Exhibit 10.81
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK

             
 
     
SECURITIES AND EXCHANGE
COMMISSION,
     
 
     
Plaintiff,
     
 
     
v.
    Civil Action No.
 
     
NORTEL NETWORKS CORPORATION and
NORTEL NETWORKS LIMITED,
     
 
     
Defendants.
     
 
             

CONSENT OF DEFENDANTS NORTEL NETWORKS
CORPORATION AND NORTEL NETWORKS LIMITED
     1. Defendants Nortel Networks Corporation and Nortel Networks Limited
(“Defendants”) waive service of a summons and the Complaint in this action,
enter a general appearance, and admit the Court’s jurisdiction over Defendants
and over the subject matter of this action.
     2. Without admitting or denying the allegations of the complaint (except as
to personal and subject matter jurisdiction, which Defendants admit), Defendants
hereby consent to the entry of the Final Judgment as to Defendants Nortel
Networks Corporation and Nortel Networks Limited in the form attached hereto
(the “Final Judgment”) and incorporated by reference herein, which, among other
things:

  (a)   permanently restrains and enjoins Defendants from violation of Section
17(a) of the Securities Act of 1933 (the “Securities Act”) [15 U.S.C. §77q(a)],
Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the Securities
Exchange Act of 1934 (the “Exchange Act”) [15 U.S.C. §§

 

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      78j(b), 78m(a), 78m(b)(2)(A), 78m(b)(2)(B) and 78m(b)(5)], and Exchange
Act Rules 10b-5, 12b-20, 13a-1 and 13a-13 [17 C.F.R. §§ 240.10b-5, 240.12b-20,
240.13a-1 and 240.13a-13];     (b)   orders Defendant Nortel Networks
Corporation to pay disgorgement in the amount of $1;     (c)   orders Defendant
Nortel Networks Corporation to pay a civil penalty in the amount of $35,000,000
under Section 20(d) of the Securities Act and Section 21(d)(3) of the Exchange
Act [15 U.S.C. 15 §§ 77t(d) and 78u(d)(3)]; and     (d)   orders Defendants to
perform the undertakings identified in Paragraph 5 below.

     3. Defendants acknowledge that the civil penalty paid pursuant to the Final
Judgment may be distributed pursuant to the Fair Fund provisions of Section
308(a) of the Sarbanes-Oxley Act of 2002. Defendant Nortel Networks Corporation
agrees to pay all costs incurred under any plan resulting from the distribution
or payment of the $35,000,001 disgorgement and civil penalty, and there will be
no deduction from the Fund for those costs. Regardless of whether any such Fair
Fund distribution is made, the civil penalty shall be treated as a penalty paid
to the government for all purposes, including all tax purposes. To preserve the
deterrent effect of the civil penalty, Defendants agree that they shall not,
after offset or reduction or any award of compensatory damages in any Related
Investor Action based on Defendant Nortel Networks Corporation’s payment of
disgorgement in this action, argue that they are entitled to, nor shall they
further benefit by, offset or reduction of such compensatory damages award by
the amount of any part of Defendant Nortel Networks Corporation’s payment of a
civil

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penalty in this action (“Penalty Offset”). If the court in any Related Investor
Action grants such a Penalty Offset, Defendants agree that they shall, within
30 days after entry of a final order granting the Penalty Offset, notify the
Commission’s counsel in this action, and Defendant Nortel Networks Corporation
shall pay the amount of the Penalty Offset to the United States Treasury or to a
Fair Fund, as the Commission directs. Such a payment shall not be deemed an
additional civil penalty and shall not be deemed to change the amount of the
civil penalty imposed in this action. For purposes of this paragraph, a “Related
Investor Action” means a private damages action brought against Nortel Networks
Corporation and/or Nortel Networks Limited by or on behalf of one or more
investors based on substantially the same facts as alleged in the complaint in
this action.
     4. Defendants agree that they shall not seek or accept, directly or
indirectly, reimbursement or indemnification from any source, including but not
limited to payment made pursuant to any insurance policy, with regard to any
civil penalty amounts that Defendant Nortel Networks Corporation pays pursuant
to the Final Judgment, regardless of whether such penalty amounts or any part
thereof are added to a distribution fund or otherwise used for the benefit of
investors. Defendants further agree that they shall not claim, assert, or apply
for a tax deduction or tax credit with regard to any federal, state, or local
tax for any penalty amounts that Defendant Nortel Networks Corporation pays
pursuant to the Final Judgment, regardless of whether such penalty amounts or
any part thereof are added to a distribution fund or otherwise used for the
benefit of investors.

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     5. Defendants agree to and shall perform the following undertakings:
          (a) Within 15 days of the entry of the Final Judgment, Defendants
shall provide the Commission’s counsel in this action with a written report
detailing what steps need to be taken, as of the close of Defendants’ second
quarter 2007, to complete the remediation plan attached as Exhibit A to this
Consent. Defendants shall continue to provide such reports to the Commission’s
counsel in this action, within 30 days of the filing of each Form 10-K or 10-Q,
until the remediation plan has been fully implemented.
          (b) Within 15 days of the entry of the Final Judgment, Defendants
shall provide the Commission’s counsel in this action with a written report
detailing what steps need to be taken, as of the close of Defendants’ second
quarter 2007, to address and/or resolve the material weakness identified in
Defendants’ 2006 Forms 10-K. Defendants shall continue to provide such reports
to the Commission’s counsel in this action, within 30 days of the filing of each
Form 10-K or 10-Q, until Defendants conclude that the material weakness
identified in Defendants’ 2006 Forms 10-K has been resolved and no longer exists
and Defendants’ outside auditor (currently KPMG LLP) attests or agrees with
management’s conclusion that the material weakness no longer exists.
          (c) Upon reasonable notice, Defendants agree to make their
representatives available (including, where appropriate, their Chief Financial
Officer, their Controller, their Chief Compliance Officer and/or the Chair of
Defendants’ Audit Committees) to meet with the Commission’s staff to discuss and
answer any questions raised by any of the reports.
          (d) Defendants’ Chief Compliance Officer shall provide the
Commission’s counsel in this action with written certifications of completion
45 days after Defendants have: (i) completed the implementation of the
remediation plan attached as Exhibit A to this Consent; and

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(ii) concluded that the material weakness identified in their 2006 Forms 10-K
has been resolved and no longer exists, and that conclusion has been attested or
agreed to by Defendants’ outside auditor. The certifications shall be
countersigned by Defendants’ Chief Executive Officer. The certifications shall
provide written evidence of completion in the form of a narrative supported by
exhibits sufficient to establish completion. The Commission staff may request
such further evidence of completion as is reasonable, and Defendants agree to
provide such evidence.
     6. Defendants waive the entry of findings of fact and conclusions of law
pursuant to Rule 52 of the Federal Rules of Civil Procedure.
     7. Defendants waive the right, if any, to a jury trial and to appeal from
the entry of the Final Judgment.
     8. Defendants enter into this Consent voluntarily and represent that no
threats, offers, promises, or inducements of any kind have been made by the
Commission or any member, officer, employee, agent, or representative of the
Commission to induce Defendants to enter into this Consent.
     9. Defendants agree that this Consent shall be incorporated into the Final
Judgement with the same force and effect as if fully set forth therein.
     10. Defendants will not oppose the enforcement of the Final Judgment on the
ground, if any exists, that it fails to comply with Rule 65(d) of the Federal
Rules of Civil Procedure, and hereby waives any objection based thereon.

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     11. Defendants waive service of the Final Judgment and agree that entry of
the Final Judgment by the Court and filing with the Clerk of the Court will
constitute notice to Defendants of its terms and conditions. Defendants further
agree to provide counsel for the Commission, within thirty days after the Final
Judgment is filed with the Clerk of the Court, with an affidavit or declaration
stating that Defendants have received and read a copy of the Final Judgment.
     12. Consistent with 17 C.F.R. § 202.5(f), this Consent resolves only the
claims asserted against Defendants in this civil proceeding. Defendants
acknowledge that no promise or representation has been made by the Commission or
any member, officer, employee, agent, or representative of the Commission with
regard to any criminal liability that may have arisen or may arise from the
facts underlying this action or immunity from any such criminal liability.
Defendants waive any claim of Double Jeopardy based upon the settlement of this
proceeding, including the imposition of any remedy or civil penalty herein.
Defendants further acknowledge that the Court’s entry of a permanent injunction
may have collateral consequences under federal or state law and the rules and
regulations of self-regulatory organizations, licensing boards, and other
regulatory organizations. Such collateral consequences include, but are not
limited to, a statutory disqualification with respect to membership or
participation in, or association with a member of, a self-regulatory
organization. This statutory disqualification has consequences that are separate
from any sanction imposed in an administrative proceeding. In addition, in any
disciplinary proceeding before the Commission based on the entry of the
injunction in this action, Defendants understand that they shall not be
permitted to contest the factual allegations of the Complaint in this action.
     13. Defendants understand and agree to comply with the Commission’s policy
“not to permit a defendant or respondent to consent to a judgment or order that
imposes a sanction while

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denying the allegation in the complaint or order for proceedings.” 17 C.F.R. §
202.5. In compliance with this policy, Defendants agree: (i) not to take any
action or to make or permit to be made any public statement denying, directly or
indirectly, any allegation in the complaint or creating the impression that the
complaint is without factual basis; and (ii) that upon the filing of this
Consent, Defendants hereby withdraw any papers filed in this action to the
extent that they deny any allegation in the complaint. If Defendants breach this
agreement, the Commission may petition the Court to vacate the Final Judgment
and restore this action to its active docket. Nothing in this paragraph affects
Defendants’: (i) testimonial obligations; or (ii) right to take legal or factual
positions in litigation or other legal proceedings in which the Commission is
not a party.
     14. Defendants hereby waive any rights under the Equal Access to Justice
Act, the Small Business Regulatory Enforcement Fairness Act of 1996, or any
other provision of law to seek from the United States, or any agency, or any
official of the United States acting in his or her official capacity, directly
or indirectly, reimbursement of attorney’s fees or other fees, expenses, or
costs expended by Defendants to defend against this action. For these purposes,
Defendants agree that they are not the prevailing parties in this action since
the parties have reached a good faith settlement.
     15. Defendants agree that they will cooperate fully with the Commission in
any and all investigations, litigation, or other proceedings relating to or
arising from the subject matter of the complaint in this action and the
Commission’s investigation of the facts and circumstances which resulted in the
Commission’s bringing this action and complaint, by undertaking to do the
following:

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          (a) Appear and be interviewed by (and use their best efforts to
encourage their executives, officers, directors, and/or employees to appear and
be interviewed by) the Commission’s staff at such times and places as the staff
requests upon reasonable notice;
          (b) Agree to accept service by regular or overnight mail or electronic
transmission (including email) any notices or subpoenas issued by the Commission
for documents or testimony at depositions, hearings, or trials, or in connection
with any related investigation by Commission staff;
          (c) Appoint Defendants’ undersigned attorney as agent to receive
service of such notices and subpoenas;
          (d) Agree, with respect to such notices and subpoenas, to waive the
territorial limits on service contained in Rule 45 of the Federal Rules of Civil
Procedure and any applicable local rules, and in the Hague Convention on Taking
of evidence Abroad in Civil or Commercial Matters; and
          (f) Consent to personal jurisdiction over Defendants in any United
States District Court for purposes of enforcing any such subpoena.
     16. Defendants agree that the Commission may present the Final Judgment to
the Court for signature and entry without further notice.

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     17. Defendants agree that this Court shall retain jurisdiction over this
matter for the purpose of enforcing the terms of the Final Judgment.

                      NORTEL NETWORKS CORPORATION and
NORTEL NETWORKS LIMITED    
 
               
Dated: September 28, 2007
  By:   /s/ Gordon A. Davies                           [Name, Title and Address]
  Gordon A. Davies,             Chief Legal Officer and Corporate Secretary    
        195 The West Mall, Toronto Ontario M9C 5K1

On September 28, 2007, Gordon A. Davies, a person known to me, personally
appeared before me and acknowledged executing the foregoing Consent with full
authority to do so on behalf of Nortel Networks Corporation and Nortel Networks
Limited as its Chief Legal Officer and Corporate Secretary.

                  /s/  Anna Ventresca      Notary Public      Commission
expires: N/A     

Approved as to form:
/s/ William R. McLucas
William R. McLucas
Wilmer Cutler Pickering
   Hale and Dorr LLP
1875 Pennsylvania Avenue, NW
Washington, DC 20006
Counsel for Defendants
   Nortel Networks Corporation and
   Nortel Networks Limited

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EXHIBIT A
REMEDIATION PLAN REFERRED TO IN PARAGRAPH 5(a) OF THE CONSENT OF NORTEL NETWORKS
CORPORATION AND NORTEL NETWORKS LIMITED

  People:     (i)   New executive management has communicated, in multiple ways,
consistently and frequently, its expectation to Nortel employees that all
employees will be held accountable for their conduct. In connection with the
inappropriate provisioning and revenue recognition practices identified by the
independent inquiries, appropriate disciplinary sanctions were developed by
management based on the individual conduct and knowledge of employees that were
involved in these practices. After evaluating individual conduct and knowledge,
management has taken further employee disciplinary actions in 2006.     (ii)  
Recognizing that Nortel needed to “turn a new page” with new operational
leaders, in November 2005 the four individuals who headed the business units in
2002 and 2003 and the individual who headed Nortel’s Global Operations unit
during the same period left the Company.     (iii)   Management has made
significant progress in upgrading the skill sets and experience of the Company’s
Finance organization, both through external hires and through remedial and
on-going training of current employees, and including the establishment of a new
senior Finance management team and appointment of a Controller with extensive
experience in U.S. GAAP. From January 1, 2004 to December 31, 2006, the Company
filled 673 positions with external hires (476 in Control and 197 in Financial
Planning & Analysis (“FP&A”)), of which 168 (142 in Control and 26 in FP&A) are
certified public accountants. In 2005, the CFO reviewed the job requirements of
every vacancy and new position in the Finance organization to ensure that
candidates would have the appropriate skill sets, experience and professional
designations for each such position. Starting in 2006, Finance leaders are
required to review and approve the job requirements of every vacancy and new
position. As well, the Finance organization has supplemented its capacity by
retaining outside experts on a temporary or project basis.

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  (iv)   Through its Global Finance Training and Communications (“GFTC”) group,
which reports to the Assistant Controller, Nortel has developed and offered (on
a mandatory basis for targeted employee populations in 2006) remedial and
ongoing training in areas of financial accounting that were found to be
problematic in the restatements, including provisions and accruals, revenue
recognition, foreign exchange and finance ethics. These training programs
include the following:

  –   since 2004, a one-day mandatory training program for Finance employees
related to provisioning focusing on SFAS No. 5 and expense accruals under U.S.
GAAP. As of December 31, 2006, 1,373 Finance employees (representing
approximately 89% of the 1,539 Finance personnel designated to take this
mandatory training) have successfully completed the course.     –   implemented
in 2006, a supplemental training session on provisions accounting based on
learnings and specific case study examples from the Company’s restatements which
is mandatory for all Control employees with authority to approve manual journal
entry transactions. As of December 31, 2006, 75 Control employees (representing
approximately 70% of the 107 Control employees designated to take this mandatory
training) have successfully completed the course.     –   a comprehensive
three-day revenue recognition training program, which was made mandatory in 2006
for a targeted population of FP&A and Control employees. As of December 31,
2006, 568 FP&A and Control employees (representing approximately 87% of the 650
FP&A and Control employees designated to take this mandatory training) have
successfully completed the course.

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      Nortel retained third party resources and expertise as it considered
appropriate to assist with the development and delivery of these training
programs. In addition, an Executive Global Finance Training Council has been
established to oversee and set priorities for training for Finance employees in
accordance with a new Finance training policy, which details minimum annual
training requirements (by level) for all Finance employees. In addition to
direct feedback from the Executive Finance Training Council (including direction
from the Assistant Controller who is a member of the Council), the GFTC group
identifies on-going training needs through a variety of sources such as:
(i) recommendations from the Company’s technical accounting function relative to
queries received and errors identified on a consistent basis as well as emerging
issues and new accounting guidance; and (ii) informal feedback from other
Finance leaders. As new accounting guidance, pronouncements and directives on
U.S. GAAP are promulgated, the Controller and other members of the GFTC group
now provide quarterly training and updates, by webcast. Further, Nortel is in
the process of developing a Competency and Training Model to define the
necessary skill sets for key positions and accompanying training requirements in
FP&A and Control. In this connection, Nortel surveyed its Finance leadership
team to identify core skills required to successfully perform certain Finance
roles and compared the identified skills with its existing training curriculum.
The Competency and Training Model will be used to facilitate employee
development, evaluate candidates for vacant positions, provide guidelines on
mandatory and elective training requirements, and further develop and refine the
GFTC group’s priorities.     (v)   The Company initially created separate
Offices of Ethics and Compliance, and in November 2006 combined these functions,
which include Internal Audit and Security, under the responsibility of the Chief
Compliance Officer. Nortel believes that this new structure will allow for more
effective coordination of ethics and compliance activities and is in line with
best practices of large multi-national corporations. The Board has appointed, in
its assessment, a highly qualified individual to oversee these four key
functions. Nortel believes that it has put in place a compliance infrastructure
as well as a consistent approach to corporate discipline for breaches of its
policies, procedures and Code of Conduct. The Chief Compliance Officer reports
directly to the CEO and the Audit

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      Committee and only the Audit Committee can hire or fire the Chief
Compliance Officer. The Ethics function is responsible for recommending changes
to and interpretations of Nortel’s Code of Conduct, improving employee awareness
of the Code of Conduct, monitoring annual employee certification of the Code of
Conduct, devising and conducting Code-specific and other training for employees,
and intake of employee allegations of Code violations. An updated Code of
Conduct was issued by the Ethics function in September 2006, and mandatory
training in the new Code’s provisions and employee certification, where
permitted by applicable law, has been implemented. The Compliance function has
the following responsibilities: reviewing planned activities and transactions to
ensure compliance with Company policies and applicable laws; reviewing policies
and procedures to ensure compliance with applicable laws; developing employee
compliance training; conducting compliance audits of the business units and
regions in which compliance risks are assessed; reviewing findings of compliance
audits; monitoring resolution of calls to Nortel’s ethics “hot line” to ensure
complaints are promptly and thoroughly investigated and resolved; identifying
risk areas that require additional training; and identifying potential areas of
compliance risk, based on the internal and external environments, and developing
corrective action plans. Nortel has enhanced its anti-fraud management process,
including by establishing an anti-fraud policy and guidance on how to
communicate knowledge of potential fraud under the Code of Conduct. To ensure
that Nortel’s ethics hot line will remain an effective and active means for
employees to report concerns, Nortel continues to promote the use and
effectiveness of the hot line to employees. A highly visible icon was developed
and is placed on Nortel’s Global Web home page to provide employees with a daily
visible reminder of the hot line. As a further means of reminding employees of
the hot line, posters advertising the hot line were prepared and placed at major
facilities in 2006. A follow-up poster campaign is contemplated for 2007.
Nortel’s ethics certification process requires employees to certify annually
that they have read, understood and will comply with the Code of Conduct. The
certification process is typically used as another opportunity to remind
employees

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      of the requirement to report actual and suspected violations, and of the
existence of the hot line. In addition, many of Nortel’s general training
sessions are used to reinforce the existence and importance of the hot line.
Specialized training for Finance employees has also been used to remind Finance
employees of the hot line. In late 2006, Nortel launched an on-line
scenario-based ethics training module. The training is mandatory for all
employees. This training module reinforces the existence and importance of the
hot line. One scenario in particular involves using the hot line to deal with
employee concerns. Nortel issues a quarterly Compliance newsletter which also
publicizes the hot line. In addition to the above, communications from leaders
have from time to time reminded employees of the hot line and encouraged them to
use it. To demonstrate the effectiveness of the hot line, Nortel is implementing
measures to communicate generally to employees, to the extent permitted by
privacy laws and Nortel’s privacy policy, the results of disciplinary actions
arising from reported allegations. This is intended to ensure employees
understand that allegations are taken seriously, will be investigated and dealt
with thoroughly, and employees are treated similarly. The primary vehicle for
communicating such matters to employees will be the quarterly Compliance
newsletter. In addition, employees reporting concerns are advised of the results
of investigations, to the extent permitted by privacy laws and Nortel’s privacy
policy. The quarterly Compliance newsletter, as well as Nortel’s annual ethics
certification process, will serve as a continuing means to communicate the
importance of compliance with Nortel’s Code of Conduct.     (vi)   The Company
created a Compliance Committee in February 2006 to oversee the effectiveness of
Nortel’s compliance program, policies, procedures and the Code of Conduct and
provide direction to the Office of Compliance. The Compliance Committee is now
composed of Nortel’s CEO, CFO, Chief Compliance Officer, Chief Legal Officer,
and Executive Vice President, Corporate Operations, in order to ensure
coordination of legal, compliance, ethics and risk management programs and
activities throughout the Company. The Compliance Committee’s oversight
responsibilities include: ensuring that the Company’s compliance program is well

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      communicated; regularly reviewing policies, procedures and other internal
systems to ensure they are in compliance with the Code of Conduct, relevant
laws, and are in alignment with the overall compliance program; receiving
reports on calls to the ethics hot line and other sources to verify that each
complaint is properly reviewed, investigated and resolved; monitoring on-going
compliance training and awareness programs; reviewing the results of compliance
audits and actions taken to address audit findings and recommendations;
reviewing all reports of fraud or related unethical activities to ensure they
are brought to the attention of the Audit Committee and investigated as
appropriate; reviewing the compliance risk assessments and proactive actions to
address the risks; and monitoring of discipline imposed by the Company to ensure
that discipline is fair and consistent across the Company. The Chief Compliance
Officer reports on the activities of the Compliance Committee to the Audit
Committee on a quarterly basis, including the volume of usage of the ethics hot
line and any areas identified by the Compliance function as requiring additional
training or potential areas of compliance risk.     Processes:     (vii)   In
response to the finding of the Independent Review that historically Nortel
Finance employees responsible for meeting EBT targets, rather than employees in
the Control organization, had authority to record and release provisions, the
Board directed management to end that practice by separating the FP&A and
Control functions and by vesting the Control organization with sole
responsibility for accounting decisions and accounting entries. With the
exception of joint venture entities and Nortel Government Solutions, Inc. (a
variable interest entity for accounting purposes, which is subject to a “hold
separate” arrangement to comply with U.S. national industrial security
requirements), the Company implemented the new segregated structure over a
six-month period, from September 2005 to February 2006, and the FP&A functions
are now separate from the Control function, and the Control organization has had
the exclusive authority to approve and post general ledger entries commencing
with the closing of Nortel’s books and records for the quarter ended March 31,
2006, other than tax-related entries which are approved by the Company’s Tax
organization.

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  (viii)   Management has restructured the Company’s technical accounting
function into two groups to provide technical accounting guidance: one for
revenue recognition issues, called Global Revenue Governance (“GRG”), and one
for all other accounting issues, called Global Technical Accounting (“GTA”).
Both GRG and GTA report directly to the Assistant Controller. The mandate of GRG
is to render binding guidance on the accounting for revenue recognition for
contracts and contract amendments and to serve as the final authority on revenue
recognition decisions. The mandate of GTA is to make binding decisions for the
accounting on all technical non-revenue issues, including issues related to
provisions. Important issues arising out of either GRG or GTA are required to be
raised with the Controller for resolution. Internal finance process guidelines
(“FPGs”) have been adopted to formalize the authority of GRG and GTA. These FPGs
contain matrices with dollar thresholds above which the Assistant Controller or
the Controller, as applicable, must approve the accounting guidance. New
directors of both GRG and GTA, with appropriate technical qualifications, have
been recruited from outside Nortel. Management has also increased the staffing
of GRG and GTA and upgraded the technical qualifications of their respective
personnel.     (ix)   Since April 2004, responsibility for drafting and revising
Nortel’s internal accounting and finance process guidelines has been vested in
the Global Finance Policies & Process (“GFPP”) group, led by a certified public
accountant. The mandate of GFPP is to keep Nortel’s internal accounting guidance
current and in compliance with U.S. GAAP, to make that guidance “user-friendly”
with “real life” examples of practical applications where appropriate and to
identify changes to U.S. GAAP and update Nortel’s accounting policies
accordingly. As at December 31, 2006, GFPP has developed twenty-five accounting
guidelines on various topics, including accruals, provisions, revenue
recognition and foreign exchange. In addition, GFPP has developed thirteen FPGs
on various topics,

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      including manual journal entries, balance sheet reviews, revenue
recognition documentation and account reconciliations. Further, as at March 31,
2007, GFPP has reviewed and, where necessary, revised all key internal
accounting guidelines and included “real life” examples of practical
applications of such guidance where it was considered appropriate. Monthly
newsletters to Finance employees are issued on new policies, accounting
guidelines and FPGs.     (x)   As part of its remediation efforts and to
compensate for the material weaknesses in Nortel’s internal control over
financial reporting, management undertook intensive efforts in 2005 and early
2006 to improve its internal controls and procedures relating to revenue
recognition. These efforts included, among other measures, an extensive
collection and review by GRG of documentation on customer contracts, comprising
approximately 75% of 2005 revenues, to determine whether Nortel’s revenue
recognition accounting policies were being applied properly and consistently
across the organization. As a result of these and other efforts, various revenue
recognition errors were identified and adjusted in the 2005 Annual Report, as
described in more detail in paragraphs 45-47 of the Settlement Agreement. In the
first quarter of 2006, Nortel issued a new FPG requiring a review by GRG for all
new contracts and amendments to existing contracts having a total revenue impact
in excess of $5 million. The review is required to be completed by the time of
the Audit Committee meeting in respect of the quarter in which the delivery of
product, or performance of services or fulfillment of other contractual
obligations, occurs. Additional measures have been implemented in an effort to
ensure that all contracts are submitted to GRG for binding accounting guidance.
For example, GRG is now provided with a quarterly confirmation of all contracts,
and incremental approval from the Controller is required for amendments or
superseding contracts that change the timing of revenue recognition. Both GRG
and Nortel’s Contract Assurance group, which group’s mandate is to accurately
execute on the application of U.S. GAAP and GRG guidance issued pursuant to the
new FPG, now report to the Assistant Controller.

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  (xi)   Starting in 2004, Nortel’s management has implemented significant
controls around manual journal entries (“MJEs”) in an effort to reduce their
susceptibility to human error and manipulation. These controls include the
development and adoption of FPGs that specify the supporting documentation that
must be provided before a MJE can be approved and posted to the general ledger,
the authority level of individuals authorized to approve MJEs and the
segregation of duties among the initiator, approver and poster of the MJE. MJEs
and all supporting documentation are required to be loaded into a database to
facilitate both record retention and access by all appropriate parties, such as
the compliance reviewers, Internal Audit and the external auditors. Also,
Finance employees received training on the application of the new MJE controls
and their requirements. With the exception of joint venture entities and Nortel
Government Solutions, Inc., incremental compliance reviews were commenced in
2005 for all MJEs over a specified dollar value for compliance with the new
documentation requirements for MJEs. In 2006, Nortel established the Global MJE
Center of Excellence to implement a consistent global compliance review process
and global compliance reporting under the leadership of the Company’s U.S.
Regional Controller, who reports directly to the Controller. Under this global
incremental review process, any MJE that fails to satisfy one or more of the
substantive requirements (such as failure to attach complete, relevant
supporting documents or appropriate approvals) is required to be rejected by the
reviewer and returned to the initiator of the MJE for remediation and subsequent
validation by the reviewer.     (xii)   Beginning with the filing of Nortel’s
2004 Form 10-K, management adopted and began to implement a series of improved
internal controls on the preparation and review of post closing adjustments
(“PCAs”). Because all PCAs are MJEs submitted after the initial consolidation of
the financial statements, management determined to apply all of the control
requirements governing MJEs to PCAs. To eliminate the potential for
inappropriate corporate initiation of PCAs, PCAs must be initiated in the
regions or business units, with the exception of normal and appropriate
corporate tax, consolidation and elimination entries. Once approved, proposed
PCAs are subject to the same incremental compliance review as MJEs.

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      All of the materials relevant to each PCA are loaded into a database that
is accessible by all appropriate parties including Nortel’s external auditors.
The Director of Corporate Consolidations (the “Director”) is required to review
each proposed PCA for materiality and, based on that analysis, recommend to the
Controller the proposed PCAs that should be posted and those that should be
placed on a list of unadjusted differences. The Director and Controller then
review those recommendations and the underlying accounting rationale, and the
Controller must determine which adjustments to record. Any unadjusted
differences remaining at the end of this process which have been deemed to be
immaterial are required to be reported to the Audit Committee. Management’s goal
is to remediate the gaps in controls which do not operate effectively to prevent
late entries. During 2006, the Corporate Consolidations group commenced a
process to review the root causes of PCAs. This process has evolved and,
starting in 2007, Corporate Consolidations, with assistance from the SOX group,
collects information on each PCA to determine the root cause of the PCA, in
particular what (if any) internal control deficiency gave rise to the PCA, and a
remediation plan is developed and implemented by the initiator of the PCA, as
appropriate, with specific timelines for completion of the required remedial
activity. Corporate Consolidations is responsible for tracking the remedial
actions against plans and timelines.     (xiii)   Commencing in 2005, the
Controller initiated weekly meetings, held throughout the quarter-close process
until the financial statements are filed, in which technical accounting issues
are discussed, monitored and resolved. These meetings are attended by the
Controller, Assistant Controller, senior managers in GRG and GTA and other
employees, depending on the issues under discussion, and the external auditors.
    (xiv)   Starting in 2005, Nortel’s management has implemented an enhanced
balance sheet review (“BSR”) process in recognition that timely and thorough
BSRs provide an effective internal control. With the exception of tax (which is
the responsibility of the Company’s Tax organization), all balance sheet line
items

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      have been assigned an “owner” within the Control organization who is
responsible for overseeing all transactional activity within the account,
including determining the propriety of all such activity in compliance with U.S.
GAAP and for preparing documentation about the account prior to each quarterly
BSR. The BSR process includes a comprehensive evaluation of activity within key
liability accounts and a specific focus on the review of provisioning activity
as well as cumulative foreign exchange translation adjustment movements. The
process also includes a review of restructuring charges, the monitoring of which
has been centralized within the Control function. Each balance sheet account
owner must explain the activity in the account and identify the triggering
events for all substantial activity. The controls and review processes around
current liability balances and related releases have been enhanced through the
development of improved continuity schedules (which track quarterly changes in
accrued liabilities accounts) with narrative explanation for substantial
additions and identification of the triggering events for all substantial
releases. The continuity schedules are required to be reviewed and analyzed by
Nortel’s Corporate Consolidations group and presented by the Controller to the
Audit Committee quarterly.     (xv)   Beginning in 2005, management enhanced the
reviews conducted during its internal quarterly profit and loss meetings
(“Results Calls”) to provide a forum for discussion of the results for each of
its business units separately and the results on a consolidated basis, and
discuss the variance analysis to budget, to the prior period and to the prior
year. In the Results Calls for each business unit, the finance leader of the
business unit, FP&A and the applicable Regional Controller are called upon to
identify and discuss significant technical accounting issues, including revenue
recognition items, that arose during the period that could affect the results
for that period. Where technical accounting issues remain outstanding, they are
discussed during the Results Calls as well as during the Controller’s accounting
issues meetings. To the extent technical accounting issues have not been
resolved at the time of the Results Calls, such issues are to be resolved and
reported on during the BSRs, which occur prior to the filing of the financial
statements.

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  (xvi)   Recognizing that timely and accurate account reconciliations are a
priority, Nortel’s new management has implemented a policy requiring timely
account reconciliations to confirm the accuracy and completeness of ending
balances in each general ledger account. In the third quarter of 2006,
management issued a new global FPG on the account reconciliation process to
outline the requirements for account reconciliations, and which requires
quarterly reconciliation of each balance sheet account. Certain accounts
determined to be high risk, based on an account risk analysis by the appropriate
Control leader, must be reconciled prior to the Audit Committee meeting for the
applicable reporting period. Reports are prepared to monitor the timely
preparation and review of reconciliations.     (xvii)   With respect to foreign
exchange, in 2005, Nortel’s management enhanced its annual functional currency
study which ultimately determines the methodology for translating subsidiary
foreign currency results to U.S. dollar reporting currency. The enhanced study
improved the analysis and documentation to substantiate the functional currency
determination, and is reviewed and approved by the appropriate regional
Controller and corporate Controller. In addition, in 2005, management
implemented a quarterly process to analyze inter-company balances for compliance
with SFAS No. 52, paragraph 20. The Treasury function reviews inter-company
loans quarterly and inter-company trade positions annually to assist Control in
determining if any balances are of a long-term investment, whereby foreign
exchange would be recorded in equity. Systems have been automated to support the
translation of a significant operating subsidiary’s foreign currency results to
U.S. dollar reporting.     (xviii)   The Audit Committee has established new
priorities for the Internal Audit organization relating to the evaluation of
risk exposures for financial reporting, and management has amended the charter
for the internal audit function to include oversight responsibilities for the
adequacy and effectiveness of financial reporting controls. The Audit Committee
realigned the reporting responsibilities for Internal Audit and directed senior
management to strengthen significantly the internal audit function in the first
quarter of 2004, and also hired a new Internal

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      Audit leader as of July 2005. The head of Internal Audit reports directly
to the CEO and the Audit Committee to ensure that Internal Audit is independent
from the activities it reviews. Beginning in 2005, Internal Audit work plans
include a focus on accounting for transactions, financial reporting and
financial reporting controls. Starting in 2006, the Internal Audit work plan
includes an assessment of the adequacy and degree of compliance with financial,
operational and system controls.     (xix)   As part of the efforts to increase
awareness of and timely and appropriate remediation of internal controls, in the
second quarter of 2006 Nortel established a SOX Steering Committee comprised of
senior management from Finance, Legal, Human Resources, Internal Audit,
Information Services and Operations. Regular reporting of remediation activities
to senior management, including an escalation process to address areas where
remediation planned dates were not met was implemented. The SOX vice president
regularly meets with Internal Audit and reports to the Audit Committee on the
ongoing development, implementation and progress of remedial measures. Training
is provided for teams that document and administered controls to improve control
design competencies. In addition, the SOX team implemented a revised SOX 404
scope, a comprehensive methodology redesign and changes to the documentation
requirements to greatly improve the quality of the SOX 404 documentation. As a
result of all of these activities, there was significant remediation in 2006 of
internal control deficiencies identified in various business processes that
impact the Company’s internal control over financial reporting.     (xx)   The
Board has implemented processes for Nortel’s management to provide quarterly
assessments in respect of the overall quality and transparency of the Company’s
financial reporting and suggestions for improvements in its form and content,
which Nortel’s external auditors have the opportunity to review and comment on.
These processes include quarterly reporting by the CFO and Controller to the
Board and by the SOX vice president and head of Internal Audit to the Audit
Committee. Further, the presidents of the business units are expected

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      to take full responsibility for the respective financial results of their
businesses and, commencing in 2007, will be required, on a quarterly rotation
basis, to provide presentations to the Board with the Vice President, Finance on
the financial results of their respective business units. In addition, the Audit
Committee will periodically hold separate executive sessions with the Vice
President, Finance to discuss financial issues specific to each business unit.  
  Technology:     (xxi)   In an effort to improve Nortel’s financial reporting
systems and capabilities, to simplify its multiple accounting systems, and to
reduce the number of MJEs, Nortel retained an outside consulting firm to advise
on the appropriateness of implementing a Systems, Application and Products
(“SAP”) platform worldwide that would consolidate many of Nortel’s systems into
a single integrated financial software system. Based on that advice, Nortel
adopted the SAP platform to integrate its processes and systems, and undertook
an assessment of existing financial systems and processes to determine the most
effective implementation of standard SAP software. The finance design and build
for the initial scope of the SAP system, including general ledger functionality,
was completed by the end of August 2006, and these processes are planned to be
tested and fully deployed during 2007. Once fully deployed, Nortel estimates
that MJEs will be reduced by approximately 30%. Processes for additional
activities will be built upon this first phase of functionality. Process design
for these additional activities has been completed and management expects that
the build, testing and deployment will be completed by the third quarter of
2007.     (xxii)   The Company’s general computing control (“GCC”) environment
has been strengthened with the implementation of new and enhanced controls.
During 2006, numerous control deficiencies were remediated across applications,
interfaces and the infrastructure impacting internal control over financial
reporting. In particular, Nortel established a standard user management process
that facilitates the approval of all user access requests and the removal of
accounts when appropriate and implemented regular reviews of business user
accounts.

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      Further, Nortel implemented standard and enhanced controls regarding
change management to applications to ensure the changes are appropriately
tested, approved and implemented. In addition, enhanced security protection of
data files used to transfer data from one application to another were
implemented. Segregation of duties was improved in the GCC environment by
restricting the number of operating system administrators with privileged access
maintaining an audit trail of software changes that are made to some key
information system applications.