Dear Avaya Shareholder,

Our first fiscal quarter results, which we announced on January 25th represent a solid start to our 2005 fiscal year and reflect the progress we are making on our strategic goals.

First, we continued to drive improvements in our business, as reflected by a 70% increase in operating income, to $88.2 million from $52 million in the year-ago period.

At the same time, we closed on our acquisitions of Tenovis and Spectel, which expand our geographic footprint, diversify our revenues and broaden our solutions portfolio, and which significantly enhance our competitive positioning.

And we also strengthened our balance sheet substantially by further reducing debt. These results put us on track to achieve our goals for the year: growing revenues 25-27% through a combination of organic growth and growth resulting from the acquisitions we have made, increasing operating income by 40%, and increasing our operating margin to the 8.5-9% range.

There were, however, some areas of our performance that clearly need to be improved. Product sales, for example, grew at double-digit rates internationally compared to the first quarter of last year, but were not up to our expectations in the U.S.

As we move forward, we believe the dynamic enterprise telephony market continues to offer significant growth opportunities as a result of the transition to IP telephony – particularly as this transition begins to accelerate in key regions, such as Europe, just as it has in the United States.

As the market leader in IP telephony, we are very well positioned to capture these opportunities. We've held the #1 position in IP telephony market share for four consecutive quarters and our IP telephony solutions continue to win industry and customer praise. During the first quarter, we reached a landmark, shipping our 5 millionth IP line.

Our strategic differentiation in the market, coupled with our expanded global reach, will enable us to build on our leadership in the dynamic market we serve. And the operating leverage and financial discipline we have instilled in our business model will allow us to significantly increase our profitability.

Our 1st quarter earnings press release and accompanying presentation are posted in the Investor Events section. I encourage you to review them in more detail.

Donald K. Peterson
Chairman and Chief Executive Officer