Nortel

Nortel

January 11, 2005 07:38 ET

Nortel Networks Corporation Files 2003 Financial Statements


NEWS RELEASE TRANSMITTED BY CCNMatthews

FOR: NORTEL

NYSE, TSX SYMBOL: NT

JANUARY 11, 2005 - 07:38 ET

Nortel Networks Corporation Files 2003 Financial
Statements

TORONTO--(CCNMatthews - Jan 11, 2005) -

Nortel Networks Corporation (NYSE:NT) (TSX:NT):

-- Restatements Completed

-- Independent Review Recommendations to be Implemented; Causes of
Revenue Adjustments to be Examined

-- Chief Ethics and Compliance Officer Appointed

-- Board Renewal

Nortel Networks Corporation announced that today it has completed filing
its audited financial statements for the year 2003 prepared in
accordance with United States and Canadian generally accepted accounting
principles, and related Annual Report on Form 10-K and corresponding
Canadian filings (the "2003 Annual Reports"). The 2003 Annual Reports
reflect the restatement of the years ended 2001 and 2002, and the
revision of previously announced results for the year ended 2003.
Annexed to this press release is certain selected financial information.

"With the completion of our restatements we have a solid foundation on
which to move forward with our business," said Bill Owens, president and
chief executive officer. "I want to thank all our employees and
partners, who have tirelessly dedicated their time and efforts. The
restatement has been a monumental task, both complex and demanding. I
also want to thank our customers for their consistent support that has
allowed us to maintain our business and strong financial position during
this time and continue our expansion in critical markets. We are
well-positioned for the future with an extensive global presence."

"We have a number of important initiatives we expect to announce in the
near future including those focusing on Asia and China, and those
associated with converged, solutions-oriented networks," continued
Owens. "We also expect to make announcements regarding our progress in
important new areas of business such as security and Federal solutions.
We are committed to continued innovation leadership through our strong
investment in R&D. We are focused on cash, cost and revenue to ensure
our business model better serves our targeted operating performance. I
am pleased with our cash performance in Q4, 2004 and we enter 2005 in a
strong position."

Audit Committee Independent Review

Included in the 2003 Annual Reports and also annexed to this press
release are the summary findings and recommendations of the independent
review initiated by the Nortel Audit Committee in October 2003. The
independent review examined the facts and circumstances leading to the
earlier restatement of the Company's and Nortel Networks Limited's
financial results for 2002, 2001 and 2000 and the first two fiscal
quarters of 2003 (which independent review was later extended to cover
the balance of 2003). The Audit Committee initiated this review to gain
a full understanding of the events that caused significant excess
liabilities being carried on the Company's balance sheet that needed to
be restated and to recommend to the Board of Directors the adoption of
necessary remedial measures to address personnel, internal control,
compliance and discipline issues. In carrying out this task, the Audit
Committee was assisted by the law firm of Wilmer Cutler Pickering Hale
and Dorr LLP and the forensic accounting firm of Huron Consulting
Services LLC.

As discussed in the accompanying summary, the independent review has
resulted in extensive recommendations by the Audit Committee for
remedial measures that are intended to prevent the recurrence of the
inappropriate accounting conduct that gave rise to the restatement, to
rebuild the Company's finance environment based on principles of
transparency and integrity, and to ensure sound financial reporting and
comprehensive disclosure. The Board of Directors has adopted these
recommendations in their entirety and instructed management to develop a
detailed plan and timetable for their implementation, which will be
monitored by the Board.

"My fellow board members and our Nortel management team have been
dedicated to the long term best interests of the Company and its
shareholders and to conducting our activities with the utmost
transparency and integrity," said L.R. Wilson, chairman, Board of
Directors. "While this has been a challenging period, the outcome of the
independent review is a set of comprehensive recommendations that will
leave the Company stronger and better served in the future."

In light of the substantial revenue adjustments required to be made in
the restatement due to accounting errors related to revenue recognition,
the Audit Committee has determined to review the facts and circumstances
leading to the restatement of this revenue for specific identified
transactions. The review will have a particular emphasis on the
underlying conduct that led to the initial recognition of these
revenues. The Audit Committee wants a full understanding of the historic
events that required the revenue for these specific transactions to be
restated and to develop any additional remedial measures, including
those involving internal controls and processes. Wilmer Cutler Pickering
Hale and Dorr LLP will be assisting the Audit Committee with this
review.

As a matter of corporate leadership and integrity, twelve senior
executives of Nortel's core executive leadership team have voluntarily
undertaken to pay to the Company over a three year period the amount of
their Return to Profitability bonuses awarded in 2003 (net of tax
withheld at source) aggregating the equivalent of approximately US$8.6
million, and to disclaim any potential award of the remaining two
installments of the 2003 Restricted Stock Unit Plan, in each case
regardless of whether the profitability metrics for these bonuses or
awards were met on a restated basis. While none of these executives was
found to have been directly involved in the inappropriate provisioning
conduct, these members of the core executive team share the Board's deep
disappointment over the circumstances that led to the restatement.

"These voluntary actions reflect the strength of character and quality
of leadership of Nortel's core executive team," said Owens. "These
actions are a tangible demonstration of senior management's commitment
to Nortel."

Further, the Board has cancelled the remaining two installments for all
eligible employees under the 2003 Restricted Stock Unit Plan.

Chief Ethics and Compliance Officer Appointed

Susan E. Shepard has been appointed to the recently created position of
Chief Ethics and Compliance Officer reporting to the chairman of the
Board and the president and chief executive officer effective February
21, 2005. Over the course of her career, Ms. Shepard has served in a
number of positions specifically related to ethics and compliance. Ms.
Shepard has been a Commissioner for the New York State Ethics Commission
since May 2003. In addition, prior to becoming engaged in private
practice in 1997, Ms. Shepard was Commissioner of Investigation for New
York City (1990 to 1994), Chief Counsel to the New York State Commission
of Investigation (1986 to 1990), and an Assistant United States Attorney
for the Eastern District of New York (1976 to1986).

Board Renewal

Board renewal has been an important focus throughout 2003 and 2004.
Following a search initiated in 2003, Nortel's Board of Directors was
strengthened by two additions in the first half of 2004, Dr. Manfred
Bischoff and the Hon. John Manley, each of whom will be standing for
election as Directors at Nortel's upcoming Annual Shareholders' Meeting
in 2005 (the "Meeting").

"The regular rotation of directors provides an appropriate balance of
renewal with continuity and orderly succession," said L.R. Wilson,
chairman, Board of Directors. "Given we were unable to hold a
shareholders' meeting in 2004, the Board felt it essential that the
process be accelerated at the upcoming Meeting. Accordingly, after
discussions with the Board, five directors, including myself, all
initially elected to the Board between 1991 and 1997, have decided not
to stand for re-election."

In addition to Mr. Wilson, the four other retiring directors are L. Yves
Fortier, Sherwood Smith, Jr., Guylaine Saucier and the Hon. James
Blanchard.

The Board of Directors has appointed two additional directors to the
Board of Nortel Networks Corporation; Richard McCormick, the former
Chairman and Chief Executive Officer of U S WEST; and Harry Pearce, the
retired Chairman of Hughes Electronics Corporation and retired Vice
Chairman of General Motors.

"I have had the privilege of serving on the boards of a number of public
companies and I have never seen a board - or more specifically a
Chairman - more committed to doing the right thing for a company and its
shareholders," said Owens. "On behalf of the Company, I want to thank
Red Wilson and Messrs. Fortier, Smith and Blanchard and Mrs. Saucier for
their decisive actions in stewarding Nortel through this very
challenging period. On behalf of Nortel, I also want to welcome Messrs.
McCormick and Pearce. The caliber of these individuals and their breadth
of experience will be great assets in building on the fine work of their
predecessors."

In addition to the appointment of Messrs. McCormick and Pearce, John
MacNaughton, who will be retiring later this month as the President and
Chief Executive Officer of the Canada Pension Plan Investment Board,
will be nominated for election to the Board at the Meeting.

The Board of Directors expects to nominate additional candidates in the
proxy circular for the next Meeting.

Nortel Networks Limited; 2004 Quarterly Filings

The Company expects that its principal operating subsidiary, Nortel
Networks Limited ("NNL"), will file shortly its audited financial
statements for the year 2003 prepared in accordance with United States
and Canadian generally accepted accounting principles, and related
Annual Report on Form 10-K and corresponding Canadian filing. Mr.
McCormick and Mr. Pearce have also been appointed to the NNL Board of
Directors, effective upon the completion of these filings.

Further, the Company expects that it and NNL will file their unaudited
financial statements for the first and second quarters of 2004, and
related periodic reports, before the end of January 2005 and follow as
soon as practicable thereafter with the filing of their unaudited
financial statements for the third quarter of 2004 and related periodic
reports.

The Company will hold a media conference call today at 9:00 am ET to
discuss this announcement.

To participate, please call the following at least 15 minutes prior to
the start of the event:



Teleconference:
North America: 888-211-4395
International: 212-231-6007
Webcast: www.nortel.com/pressconf011105

Replay:
(Available one hour after the conference until 5 p.m. ET on 1/21/05)
North America: 800-383-0935
International: 402-530-5545
Password: 21221515
Webcast: www.nortel.com/pressconf011105



About Nortel

Nortel is a recognized leader in delivering communications capabilities
that enhance the human experience, ignite and power global commerce, and
secure and protect the world's most critical information. Serving both
service provider and enterprise customers, Nortel delivers innovative
technology solutions encompassing end-to-end broadband, Voice over IP,
multimedia services and applications, and wireless broadband designed to
help people solve the world's greatest challenges. Nortel does business
in more than 150 countries. For more information, visit Nortel on the
Web at www.nortel.com. For the latest Nortel news, visit
www.nortel.com/news.

Certain information included in this press release is forward-looking
and is subject to important risks and uncertainties. The results or
events predicted in these statements may differ materially from actual
results or events.

Factors which could cause results or events to differ from current
expectations include, among other things: the outcome of regulatory and
criminal investigations and civil litigation actions related to Nortel's
restatements and the impact any resulting legal judgments, settlements,
penalties and expenses could have on Nortel's results of operations,
financial condition and liquidity; the findings of Nortel's independent
review and implementation of recommended remedial measures; the outcome
of the independent review with respect to revenues for specific
identified transactions, which review will have a particular emphasis on
the underlying conduct that led to the initial recognition of these
revenues; the restatement or revisions of Nortel's previously announced
or filed financial results and resulting negative publicity; the
existence of material weaknesses in Nortel's internal controls over
financial reporting; the impact of Nortel's and NNL's failure to timely
file their financial statements and related periodic reports, including
breach of its support facility and public debt obligations and Nortel's
inability to access its shelf registration statement filed with the
United States Securities and Exchange Commission (SEC); ongoing SEC
reviews, which may result in changes to our public filings; the
potential delisting or suspension of Nortel's and NNL's publicly traded
securities; the impact of management changes, including the termination
for cause of Nortel's former CEO, CFO and Controller in August 2004; the
sufficiency of Nortel's restructuring activities, including the work
plan announced on August 19, 2004 as updated on September 30, 2004,
including the potential for higher actual costs to be incurred in
connection with restructuring actions compared to the estimated costs of
such actions; cautious or reduced spending by Nortel's customers;

fluctuations in Nortel's operating results and general industry,
economic and market conditions and growth rates; fluctuations in
Nortel's cash flow, level of outstanding debt and current debt ratings;
Nortel's ability to recruit and retain qualified employees; the use of
cash collateral to support Nortel's normal course business activities;
the dependence on Nortel's subsidiaries for funding; the impact of
Nortel's defined benefit plans and deferred tax assets on results of
operations and Nortel's cash flow; the adverse resolution of class
actions, litigation in the ordinary course of business, intellectual
property disputes and similar matters; Nortel's dependence on new
product development and its ability to predict market demand for
particular products; Nortel's ability to integrate the operations and
technologies of acquired businesses in an effective manner; the impact
of rapid technological and market change; the impact of price and
product competition; barriers to international growth and global
economic conditions, particularly in emerging markets and including
interest rate and currency exchange rate fluctuations; the impact of
rationalization in the telecommunications industry; changes in
regulation of the Internet; the impact of the credit risks of Nortel's
customers and the impact of customer financing and commitments; stock
market volatility generally and as a result of acceleration of the
settlement date or early settlement, which is currently not available,
of Nortel's forward purchase contracts; the impact of Nortel's supply
and outsourcing contracts that contain delivery and installation
provisions, which, if not met, could result in the payment of
substantial penalties or liquidated damages; and the future success of
Nortel's strategic alliances.

For additional information with respect to certain of these and other
factors, see the most recent Annual Report on Form 10-K filed by Nortel
with the SEC.

Unless otherwise required by applicable securities laws, Nortel
disclaims any intention or obligation to update or revise any
forward-looking statements, whether as a result of new information,
future events or otherwise.

Nortel, the Nortel logo and the Globemark are trademarks of Nortel
Networks.



NORTEL NETWORKS CORPORATION
Consolidated Statements of Operations for the years ended December 31

----------------------------------------------------------------------
(U.S. GAAP, millions of U.S. dollars,
except per share amounts) 2003 2002 2001
----------------------------------------------------------------------
As As
restated restated

Revenues $10,193 $11,008 $18,900
Cost of revenues 5,852 7,103 14,612
----------------------------------------------------------------------
Gross profit 4,341 3,905 4,288

Selling, general and administrative
expense 1,939 2,553 6,111
Research and development expense 1,960 2,083 3,116
In-process research and development
expense - - 15
Amortization of intangibles
Acquired technology and other 101 157 806
Goodwill - - 4,058
Deferred stock option compensation 16 110 248
Special charges
Goodwill impairment - 595 11,426
Other special charges 284 1,500 3,390
(Gain) loss on sale of businesses and
assets (4) (21) 138
----------------------------------------------------------------------
Operating earnings (loss) 45 (3,072) (25,020)

Other income (expense) - net 445 (5) (506)
Interest expense
Long-term debt (181) (220) (208)
Other (28) (52) (103)
----------------------------------------------------------------------
Earnings (loss) from continuing
operations before income taxes,
minority interests and equity in net
loss of associated companies 281 (3,349) (25,837)
Income tax benefit (expense) 80 468 2,751
----------------------------------------------------------------------
361 (2,881) (23,086)
Minority interests - net of tax (63) 5 (34)
Equity in net loss of associated
companies - net of tax (36) (17) (150)
----------------------------------------------------------------------
Net earnings (loss) from continuing
operations 262 (2,893) (23,270)
Net earnings (loss) from discontinued
operations - net of tax 184 (101) (2,467)
----------------------------------------------------------------------
Net earnings (loss) before cumulative
effect of accounting changes 446 (2,994) (25,737)
Cumulative effect of accounting changes
- net of tax (12) - 15
----------------------------------------------------------------------
Net earnings (loss) $434 $(2,994) $(25,722)
----------------------------------------------------------------------

Basic earnings (loss) per common share
- from continuing operations $0.06 $(0.75) $(7.30)
- from discontinued operations 0.04 (0.03) (0.78)
----------------------------------------------------------------------
Basic earnings (loss) per common share $0.10 $(0.78) $(8.08)
----------------------------------------------------------------------

Diluted earnings (loss) per common share
- from continuing operations $0.06 $(0.75) $(7.30)
- from discontinued operations 0.04 (0.03) (0.78)
----------------------------------------------------------------------
Diluted earnings (loss) per common share $0.10 $(0.78) $(8.08)
----------------------------------------------------------------------

Dividends declared per common share $- $- $0.0375


Please refer to our Annual Report on Form 10-K for the year ended
December 31, 2003 including the Notes to the Audited Consolidated
Financial Statements



NORTEL NETWORKS CORPORATION
Consolidated Balance Sheets as of December 31

----------------------------------------------------------------------
(U.S. GAAP, millions of U.S. dollars) 2003 2002
----------------------------------------------------------------------
As
restated
ASSETS
Current assets
Cash and cash equivalents $3,997 $3,790
Restricted cash and cash equivalents 63 249
Accounts receivable - net 2,505 2,228
Inventories - net 1,190 1,506
Income taxes recoverable 90 114
Deferred income taxes - net 369 790
Other current assets 315 650
----------------------------------------------------------------------
Total current assets 8,529 9,327

Investments 244 237
Plant and equipment - net 1,656 1,692
Goodwill 2,305 2,199
Intangible assets - net 86 139
Deferred income taxes - net 3,397 2,582
Other assets 374 785
----------------------------------------------------------------------
Total assets $16,591 $16,961
----------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities
Notes payable $17 $30
Trade and other accounts payable 861 803
Payroll and benefit-related liabilities 764 485
Contractual liabilities 530 894
Restructuring 206 507
Other accrued liabilities 2,505 3,257
Long-term debt due within one year 119 243
----------------------------------------------------------------------
Total current liabilities 5,002 6,219

Long-term debt 3,891 3,960
Deferred income taxes - net 191 337
Other liabilities 2,945 2,761
----------------------------------------------------------------------
Total liabilities 12,029 13,277
----------------------------------------------------------------------

Minority interests in subsidiary companies 617 631

Commitments and contingencies

SHAREHOLDERS' EQUITY
Common shares, without par value - Authorized
shares: unlimited; Issued and outstanding
shares: 4,166,714,475 for 2003 and
3,844,171,700 for 2002 33,674 33,234
Additional paid-in capital 3,341 3,753
Deferred stock option compensation - (17)
Accumulated deficit (32,532) (32,966)
Accumulated other comprehensive loss (538) (951)
----------------------------------------------------------------------
Total shareholders' equity 3,945 3,053
----------------------------------------------------------------------
Total liabilities and shareholders' equity $16,591 $16,961
----------------------------------------------------------------------

Please refer to our Annual Report on Form 10-K for the year ended
December 31, 2003 including the Notes to the Audited Consolidated
Financial Statements



NORTEL NETWORKS CORPORATION
Consolidated Statements of Cash Flows for the years ended December 31

----------------------------------------------------------------------
(U.S. GAAP, millions of U.S. dollars) 2003 2002 2001
----------------------------------------------------------------------
As As
restated restated

Cash flows from (used in) operating activities
Net earnings (loss) from continuing
operations $262 $(2,893) $(23,270)
Adjustments to reconcile net earnings
(loss) from continuing operations to
net cash from (used in) operating
activities, net of effects from
acquisitions
and divestitures of businesses:
Amortization and depreciation 541 701 5,665
In-process research and development
expense - - 15
Non-cash portion of special charges and
related asset write downs 87 1,142 12,760
Equity in net loss of associated companies 36 17 150
Current and deferred stock option
compensation 42 110 248
Deferred income taxes (50) (425) (1,513)
Other liabilities 161 (2) (9)
(Gain) loss on repurchases of outstanding
debt securities (4) (60) -
(Gain) loss on sale or write down of
investments and businesses (51) 18 506
Other - net (786) (191) (1,529)
Change in operating assets and
liabilities (153) 815 7,183
----------------------------------------------------------------------
Net cash from (used in) operating
activities of continuing operations 85 (768) 206
----------------------------------------------------------------------

Cash flows from (used in) investing activities
Expenditures for plant and equipment (172) (352) (1,302)
Proceeds on disposals of plant and
equipment 38 406 208
Acquisitions of investments and businesses
- net of cash acquired (58) (29) (79)
Proceeds on sale of investments and
businesses 107 104 604
----------------------------------------------------------------------
Net cash from (used in) investing
activities of continuing operations (85) 129 (569)
----------------------------------------------------------------------

Cash flows from (used in) financing activities
Dividends on common shares - - (123)
Dividends paid by subsidiaries to minority
interests (35) (26) (27)
Increase (decrease) in notes payable - net (45) (333) (230)
Proceeds from long-term debt - 33 3,286
Repayments of long-term debt (270) (611) (470)
Repayments of capital leases payable (12) (17) (26)
Issuance of common shares 3 863 146
Issuance of prepaid forward purchase
contracts - 623 -
----------------------------------------------------------------------
Net cash from (used in) financing
activities of continuing operations (359) 532 2,556
----------------------------------------------------------------------
Effect of foreign exchange rate changes on
cash and cash equivalents 176 74 (10)
----------------------------------------------------------------------
Net cash from (used in) continuing
operations (183) (33) 2,183
Net cash from (used in) discontinued
operations 390 349 (331)
----------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 207 316 1,852
Cash and cash equivalents at beginning of
year 3,790 3,474 1,622
----------------------------------------------------------------------
Cash and cash equivalents at end of year $3,997 $3,790 $3,474
----------------------------------------------------------------------

Please refer to our Annual Report on Form 10-K for the year ended
December 31, 2003 including the Notes to the Audited Consolidated
Financial Statements


Segment revenues

The following table summarizes our revenues for 2003, 2002 and 2001 by
segment:

----------------------------------------------------------------------
For the years ended December 31,
2003 2002 2001
----------------------------------------------------------------------
Wireless Networks $ 4,389 $ 4,161 $ 5,699
Enterprise Networks 2,589 2,422 3,222
Wireline Networks 2,005 2,572 4,328
Optical Networks 1,179 1,820 5,050
Other (a) 31 33 601
----------------------------------------------------------------------
Consolidated $ 10,193 $ 11,008 $ 18,900
----------------------------------------------------------------------

----------------------------------------------------------------------
2003 vs 2002 2002 vs 2001
$ Change % Change $ Change % Change
----------------------------------------------------------------------
Wireless Networks $ 228 5 $ (1,538) (27)
Enterprise Networks 167 7 (800) (25)
Wireline Networks (567) (22) (1,756) (41)
Optical Networks (641) (35) (3,230) (64)
Other (a) (2) (6) (568) (95)
----------------------------------------------------------------------
Consolidated $ (815) (7) $ (7,892) (42)
----------------------------------------------------------------------

(a) "Other" represented miscellaneous business activities and
corporate functions.


The following table summarizes our quarterly revenues for 2003 by
segment:

----------------------------------------------------------------------
For the three months ending For the year
March 31, June 30,Sept. 30, Dec. 31, ended Dec. 31,
2003 2003 2003 2003 2003
----------------------------------------------------------------------
Wireless Networks $ 869 $ 973 $ 1,111 $ 1,436 $ 4,389
Enterprise Networks 588 517 545 939 2,589
Wireline Networks 515 495 423 572 2,005
Optical Networks 317 288 260 314 1,179
Other (a) 9 12 5 5 31
----------------------------------------------------------------------
Consolidated $ 2,298 $ 2,285 $ 2,344 $ 3,266 $ 10,193
----------------------------------------------------------------------

(a) "Other" represented miscellaneous business activities and
corporate functions.


Geographic revenues

The following table summarizes our geographic revenues based on the
location of the customer:

----------------------------------------------------------------------
For the years ended December 31,
2003 2002 2001
----------------------------------------------------------------------
United States $ 5,424 $ 5,823 $ 10,136
EMEA (a) 2,366 2,500 4,380
Canada 587 648 1,076
Asia Pacific 1,307 1,483 2,289
CALA (b) 509 554 1,019
----------------------------------------------------------------------
Consolidated $ 10,193 $ 11,008 $ 18,900
----------------------------------------------------------------------

----------------------------------------------------------------------
2003 vs 2002 2002 vs 2001
$ Change % Change $ Change % Change
----------------------------------------------------------------------
United States $ (399) (7) $ (4,313) (43)
EMEA (a) (134) (5) (1,880) (43)
Canada (61) (9) (428) (40)
Asia Pacific (176) (12) (806) (35)
CALA (b) (45) (8) (465) (46)
----------------------------------------------------------------------
Consolidated $ (815) (7) $ (7,892) (42)
----------------------------------------------------------------------

(a) The Europe, Middle East and Africa region, or EMEA.
(b) The Caribbean and Latin America region, or CALA.

Please refer to our Annual Report on Form 10-K for the year ended
December 31, 2003 including the Notes to the Audited Consolidated
Financial Statements


Quarterly Financial Data (Unaudited)

----------------------------------------------------------------------
(U.S. GAAP, millions of U.S. 4th Quarter 3rd Quarter
dollars. except per share amounts) 2003 2002 2003 2002
----------------------------------------------------------------------
Revenues
As previously reported $2,525 $2,266 $2,350
As reported or restated $3,266 2,616 2,344 2,322
Gross profit
As previously reported 1,029 1,192 910
As reported or restated 1,434 1,109 1,130 730
Special charges
As previously reported 178 70 1,171
As reported or restated 86 269 80 1,089
Other income (expense) - net
As previously reported 15 100 (13)
As reported or restated 143 (34) 148 28
Net earnings (loss) from continuing
operations
As previously reported (167) 130 (1,735)
As reported or restated 501 (195) 88 (1,556)
Net earnings (loss) from
discontinued operations
As previously reported (1) 55 2
As reported or restated 27 (99) 43 5
----------------------------------------------------------------------
Net earnings (loss) before
cumulative effect of accounting
change
As previously reported (168) 185 (1,733)
As reported or restated 528 (294) 131 (1,551)
Cumulative effect of accounting
change
As previously reported - - -
As reported or restated - - - -
----------------------------------------------------------------------
Net earnings (loss)
As previously reported - (168) 185 (1,733)
As reported or restated 528 (294) 131 (1,551)
----------------------------------------------------------------------

Basic earnings (loss) per common
share - from continuing operations
As previously reported (0.04) 0.03 (0.40)
As reported or restated 0.12 (0.05) 0.02 (0.36)
- from discontinued operations
As previously reported 0.00 0.01 0.00
As reported or restated 0.00 (0.02) 0.01 0.00
----------------------------------------------------------------------
Basic earnings (loss) per common
share
As previously reported (0.04) 0.04 (0.40)
As reported or restated 0.12 (0.07) 0.03 (0.36)
Diluted earnings (loss) per common
share - from continuing operations
As previously reported (0.04) 0.03 (0.40)
As reported or restated 0.12 (0.05) 0.02 (0.36)
- from discontinued operations
As previously reported 0.00 0.01 0.00
As reported or restated 0.00 (0.02) 0.01 0.00
----------------------------------------------------------------------
Diluted earnings (loss) per common
share
As previously reported (0.04) 0.04 (0.40)
As reported or restated 0.12 (0.07) 0.03 (0.36)

Dividends declared per common share - - - -

----------------------------------------------------------------------
(U.S. GAAP, millions of U.S. 2nd Quarter 1st Quarter
dollars. except per share amounts) 2003 2002 2003 2002
----------------------------------------------------------------------
Revenues
As previously reported $2,338 $2,788 $2,377 $2,906
As reported or restated 2,285 2,920 2,298 3,150
Gross profit
As previously reported 1,028 1,013 1,044 819
As reported or restated 882 1,029 895 1,037
Special charges
As previously reported (2) 361 112 463
As reported or restated (22) 295 140 442
Other income (expense) - net
As previously reported 23 (23) 4 (9)
As reported or restated 60 101 94 (100)
Net earnings (loss) from continuing
operations
As previously reported 38 (632) (171) (752)
As reported or restated (93) (452) (234) (690)
Net earnings (loss) from
discontinued operations
As previously reported (1) 3 190 16
As reported or restated (8) (62) 122 55
----------------------------------------------------------------------
Net earnings (loss) before
cumulative effect of accounting
change
As previously reported 37 (629) 19 (736)
As reported or restated (101) (514) (112) (635)
Cumulative effect of accounting
change
As previously reported - - (8) -
As reported or restated - - (12) -
----------------------------------------------------------------------
Net earnings (loss)
As previously reported 37 (629) 11 (736)
As reported or restated (101) (514) (124) (635)
----------------------------------------------------------------------

Basic earnings (loss) per common
share - from continuing operations
As previously reported 0.01 (0.18) (0.04) (0.23)
As reported or restated (0.02) (0.13) (0.06) (0.21)
- from discontinued operations
As previously reported 0.00 0.00 0.04 0.00
As reported or restated 0.00 (0.02) 0.03 0.01
----------------------------------------------------------------------
Basic earnings (loss) per common
share
As previously reported 0.01 (0.18) 0.00 (0.23)
As reported or restated (0.02) (0.15) (0.03) (0.20)
Diluted earnings (loss) per common
share - from continuing operations
As previously reported 0.01 (0.18) (0.04) (0.23)
As reported or restated (0.02) (0.13) (0.06) (0.21)
- from discontinued operations
As previously reported 0.00 0.00 0.04 0.00
As reported or restated 0.00 (0.02) 0.03 0.01
----------------------------------------------------------------------
Diluted earnings (loss) per common
share
As previously reported 0.01 (0.18) 0.00 (0.23)
As reported or restated (0.02) (0.15) (0.03) (0.20)

Dividends declared per common share - - - -


Please refer to our Annual Report on Form 10-K for the year ended
December 31, 2003 including the Notes to the Audited Consolidated
Financial Statements



SUMMARY OF FINDINGS AND OF RECOMMENDED REMEDIAL MEASURES OF THE
INDEPENDENT REVIEW

SUBMITTED TO THE AUDIT COMMITTEE OF THE BOARDS OF DIRECTORS OF NORTEL
NETWORKS CORPORATION AND NORTEL NETWORKS LIMITED



Wilmer Cutler Pickering Hale and Dorr LLP
2445 M Street, N.W.
Washington, D.C. 20037

Huron Consulting Services LLC
99 High Street
Boston, Massachusetts 02110



In late October 2003, Nortel Networks Corporation ("Nortel" or the
"Company") announced that it intended to restate approximately $900M of
liabilities carried on its previously reported balance sheet as of June
30, 2003, following a comprehensive internal review of these liabilities
("First Restatement"). The Company stated that the principal effects of
the restatement would be a reduction in previously reported net losses
for 2000, 2001, and 2002 and an increase in shareholders' equity and net
assets previously reported on its balance sheet. Concurrent with this
announcement, the Audit Committees of the Boards of Directors of Nortel
Networks Corporation and Nortel Networks Limited (collectively, the
"Audit Committee" and the "Board of Directors" or "Board," respectively)
initiated an independent review of the facts and circumstances leading
to the First Restatement. The Audit Committee wanted to gain a full
understanding of the events that caused significant excess liabilities
to be maintained on the balance sheet that needed to be restated, and to
recommend that the Board of Directors adopt, and direct management to
implement, necessary remedial measures to address personnel, controls,
compliance, and discipline. The Audit Committee engaged Wilmer Cutler
Pickering Hale and Dorr LLP ("WCPHD") to advise it in connection with
its independent review. Because of the significant accounting issues
involved in the inquiry, WCPHD retained Huron Consulting Services LLC
("Huron") to provide expert accounting assistance. Huron has been
involved in all phases of WCPHD's work.

Scope of the Independent Review

The independent review focused initially on events relating to the
establishment and release of contractual liability and other related
provisions (also called accruals, reserves, or accrued liabilities) in
the second half of 2002 and the first half of 2003, including the
involvement of senior corporate leadership. (The review did not include
provisioning activity in the first half of 2002 because it was not
expected that any such activity could have had a material impact on the
results of those quarters in light of the significant losses in those
periods.) As the review evolved, its focus broadened to include specific
provisioning activities in each of the business units and geographic
regions. In light of concerns raised in the initial phase, the Audit
Committee expanded the review to include provisioning activities in the
third and fourth quarters of 2003.

The Audit Committee expressly directed that requested documents be
promptly provided and that employees cooperate with requests for
interviews; the Audit Committee instructed senior management to
implement these directions throughout the Company. Over the course of
the inquiry, more than 50 current and former Nortel employees were
interviewed, some more than once. While the independent inquiry did not
examine the work of Nortel's external auditor, Deloitte & Touche LLP,
several current and former audit engagement partners were interviewed.
Hundreds of thousands of hard copy and electronic documents and emails
were collected and reviewed from corporate headquarters in Brampton,
from company servers, and from key employees in the business units and
in the regions.

It was beyond the scope of the independent inquiry to audit or otherwise
review the substantive accuracy of Nortel's restated financial
statements. As the inquiry progressed, the Audit Committee directed new
corporate management to examine in depth the concerns identified by
WCPHD regarding provisioning activity and to review provision releases
in each of the four quarters of 2003, down to a low threshold. That
examination, and other errors identified by management, led to a second
restatement of financial results, filed today (the "Second
Restatement"). WCPHD and Huron played no role in management's
restatement efforts. It was also beyond the scope of the independent
inquiry to review other aspects of Nortel's accounting practices. The
Second Restatement addresses a number of these practices.

WCPHD and Huron reported regularly to the Audit Committee on the
progress of the investigation. Most, or all, of the independent and
non-management Board members attended these Audit Committee briefings.
The Chairs of the Audit Committee and of the Board of Directors were
briefed between Audit Committee meetings to provide them with a "real
time" understanding of the progress of the investigation. At the
direction of the Audit Committee, WCPHD and Huron met regularly with new
management and the Company's external auditors to provide facts
developed through the inquiry, so both would have this information as
they proceeded through the Second Restatement. WCPHD and Huron also
briefed Canadian and U.S. regulators on a regular basis. The Audit
Committee has reviewed in detail the findings of the independent review
and the recommended remedial measures, and it has adopted those findings
and proposed remedial measures in their entirety. This synopsis
summarizes those findings and proposed remedial measures.

Summary of Findings of the Independent Review

The investigation necessarily focused on the financial picture of the
Company at the time that decisions were made and actions were taken
regarding provisioning activity. Because of significant changes to
financial results reflected in the Second Restatement, the restated
financial results differ from the historical results that formed the
backdrop for this inquiry.

In summary, former corporate management (now terminated for cause) and
former finance management (now terminated for cause) in the Company's
finance organization endorsed, and employees carried out, accounting
practices relating to the recording and release of provisions that were
not in compliance with U.S. generally accepted accounting principles
("U.S. GAAP") in at least four quarters, including the third and fourth
quarters of 2002 and the first and second quarters of 2003. In three of
those four quarters - when Nortel was at, or close to, break even -
these practices were undertaken to meet internally imposed pro-forma
earnings before taxes ("EBT") targets. While the dollar value of most of
the individual provisions was relatively small, the aggregate value of
the provisions made the difference between a profit and a reported loss,
on a pro forma basis, in the fourth quarter of 2002 and the difference
between a loss and a reported profit, on a pro forma basis, in the first
and second quarters of 2003. This conduct caused Nortel to report a loss
in the fourth quarter of 2002 and to pay no employee bonuses, and to
achieve and maintain profitability in the first and second quarters of
2003, which, in turn, caused it to pay bonuses to all Nortel employees
and significant bonuses to senior management under bonus plans tied to a
pro forma profitability metric.

The failure to follow U.S. GAAP with respect to provisioning can be
understood in light of the management, organizational structure, and
internal controls that characterized Nortel's finance organization.
These characteristics, discussed below, include:

-- Management "tone at the top" that conveyed the strong leadership
message that earnings targets could be met through application of
accounting practices that finance managers knew or ought to have known
were not in compliance with U.S. GAAP and that questioning these
practices was not acceptable;

-- Lack of technical accounting expertise which fostered accounting
practices not in compliance with U.S. GAAP;

-- Weak or ineffective internal controls which, in turn, provided
little or no check on inaccurate financial reporting;

-- Operation of a complicated "matrix" structure which contributed to a
lack of clear responsibility and accountability by business units and by
regions; and

-- Lack of integration between the business units and corporate
management that led to a lack of transparency regarding provisioning
activity to achieve internal EBT targets.

Nortel posted significant losses in 2001 and 2002 and downsized its work
force by nearly two-thirds. The remaining employees were asked to
undertake significant additional responsibilities with no increase in
pay and no bonuses. The Company's former senior corporate management
asserted, at the start of the inquiry, that the Company's downturn, and
concomitant downsizing of operations and workforce, led to a loss of
documentation and a decline in financial discipline. Those factors, in
their view, were primarily responsible for the significant excess
provisions on the balance sheet as of June 30, 2003, which resulted in
the First Restatement. While that downturn surely played a part in the
circumstances leading to the First Restatement, the root causes ran far
deeper.

When Frank Dunn became CFO in 1999, and then CEO in 2001, he drove
senior management in his finance organization to achieve EBT targets
that he set with his senior management team. The provisioning practices
adopted by Dunn and other finance employees to achieve internal EBT
targets were not in compliance with U.S. GAAP, particularly Statement of
Financial Accounting Standards Number 5 ("SFAS 5"). SFAS 5, which
governs accounting for contingencies, requires, among other things, a
probability analysis for each risk before a provision can be recorded.
It also requires that a triggering event - such as resolution of the
exposure or a change in estimate - occur in the quarter to warrant the
release of a provision. Dunn and other finance employees recognized that
provisioning activity - how much to reserve for a particular exposure
and when that reserve should be released - inherently involved
application of significant judgment under U.S. GAAP. Dunn and others
stretched the judgment inherent in the provisioning process to create a
flexible tool to achieve EBT targets. They viewed provisioning as "a
gray area." They became comfortable with the concept that the value of a
provision could be reasonably set at virtually any number within a wide
range and that a provision release could be justified in a number of
quarters after the quarter in which the exposure, which formed the basis
for the provision, was resolved. Dunn and others exercised their
judgment strategically to achieve EBT targets.

Third quarter, 2002

At the direction of then-CFO Doug Beatty, a company-wide analysis of
accrued liabilities on the balance sheet was launched in early August
2002. The CFO and the Controller, Michael Gollogly, learned that this
analysis showed approximately $303M in provisions that were no longer
required and were available for release. The CFO and the Controller,
each a corporate officer, knew, or ought to have known, that excess
provisions, if retained on the balance sheet, would cause the Company's
financial statements to be inaccurate and that U.S. GAAP would have
required either that such provisions be released in that period and
properly disclosed, or that prior period financial statements be
restated. Instead, they permitted finance employees in the business
units and in the regions to release excess accruals into income over the
following several quarters. They acted in contravention of U.S. GAAP by
failing to correct the Company's financial statements to account for the
significant excess accrued liabilities. Neither the CFO nor the
Controller advised the Audit Committee and/or the Board of Directors
that significant excess provisions on the balance sheet had been
identified and that the Company's financial statements might be
inaccurate, nor did either suggest such information should be disclosed
in the Company's financial statements.

As a result of this company-wide review, senior finance employees
recognized that their respective business unit or region had excess
provisions on Nortel's balance sheet, and directed other finance
employees to track these excess provisions. Nortel finance employees had
their own distinct term for a provision on the balance sheet that was no
longer needed - it was "hard." Each business unit developed, in varying
levels of detail and over varying periods of time, internal "hardness"
schedules that identified provisions that were no longer required and
were available for release. Finance employees treated provisions
identified on these schedules as a pool from which releases could be
made to "close the gap" between actual EBT and EBT targets in subsequent
quarters.

Fourth quarter, 2002

By mid-2002, employees throughout the Company were being recruited by
other companies and morale was low. Corporate management sought to
retain these employees but recognized that other public companies had
come under criticism for awarding "stay" bonuses in the face of enormous
losses. At management's recommendation, the Board determined to reward
employees with bonuses under bonus plans tied to profitability. One
plan, the Return to Profitability ("RTP") bonus, contemplated a one-time
bonus payment to every employee, save 43 top executives, in the first
quarter in which the Company achieved pro forma profitability. The 43
executives were eligible to receive 20% of their share of the RTP bonus
in the first quarter in which the Company attained profitability, 40%
after the second consecutive quarter of cumulative profitability, and
the remaining 40% upon four quarters of cumulative profitability. In
order for the RTP bonuses to be paid, pro forma profits had to exceed,
by at least one dollar, the total cost of the bonus for that quarter.
Another plan, the Restricted Stock Unit ("RSU") plan, made a significant
number of share units available for award by the Board to the same 43
executives in four installments tied to profitability milestones. Once a
milestone was met, the Board had discretion whether to make the award.

Through the first three quarters of 2002, Nortel experienced significant
losses, and management reported to the Board that it expected losses
would continue in the fourth quarter. After the initial results for the
business units and regions were consolidated, they showed that Nortel
unexpectedly would achieve pro forma profitability in the fourth
quarter. Frank Dunn, who had been promoted to CEO in 2001, understood
that profitability had been attained from an operational standpoint but
determined that it was unwise to report profitability and pay bonuses in
the fourth quarter because performance for the rest of the year had been
poor. He determined that provisions should be taken to cause a loss for
the quarter. Over a two day period late in the closing process, the CFO
and the Controller worked with employees in the finance organizations in
the business units, the regions, and in global operations, to identify
and record additional provisions totaling more than $175 million. All of
these provisions were recorded "top-side" - that is, by employees in the
office of the Controller based on information provided by the business
units, regions and global operations - because of the late date in the
closing process on which they were made. Nortel's results for the fourth
quarter of 2002 turned from an unexpected profit into the loss
previously forecasted by management to the Board of Directors. Neither
the CEO, the CFO, nor the Controller advised the Audit Committee and/or
the Board of Directors of this concerted provisioning activity to
improperly turn a profit into a loss. Nortel has since determined that
many of these provisions were not recorded in compliance with U.S. GAAP,
and has reversed those provisions in the Second Restatement. The loss
then reported by Nortel in the fourth quarter meant that no employee
bonuses were paid for that quarter.

First quarter, 2003

While Nortel had announced publicly that it expected to achieve pro
forma profitability in the second quarter of 2003, Dunn told a number of
employees that he intended to achieve profitability one quarter earlier,
and he established internal EBT targets for each business unit and for
corporate to reach that goal. At Dunn's direction, "roadmaps" were
developed to show how the targets could be achieved. These roadmaps made
clear that the internal EBT targets for the quarter could only be met
through release from the balance sheet of excess provisions that lacked
an accounting trigger in the quarter. At the request of finance
management in each business unit, finance employees identified excess,
or "hard," provisions from the balance sheet, and, together, they
determined which provisions to release to close the gap and meet the
internal EBT targets. That release activity was supplemented by
releases, directed by the CFO and by the Controller, of excess corporate
provisions that had been identified in the third quarter of 2002 as
available for release. Releases of provisions by corporate and by each
business unit and region, including excess provisions, totaling $361M,
enabled Nortel to show a consolidated pro forma profit in the first
quarter, notwithstanding that its operations were running at a loss. The
Finance Vice Presidents of the business units and two of the three
regions, the Asia Controller, the CFO, the Controller, and the CEO knew,
or ought to have known, that U.S. GAAP did not permit the release,
without proper justification, of excess provisions into the income
statement. Nortel has since determined that many of these releases in
this quarter were not in accordance with U.S. GAAP, and has reversed
those releases in the First and Second Restatements and restated the
releases into proper quarters.

When presenting the preliminary results for the quarter to the Audit
Committee, the Controller inaccurately represented that the vast
majority of these releases were "business as usual" and in compliance
with U.S. GAAP, and that the remaining releases were one time,
non-recurring events and in compliance with U.S. GAAP. Further, the CFO
and the Controller failed to advise the Audit Committee and/or the Board
of Directors that release of excess corporate provisions was required to
achieve profitability and make up for the shortfall in operational
results; that such releases were needed to cover the cost of the bonus
compensation; that no event in the quarter triggered the releases (as
required by U.S. GAAP); that the releases implicated Staff Accounting
Bulletin 99 (relating to materiality) because they turned a loss for the
quarter into a profit; and that they retained a significant amount of
excess provisions on the balance sheet to be used, when needed, in a
subsequent quarter. In separate executive sessions held by the Audit
Committee with the CFO and the Controller, neither the CFO nor the
Controller raised quality of earnings issues nor questioned the payment
of the RTP bonus. Based on management's representations, the Audit
Committee approved the quarterly results, and the Board approved the
award of the RTP bonus.

Second quarter, 2003

Seeking to continue to show profitability in the second quarter and meet
the first RSU milestone and the second tranche of the RTP bonus, senior
corporate management developed internal EBT targets to achieve pro forma
profitability. As was the case in the first quarter, it became clear
during the quarter that operational results would be a loss. At the
request of finance management in each business unit, finance employees
again identified "hard" provisions from the balance sheet, and,
together, they determined which provisions to release to close the gap
and achieve the internal EBT targets. Nortel has since determined that
many of these releases were not in accordance with U.S. GAAP, and has
reversed those releases in the First and Second Restatements and
restated the releases into proper quarters. In both the first and second
quarters of 2003, the dollar value of many individual releases was
relatively small, but the aggregate value of the releases made the
difference between a pro forma loss and profit in each quarter.

The CEO, the CFO and the Controller failed to advise the Audit Committee
or the Board of Directors that operations of the business units were
running at a loss during the second quarter and that the validity of
many of the numerous provision releases, totaling more than $370
million, could be questionable. Based on management's representations,
the Audit Committee approved the quarterly results, and the Board
approved payment of the second tranche of the RTP bonus and awarded
restricted stock under the RSU plan.

Third and fourth quarters, 2003

In light of concerns raised by the inappropriate accounting judgments
outlined above, the Audit Committee expanded its investigation to
determine whether excess provisions were released to meet internal EBT
targets in each of these two quarters. No evidence emerged to suggest an
intent to release provisions strategically in those quarters to meet EBT
targets. Given the significant volume of provision releases in these two
quarters, the Audit Committee directed management to review provision
releases, down to a low threshold, using the same methods used to
evaluate the releases made in the first half of the year. This review
has resulted in additional adjustments for these quarters, which are
reflected in the Second Restatement.

Governing Principles for Remedial Measures

The Audit Committee asked WCPHD to recommend governing principles, based
on its independent inquiry, to prevent recurrence of the inappropriate
accounting conduct, to rebuild a finance environment based on
transparency and integrity, and to ensure sound financial reporting and
comprehensive disclosure. The recommendations developed by WCPHD and
provided to the Audit Committee were directed at:

-- Establishing standards of conduct to be enforced through appropriate
discipline;

-- Infusing strong technical skills and experience into the finance
organization;

-- Requiring comprehensive, on-going training on increasingly complex
accounting standards;

-- Strengthening and improving internal controls and processes;

-- Establishing a compliance program throughout the Company which is
appropriately staffed and funded;

-- Requiring management to provide clear and concise information, in a
timely manner, to the Board to facilitate its decision-making; and

-- Implementing an information technology platform that improves the
reliability of financial reporting and reduces the opportunities for
manipulation of results.

These recommendations were grouped into three categories - people,
processes and technology - and are discussed below:

-- People

An effective "tone at the top" requires effective policies and
procedures, but these alone are not sufficient. Those who manage and
lead the Company, and are its officers, must exercise the highest
fiduciary duties to the Company and shareholders and must be
accountable, both to corporate management and the Board, for accurately
reporting financial results.

Based on periodic reports by WCPHD on the progress of the independent
inquiry, the Audit Committee recommended, and the Board of Directors
approved, termination for cause of the CEO, the CFO, the Controller, and
seven additional senior finance employees. The Board of Directors
determined that each of these individuals had significant
responsibilities for Nortel's financial reporting as a whole, or for
their respective business units and geographic regions, and that each
was aware, or ought to have been aware, that Nortel's provisioning
activity, described above, did not comply with U.S. GAAP. Nortel has
formally demanded the return of all bonus compensation paid to each of
these individuals in 2003. Once the Board receives responses to this
demand, it should determine the appropriate course of action to pursue
with each of these ten former employees.

Senior corporate officers, including the four Presidents of the business
units during the period covered by this inquiry, the four Presidents of
the regions, and the President of Global Operations, now recognize that
inappropriate activity involving provisioning occurred "on their watch."
While they lacked an understanding that certain provisioning activities
in their respective business units were not in compliance with U.S.
GAAP, they now recognize that such conduct was instrumental in achieving
the reported results in the fourth quarter of 2002 and the first and
second quarters of 2003. To demonstrate personal commitment to the
governing principles stated above and to lead the Company forward, each
of these officers has volunteered to return to the Company the entire
RTP bonus that he or she was awarded, net of taxes already paid, and to
disclaim any opportunity to receive the third and fourth installments of
the RSU bonus, which the Board has accepted. In light of the Board's
expectation that senior employees of the Company will lead by example,
the Board should decline to award the third and fourth tranches of the
RSU plan to the remaining eligible employees, irrespective of whether
the profitability metrics for such bonuses are met as a result of the
Second Restatement.

The Board of Directors must make clear that it has not tolerated, and
will not in the future tolerate, accounting conduct that involves the
misapplication of U.S. GAAP. It must further communicate its expectation
that every Nortel employee will adhere to the highest ethical standards;
will have training and experience commensurate with his or her job
responsibilities; and will be held accountable for his or her actions
and decisions. The Board of Directors and management should continue to
address the issues associated with the inappropriate use of provisions.

Recent experience has shown that the Nortel finance organization lacks
sufficient technical accounting expertise. Many finance employees are
"career" Nortel employees and learned accounting at Nortel. Whatever
basic accounting knowledge is resident within Nortel is largely
knowledge of Canadian GAAP, not U.S. GAAP. Nortel reported in accordance
with Canadian GAAP until 2000, when it switched to reporting in
accordance with U.S. GAAP. High quality finance employees are critical
to the soundness of the Company's financial reporting systems and
controls so that the results of operations are reported accurately and
in a timely manner. The Board of Directors should direct management to
recruit, from outside Nortel, individuals with strong accounting and
financial reporting skills and a proven record of integrity and ethical
behavior to fill key finance positions. The Board should also direct
management to review the training and experience of Nortel mid-level
finance employees and to supplement this expertise, where appropriate,
by hiring individuals from outside Nortel with strong accounting
training and background.

Nortel has long had an internal "technical accounting group" to which
finance employees were supposed to turn for resolution of difficult
accounting questions and for technical accounting interpretations. While
this practice is a sound one, the practical application has fallen
short. Finance employees did not regularly turn to this group for
resolution of an issue, and it was far from clear that this group had
the "last word" on such issues. That technical accounting group should
be led by a very senior finance executive with in-depth knowledge of,
and experience in applying, U.S. GAAP. Management should be directed to
conduct a benchmarking study to evaluate whether the technical
accounting group is properly organized; its personnel component is
consistent with other similar companies; its staff has appropriate and
current expertise; and its authority to resolve accounting issues and
technical interpretations is clearly defined within the organization.

Notwithstanding the enormous time and resources that the Company has
devoted to restatement activities for the past year, many employees
appear to lack a clear understanding of the accounting issues that gave
rise to the restatements. That is perhaps not surprising in light of the
lack of basic U.S. GAAP training and expertise in the finance
organization. Management has taken significant steps to remedy this
deficit by requiring mandatory training, developed by external
consultants, and taught by knowledgeable finance employees. These
remedial training programs are an important first step, but much more
must be done to ensure that the finance organization is fluent in
governing accounting standards and principles. Widespread training, by
outside experts, at all levels of the finance organization, must
continue so that all finance employees receive comprehensive training in
U.S. GAAP and in the consequences of failing to follow U.S. GAAP. Going
forward, management should develop in depth, on-going continuing
education programs that explain continuously evolving complex accounting
standards. Management should assess the staffing of its training
organization, and the adequacy of its trainers. Every Nortel employee,
including each finance employee, must now acknowledge annually, in
writing, that he or she has read Nortel's code of conduct and will
adhere to that code. The certification for each finance employee should
be expanded to include an acknowledgement that each such employee is
familiar with all applicable U.S. GAAP requirements. In addition, the
Board should consider whether each finance employee should be required
to complete a certain number of hours of continuing professional
education each year.

-- Processes

A basic component of sound corporate oversight is the control structure.
Internal controls - the Company's accounting policies, organizational
structure, systems, processes, employees, leadership, and culture -
working together, foster accurate financial reporting and sound
disclosure in a timely manner. While management has recognized
weaknesses in existing processes and controls, and has taken steps to
remedy these deficiencies, more needs to be done.

Nortel is a multi-national organization that has changed organizational
structure over the past several years. One legacy of this changing
structure is a matrix organization in which there is no clear assignment
of responsibility for assessing the adequacy and usage of contractual
liability provisions; even where responsibility is clear, it is unlikely
that sufficient monitoring is in place to make sure that provisioning
activity is in accord with U.S. GAAP. The need for the matrix
organization must be re-examined in light of the risks that it poses to
financial discipline and accountability and, if a matrix structure
continues to be used, clear accountability must be established.

Historically, finance employees responsible for meeting EBT targets had
authority to record and release provisions. That practice must end
immediately. The control organization must have sole authority to make
these decisions and record these entries. The Board of Directors must
insist that the re-engineering of the control organization be a
management priority. In addition, the Controller and the control
organization, working with the General Counsel, must develop standards
of transparency in financial reporting that meet both the letter and the
spirit of legal requirements.

Nortel's written accounting policies must be reviewed and, where
necessary, rewritten to ensure strict adherence to U.S. GAAP and provide
numerous "real life" examples of practical applications. Procedures must
be adopted to identify evolving interpretations of accounting standards
and best practices under U.S. GAAP and to develop and conform Nortel's
policies in a timely manner. Employees charged with responsibility for
Nortel's accounting policies must have substantial knowledge of the
strengths and weaknesses of the financial organization and knowledge of
best practices in similarly situated companies and ensure that
accounting practices follow Nortel's policies. These policies must be
communicated to finance and control employees, and management must
stress the importance of adherence to the policies and impose sanctions
if they are not followed.

The internal audit function must be strengthened and must provide an
independent check on the integrity of financial reporting. Historically,
Nortel's internal auditor focused solely on "operational" reviews and
had no role in determining whether Nortel's accounting policies were in
compliance with U.S. GAAP or in evaluating whether these policies were
properly applied. The Audit Committee has already established new
priorities for the internal auditor relating to the evaluation of risk
exposures for financial reporting. Internal audit should continue its
practice of proposing an annual work plan, and should ensure that the
work plan focuses on the new priorities set by the Audit Committee. The
Company is currently conducting a search to fill the vacant position of
internal auditor. The internal audit function requires a leader with
substantial experience in applying U.S. GAAP in a similarly-situated
company and great familiarity in applying professional standards issued
by the Institute of Internal Auditors. The internal auditor should
report to the CEO to remove any potential threat to independence. The
internal auditor should continue to have direct and regular access to
the Board and the Audit Committee. Staffing of internal audit must be
consistent with its mandate.

These governing principles are an effort to forge a framework for
rebuilding the Nortel finance environment. Equally important, the Board,
the CEO, and the CFO must continue to promote high ethical standards
throughout the Company. Words announcing adherence to the highest
standard of integrity are relatively easy to express, but it is actions,
not words, that count. The Board has established the position of a Chief
Ethics and Compliance Officer. The Board has also adopted a code of
ethical conduct and business practices which outlines principles to
guide ethical decision-making and provides practical answers to ethics
questions regularly asked in the workplace. The Board should direct
management to enhance significantly the existing compliance program.
Together, the code and a strengthened compliance program set the tone
and the standards of behavior that the Company expects from its
employees. Employees must be convinced of the Company's commitment to an
ethical climate, and of the central role that they play in ensuring that
the Company's code is followed. They must view compliance with the
Company's code of conduct, standards, and control systems as a central
priority, and understand they will be rewarded for ethical behavior,
even if it uncovers some problem that others might prefer to remain
undisclosed. On a regular basis, the Board should review the activities
of the compliance office, the strength of the compliance program, and
the risks it has addressed.

The Board must receive from management, in sufficient time prior to
meetings, all materials necessary for it to monitor and act on business
risks affecting Nortel and information relating to decisions the Board
is being asked to make. The Audit Committee needs clear and concise
information relating to Nortel's financial reporting. The Board should
implement a process whereby management would provide a quarterly
assessment of the overall quality and transparency of Nortel's financial
reporting and suggestions for improvements in form and content, which
the external auditors would review and comment. The Board's practice of
receiving all information respecting Nortel's financial performance on a
consolidated basis, and of each of its business units, only from the CFO
should change. The heads of each business unit should be expected to
take full responsibility for the financial results of their respective
businesses and to provide quarterly presentations to the Board with the
senior finance employee in that business unit. Periodically, the Audit
Committee should have separate, executive sessions with the chief
operations and finance employees for each business unit to discuss
issues specific to their businesses.

-- Technology

Management has announced that it intends to acquire and install a SAP
information technology platform to facilitate production of accurate
financial results in a timely and cost effective manner. The objectives
of any technology platform implemented by Nortel should include
identification of existing control procedures that are redundant or
inefficient; prevention/detection and correction of errors on a timely
basis; prevention or detection of fraud; simplification of systems and
increased productivity; reduction of opportunities for manual
intervention; ability to trace transactions from start to finish;
improved operation of controls; and substantive analysis of results,
including both operating and financial metrics. In sum, those
responsible for implementing SAP should have a strong focus on
re-engineering existing processes so that the control elements intrinsic
to the SAP system are effective.

After thorough consideration, the Audit Committee has recommended, and
the Board of Directors has approved, adoption of each of these
recommendations. The Board of Directors has directed management to
develop a detailed plan and timetable for the implementation of these
recommendations and intends to monitor the implementation of these
principles by management.

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