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indeterminate amounts or could result in fines and penalties. Nortel Networks cannot determine whether these actions, suits, claims and
proceedings will, individually or collectively, have a material adverse effect on the business, results of operations, financial condition and
liquidity of Nortel Networks. Nortel Networks and any named directors and officers of Nortel Networks intend to vigorously defend these
actions, suits, claims and proceedings.
On April 5, 2004, Nortel Networks announced that the SEC had issued a formal order of investigation in connection with Nortel Networks
previous restatement of its financial results for certain periods, as announced in October 2003, and Nortel Networks announcements in
March 2004 regarding the likely need to revise certain previously announced results and restate previously filed financial results for one or
more earlier periods. The matter had been the subject of an informal SEC inquiry. On April 13, 2004, Nortel Networks announced that it had
received a letter from the staff of the Ontario Securities Commission (“OSC”) advising that there is an OSC Enforcement Staff investigation
into the same matters that are the subject of the SEC investigation.
On May 14, 2004, Nortel Networks announced that it had received a Federal Grand Jury Subpoena for the production of certain documents,
including financial statements and corporate, personnel and accounting records, prepared during the period from January 1, 2000 to the date of
the subpoena. The materials sought are pertinent to an ongoing criminal investigation being conducted by the U.S. Attorney’s Office for the
Northern District of Texas, Dallas Division.
On August 16, 2004, Nortel Networks received a letter from the Integrated Market Enforcement Team of the Royal Canadian Mounted Police
(“RCMP”) advising Nortel Networks that the RCMP would be commencing a criminal investigation into Nortel Networks financial accounting
situation.
Environmental matters
Nortel Networks operations are subject to a wide range of environmental laws in various jurisdictions around the world. Nortel Networks seeks
to operate its business in compliance with such laws. In 2004, Nortel Networks expects to become subject to new European product content
laws and product takeback and recycling requirements that will require full compliance by 2006. It is expected that these laws will require
Nortel Networks to incur additional compliance costs. Although costs relating to environmental matters have not resulted in a material adverse
effect on the business, results of operations, financial condition and liquidity in the past, there can be no assurance that Nortel Networks will
not be required to incur such costs in the future. Nortel Networks has a corporate environmental management system standard and an
environmental program to promote such compliance. Moreover, Nortel Networks has a periodic, risk-based, integrated environment, health and
safety audit program.
Nortel Networks environmental program focuses its activities on design for the environment, supply chain and packaging reduction issues.
Nortel Networks works with its suppliers and other external groups to encourage the sharing of non-proprietary information on environmental
research.
Nortel Networks is exposed to liabilities and compliance costs arising from its past and current generation, management and disposal of
hazardous substances and wastes. As of December 31, 2003, the accruals on the consolidated balance sheet for environmental matters were
$33. Based on information available as of December 31, 2003, management believes that the existing accruals are sufficient to satisfy probable
and reasonably estimable environmental liabilities related to known environmental matters. Any additional liability that may result from these
matters, and any additional liabilities that may result in connection with other locations currently under investigation, are not expected to have
a material adverse effect on the business, results of operations, financial condition and liquidity of Nortel Networks.
Nortel Networks has remedial activities under way at 12 sites which are either currently or previously owned or occupied facilities. An
estimate of Nortel Networks anticipated remediation costs associated with all such sites, to the extent probable and reasonably estimable, is
included in the environmental accruals referred to above in an approximate amount of $33.
Nortel Networks is also listed as a potentially responsible party (“PRP”) under the U.S. Comprehensive Environmental Response,
Compensation and Liability Act (“CERCLA”) at six Superfund sites in the U.S. An estimate of Nortel Networks share of the anticipated
remediation costs associated with such Superfund sites is expected to be de minimis and is included in the environmental accruals of $33
referred to above.
Liability under CERCLA may be imposed on a joint and several basis, without regard to the extent of Nortel Networks involvement. In
addition, the accuracy of Nortel Networks estimate of environmental liability is affected by several uncertainties such as additional
requirements which may be identified in connection with remedial activities, the complexity
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