to allocate the arrangement consideration in cases where fair value could only be determined for the undelivered items. Under the new guidance, the Company allocates the total arrangement consideration based upon the relative selling price of each deliverable and revenue is recognized as each item is delivered.

The Company enters into multiple deliverable arrangements, which may include various combinations of products, software and services. Most product and service deliverables qualify as separate units of accounting and can be sold on a standalone basis. A deliverable constitutes a separate unit of accounting when it has standalone value and, where return rights exist, delivery or performance of the undelivered items is considered probable and substantially within the Company's control. When the Company sells products with implementation services, they are generally combined as one or more units of accounting, depending on the nature of the services and the customer's acceptance requirements.

Most of the Company's solutions have both software and non-software components that function together to deliver the products' essential functionality. For these multiple deliverable arrangements, the Company allocates revenue to the deliverables based on their relative selling prices. To the extent that a deliverable is subject to specific guidance on whether and/or how to allocate the consideration in a multiple deliverable arrangement, that deliverable is accounted for in accordance with such specific guidance. 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 or meeting other future performance obligations.

The Company allocates revenue based on a selling price hierarchy of vendor-specific objective evidence, third-party evidence, and then selling price. Vendor-specific objective evidence is based on the price charged when the deliverable is sold separately. Third-party evidence is based on 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 third-party evidence. Estimated selling price 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. Estimated selling price is established considering multiple factors including, but not limited to, pricing practices in different geographies and through different sales channels, major product and services groups, and customer classifications.

Once the Company allocates revenue to each deliverable, the Company recognizes revenue in accordance with its policies when all revenue recognition criteria are met. Products revenue is generally recognized upon delivery and maintenance and operations services revenue is generally recognized ratably over the period during which the services are performed. However, revenue for professional services arrangements is generally recognized upon completion of performance and revenue for arrangements that require acceptance of the product, system, or solution, is recognized when the acceptance criteria have been met.

Standalone or subsequent sales of software or software-related items are recognized in accordance with the software revenue recognition guidance. For multiple deliverable arrangements that only include software items, the Company generally uses the residual method to allocate the 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 vendor-specific objective evidence for the undelivered items cannot be determined, the Company defers revenue until all items are delivered and services have been performed, or until such evidence of fair value can be determined for the undelivered items.

Multiple deliverable arrangements in fiscal 2010 and prior Prior to fiscal 2011, a multiple deliverable arrangement is separated into more than one unit of accounting if all of the following criteria are met: (i) the delivered item(s) has value to the customer on a standalone basis; (ii) there is objective and reliable evidence of the fair value of the undelivered item(s); and (iii) if the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially within the control of the Company. If these criteria are not met, the delivered items are combined with the undelivered items to form a single unit of accounting and revenue is recognized on either a straight-line basis over the services period or deferred until the earlier of when such criteria are met or when the last item is delivered.

The Company uses the residual method to allocate the arrangement consideration for multiple deliverable arrangements for which objective and reliable evidence of fair value can only be determined for the undelivered items. 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.

The Company uses objective and reliable evidence of fair value to separate the deliverables into more than one unit of accounting if the Company has vendor-specific objective evidence or third-party evidence of fair value for all of the deliverables. The accounting guidance does not permit the Company to use an estimated selling price for these arrangements 64 -------------------------------------------------------------------------------- when objective and reliable evidence of fair value is not available.

The Company recognizes revenue in accordance with the software revenue recognition guidance for arrangements that include software that is more than incidental to the products or services as a whole. In multiple deliverable software arrangements, the Company generally uses the residual method to allocate the arrangement consideration. When vendor-specific objective evidence of fair value cannot be determined for the undelivered items, the Company defers revenue until all items have been delivered or until such evidence can be determined.

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

As discussed more fully in Note 12, "Income Taxes" to our audited consolidated financial statements at September 30, 2012, the Company changed its indefinite reinvestment of undistributed foreign earnings assertion.

FASB Accounting Standards Codification ("ASC") subtopic 740-10, "Income Taxes-Overall" ("ASC 740-10") prescribes a comprehensive model for the financial statement recognition, measurement, classification, and disclosure of uncertain tax positions. ASC 740-10 contains a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, based on the technical merits of the position. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement.

Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. Although we believe our reserves are reasonable, no assurance can be given that the final tax outcome of these matters will not be different from that which is reflected in our historical income tax provision and accruals. We adjust these reserves in light of changing facts and circumstances.

Intangible and Long-lived Assets Intangible assets include technology, customer relationships, trademarks and trade-names and other intangibles. Intangible assets with finite lives are amortized using the straight-line method over the estimated economic lives of the assets, which range from two to fifteen years. 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 in accordance with FASB ASC Topic 360, "Property, Plant, and Equipment" ("ASC 360"). Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss for long-lived assets that management expects to hold and use is based on the estimated fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or estimated fair value less costs to sell. Intangible assets determined to have indefinite useful lives are not amortized but are tested for impairment annually each September 30th, and more frequently if events occur or circumstances change that indicate an asset may be impaired. The estimated useful life of intangible and long-lived assets are based on many factors including assumptions regarding the effects of obsolescence, demand, competition and other economic factors, expectations regarding the future use of the asset, and our historical experience with similar assets. The assumptions used to determine the estimated useful lives could change due to numerous factors including product demand, market conditions, technological developments, economic conditions and competition.

Goodwill Goodwill is not amortized but is subject to periodic testing for impairment in accordance with FASB ASC Topic 350, "Intangibles-Goodwill and Other" ("ASC 350") at the reporting unit level which is one level below the Company's operating segments. The assessment of goodwill impairment is conducted by estimating and comparing the fair value of the Company's reporting units' net assets, as defined in ASC 350, to their carrying value as of that date. The fair value is estimated using an income approach whereby the fair value of the asset is based on the future cash flows that each reporting unit's assets can be expected to generate. Future cash flows are based on forward-looking information regarding market share and costs for each reporting unit and are discounted using an appropriate discount rate. Future discounted cash flows can be affected by changes in industry or market conditions or the rate and extent to which anticipated synergies or cost savings are realized with newly acquired entities.

The test for impairment is conducted annually each September 30th, and more frequently if events occur or 65 -------------------------------------------------------------------------------- circumstances change that indicate that the fair value of a reporting unit may be below its carrying amount.

At September 30, 2012 the Company performed its annual goodwill impairment test and determined that the respective book values of the Company's reporting units did not exceed their estimated fair values and that it was not necessary to record impairment charges. In order to evaluate the sensitivity of the fair value calculations on the goodwill impairment test the Company applied a hypothetical 10% decrease to the fair value of each reporting unit. This hypothetical 10% decrease in the fair value of each reporting unit at September 30, 2012 indicated that only one reporting unit, with goodwill of $133 million, would fail step one of the goodwill impairment test. Based on our goodwill impairment assessment performed as of September 30, 2012, we determined that no other reporting unit was at risk for failing step one of the goodwill impairment test.

Restructuring Programs The Company accounts for exit or disposal of activities in accordance with FASB ASC Topic 420, "Exit or Disposal Cost Obligations" ("ASC 420"). In accordance with ASC 420, a business restructuring is defined as an exit or disposal activity that includes but is not limited to a program that is planned and controlled by management and materially changes either the scope of a business or the manner in which that business is conducted. Business restructuring charges includes (i) one-time termination benefits related to employee separations, (ii) contract termination costs and (iii) other costs associated with exit or disposal activities including, but not limited to, costs for consolidating or closing facilities and relocating employees.

A liability is recognized and measured at its fair value for one-time termination benefits once the plan of termination is communicated to affected employees and it meets all of the following criteria: (i) management commits to a plan of termination, (ii) the plan identifies the number of employees to be terminated and their job classifications or functions, locations and the expected completion date, (iii) the plan establishes the terms of the benefit arrangement and (iv) it is unlikely that significant changes to the plan will be made or the plan will be withdrawn. Contract termination costs include costs to terminate a contract or costs that will continue to be incurred under the contract without benefit to the Company. A liability is recognized and measured at its fair value when the Company either terminates the contract or ceases using the rights conveyed by the contract. A liability is recognized and measured at its fair value for other associated costs in the period in which the liability is incurred.

In connection with the Merger, the Company adopted a plan to exit certain activities of the newly acquired company. A liability was recognized as of the consummation date of the acquisition for the costs under the exit plan in accordance with the authoritative guidance at that time if these costs were not associated with or were not incurred to generate revenues of the combined entity after the consummation date and either (i) had no future economic benefit to the combined company, were incremental to other costs incurred by either the acquired company or the acquiring company in the conduct of activities prior to the consummation date, and were expected to be incurred as a direct result of the plan to exit an activity of the acquired company or (ii) the cost represented an amount to be incurred by the combined company under a contractual obligation of the acquired company that existed prior to the consummation date and will either continue after the plan is completed with no economic benefit to the combined company or be a penalty incurred by the combined company to cancel that contractual obligation.

Pension and Postretirement 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 covering a portion of its U.S. retirees that include healthcare benefits and life insurance coverage. 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 Company's pension and postretirement benefit costs are developed from actuarial valuations. Inherent in these valuations are key assumptions, including the discount rate and expected long-term rate of return on plan assets. Material changes in pension and postretirement benefit costs may occur in the future due to changes in these assumptions, changes in the number of plan participants, changes in the level of benefits provided, changes in asset levels and changes in legislation.

The discount rate is subject to change each year, consistent with changes in rates of return on high-quality fixed-income investments currently available and expected to be available during the expected benefit payment period. As of September 30, 2012, the Company selects the assumed discount rate for its U.S.

pension and postretirement plans by applying the rates from the AonHewitt AA Only and AonHewitt AA Only Above Median yield curves to the expected benefit payment streams and develops a rate at which it is believed the benefit obligations could be effectively settled. Previously, the Company applied rates from the Citigroup Pension Discount Curve and the Citigroup Above Median Pension Discount Curve. The Company follows a similar process for its non-U.S. pension plans by applying the published iBoxx indices. Based on the published rates as of September 30, 2012, the Company used a weighted average discount rate of 3.94% for the U.S. pension plans, 3.61% for the non-U.S. pension plans, and 3.81% for the postretirement plans. For the U.S. pension plans, non-U.S. pension plans, and the postretirement plans, every one-percentage-point increase or decrease in the discount rate reduces or increases our benefit obligation by $449 million, $98 million, and $65 million, respectively.

66 -------------------------------------------------------------------------------- The market-related value of the Company's plan assets as of the measurement date is developed using a 5-year smoothing technique. First, a preliminary market-related value is calculated by adjusting the market-related value at the beginning of the year for payments to and from plan assets and the expected return on assets during the year. The expected return on assets represents the expected long-term rate of return on plan assets adjusted up to plus or minus 2% based on the actual 10-year average rate of return on plan assets. A final market-related value is determined as the preliminary market-related value, plus 20% of the difference between the actual return and expected return for each of the past five years.

These pension and other postretirement benefits are accounted for in accordance with FASB ASC Topic 715, "Compensation-Retirement Benefits" ("ASC 715"). ASC 715 requires that plan assets and obligations be measured as of the reporting date and the over-funded, under-funded or unfunded status of plans be recognized as of the reporting date as an asset or liability in the Consolidated Balance Sheets. In addition, ASC 715 requires costs and related obligations and assets arising from pensions and other postretirement benefit plans to be accounted for based on actuarially-determined estimates.

The plans use different factors, including years of service, eligible compensation and age, to determine the benefit amount for eligible participants.

The Company funds its U.S. pension plans in compliance with applicable laws. See Note 13, "Benefit Obligations," to our audited consolidated financial statements for a discussion of the Company's pension and postretirement plans.

Commitments and Contingencies In the ordinary course of business we are subject to legal proceedings related to environmental, product, employment, intellectual property, licensing and other matters. In addition, we are subject to indemnification and liability sharing claims by Lucent Technologies Inc. (now Alcatel-Lucent) under the terms of the Contribution and Distribution Agreement. In order to determine the amount of reserves required, we assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of reserves required for these contingencies is made after analysis of each individual issue. The estimates of required reserves may change in the future due to new developments in each matter or changes in approach such as a change in settlement strategy. Assessing the adequacy of any reserve for matters for which we may have to indemnify Alcatel-Lucent is especially difficult, as we do not control the defense of those matters and have limited information. In addition, estimates are made for our repurchase obligations related to products sold to various distributors who obtain financing from certain third party lending institutions, as described in Note 17, "Commitments and Contingencies" to our audited consolidated financial statements.

Share-based Compensation The Company accounts for share-based compensation in accordance with FASB Topic ASC 718, "Compensation-Stock Compensation" ("ASC 718"), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including stock options, restricted stock units and stock purchases based on estimated fair values. The determination of the fair value of share-based payment awards on the date of grant using an option pricing model is affected by the fair market value of our Parent's stock (as defined in Avaya Holdings Corp's Amended and Restated 2007 Equity Incentive Plan) as well as a number of highly complex and subjective assumptions.

New Accounting Guidance Recently Adopted Disclosure of Supplementary Pro Forma Information for Business Combinations In December 2010, the Financial Accounting Standards Board ("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 became effective for the Company for business combinations for which the acquisition date was on or after October 1, 2011. The adoption of this guidance did not have a material impact on the Company's financial statement disclosures.

Goodwill Impairment Test 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 became effective for the Company beginning October 1, 2011 and did not have a material impact on the Company's consolidated financial statements or financial statement disclosures.

67 -------------------------------------------------------------------------------- Fair Value Measures In May 2011, the FASB issued revised guidance which is intended to achieve common fair value measurement and disclosure guidance in GAAP and International Financial Reporting Standards. The majority of the changes represent a clarification to existing GAAP. Additionally, the revised guidance includes expanded disclosure requirements. This accounting guidance became effective for the Company beginning in the second quarter of fiscal 2012 and did not have a material impact on the Company's consolidated financial statements or financial statement disclosures.

Multiemployer Pension Plan Disclosures In September 2011, the FASB issued revised guidance which requires additional disclosure about an employer's participation in a multiemployer pension plan.

The accounting guidance became effective for the Company as of September 30, 2012 and is applied retrospectively for all prior periods presented. The adoption of this accounting guidance did not have a material impact on the Company's financial statement disclosures.

Recent Accounting Guidance Not Yet Effective In June 2011, the FASB issued revised guidance on the presentation of comprehensive income and its components in the financial statements. As a result of the guidance, companies will now be required to present net income and other comprehensive income either in a single continuous statement or in two separate, but consecutive statements. This standard eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. The standard does not, however, change the items that must be reported in other comprehensive income or the determination of net income. This new guidance is to be applied retrospectively. This accounting guidance is effective for the Company beginning in fiscal 2013 and is only expected to impact the presentation of the Company's consolidated financial statements.

In September 2011, the FASB issued revised guidance intended to simplify how an entity tests goodwill for impairment. As a result of the guidance, an entity will be allowed to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity will not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The accounting guidance is effective for the Company beginning in fiscal 2013 and early adoption is permitted. This accounting guidance is not expected to have a material impact on the consolidated financial statements or financial statement disclosures.

In July 2012, the FASB issued revised guidance intended to simplify how an entity tests indefinite-lived intangible assets other than goodwill for impairment. As a result of the guidance, an entity will be allowed to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test. An entity will not be required to perform the quantitative impairment test unless the entity determines, based on a qualitative assessment, that it is more likely than not that the indefinite-lived asset is impaired. The accounting guidance is effective for the Company beginning in fiscal 2013. This accounting guidance is not expected to have a material impact on the consolidated financial statements or financial statement disclosures.

Cautionary Note Regarding Forward Looking Statements This Annual Report on Form 10-K contains "forward-looking statements." In some cases, these statements may be identified by the use of forward-looking terminology such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "might," "our vision," "plan," "potential," "predict," "should," "will" or "would" or other similar words. These statements discuss future expectations, contain projections of results of operations or of financial condition, or state trends and known uncertainties or other forward-looking information. You are cautioned that forward-looking statements are inherently uncertain. Each forward-looking statement contained in this report is subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statement. We refer you to the section entitled "Risk Factors" in this Form 10-K for identification of important factors with respect to these risks and uncertainties. We caution readers not to place considerable reliance on such statements. Our business is subject to substantial risks and uncertainties, including those identified in this report. The information contained in this report is provided by us as of the date of this Form 10-K, and we do not undertake any obligation to update any forward-looking statements contained in this document as a result of new information, future events or otherwise. Forward-looking statements include, without limitation, statements regarding: • our expectations regarding our revenue, cost of revenue, selling, general and administrative expenses, research and development expenses, amortization of intangible assets and interest expense; • our expectations regarding the demand for our next-generation business collaboration solutions and the market trends contributing to such demand; • our strategy for worldwide growth, including our ability to develop and sell advanced communications products and services, including unified communications, networking solutions and contact center solutions; • the strength of our current intellectual property portfolio and our intention to obtain patents and other intellectual 68--------------------------------------------------------------------------------property rights used in connection with our business; • our anticipated competition as the business collaboration market evolves; • the product sales to be generated by our backlog; • our future cash requirements, including our primary cash requirements for the period October 1, 2012 through September 30, 2013; • the intention to use the net proceeds of any initial public offering conducted by Parent, among other things, to repay a portion of our existing indebtedness; • our future sources of liquidity, including any future refinancing of our existing debt or issuance of additional securities; • the uncertainties regarding our liquidity, including our ability to generate revenue, reduce costs, make future acquisitions and defend against litigation; • the impact of new accounting pronouncements; and • our expectations regarding the impact of legal proceedings, including antitrust, intellectual property or employment litigation.

Many factors could 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 ability to develop and sell advanced communications products and services, including unified communications, networking solutions and contact center solutions; • our reliance on our indirect sales channel; • economic conditions and the willingness of enterprises to make capital investments; • the market for our products and services, including unified communications solutions; • our ability to remain competitive in the markets we serve; • the ability to retain and attract key employees; • our degree of leverage and its effect on our ability to raise additional capital and to react to changes in the economy or our industry; • our ability to integrate acquired businesses, such as Radvision; • our ability to successfully transition toward or integrate the products of acquired businesses into our portfolio; • our ability to manage our supply chain and logistics functions; • liquidity and our access to capital markets; • the ability to protect our intellectual property and avoid claims of infringement; • our ability to maintain adequate security over our information systems; • environmental, health and safety laws, regulations, costs and other liabilities; • climate change risks; • an adverse result in any significant litigation, including antitrust, intellectual property or employment litigation; • risks relating to the transaction of business internationally; and • pension and post-retirement healthcare and life insurance liabilities.

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