72911--4/28/2006--NORTEL_NETWORKS

related topics

{debt, indebtedness, cash}

{financial, litigation, operation}

{product, market, service}

{acquisition, growth, future}

{control, financial, internal}

{stock, price, share}

{capital, credit, financial}

{condition, economic, financial}

{cost, contract, operation}

{stock, price, operating}

{personnel, key, retain}

{operation, international, foreign}

{customer, product, revenue}

{system, service, information}

{property, intellectual, protect}

{tax, income, asset}

{regulation, change, law}

We are subject to ongoing regulatory and criminal investigations in the U.S. and Canada, which could require us to pay substantial fines or other penalties or subject us to sanctions and we cannot predict the timing of developments in these matters. It is uncertain at this time if and when the Proposed Class Action Settlement will be finalized and approved. If the Proposed Class Action Settlement is finalized and approved, it would require us to pay a substantial cash amount and would result in a significant dilution of existing equity positions. We are subject to additional significant pending civil litigation actions, which are not encompassed by the Proposed Class Action Settlement and which, if decided against us or as a result of settlement, could require us to pay substantial judgments, settlements, fines or other penalties and could result in the significant dilution of existing equity positions, and we cannot predict the timing of developments in these matters. Material adverse legal judgments, fines, penalties or settlements, including the Proposed Class Action Settlement, could have a material adverse effect on our business, results of operations, financial condition and liquidity, which could be very significant. We and our independent registered chartered accountants have identified a number of material weaknesses related to our internal control over financial reporting and concluded that our internal control over financial reporting was ineffective as at December 31, 2005. These material weaknesses remain unremedied, which could continue to impact our ability to report our results of operations and financial condition accurately and in a timely manner. Full implementation of the governing principles of the Independent Review as they relate to remedial measures, the full remediation of our material weaknesses, internal control over financial reporting, and disclosure controls and procedures will continue to take significant time and effort. Our credit ratings are below investment grade, and we are currently unable to access, in its current form, our shelf registration statement filed with the SEC, each of which may adversely affect our liquidity. Continuing negative publicity has affected and may continue to adversely affect our business and the market price of our publicly traded securities. We may not be able to attract or retain the personnel necessary to achieve our business objectives. The anticipated delay in filing the 2006 First Quarter Reports or any other future breach of the continued listing requirements of the NYSE and TSX could cause the NYSE and/or the TSX to commence suspension or delisting procedures. Risks Relating to Our Business Our operating results have historically been subject to yearly and quarterly fluctuations and are expected to continue to fluctuate, which may adversely affect the market price of our publicly traded securities. Factors contributing to these fluctuations could have a material adverse effect on our business, results of operations and financial condition. Global economic conditions and other trends and factors affecting the telecommunications industry are beyond our control and may result in reduced demand and pricing pressure on our products. We face significant competition, may not be able to maintain our market share and may suffer from competitive pricing practices. We may be materially and adversely affected by cautious capital spending by our customers. Increased consolidation among our customers and the loss of customers in certain markets could have a material adverse effect on our business, results of operations and financial condition. Rationalization and consolidation in the industry may lead to increased competition and harm our business. We operate in highly dynamic and volatile industries characterized by rapidly changing technologies, evolving industry standards, frequent new product introductions and short product life cycles. Our performance may be materially and adversely affected if our expectations regarding market demand for particular products prove to be wrong. We face certain barriers in our efforts to expand internationally. Our gross margins may decline, which would reduce our operating results and could contribute to volatility in the market price of our publicly traded securities. Negative developments associated with our supply contracts and contract manufacturing agreements including as a result of using a sole supplier for key optical networking solutions components may materially and adversely affect our business, results of operations, financial condition and supply relationships. Many of our current and planned products are highly complex and may contain defects or errors that are detected only after deployment in telecommunications networks, which could harm our reputation and adversely affect our business, results of operations and financial condition. Fluctuations in foreign currency exchange rates could negatively impact our business, results of operations and financial condition. We continue to restructure and transform our business to respond to industry and market conditions and to address our biggest operational and strategic challenges. The assumptions underlying these efforts may prove to be inaccurate, or we may fail to achieve the expected benefits from these efforts, and we may have to restructure or transform our business again in the future. If market conditions deteriorate or future results of operations are less than expected, an additional valuation allowance may be required for all or a portion of our deferred tax assets. If we fail to protect our intellectual property rights, or if we are subject to adverse judgments or settlements arising out of disputes regarding intellectual property rights, our business, results of operations and financial condition could be materially and adversely affected. Changes in regulation of the Internet and/or other aspects of the industry may affect the manner in which we conduct our business and may materially and adversely affect our business, results of operations and financial condition. We have made, and may continue to make, strategic acquisitions. If we are not successful in operating or integrating these acquisitions, our business, results of operations and financial condition may be materially and adversely affected. Our business may suffer if our strategic alliances are not consummated or are not successful. If we fail to adequately evolve our financial and managerial control and reporting systems and processes, our ability to manage and grow our business will be negatively affected. Our risk management strategy may be not effective or not commensurate to the risks we are facing. Risks Relating to Our Liquidity, Financing Arrangements and Capital Cash flow fluctuations may affect our ability to fund our working capital requirements or achieve our business objectives in a timely manner. Additional sources of funds may not be available on acceptable terms or at all. Our high level of debt could materially and adversely affect our business, results of operations, financial condition and liquidity. Covenants under the 2006 Credit Facility and the EDC Support Facility impose operating and financial restrictions on us, which may prevent us from capitalizing on business opportunities. Certain provisions in the indentures governing certain of our public debt issues, together with the provisions of the 2006 Credit Facility, severely limit our ability to incur certain types of additional secured debt while the secured loans under the 2006 Credit Facility are outstanding. An increased portion of our cash and cash equivalents may be restricted as cash collateral if we are unable to secure alternative support for certain obligations arising out of our normal course business activities. An inability of our subsidiaries to provide us with funding in sufficient amounts could adversely affect our ability to meet our obligations. We may need to make larger contributions to our defined benefit plans in the future. Industry concerns could continue and increase our exposure to our customers credit risk and the risk that our customers will not be able to fulfill their payment obligations to us under customer financing arrangements. Our stock price has historically been volatile and further declines in the market price of our publicly traded securities may negatively impact our ability to make future acquisitions, raise capital, issue debt and retain employees.

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72911--4/28/2006--NORTEL_NETWORKS_CORP