Nortel Networks: Nortel Networks Updates Third Quarter 2002 Outlook and Breakeven Cost Structure

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August 27, 2002

Nortel Networks Updates Third Quarter 2002 Outlook and Breakeven Cost Structure

TORONTO – Nortel Networks* Corporation [NYSE/TSX: NT] announced that it expects revenues from continuing operations for the third quarter of 2002 to be lower than its previously stated guidance, primarily due to further reductions in spending by service providers in the United States. In light of the additional pressure on spending in the near term, and the continuing expectation for ongoing pressure on customer capital spending well into 2003, the Company is also taking additional actions to lower its quarterly breakeven cost structure.

“We continue to see reductions in near term spending plans by service providers especially in the United States,” said Frank Dunn, president and chief executive officer, Nortel Networks. “Despite the reduction in capital spending and revenues, we continue to expect ongoing sequential pro forma(a) bottom line improvement in the third quarter and fourth quarter of 2002, reflecting the impact of our ongoing restructuring activities. We now expect revenues from continuing operations in the third quarter of 2002 to be lower than second quarter 2002 revenues by up to approximately 10%, compared to our previous view of ‘essentially flat’.”

Dunn continued, “Our top priority remains to return to profitability by the end of June 2003. In our drive to achieve this goal, and in light of the ongoing pressure on customer capital spending plans globally, we are taking steps to further reduce our quarterly breakeven cost structure (not including costs related to acquisitions and any special charges or gains) to below US$2.6 billion. This compares to our previously stated quarterly breakeven cost structure, on the same basis, of approximately US$3.2 billion. Our focus will be on simplifying the structure around our three businesses and ensuring that a more direct connection exists between our operations and customer facing teams. This approach will allow us to be even more responsive to our customers’ needs, while reducing our cost structure.”

“We are making excellent progress with our customer engagement and the development and deployment of our leadership portfolio. However, the market environment continues to be challenging with lower spending levels than previously expected and a more prolonged industry transition. While we continue to align our business to this environment, we remain committed to our previously stated priorities to:

return to profitability in the near term;
focus on providing quality solutions that meet our enterprise and service provider customer needs; and
drive for market leadership through technology innovation,” concluded Dunn.

These actions will result in additional charges associated with workforce reductions and related facilities closures and streamlining activities. Although the plans and associated costs are in the process of being finalized (and will be provided as part of the Company’s third quarter 2002 results), the Company noted that it has sufficient liquidity to fund both these actions and its operations, without utilizing its bank facilities (all of which remain available and undrawn).

The Company expects the restructuring activities to be substantially completed by end of the fourth quarter of 2002. When ultimately completed, the Company expects a workforce of approximately 35,000.

Nortel Networks is an industry leader and innovator focused on transforming how the world communicates and exchanges information. The company is supplying its service provider and enterprise customers with communications technology and infrastructure to enable value-added IP data, voice and multimedia services spanning Metro and Enterprise Networks, Wireless Networks and Optical Networks. As a global company, Nortel Networks does business in more than 150 countries. More information about Nortel Networks can be found on the Web at www.nortelnetworks.com.

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 severity and duration of the industry adjustment; the sufficiency of our restructuring activities, including the potential for higher actual costs to be incurred in connection with restructuring actions compared to the estimated costs of such actions; fluctuations in operating results and general industry, economic and market conditions and growth rates; the ability to recruit and retain qualified employees; fluctuations in cash flow; the level of outstanding debt and debt ratings; the ability to meet financial covenants contained in our credit agreements; the ability to make acquisitions and/or 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; 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; the dependence on new product development; the uncertainties of the Internet; the impact of the credit risks of our customers and the impact of increased provision of customer financing and commitments; stock market volatility; the entrance into an increased number of supply, turnkey, and outsourcing contracts which contain delivery, installation, and performance provisions, which, if not met, could result in the payment of substantial penalties or liquidated damages; the ability to obtain timely, adequate and reasonably priced component parts from suppliers and internal manufacturing capacity; the future success of our strategic alliances; and the adverse resolution of litigation. For additional information with respect to certain of these and other factors, see the reports filed by Nortel Networks Corporation and Nortel Networks Limited with the United States Securities and Exchange Commission. Unless otherwise required by applicable securities laws, Nortel Networks Corporation and Nortel Networks Limited disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Nortel Networks pro forma loss from continuing operations is defined as reported net loss from continuing operations before any “Acquisition Related Costs” (in-process research and development expense, and the amortization of acquired technology and goodwill from all acquisitions subsequent to July 1998, as applicable), stock option compensation from acquisitions and divestitures, all special charges (which includes restructuring), any gain or loss on sale of businesses, one time gains associated with certain investment sales, and any associated items as included in the income or loss of our equity accounted for investments. This pro forma measure is not a recognized measure for financial statement presentation under United States generally accepted accounting principles (U.S. GAAP). Non-U.S. GAAP earnings measures (such as this pro forma measure) do not have any standardized meaning and are therefore unlikely to be comparable to similar measures presented by other issuers. This pro forma measure is provided to assist readers in evaluating the operating performance of Nortel Networks ongoing business and each of the items listed above are excluded because they are considered to be of a non-operational nature in the applicable period. Investors are encouraged to consider this pro forma measure in the context of Nortel Networks U.S. GAAP results.

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

Contact for Press and Analysts:

Investors:
Nortel Networks
888-901-7286
905-863-6049
investor@nortel.com

Business media:
Tina Warren
Nortel Networks
905-863-4702
tinawarr@nortel.com

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