Dear Avaya Shareholder,

Over the last few years, we've transformed Avaya to capitalize on the opportunities we see in the global enterprise telephony market as firms start the transition to IP systems and applications: we've upgraded and enhanced our product and service portfolio, improved our operations, expanded our footprint and presence in the market, strengthened our financial position and significantly increased our profitability.

Today, we are the leader in IP telephony, not only among the incumbent enterprise telephony providers, but among all the market participants, according to the Synergy Research Group.

In the second quarter of FY 2005, however, several factors combined to temporarily slow our momentum. The implementation of a new go-to-market strategy, the diversion of management resources to the Tenovis integration, and decreased purchases by our indirect channel business partners affected our performance in the U.S.

We did generate continued strong growth in IP sales, which rose nearly 30% during the quarter on a year-over-year basis, our international sales were solid, and the Tenovis integration is on track from a financial perspective. But due to the weakness in our U.S. results, our overall performance in Q2 was below our expectations. As a result, we do not believe we will achieve the revenue, operating income and operating margin targets that we had set for the current fiscal year.

As we move through the second half of the year, we're focused intensely on improving our results in the U.S. and ensuring the successful integration of Tenovis. We are also committed to taking the necessary actions to improve our performance and profitability. We expect to see sequential improvements in revenue and earnings in our third fiscal quarter, with sequential growth accelerating into the fourth quarter.

Our 2nd 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