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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


FORM 10-Q

|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
|x |  | Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 
| 
|  |  | For the Quarterly Period Ended March 31, 2003                                           
| 
|  |  | OR                                                                                      
| 
|o |  | Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
| 
|  |  | For the Transition Period From ________ to ________                                     

Commission file number 000-30758

Nortel Networks Limited

(Exact name of registrant as specified in its charter)




|                                                               |  |                                      |  | 
|-------------------------------------------------------------- |  | ------------------------------------ |  | 
|Canada                                                         |  | 62-12-62580                          | 
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                              
|8200 Dixie Road, Suite 100                                     |  |                                      |  | 
|Brampton, Ontario, Canada                                      |  | L6T 5P6                              | 
|(Address of principal executive offices)                       |  | (Zip Code)                          



Registrants telephone number including area code (905) 863-0000

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.

Yes ü                                                No

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).  Yes ü       No

Indicate the number of shares outstanding of each of the issuers classes of
common stock, as at April 30, 2003

1,460,978,638 without nominal or par value



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TABLE OF CONTENTS



|                               |                                                                                               |                                            |  |  |  |  |  | 
|------------------------------ | --------------------------------------------------------------------------------------------- | ------------------------------------------ |  |  |  |  |  | 
|PART 1 - FINANCIAL INFORMATION
|                               | ITEM 1. Consolidated Financial Statements (unaudited)                                        
|                               |                                                                                               | Consolidated Statements of Operations     
|                               |                                                                                               | Consolidated Balance Sheets               
|                               |                                                                                               | Consolidated Statements of Cash Flows     
|                               |                                                                                               | Notes to Consolidated Financial Statements
|                               | ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                               | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|                               | ITEM 4. CONTROLS AND PROCEDURES                                                              
|PART II - OTHER INFORMATION   
|                               | ITEM 1. LEGAL PROCEEDINGS                                                                    
|                               | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                    
|CERTIFICATIONS                
|Exhibit 10.1                  
|Exhibit 10.2                  
|Exhibit 99.1                  



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##### Table of Contents



TABLE OF CONTENTS

PART I
FINANCIAL INFORMATION

|        |                                                                                       |  |  |      | 
|------- | ------------------------------------------------------------------------------------- |  |  | ---- | 
|        |                                                                                       |  |  | PAGE
|        |                                                                                       |  |  |     
|ITEM 1. | Consolidated Financial Statements (unaudited)                                         |  |  | 4    | 
|       
|ITEM 2. | Managements Discussion and Analysis of Financial
Condition and Results of Operations |  |  | 27   | 
|       
|ITEM 3. | Quantitative and Qualitative Disclosures About
Market Risk                            |  |  | 60   | 
|       
|ITEM 4. | Controls and Procedures                                                               |  |  | 60   | 

PART II
OTHER INFORMATION

|               |                                  |  |    |    | 
|-------------- | -------------------------------- |  | -- | -- | 
|ITEM 1.        | Legal Proceedings                |  |    | 61 | 
|              
|ITEM 6.        | Exhibits and Reports on Form 8-K |  |    | 61 | 
|              
|Signatures     |                                  |  | 62 |   
|              
|Certifications |                                  |  | 63 |   

All dollar amounts in this document are in United States dollars unless otherwise stated.

NORTEL NETWORKS, NORTEL NETWORKS LOGO, NT and the GLOBEMARK are trademarks of Nortel Networks.

MOODYS is a trademark of Moodys Investor Services, Inc.


S&P 100, S&P 500 and STANDARD & POORS are trademarks of The McGraw-Hill Companies, Inc.


2



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##### Table of Contents






PART I
FINANCIAL INFORMATION




ITEM 1.   Consolidated Financial Statements (unaudited)

Contents of Consolidated Financial Statements

|                                           |  |      |   | 
|------------------------------------------ |  | ---- | - | 
|                                           |  | PAGE
|                                           |  |     
|Consolidated Statements of Operations      |  |      | 4 | 
|                                          
|Consolidated Balance Sheets                |  |      | 5 | 
|                                          
|Consolidated Statements of Cash Flows      |  |      | 6 | 
|                                          
|Notes to Consolidated Financial Statements |  |      | 7 | 

3



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NORTEL NETWORKS LIMITED

Consolidated Statements of Operations (unaudited) for the three months ended


|                                                        |                |      |           |     |      |           |        |     |  
|------------------------------------------------------- | -------------- | ---- | --------- | --- | ---- | --------- | ------ | --- | -
|                                                       
|                                                        |                |      | March 31, |     |      | March 31,
|(millions of U.S. dollars)                              |                | 2003 |           |     | 2002
|                                                       
|                                                       
|                                                       
|                                                       
|                                                       
|Revenues                                                |                | $    | 2,397     |     |      | $         | 2,910  |    
|                                                       
|                                                       
|                                                       
|                                                       
|Cost of revenues                                        |                |      | 1,359     |     |      |           | 2,229  |    
|                                                       
|Gross profit                                            |                |      | 1,038     |     |      |           | 681    |    
|                                                       
|Selling, general and administrative expense             |                |      | 485       |     |      |           | 740    |    
|                                                       
|                                                       
|                                                       
|                                                       
|Research and development expense                        |                |      | 488       |     |      |           | 577    |    
|                                                       
|                                                       
|                                                       
|                                                       
|Amortization of acquired technology                     |                |      |          |     |      |           | 5      |    
|                                                       
|                                                       
|                                                       
|                                                       
|Special charges                                         |                |      | 133       |     |      |           | 443    |    
|                                                       
|                                                       
|                                                       
|                                                       
|Gain on sale of businesses                              |                |      |          |     |      |           | (3     | )  
|                                                       
|Operating loss                                          |                |      | (68       | )   |      |           | (1,081 | )  
|                                                       
|Other income (expense)  net                            |                |      | 49        |     |      |           | (14    | )  
|                                                       
|                                                       
|                                                       
|                                                       
|Interest expense                                        |                |      |           |     |      |           |        |    
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Long-term debt |      |           | (24 | )    |           |        | (36 | )
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Other          |      |           | (7  | )    |           |        | (12 | )
|                                                       
|Loss from continuing operations before income taxes     |                |      | (50       | )   |      |           | (1,143 | )  
|                                                       
|                                                       
|                                                       
|                                                       
|Income tax benefit (provision)                          |                |      | (10       | )   |      |           | 362    |    
|                                                       
|                                                        |                |      | (60       | )   |      |           | (781   | )  
|                                                       
|                                                       
|                                                       
|                                                       
|Equity in net loss of associated companies  net of tax |                |      | (7        | )   |      |           | (4     | )  
|                                                       
|Net loss from continuing operations                     |                |      | (67       | )   |      |           | (785   | )  
|                                                       
|                                                       
|                                                       
|                                                       
|Net earnings from discontinued operations  net of tax  |                |      | 164       |     |      |           |       |    
|                                                       
|Net earnings (loss)                                     |                |      | 97        |     |      |           | (785   | )  
|                                                       
|                                                       
|                                                       
|                                                       
|Dividends on preferred shares                           |                |      | (5        | )   |      |           | (5     | )  
|                                                       
|Net earnings (loss) applicable to common shares         |                | $    | 92        |     |      | $         | (790   | )  
|                                                       

The accompanying notes are an integral part of these consolidated financial statements

4



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NORTEL NETWORKS LIMITED

Consolidated Balance Sheets (unaudited) as at


|                                                                    |                                                                                                  |      |           |       |      |              |         |       | 
|------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------ | ---- | --------- | ----- | ---- | ------------ | ------- | ----- | 
|                                                                   
|                                                                    |                                                                                                  |      | March 31, |       |      | December 31,
|(millions of U.S. dollars)                                          |                                                                                                  | 2003 |           |       | 2002
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|ASSETS                                                              |                                                                                                  |      |           |       |      |              |         |      
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Current assets                                                      |                                                                                                  |      |           |       |      |              |         |      
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Cash and cash equivalents                                                                        |      | $         | 3,913 |      |              | $       | 3,813 | 
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Restricted cash and cash equivalents                                                             |      |           | 227   |      |              |         | 249   | 
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Accounts receivable (less provisions of $403 as at March 31, 2003, $477 as at December 31, 2002) |      |           | 2,028 |      |              |         | 1,993 | 
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Inventories  net                                                                                |      |           | 846   |      |              |         | 889   | 
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Income taxes recoverable                                                                         |      |           | 60    |      |              |         | 58    | 
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Deferred income taxes  net                                                                      |      |           | 784   |      |              |         | 793   | 
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Other current assets                                                                             |      |           | 419   |      |              |         | 706   | 
|                                                                   
|Total current assets                                                |                                                                                                  |      | 8,277     |       |      |              | 8,501   |      
|                                                                   
|Investments at cost and associated companies at equity              |                                                                                                  |      | 211       |       |      |              | 246     |      
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Plant and equipment  net                                           |                                                                                                  |      | 1,396     |       |      |              | 1,441   |      
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Goodwill                                                            |                                                                                                  |      | 2,021     |       |      |              | 2,021   |      
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Deferred income taxes  net                                         |                                                                                                  |      | 3,026     |       |      |              | 2,797   |      
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Other assets                                                        |                                                                                                  |      | 749       |       |      |              | 747     |      
|                                                                   
|Total assets                                                        |                                                                                                  | $    | 15,680    |       |      | $            | 15,753  |      
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|LIABILITIES AND SHAREHOLDERS EQUITY                                |                                                                                                  |      |           |       |      |              |         |      
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Current liabilities                                                 |                                                                                                  |      |           |       |      |              |         |      
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Notes payable                                                                                    |      | $         | 78    |      |              | $       | 100   | 
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Trade and other accounts payable                                                                 |      |           | 803   |      |              |         | 931   | 
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Payroll and benefit-related liabilities                                                          |      |           | 664   |      |              |         | 513   | 
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Contractual liabilities                                                                          |      |           | 1,457 |      |              |         | 1,546 | 
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Restructuring                                                                                    |      |           | 680   |      |              |         | 761   | 
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Other accrued liabilities                                                                        |      |           | 2,634 |      |              |         | 2,803 | 
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Long-term debt due within one year                                                               |      |           | 234   |      |              |         | 233   | 
|                                                                   
|Total current liabilities                                           |                                                                                                  |      | 6,550     |       |      |              | 6,887   |      
|                                                                   
|Long-term debt                                                      |                                                                                                  |      | 1,864     |       |      |              | 1,919   |      
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Deferred income taxes  net                                         |                                                                                                  |      | 431       |       |      |              | 366     |      
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Other liabilities                                                   |                                                                                                  |      | 2,408     |       |      |              | 2,351   |      
|                                                                   
|                                                                    |                                                                                                  |      | 11,253    |       |      |              | 11,523  |      
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Minority interest in subsidiary companies                           |                                                                                                  |      | 70        |       |      |              | 78      |      
|                                                                   
|Guarantees, commitments and contingencies (notes 9 and 14)          |                                                                                                  |      |           |       |      |              |         |      
|                                                                   
|SHAREHOLDERS EQUITY                                                |                                                                                                  |      |           |       |      |              |         |      
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Preferred shares, without par value  Authorized shares: unlimited; |                                                                                                  |      |           |       |      |              |         |      
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Issued and outstanding shares: 30,000,000 at March 31, 2003 and December 31, 2002                |      |           | 536   |      |              |         | 536   | 
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Common shares, without par value  Authorized shares: unlimited;    |                                                                                                  |      |           |       |      |              |         |      
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Issued and outstanding shares: 1,460,978,638 at March 31, 2003 and December 31, 2002             |      |           | 1,211 |      |              |         | 1,211 | 
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Additional paid-in capital                                          |                                                                                                  |      | 21,991    |       |      |              | 21,991  |      
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Deficit                                                             |                                                                                                  |      | (18,000   | )     |      |              | (18,093 | )    
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Accumulated other comprehensive loss                                |                                                                                                  |      | (1,381    | )     |      |              | (1,493  | )    
|                                                                   
|Total shareholders equity                                          |                                                                                                  |      | 4,357     |       |      |              | 4,152   |      
|                                                                   
|Total liabilities and shareholders equity                          |                                                                                                  | $    | 15,680    |       |      | $            | 15,753  |      
|                                                                   

The accompanying notes are an integral part of these consolidated financial statements

5



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NORTEL NETWORKS LIMITED

Consolidated Statements of Cash Flows (unaudited) for the three months ended


|                                                       |                                                                                                                                                                                |                                                                   |                                          |      |           |      |       |           |      |      |  
|------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------- | ---------------------------------------- | ---- | --------- | ---- | ----- | --------- | ---- | ---- | -
|                                                      
|                                                       |                                                                                                                                                                                |                                                                   |                                          |      | March 31, |      |       | March 31,
|(millions of U.S. dollars)                             |                                                                                                                                                                                | 2003                                                              |                                          |      | 2002     
|                                                      
|                                                      
|                                                      
|                                                      
|                                                      
|Cash flows from (used in) operating activities         |                                                                                                                                                                                |                                                                   |                                          |      |           |      |       |          
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Net loss from continuing operations                                                                                                                                            |                                                                   | $                                        | (67  | )         |      | $     | (785      | )   
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Adjustments to reconcile net loss from continuing operations to net cash from (used
in) operating activities, net of effects from acquisitions and divestitures of businesses: |                                                                   |                                          |      |           |      |       |           |     
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                                                                                                                                | Amortization and depreciation                                     |                                          |      | 104       |      |       |           | 157  |     
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                                                                                                                                | Non-cash portion of special charges and related asset write downs |                                          |      | (5        | )    |       |           | 75   |     
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                                                                                                                                | Equity in net loss of associated companies                        |                                          |      | 7         |      |       |           | 4    |     
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                                                                                                                                | Current stock option compensation                                 |                                          |      | 5         |      |       |           |     |     
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                                                                                                                                | Deferred income taxes                                             |                                          |      | 7         |      |       |           | (371 | )   
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                                                                                                                                | Other liabilities                                                 |                                          |      | 26        |      |       |           | (37  | )   
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                                                                                                                                | Gain on repurchases of outstanding debt securities                |                                          |      | (4        | )    |       |           |     |     
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                                                                                                                                | (Gain) loss on sale or write down of investments and businesses   |                                          |      | 33        |      |       |           | (11  | )   
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                                                                                                                                | Other  net                                                       |                                          |      | 34        |      |       |           | 127  |     
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                                                                                                                                | Change in operating assets and liabilities:                       |                                          |      |           |      |       |           |      |     
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                                                                                                                                |                                                                   | Accounts receivable                      |      |           | (46  | )     |           |      | 165  |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                                                                                                                                |                                                                   | Inventories                              |      |           | 111  |       |           |      | 74   |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                                                                                                                                |                                                                   | Income taxes                             |      |           | (6   | )     |           |      | 519  |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                                                                                                                                |                                                                   | Restructuring                            |      |           | (187 | )     |           |      | (387 | )
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                                                                                                                                |                                                                   | Accounts payable and accrued liabilities |      |           | (130 | )     |           |      | 180  |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                                                                                                                                |                                                                   | Other operating assets and liabilities   |      |           | 4    |       |           |      | (104 | )
|                                                      
|                                                       | Net cash used in operating activities of continuing operations                                                                                                                 |                                                                   |                                          | (114 | )         |      |       | (394      | )   
|                                                      
|                                                      
|                                                      
|                                                      
|                                                      
|Cash flows from (used in) investing activities         |                                                                                                                                                                                |                                                                   |                                          |      |           |      |       |          
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Expenditures for plant and equipment                                                                                                                                           |                                                                   |                                          | (18  | )         |      |       | (103      | )   
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Proceeds on disposals of plant and equipment                                                                                                                                   |                                                                   |                                          | 6    |           |      |       | 44        |     
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Decrease in restricted cash and cash equivalents                                                                                                                               |                                                                   |                                          | 20   |           |      |       |          |     
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Increase in long-term receivables                                                                                                                                              |                                                                   |                                          | (9   | )         |      |       | (107      | )   
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Decrease in long-term receivables                                                                                                                                              |                                                                   |                                          | 5    |           |      |       | 89        |     
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Acquisitions of investments and businesses  net of cash acquired                                                                                                              |                                                                   |                                          | (2   | )         |      |       | (19       | )   
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Proceeds on sale of investments and businesses                                                                                                                                 |                                                                   |                                          | 7    |           |      |       | 24        |     
|                                                      
|                                                       | Net cash from (used in) investing activities of continuing operations                                                                                                          |                                                                   |                                          | 9    |           |      |       | (72       | )   
|                                                      
|                                                      
|                                                      
|                                                      
|                                                      
|Cash flows from (used in) financing activities         |                                                                                                                                                                                |                                                                   |                                          |      |           |      |       |          
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Dividends on preferred shares                                                                                                                                                  |                                                                   |                                          | (5   | )         |      |       | (5        | )   
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Decrease in notes payable  net                                                                                                                                                |                                                                   |                                          | (17  | )         |      |       | (11       | )   
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Proceeds from long-term debt                                                                                                                                                   |                                                                   |                                          |     |           |      |       | 11        |     
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Repayments of long-term debt                                                                                                                                                   |                                                                   |                                          | (43  | )         |      |       | (2        | )   
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Decrease in capital leases payable                                                                                                                                             |                                                                   |                                          | (1   | )         |      |       | (4        | )   
|                                                      
|                                                       | Net cash used in financing activities of continuing operations                                                                                                                 |                                                                   |                                          | (66  | )         |      |       | (11       | )   
|                                                      
|                                                       | Effect of foreign exchange rate changes on cash and cash equivalents                                                                                                           |                                                                   |                                          | 18   |           |      |       | (6        | )   
|                                                      
|                                                       | Net cash used in continuing operations                                                                                                                                         |                                                                   |                                          | (153 | )         |      |       | (483      | )   
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Net cash from discontinued operations                                                                                                                                          |                                                                   |                                          | 253  |           |      |       | 50        |     
|                                                      
|Net increase (decrease) in cash and cash equivalents   |                                                                                                                                                                                |                                                                   | 100                                      |      |           |      | (433  | )        
|                                                      
|Cash and cash equivalents at beginning of period  net |                                                                                                                                                                                |                                                                   | 3,813                                    |      |           |      | 3,457 |          
|                                                      
|Cash and cash equivalents at end of period  net       |                                                                                                                                                                                | $                                                                 | 3,913                                    |      |           | $    | 3,024 |          
|                                                      

The accompanying notes are an integral part of these consolidated financial statements

6



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##### Table of Contents






NORTEL NETWORKS LIMITED

Notes to Consolidated Financial Statements (unaudited)
(millions of U.S. dollars, except per share amounts, unless otherwise stated)




|1. |  | Significant accounting
policies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Basis of
presentation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|   |  | The accompanying unaudited consolidated financial statements of Nortel
Networks Limited (Nortel Networks) include all majority owned subsidiaries
over which Nortel Networks exercises control and have been prepared in
accordance with the rules and regulations of the United States Securities and
Exchange Commission (the SEC) for the preparation of interim financial
information. They do not include all information and notes required by
accounting principles generally accepted in the United States (GAAP) in the
preparation of annual consolidated financial statements. The accounting
policies used in the preparation of the accompanying unaudited consolidated
financial statements are the same as those described in Nortel Networks
audited consolidated financial statements prepared in accordance with GAAP
for the three years ended December 31, 2002, except as described in note 2.
Although Nortel Networks is headquartered in Canada, the accompanying
unaudited consolidated financial statements are expressed in United States
dollars as the greater part of Nortel Networks financial results and net
assets are denominated in United States dollars.
|  
|   |  | In the opinion of management, all adjustments necessary to effect a fair
statement of the results for the periods presented have been made and all
such adjustments are of a normal recurring nature. The financial results for
the three months ended March 31, 2003 are not necessarily indicative of
financial results for the full year. The accompanying unaudited consolidated
financial statements should be read in conjunction with Nortel Networks
Annual Report on Form 10-K for the year ended December 31, 2002 filed with
the SEC on March 10, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|   |  | Recent accounting pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    



| | (a) |  | In April 2003, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 149 Amendment of SFAS No. 133 on Derivative Instruments
and Hedging Activities (SFAS No. 149). SFAS 149 amends and
clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under SFAS No. 133 Accounting for Derivative Instruments
and Hedging Activities (SFAS 133). In particular, it (1) clarifies under what
circumstances a contract with an initial net investment meets the
characteristic of a derivative as discussed in SFAS 133, (2)
clarifies when a derivative contains a financing component, (3) amends
the definition of an underlying to conform it to the language used in
FASB Interpretation No. (FIN) 45, Guarantor Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45) and (4) amends certain other existing
pronouncements.        
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | SFAS 149 is effective for contracts entered into or modified after
June 30, 2003, except as stated below and for hedging relationships
designated after June 30, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |     |  | The provisions of SFAS 149 that relate to SFAS No. 133 implementation
issues that have been effective for fiscal quarters that began prior to
June 15, 2003, should continue to be applied in accordance with their
respective effective dates. In addition, certain provisions relating to
forward purchases or sales of when-issued securities or other securities
that do not yet exist, should be applied to existing contracts as well as
new contracts entered into after June 30, 2003. SFAS 149 should be
applied prospectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |     |  | Nortel Networks will adopt the provisions of SFAS 149 for the quarter
ending June 30, 2003. Nortel Networks has not yet determined the
impact that the adoption of SFAS 149 will have on its business,
results of operations and financial position.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | (b) |  | In January 2003, the FASB issued
FIN 46  Consolidation of Variable
Interest Entities (FIN 46). FIN 46 clarifies the application of
Accounting Research Bulletin No. 51  Consolidated Financial Statements
to those entities defined as Variable Interest Entities (more commonly
referred to as special purpose entities) in which equity investors do
not have the characteristics of a controlling financial interest or do
not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other
parties. FIN 46 applies immediately to all Variable Interest Entities
created after January 31, 2003, and by the beginning of the first
interim or annual reporting period commencing after June 15, 2003 for
Variable Interest Entities created prior to February 1, 2003.                                                                                                                                                                                                          
|
| |     |  | Nortel Networks currently conducts certain receivable sales and lease
financing transactions through special purpose entities and is in the
process of assessing the structure of these transactions against the
criteria set out in FIN 46. Receivable sales transactions are generally
conducted either directly with financial institutions or with multi-seller
conduits. It is not expected that Nortel Networks will be required to
consolidate any of these special purpose entities or provide any of the
additional disclosures set out in FIN 46.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |     |  | Certain lease financing transactions are structured through single
transaction special purpose entities that currently do not have sufficient
equity at risk as defined in FIN 46. In addition, Nortel Networks retains
certain risks associated with guaranteeing recovery of the unamortized principal balance of the debt which is
expected to represent the majority of the risks associated with the
special purpose entities activities. The amount of the guarantee will be adjusted
over time as the underlying debt matures. Therefore, it is expected that
unless the existing arrangements are modified prior to July 1, 2003,
Nortel Networks will be required to consolidate the assets, liabilities
and any non-controlling interests of these special purpose entities
effective July 1, 2003. The total assets and total liabilities held by
these entities at March 31, 2003 were each approximately $176 and these
amounts represent the collateral and maximum exposure to loss,
respectively, as a result of our involvement with these entities.

7



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| | (c) |  | In November 2002, the FASB Emerging Issues Task Force (EITF)
reached a consensus on Issue 00-21, Accounting for Revenue Arrangements
with Multiple Deliverables (EITF 00-21), which must be applied to all
revenue arrangements entered into after June 30, 2003. However, the
EITF is continuing discussion of the interaction of EITF 00-21 with
higher level accounting literature, including Statement of Position
81-1, Accounting for Performance of Construction-Type and Certain
Production-Type Contracts. EITF 00-21 governs how to separately
account for goods or services or both that are to be delivered in a
bundled sales arrangement and allows for either prospective application
or a cumulative adjustment upon adoption. Nortel Networks is unable to
determine the impact of EITF 00-21 on its business, results of
operations and financial condition, until the EITF resolves
uncertainties regarding the scope of this pronouncement.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|   |  | Comparative figures                                                                                                                             
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Certain 2002 figures in the accompanying unaudited consolidated financial
statements have been reclassified to conform to the 2003 presentation.
|  
|2. |  | Accounting changes                                                                                                                              



| | (a) |  | Stock-based compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | Prior to fiscal 2003, Nortel Networks, as permitted under SFAS No. 123, Accounting for
Stock-based Compensation (SFAS 123), applied Accounting Principles
Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees
(APB 25), and related interpretations in accounting for stock-based
compensation plans. SFAS 123 required disclosure of pro forma amounts to
reflect the impact if Nortel Networks had elected to adopt the optional
recognition provisions of SFAS 123 for its stock option plans and employee
stock purchase plans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |     |  | In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure  an Amendment of
FASB Statement No. 123 (SFAS 148), which amended the transitional
provisions of SFAS 123 for entities choosing to recognize stock-based
compensation under the fair value based method of SFAS 123, rather than
electing to continue to follow the intrinsic value method of APB 25.
Under SFAS 148, Nortel Networks could have adopted the recommendations of
SFAS 123 either (1) prospectively to awards granted or modified after the
beginning of the year of adoption, (2) retroactively with restatement for
awards granted or modified since January 1, 1995, or (3) prospectively to
awards granted or modified since January 1, 1995. Effective January 1,
2003, Nortel Networks has elected to expense employee stock-based
compensation using the fair value based method prospectively for all
awards granted or modified after January 1, 2003. The effect of adoption
of SFAS 148 was a stock option expense of $5 for the three months ended
March 31, 2003.
|
| |     |  | Under various stock option programs of Nortel Networks parent, Nortel
Networks Corporation (NNC), options may be granted to various eligible
employees of Nortel Networks to purchase common shares of NNC.
Had Nortel Networks applied the fair value based method to all stock-based
awards, reported net earnings (loss) would have decreased (increased) to
the pro forma amounts indicated below for each of the three months ended:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

| |                                                             |  |           |     |   |           |   |        |  
| | ----------------------------------------------------------- |  | --------- | --- | - | --------- | - | ------ | -
| |                                                            
| |                                                             |  | March 31, |     |   | March 31,
| |                                                             |  | 2003      |     |   | 2002     
| |                                                            
| | Net earnings (loss) applicable to common shares             |  | $         | 92  |   |           | $ | (790   | )
| | Stock-based compensation  reported (a)                     |  |           | 15  |   |           |   | 2      |  
| | Pro forma stock-based compensation (b)                      |  |           | (62 | ) |           |   | (238   | )
| |                                                            
| | Net earnings (loss) applicable to common shares  pro forma |  | $         | 45  |   |           | $ | (1,028 | )
| |                                                            
|
|
|
|

| | (a) |  | Included in stock-based compensation  reported for the three
months ended March 31, 2003 was stock option expense of $5 (net of
tax of nil) and restricted stock units expense of $10 (net of tax of
nil).
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (b) |  | Pro forma stock-based compensation was net of tax of $12 and
$69 for the three months ended March 31, 2003 and 2002, respectively.                                                                         

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| |  |  | The fair value of stock options used to compute pro forma net earnings
(loss) was the estimated fair value at grant date using the Black-Scholes
option-pricing model with the following weighted average assumptions for
each of the three months ended:
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                             |                               |   |           |       |           |   |      |       |  
| | ----------------------------------------------------------- | ----------------------------- | - | --------- | ----- | --------- | - | ---- | ----- | -
| |                                                            
| |                                                             |                               |   | March 31, |       | March 31,
| |                                                             |                               |   | 2003      |       | 2002     
| |                                                            
|
|
|
|
| | Black-Scholes weighted-average assumptions                  |                               |   |           |       |           |   |      |       |  
|
|
|
|
| |                                                             | Expected dividend             |   |           | 0.00  | %         |   |      | 0.00  | %
|
|
|
|
| |                                                             | Expected volatility           |   |           | 92.48 | %         |   |      | 71.17 | %
|
|
|
|
| |                                                             | Risk-free interest rate       |   |           | 2.82  | %         |   |      | 4.50  | %
|
|
|
|
| |                                                             | Expected option life in years |   |           | 4     |           |   |      | 4     |  
|
| | Weighted average stock option fair value per option granted |                               | $ | 1.56      |       |           | $ | 3.63 |      
| |                                                            



| | (b) |  | Guarantees                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | Nortel Networks has entered into agreements that contain features which
meet the definition of a guarantee under FIN 45. FIN 45 defines a guarantee to be a contract that contingently requires Nortel
Networks to make payments (either in cash, financial instruments, other
assets, common shares of NNC or through the provision of services) to a
third party based on changes in an underlying economic characteristic
(such as interest rates or market value) that is related to an asset, a
liability or an equity security of the other party. Effective January 1,
2003, Nortel Networks adopted the initial recognition and measurement
provisions of FIN 45, which apply on a prospective basis to certain
guarantees issued or modified after December 31, 2002. FIN 45 requires
that a liability be recognized for the estimated fair value of the
guarantee at its inception. The adoption of FIN 45 did not have a material
impact on the business, results of operations and financial condition of
Nortel Networks. See note 9 for additional disclosure on guarantees.



| | (c) |  | Asset retirement obligations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | Effective January, 1, 2003, Nortel Networks adopted the initial
recognition and measurement provisions of SFAS No. 143, Accounting for
Asset Retirement Obligations (SFAS 143), which applies to certain obligations associated with the retirement of tangible
long-lived assets. SFAS 143 requires that a liability be recognized for
the estimated fair value of the obligation when it is incurred. The
adoption of SFAS 143 did not have a material impact on Nortel Networks
business, results of operations and financial condition.



| | (d) |  | Accounting for costs associated with exit or disposal activities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | In June 2002, the FASB issued SFAS No. 146 Accounting for Costs
Associated with Exit or Disposal Activities (SFAS 146), which is
effective for exit or disposal activities initiated after December 31,
2002. SFAS 146 supercedes EITF Issue No. 94-3 Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in Restructuring) (EITF 94-3). SFAS
146 requires that costs associated with an exit or disposal activity be
recognized when the liability is incurred, whereas EITF 94-3 required
recognition of a liability when an entity committed to an exit plan. The
effect of SFAS 146 will be to change the timing of recognition of certain
liabilities and no material valuation differences are expected. Plans
initiated before December 31, 2002 continue to be accounted for under EITF
94-3. Nortel Networks adopted the requirements of SFAS 146 effective
January 1, 2003. See note 5 for additional disclosure and the effects of
adoption of SFAS 146.

3.   Consolidated financial statement details



| |                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The following unaudited consolidated financial statement details are
presented as at March 31, 2003 and December 31, 2002 for the consolidated
balance sheet details, and for each of the three months ended March 31, 2003
and 2002 for the consolidated statement of cash flows:

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| |  | Consolidated balance sheets
| |  | ---------------------------
|
| |  | Inventories  net:         

| |                       |  |           |     |  |              |   |     | 
| | --------------------- |  | --------- | --- |  | ------------ | - | --- | 
| |                      
| |                       |  | March 31, |     |  | December 31,
| |                       |  | 2003      |     |  | 2002        
| |                      
|
|
|
|
| | Raw materials         |  | $         | 302 |  |              | $ | 343 | 
|
|
|
|
| | Work in process       |  |           | 280 |  |              |   | 308 | 
|
|
|
|
| | Finished goods        |  |           | 264 |  |              |   | 238 | 
| |                      
| | Inventories  net (a) |  | $         | 846 |  |              | $ | 889 | 
| |                      
|
|
|
|

| | (a) |  | Net of inventory provisions of $965 and $1,014 as at March 31, 2003
and December 31, 2002, respectively. Included in Other accrued
liabilities were accruals of $157 and $168 at March 31, 2003 and
December 31, 2002, respectively for cancellation charges, inventory in
excess of future demand and the settlement of certain other claims
related to contract manufacturers or suppliers.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Plant and equipment  net:
| |  | --------------------------

| |                                |                         |   |           |        |   |              |        |        |  
| | ------------------------------ | ----------------------- | - | --------- | ------ | - | ------------ | ------ | ------ | -
| |                               
| |                                |                         |   | March 31, |        |   | December 31,
| |                                |                         |   | 2003      |        |   | 2002        
| |                               
|
|
|
|
| | Cost:                          |                         |   |           |        |   |              |        |       
|
|
|
|
| |                                | Land                    |   | $         | 55     |   |              | $      | 54     |  
|
|
|
|
| |                                | Buildings               |   |           | 1,194  |   |              |        | 1,169  |  
|
|
|
|
| |                                | Machinery and equipment |   |           | 3,714  |   |              |        | 3,732  |  
| |                               
| |                                |                         |   | 4,963     |        |   |              | 4,955  |       
| |                               
|
|
|
|
| | Less accumulated depreciation: |                         |   |           |        |   |              |        |       
|
|
|
|
| |                                | Buildings               |   |           | (471   | ) |              |        | (463   | )
|
|
|
|
| |                                | Machinery and equipment |   |           | (3,096 | ) |              |        | (3,051 | )
| |                               
| |                                |                         |   | (3,567    | )      |   |              | (3,514 | )     
| |                               
| | Plant and equipment  net      |                         | $ | 1,396     |        |   | $            | 1,441  |       
| |                               



| |  | Other accrued liabilities:
| |  | --------------------------

| |                                                             |  |           |       |  |              |   |       | 
| | ----------------------------------------------------------- |  | --------- | ----- |  | ------------ | - | ----- | 
| |                                                            
| |                                                             |  | March 31, |       |  | December 31,
| |                                                             |  | 2003      |       |  | 2002        
| |                                                            
|
|
|
|
| | Outsourcing and selling, general and administrative related |  | $         | 637   |  |              | $ | 690   | 
|
|
|
|
| | Customer deposits                                           |  |           | 357   |  |              |   | 389   | 
|
|
|
|
| | Product related                                             |  |           | 364   |  |              |   | 372   | 
|
|
|
|
| | Warranty                                                    |  |           | 238   |  |              |   | 238   | 
|
|
|
|
| | Deferred income                                             |  |           | 246   |  |              |   | 218   | 
|
|
|
|
| | Miscellaneous taxes                                         |  |           | 103   |  |              |   | 121   | 
|
|
|
|
| | Income taxes payable                                        |  |           | 74    |  |              |   | 98    | 
|
|
|
|
| | Current liabilities of discontinued operations              |  |           | 66    |  |              |   | 46    | 
|
|
|
|
| | Interest expense                                            |  |           | 32    |  |              |   | 52    | 
|
|
|
|
| | Other                                                       |  |           | 517   |  |              |   | 579   | 
| |                                                            
| | Other accrued liabilities                                   |  | $         | 2,634 |  |              | $ | 2,803 | 
| |                                                            

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| |  | Consolidated statements of cash flows      
| |  | -------------------------------------------
|
| |  | Interest and income taxes paid (recovered):

| |                               |  |           |    |  |           |   |      |  
| | ----------------------------- |  | --------- | -- |  | --------- | - | ---- | -
| |                              
| |                               |  | March 31, |    |  | March 31,
| |                               |  | 2003      |    |  | 2002     
| |                              
|
|
|
|
| | Interest paid                 |  | $         | 43 |  |           | $ | 70   |  
|
|
|
|
| | Income taxes paid (recovered) |  | $         | 21 |  |           | $ | (506 | )
| |                              



|   |  | Goodwill                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Goodwill represents the excess of the purchase price of an acquired
enterprise over the fair values of the identifiable assets acquired and
liabilities assumed. Nortel Networks tests for
impairment of goodwill on an annual basis on October 1, and at any other
time if events occur or circumstances change that would more likely than not
reduce the fair value of the reporting unit below its carrying amount.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|   |  | Circumstances that could trigger an impairment test include but are not
limited to: a significant adverse change in the business climate or legal
factors; an adverse action or assessment by a regulator; unanticipated
competition; loss of key personnel; the likelihood that a reporting unit or
significant portion of a reporting unit will be sold or otherwise disposed;
results of testing for recoverability of a significant asset group within a
reporting unit; and recognition of a goodwill impairment loss in the
financial statements of a subsidiary that is a component of a reporting
unit.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  
|   |  | The impairment test for goodwill is a two-step process. Step one consists
of a comparison of the fair value of a reporting unit with its carrying
amount, including the goodwill allocated to the reporting unit. Measurement
of the fair value of a reporting unit is based on one or more of the
following fair value measures including: estimated amounts at which the unit
as a whole could be bought or sold in a current transaction between willing
parties; using present value techniques of estimated future cash flows; or
using valuation techniques based on multiples of earnings or revenue, or a
similar performance measure. Nortel Networks also considers the
market capitalization of NNC as of the date of the impairment test.
 If the carrying amount of the reporting unit
exceeds the fair value, step two requires the fair value of the reporting
unit to be allocated to the underlying assets and liabilities of that
reporting unit, resulting in an implied fair value of goodwill. If the
carrying amount of the reporting unit goodwill exceeds the implied fair
value of that goodwill, an impairment loss equal to the excess is recorded
in net earnings (loss).
|  
|   |  | Other                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|  
|   |  | During the three months ended March 31, 2003 Nortel Networks net earnings
(loss) included approximately $80 of favorable impacts (of which
$50 was included in Other income (expense)  net, $25 in selling, general and administrative expense and $5 in research and development expense) associated with reductions
in accruals principally related to the wind-down of integration activities
of previously acquired companies, operations originally structured as joint
ventures and miscellaneous tax matters.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|  
|4. |  | Segmented information                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|  
|   |  | General description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|   |  | Nortel Networks operations are organized around four reportable segments:
Wireless Networks; Enterprise Networks; Wireline Networks; and Optical
Networks. Wireless Networks includes network access and core networking
products for voice and data communications that span second and third
generation wireless technologies and most major global standards for mobile
networks. Enterprise Networks includes circuit and packet voice solutions,
data networking and security solutions and the related professional services
used by our enterprise customers. Wireline Networks includes circuit and
packet voice solutions, data networking and security solutions and the
related professional services used by our service provider customers.
Optical Networks includes metropolitan, regional and long-haul photonic dense
wavelength division multiplexing transmission systems, synchronous optical
transmission systems, optical switching solutions, network management
software and intelligence solutions and Optical Ethernet solutions for our
service provider and enterprise customers.                                                                                        
|  
|   |  | Other represents miscellaneous business activities and corporate functions.
None of these activities meet the quantitative criteria to be disclosed as
reportable segments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  

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| |  | Segments                                                                                 
| |  | -----------------------------------------------------------------------------------------
|
| |  | The following tables set forth information by segment for each of the three
months ended:

| |                                                     |  |           |       |   |           |   |        |  
| | --------------------------------------------------- |  | --------- | ----- | - | --------- | - | ------ | -
| |                                                    
| |                                                     |  | March 31, |       |   | March 31,
| |                                                     |  | 2003      |       |   | 2002     
| |                                                    
|
|
|
|
| | Revenues                                            |  |           |       |   |           |   |        |  
|
|
|
|
| | Wireless Networks                                   |  | $         | 953   |   |           | $ | 1,136  |  
|
|
|
|
| | Enterprise Networks                                 |  |           | 611   |   |           |   | 675    |  
|
|
|
|
| | Wireline Networks                                   |  |           | 562   |   |           |   | 682    |  
|
|
|
|
| | Optical Networks                                    |  |           | 270   |   |           |   | 405    |  
|
|
|
|
| | Other                                               |  |           | 1     |   |           |   | 12     |  
| |                                                    
| | Total                                               |  | $         | 2,397 |   |           | $ | 2,910  |  
| |                                                    
|
|
|
|
| | Contribution margin                                 |  |           |       |   |           |   |        |  
|
|
|
|
| | Wireless Networks                                   |  |           | 316   |   |           |   | 244    |  
|
|
|
|
| | Enterprise Networks                                 |  |           | 145   |   |           |   | 84     |  
|
|
|
|
| | Wireline Networks                                   |  |           | 152   |   |           |   | 96     |  
|
|
|
|
| | Optical Networks                                    |  |           | 10    |   |           |   | (358   | )
|
|
|
|
| | Other                                               |  |           | (70   | ) |           |   | (125   | )
| |                                                    
| | Total                                               |  | $         | 553   |   |           | $ | (59    | )
| |                                                    
|
|
|
|
| | Research and development expense                    |  |           | (488  | ) |           |   | (577   | )
|
|
|
|
| | Amortization of acquired technology                 |  |           |      |   |           |   | (5     | )
|
|
|
|
| | Special charges                                     |  |           | (133  | ) |           |   | (443   | )
|
|
|
|
| | Gain on sale of businesses                          |  |           |      |   |           |   | 3      |  
|
|
|
|
| | Other income (expense)  net                        |  |           | 49    |   |           |   | (14    | )
|
|
|
|
| | Interest expense                                    |  |           | (31   | ) |           |   | (48    | )
| |                                                    
| | Loss from continuing operations before income taxes |  | $         | (50   | ) |           | $ | (1,143 | )
| |                                                    



|   |  | For the three months ended March 31, 2003, one customer accounted for 10.1
percent of total revenues. No single customer accounted for greater than 10
percent of revenues for the three months ended March 31, 2002.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|5. |  | Special charges                                                                                                                                                                                                      
|  
|   |  | During the three months ended March 31, 2003, Nortel Networks continued to
implement its restructuring work plan initiated in 2001. Changes in the
provision for special charges are shown below:                    

| |                                               |                    |   |           |      |   |           |            |     |             |           |   |       |   |   |       |    |   |   |       |      |  
| | --------------------------------------------- | ------------------ | - | --------- | ---- | - | --------- | ---------- | --- | ----------- | --------- | - | ----- | - | - | ----- | -- | - | - | ----- | ---- | -
| |                                              
| |                                               |                    |   |           |      |   |           | Contract   |     |             |           |   |       |   |   |       |    |   |   |       |     
| |                                               |                    |   |           |      |   |           | settlement |     |             | Plant and |   |       |   |   |       |    |   |   |      
| |                                               |                    |   | Workforce |      |   | and lease |            |     | equipment   |           |   |       |   |   |       |    |   |  
| |                                               |                    |   | reduction |      |   | costs     |            |     | write downs |           |   | Other |   |   | Total
| |                                              
| | Provision balance as at December 31, 2002 (a) |                    | $ | 416       |      |   | $         | 668        |     |             | $         |  |       |   | $ | 11    |    |   | $ | 1,095 |     
|
|
|
|
| |                                               | Special charges    |   |           | 60   |   |           |            | 78  |             |           |   | (5    | ) |   |       |   |   |   |       | 133  |  
|
|
|
|
| |                                               | Cash drawdowns     |   |           | (130 | ) |           |            | (55 | )           |           |   |      |   |   |       | (2 | ) |   |       | (187 | )
|
|
|
|
| |                                               | Non-cash drawdowns |   |           |     |   |           |            |    |             |           |   | 5     |   |   |       |   |   |   |       | 5    |  
| |                                              
| | Provision balance as at March 31, 2003(a)     |                    | $ | 346       |      |   | $         | 691        |     |             | $         |  |       |   | $ | 9     |    |   | $ | 1,046 |     
| |                                              

| | (a) |  | At March 31, 2003 and December 31, 2002, the short-term provision
balance was $680 and $761, respectively, and the long-term provision
balance was $366 and $334, respectively (included in Other liabilities).
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Regular full-time (RFT) employee notifications included in special charges
were as follows:
| |  | ---------------------------------------------------------------------------------------------

| |                                                       |                |  |                         |     |  |              |  |     |       |  |  |     | 
| | ----------------------------------------------------- | -------------- |  | ----------------------- | --- |  | ------------ |  | --- | ----- |  |  | --- | 
| |                                                      
| |                                                       |                |  | Employees (approximate)
| |                                                       |                |  | Direct (a)              |     |  | Indirect (b) |  |     | Total
| |                                                      
| | RFT employee notifications for
the three months ended |                |  |                         |     |  |              |  |     |       |  |  |    
|
|
|
|
| |                                                       | March 31, 2003 |  |                         | 200 |  |              |  | 590 |       |  |  | 790 | 
| |                                                      
|
|
|
|

| | (a) |  | Direct employees included employees performing manufacturing,
assembly, test and inspection activities associated with the production
of Nortel Networks products.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
|
|
|
| | (b) |  | Indirect employees included employees performing manufacturing
management, sales, marketing, research and development and
administrative activities.              



| |  | Three months ended March 31, 2003                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | For the three months ended March 31, 2003, Nortel Networks recorded total
special charges of $133.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Workforce reduction charges of $60 were related to severance and benefit
costs associated with approximately 790 employees notified of termination
during the three month period ended March 31, 2003 which extended across all
segments. These charges were net of $10 relating to provision amounts that
were no longer required. During the three month period ended March 31, 2003,
the workforce reduction provision balance was drawn down by cash payments of
$130. The remaining provision is expected to be substantially drawn down by
mid 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Contract settlement and lease costs of $78 consisted of net lease charges
related to a number of leased facilities (comprised of office, warehouse and
manufacturing space) and leased manufacturing equipment that were no longer
required, across all segments. Lease costs represented Nortel Networks
estimated future net contractual obligations under its operating leases for
those leases that Nortel Networks cannot terminate. Included in the $78 of
contract settlement and lease costs was $55 relating to changes in sublease
revenue assumptions associated with certain properties and $23 of net lease
charges related to newly identified leased facilities and equipment that were
no longer required which were valued using the estimated net present value
method as prescribed under SFAS 146. During the three months ended March 31,
2003, the provision balance for contract settlement and lease costs was drawn
down by cash payments of $55. The remaining provision, net of approximately
$345 in expected sublease revenue, is expected to be substantially drawn down
by the end of 2010.

12



---



##### Table of Contents





|   |  | Plant and equipment write downs of $(5) were net of $(26) related primarily
to changes in the estimated net realizable value of leasehold improvements
and related assets. Current period write downs to net realizable value were
$21 for various leasehold improvements and excess equipment.                                                                                                                                                                                                                                                                                                  
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|6. |  | Income taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|  
|   |  | At March 31, 2003, Nortel Networks net deferred tax assets, excluding
discontinued operations, were $3,379, reflecting temporary differences
between financial reporting and tax treatment of certain assets and
liabilities, in addition to the tax benefit of net operating loss and tax
credit carryforwards. These carryforwards expire at various dates beginning
in 2003.                                                                                                                                                                                                                  
|  
|   |  | During the three months ended March 31, 2003, Nortel Networks recorded a full
valuation allowance on the tax benefit of the pre-tax loss from continuing
operations of $50. The valuation allowance was recorded in accordance with
SFAS No. 109 Accounting for Income taxes, which requires that tax valuation
allowances be established when it is more likely than not that some portion
or all of a companys deferred tax assets will not be realized. The valuation allowances can be primarily attributed to continued
uncertainty in the telecommunications market.                    
|  
|7. |  | Long-term debt, credit and support facilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|   |  | Long-term debt                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|  
|   |  | During the three months ended March 31, 2003, Nortel Networks purchased a
portion of its 6.125 percent notes due February 15, 2006 with a face value of
$39. The transaction resulted in a gain of $4 which was included in the
consolidated statement of operations within Other income (expense)  net.                                                                                                                                                                                                                                                                                        
|  
|   |  | Credit facilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|  
|   |  | At March 31, 2003 and December 31, 2002, Nortel Networks had total unused
committed credit facilities of $750.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|  
|   |  | Support facilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|   |  | On February 14, 2003, Nortel Networks entered into an agreement with Export
Development Canada (EDC) regarding arrangements to provide for support, on
a secured basis, of certain performance related obligations arising out of
normal course business activities for the benefit of Nortel Networks (the
EDC Support Facility). The agreement expires on June 30, 2004.                                                                                                                                                                                                                   
|  
|   |  | The EDC Support Facility provides for up to
$750 in support including $300 of committed revolving support for performance bonds or
similar instruments, of which $95 was utilized as at March 31,
2003. The remainder is uncommitted support for performance bonds, receivables sales and/or
securitizations, of which $65 was
utilized as at March 31, 2003. For additional information, see
Nortel Networks Annual Report on Form 10-K for the year ended
December 31, 2002 and Nortel Networks Current Report on Form 8-K filed February 14,
2003 with the Securities and Exchange Commission.
|  
|   |  | Nortel Networks obligations under the EDC Support Facility are secured on an
equal basis under the existing security agreements entered into by Nortel
Networks and various of its subsidiaries that pledge substantially all of the
assets of Nortel Networks in favor of certain banks, including the banks
under Nortel Networks and Nortel Networks Inc. (NNI) $750 April 2000 five
year credit facilities and the holders of Nortel Networks and NNCs public
debt securities (see note 15).                                                                                              
|  
|8. |  | Financial instruments and hedging activities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|  
|   |  | During the three months ended March 31, 2003, various cross currency coupon
swaps (notional amount of Canadian $350) were terminated. There was no
impact to net earnings (loss) on termination as these instruments were not
designated as hedges and were previously fair valued through net earnings
(loss).                                                                                                                                                                                                                                                                                  

13



---



##### Table of Contents





|  
|--
|9.
|  
|  
|  
|  
|  
|  
|  

| |                                                |  |           |     |  |              |   |     | 
| | ---------------------------------------------- |  | --------- | --- |  | ------------ | - | --- | 
| |                                               
| |                                                |  | March 31, |     |  | December 31,
| |                                                |  | 2003      |     |  | 2002        
| |                                               
| | Bid and performance related bonds (a)          |  | $         | 318 |  |              | $ | 400 | 
|
|
|
|
| | Other bonds (b)                                |  |           | 39  |  |              |   | 35  | 
| |                                               
| | Total bid, performance related and other bonds |  | $         | 357 |  |              | $ | 435 | 
| |                                               
|
|
|
|

| | (a) |  | Net of restricted cash and cash equivalent amounts of $184 and $195
as at March 31, 2003 and December 31, 2002, respectively.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------
| | (b) |  | Net of restricted cash and cash equivalent amounts of $22 and $19 as
at March 31, 2003 and December 31, 2002, respectively.  



| |  | Customer financing                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Pursuant to certain financing agreements, Nortel Networks is committed to
provide future financing in connection with purchases of Nortel Networks
products and services. Commitments to extend future financing generally have
conditions for funding, fixed expiration or termination dates and specific
interest rates and purposes. Nortel Networks attempts to limit its financing
credit risk by utilizing an internal credit committee that actively monitors
the credit exposure of Nortel Networks. The following table sets forth
customer financing related information and commitments, excluding
discontinued operations, as at:

| |                                   |  |           |      |   |              |   |       |  
| | --------------------------------- |  | --------- | ---- | - | ------------ | - | ----- | -
| |                                  
| |                                   |  | March 31, |      |   | December 31,
| |                                   |  | 2003      |      |   | 2002        
| |                                  
| | Drawn and outstanding  gross (a) |  | $         | 962  |   |              | $ | 1,091 |  
|
|
|
|
| | Provisions for doubtful accounts  |  |           | (699 | ) |              |   | (799  | )
|
|
|
|
| |                                  
| | Drawn and outstanding  net       |  |           | 263  |   |              |   | 292   |  
|
|
|
|
| | Undrawn commitments               |  |           | 649  |   |              |   | 801   |  
| |                                  
| | Total customer financing          |  | $         | 912  |   |              | $ | 1,093 |  
| |                                  
|
|
|
|

| | (a) |  | Included short-term and long-term amounts.
| | --- |  | ------------------------------------------

14



---



##### Table of Contents





|10. |  | Restricted cash and cash
equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | As at March 31, 2003 and December 31, 2002, approximately $227 and $249 of
cash and cash equivalents, respectively, was restricted as collateral for
certain bid, performance related and other bonds. In addition to
the payment of fees, cash and cash equivalent collateral was also required in
connection with obtaining new bid, performance related and other
bonds as a result of the general economic and industry environment and Nortel
Networks current credit ratings.
|   
|11. |  | Comprehensive income
(loss)                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|    |  | The following are the components of comprehensive income (loss), net of tax,
for each of the three months ended:                                                                                                                                                                                                                                                                                                                                                                   

| |                                                |                                                                 |   |           |    |  |           |      |     |  
| | ---------------------------------------------- | --------------------------------------------------------------- | - | --------- | -- |  | --------- | ---- | --- | -
| |                                               
| |                                                |                                                                 |   | March 31, |    |  | March 31,
| |                                                |                                                                 |   | 2003      |    |  | 2002     
| |                                               
|
|
|
|
| | Net earnings (loss)                            |                                                                 | $ | 97        |    |  | $         | (785 | )  
|
|
|
|
| | Other comprehensive income (loss) adjustments: |                                                                 |   |           |    |  |           |      |    
| |                                                | Change in foreign currency translation adjustment (a)           |   |           | 91 |  |           |      | (49 | )
| |                                                | Unrealized gain (loss) on investments  net (b)                 |   |           | 10 |  |           |      | 16  |  
| |                                                | Unrealized derivative gain (loss) on cash flow hedges  net (c) |   |           | 11 |  |           |      | 1   |  
| |                                               
| | Comprehensive income (loss)                    |                                                                 | $ | 209       |    |  | $         | (817 | )  
| |                                               

| | (a) |  | The changes in the foreign currency translation adjustments were not
adjusted for income taxes since they related to indefinite term
investments in non-United States subsidiaries.                                                                                                                                                                                                             
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (b) |  | Certain securities deemed available-for-sale by Nortel Networks are
measured at fair value. Unrealized holding gains and losses related to
these securities were excluded from net earnings (loss) and are included
in comprehensive income (loss) until realized. Unrealized gain on
investments was net of tax of $4 and $11 for the three months ended
March 31, 2003 and 2002, respectively.
| | (c) |  | During the three months ended March 31, 2003 and 2002, $1 and $(4),
respectively, of net derivative gains (losses) were reclassified to net
earnings (loss). Nortel Networks estimates that $9 of net derivative
gains included in other comprehensive income (loss) will be reclassified
into net earnings (loss) within the next 12 months.                                                   



|12. |  | Discontinued
operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | During the three months ended March 31, 2003, Nortel Networks substantially
completed the wind-down of its access solutions operations. The initial
disposal strategy or intent to exit the business was approved by the Nortel
Networks Board of Directors on June 14, 2001. The continued deterioration in
industry and market conditions delayed certain disposal activities beyond the
original planned timeframe of one year. In particular, actions involving
negotiations with customers, who were also affected by industry conditions,
took longer than expected. Although disposal activities continued beyond a
one-year period, Nortel Networks has continued to present the access
solutions operations as discontinued operations in the accompanying unaudited
consolidated financial statements.
|   
|    |  | The following unaudited consolidated financial results for discontinued
operations are presented as at March 31, 2003 and December 31, 2002 for the
consolidated balance sheets, and for each of the three month periods ended
March 31, 2003 and 2002, for the consolidated statements of operations and
consolidated statements of cash flows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|    |  | Consolidated statements of operations:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

| |                                                            |  |           |     |  |           |   |    | 
| | ---------------------------------------------------------- |  | --------- | --- |  | --------- | - | -- | 
| |                                                           
| |                                                            |  | March 31, |     |  | March 31,
| |                                                            |  | 2003      |     |  | 2002     
| |                                                           
|
|
|
|
| | Revenues                                                   |  | $         | 3   |  |           | $ | 68 | 
|
|
|
|
| | Net earnings from discontinued operations  net of tax (a) |  | $         | 164 |  |           | $ |   | 
| |                                                           
|
|
|
|

| | (a) |  | Net earnings from discontinued operations were net of applicable
income tax of $8 and nil for the three months ended March 31, 2003 and
2002, respectively.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------

15



---



##### Table of Contents





| |  | Consolidated balance sheets:
| |  | ----------------------------

| |                                                     |  |           |     |  |              |   |     | 
| | --------------------------------------------------- |  | --------- | --- |  | ------------ | - | --- | 
| |                                                    
| |                                                     |  | March 31, |     |  | December 31,
| |                                                     |  | 2003      |     |  | 2002        
| |                                                    
| | Accounts receivable  net                           |  | $         |    |  |              | $ | 20  | 
|
|
|
|
| | Inventories  net                                   |  |           | 2   |  |              |   |    | 
|
|
|
|
| | Deferred income taxes                               |  |           | 66  |  |              |   | 147 | 
| | Other
current assets (a)                            |  |           | 2   |  |              |   | 45  | 
| |                                                    
| | Total
current assets of discontinued operations (b) |  | $         | 70  |  |              | $ | 212 | 
|
| | Other
long-term assets (a)(b)                       |  |           | 54  |  |              |   | 49  | 
| |                                                    
| | Total assets of discontinued operations             |  | $         | 124 |  |              | $ | 261 | 
| |                                                    
| | Current
liabilities (b)(c)                          |  | $         | 66  |  |              | $ | 46  | 
| | Long-term liabilities (b)                           |  |           | 2   |  |              |   | 2   | 
| |                                                    
| | Total liabilities of discontinued operations        |  | $         | 68  |  |              | $ | 48  | 
| |                                                    
|
|
|
|

| | (a) |  | Included customer financing receivables of nil (net of provisions of
$105) and $66 (net of provisions of $507) as at March 31, 2003 and
December 31, 2002, respectively.                                                                                                            
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (b) |  | Current assets, Other long-term assets, Current liabilities and
Long-term liabilities of discontinued operations were included in Other
current assets, Other assets, Other accrued liabilities and Other
liabilities, respectively, of Nortel Networks consolidated balance
sheets.
| | (c) |  | Included accruals of $66 and $44 as at March 31, 2003 and December
31, 2002, respectively, related to the future contractual obligations
and estimated liabilities during the planned period of disposition.                                                                        



| |  | Consolidated statements of cash flows:
| |  | --------------------------------------

| |                                                   |                      |   |           |     |  |           |    |     |  
| | ------------------------------------------------- | -------------------- | - | --------- | --- |  | --------- | -- | --- | -
| |                                                  
| |                                                   |                      |   | March 31, |     |  | March 31,
| |                                                   |                      |   | 2003      |     |  | 2002     
| |                                                  
| | Cash flows from (used in) discontinued operations |                      |   |           |     |  |           |    |    
| |                                                   | Operating activities |   | $         | 12  |  |           | $  | 72  |  
| |                                                   | Investing activities |   |           | 241 |  |           |    | (22 | )
| |                                                  
| | Net cash from discontinued operations             |                      | $ | 253       |     |  | $         | 50 |    
| |                                                  



| |  | Three months ended March 31, 2003                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | On March 24, 2003, Nortel Networks sold 8 million common shares of Arris
Group Inc. (Arris) to Arris for cash consideration of $28 pursuant to a
March 11, 2003 agreement (the March 2003 Agreement). This resulted in a
gain of $12. Upon completion of this transaction, Nortel Networks owned 14
million Arris common shares or 18.8 percent of the Arris outstanding common
shares. Nortel Networks has classified its remaining ownership interest in
Arris as an available-for-sale investment. In addition, on March 18, 2003,
Nortel Networks assigned its membership interest in Arris Interactive LLC to
ANTEC Corporation, an Arris company, for cash consideration of $89. This
resulted in a gain for the full amount.                                  
|
| |  | Under the terms of the March 2003 Agreement, Arris has the option to
purchase, from Nortel Networks, prior to the earlier of (1) June 30, 2003 and
(2) at Nortel Networks election, on the occurrence of a change of control,
or a material change in the business, of Arris, or the commencement of a
third party tender offer for the common shares of Arris, an additional 8
million shares of Arris. The purchase price of these shares will be equal to
the greater of $4.00 per share or 90 percent of the five trading day volume
weighted average market price prior to the exercise date. Nortel Networks
has also entered into various lock-up arrangements which restrict its rights
to dispose of its remaining common shares of Arris until June 11, 2003.
|
| |  | On March 20, 2003, Nortel Networks entered into a restructuring agreement
with a customer to restructure approximately $465 of trade and customer
financing receivables owed to Nortel Networks, the majority of which was
previously provisioned. As a result of the restructuring agreement, Nortel
Networks received consideration including cash of $125, notes and an ownership interest which have been fully provided for and the
mutual release of all other claims between the parties. A gain of $95 was
recorded as a result of the transaction. In addition to the restructuring
agreement, a five year equipment and services supply agreement                                                                                                              

16



---



##### Table of Contents





|    |  | was entered into requiring customer payment terms of either cash in advance or guarantee
by letters of credit in favor of Nortel Networks.                                                                                                                                                                                                                                                                                                                                                              
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|13. |  | Related party transactions                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|    |  | In the ordinary course of business, Nortel Networks engages in transactions
with certain of its equity-owned investees that are under or are subject to
Nortel Networks significant influence and with NNC, joint ventures of NNC and
owned subsidiaries of NNC. These transactions include sales and purchases
of goods and services (under usual trade terms measured at their exchange
amounts), cash borrowings between the parties and funding activities pursuant
to reciprocal credit agreements.
|   
|    |  | As at March 31, 2003 and December 31, 2002, Nortel Networks had the following
related party amounts on its balance sheet related to NNC and owned
subsidiaries of NNC:                                                                                                                                                                                                                                                                                                                                  

| |                                                                      |  |           |     |  |              |   |     |  
| | -------------------------------------------------------------------- |  | --------- | --- |  | ------------ | - | --- | -
| |                                                                     
| |                                                                      |  | March 31, |     |  | December 31,
| |                                                                      |  | 2003      |     |  | 2002        
| |                                                                     
| | Owing from (to) NNC                                                  |  | $         | 58  |  |              | $ | (17 | )
|
|
|
|
| | Owing from (to) NNC subsidiaries                                     |  | $         | 119 |  |              | $ | 99  |  
|
| | Stock option fair value increment (included in shareholders equity) |  | $         |    |  |              | $ | 525 |  
| |                                                                     



|    |  | On August 29, 2002, a payment was made by a subsidiary of Nortel Networks to
NNC equal to $525 representing the difference between the market value of NNC
common shares issued on stock option exercises and the exercise price of NNC
stock options exercised by employees of the subsidiary. This payment was
referred to as stock option fair value increment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|14. |  | Contingencies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|    |  | Subsequent to the February 15, 2001 announcement in which NNC provided
revised guidance for financial performance for the 2001 fiscal year and the
first quarter of 2001, NNC and certain of its then current officers and
directors were named as defendants in more than twenty-five purported class
action lawsuits. These lawsuits in the United States District Courts for the
Eastern District of New York, for the Southern District of New York and for
the District of New Jersey, and the provinces of Ontario, Quebec and British
Columbia in Canada, on behalf of shareholders who acquired NNC securities as
early as October 24, 2000 and as late as February 15, 2001, allege, among
other things, violations of United States federal and Canadian provincial
securities laws. These matters also have been the subject of review by
Canadian and U.S. securities regulatory authorities. On May 11, 2001, NNC
filed motions to dismiss and/or stay in connection with the three proceedings
in Quebec primarily based on the factual allegations lacking substantial
connection to Quebec and the inclusion of shareholders resident in Quebec in
the class claimed in the Ontario lawsuit. The plaintiffs in two of these
proceedings in Quebec obtained court approval for discontinuances of their
proceedings on January 17, 2002. The motion to dismiss and/or stay the third
proceeding was heard on November 6, 2001 and the court deferred any
determination on the motion to the judge who will hear the application for
authorization to commence a class proceeding. On December 6, 2001, NNC filed
a motion seeking leave to appeal that decision. The motion for leave to
appeal was dismissed on March 11, 2002. On October 16, 2001, an order in the
Southern District of New York was filed consolidating twenty-five of the
related United States class action lawsuits into a single case, appointing
class plaintiffs and counsel for such plaintiffs. The plaintiffs served a
consolidated amended complaint on January 18, 2002. On December 17, 2001,
the defendants in the British Columbia action served notice of a motion
requesting the court to decline jurisdiction and to stay all proceedings on
the ground that British Columbia is an inappropriate forum. The motion has
been adjourned at the plaintiffs request to a future date to be set by the
parties.
|   
|    |  | A class action lawsuit against NNC was also filed in the United States
District Court for the Southern District of New York on behalf of
shareholders who acquired the securities of JDS Uniphase Corporation (JDS)
between January 18, 2001 and February 15, 2001, alleging violations of the
same United States federal securities laws as the above-noted lawsuits.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|    |  | On April 1, 2002, NNC filed a motion to dismiss both the above consolidated
United States shareholder class action and the above JDS shareholder class
action complaints on the grounds that they failed to state a cause of action
under United                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

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| |  | States federal securities laws. With respect to the JDS
shareholder class action complaint, NNC also moved to dismiss on the separate
basis that JDS shareholders lacked standing to sue NNC. On January 3, 2003,
the District Court granted the motion to dismiss the JDS shareholder class
action complaint and denied the motion to dismiss the consolidated United
States class action complaint. Plaintiffs are appealing the dismissal of the
JDS shareholder class action complaint.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | On July 17, 2002, a new purported class action lawsuit (the Ontario Claim)
was filed in the Ontario Superior Court of Justice, Commercial List, naming
NNC, certain of its current and former officers and directors, and its
auditor as defendants. The factual allegations in the Ontario Claim are
substantially similar to the allegations in the consolidated amended
complaint filed in the United States District Court described above. The
Ontario Claim is on behalf of all Canadian residents who purchased NNC
securities (including options on NNC securities) between October 24, 2000 and
February 15, 2001. The plaintiffs claim damages of Canadian $5,000, plus
punitive damages in the amount of Canadian $1,000, prejudgment and
postjudgment interest, and costs of the action.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | A purported class action lawsuit was filed in the United States District
Court for the Middle District of Tennessee on December 21, 2001, on behalf of
participants and beneficiaries of the Nortel Networks Long-Term Investment
Plan (the Plan) at any time during the period of March 7, 2000 through the
filing date and who made or maintained Plan investments in NNC common shares,
under the Employee Retirement Income Security Act for Plan-wide relief and
alleging, among other things, material misrepresentations and omissions to
induce Plan participants to continue to invest in and maintain investments in
NNC common shares in the Plan. A second purported class action lawsuit, on
behalf of the Plan and Plan participants for whose individual accounts the
Plan purchased NNC common shares during the period from October 27, 2000 to
February 15, 2001, and making similar allegations was filed in the same court
on March 12, 2002. A third purported class action lawsuit, on behalf of
persons who are or were Plan participants or beneficiaries at any time since
March 1, 1999 to the filing date, and making similar allegations, was filed
in the same court on March 21, 2002. The first and second purported class
action lawsuits were consolidated by a new purported class action complaint,
filed on May 15, 2002 in the same court and making similar allegations, on
behalf of Plan participants and beneficiaries who directed the Plan to purchase or hold shares of certain funds, which held
primarily NNC common shares, during the period of March 7, 2000 through
December 21, 2000. On September 24, 2002, plaintiffs in the consolidated
action filed a motion to consolidate all the actions and to transfer them to
the United States District Court for the Southern District of New York. The
plaintiffs then filed a motion to withdraw the pending motion to consolidate
and transfer. The withdrawal was granted by the District Court on December
30, 2002. A fourth purported class action lawsuit, on behalf of the Plan and
Plan participants for whose individual accounts the Plan held NNC common
shares during the period from March 7, 2000 through March 31, 2001, and
making similar allegations, was filed in the United States District Court for
the Southern District of New York on March 12, 2003. On March 18, 2003,
plaintiffs in the fourth purported class action filed a motion with the
Judicial Panel on Multidistrict Litigation to transfer all the actions to the
Southern District of New York for coordinated or consolidated proceedings
pursuant to 28 U.S.C. section 1407.
|
| |  | On February 12, 2001, NNI, a subsidiary of Nortel Networks, was served with a
consolidated amended class action complaint (the First Complaint) that
purported to add NNC as a defendant to a lawsuit commenced in July 2000
against Entrust, Inc. (formerly Entrust Technologies, Inc.) (Entrust) and
two of its then current officers in the United States District Court for the
Eastern District of Texas (Marshall Division) (the District Court). The
First Complaint alleges that Entrust, two officers of Entrust, and NNC
violated the Securities Exchange Act of 1934 with respect to certain
statements made by Entrust. NNC is alleged to be a controlling person of
Entrust. On April 6, 2001, NNC filed a motion to dismiss the First
Complaint. On July 31, 2001, the First Complaint was dismissed without
prejudice. On August 31, 2001, the plaintiffs filed a second amended class
action complaint (the Second Complaint) against the same defendants
asserting claims substantively similar to those in the First Complaint. On
September 21, 2001, NNC filed a motion to dismiss the Second Complaint. The
motion was granted by the District Court on September 30, 2002, and the
Second Complaint was dismissed without leave to amend. Plaintiffs have not
appealed the decision of the District Court and Nortel Networks considers
this matter closed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | On March 4, 1997, Bay Networks, Inc. (Bay Networks), a company acquired on
August 31, 1998, announced that shareholders had filed two separate lawsuits
in the United States District Court for the Northern District of California
(the Federal Court) and the California Superior Court, County of Santa
Clara (the California Court), against Bay Networks and ten of Bay Networks
then current and former officers and directors purportedly on behalf of a
class of shareholders who purchased Bay Networks common shares during the
period of May 1, 1995 through October 14, 1996. On August 17, 2000, the
Federal Court granted the defendants motion to dismiss the federal
complaint. On August 1, 2001, the United States Court of Appeals for the
Ninth Circuit denied the plaintiffs appeal of that decision. On April                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

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|    |  | 18, 1997, a second lawsuit was filed in the California Court, purportedly on
behalf of a class of shareholders who acquired Bay Networks common shares
pursuant to the registration statement and prospectus that became effective
on November 15, 1995. The two actions in the California Court were
consolidated in April 1998; however, the California Court denied the
plaintiffs motion for class certification. In January 2000, the California
Court of Appeal rejected the plaintiffs appeal of the decision. A petition
for review was filed with the California Supreme Court by the plaintiffs and
was denied. In February 2000, new plaintiffs who allege to have been
shareholders of Bay Networks during the relevant periods, filed a motion for
intervention in the California Court seeking to become the representatives of
a class of shareholders. The motion was granted on June 8, 2001 and the new
plaintiffs filed their complaint-in-intervention on an individual and
purported class representative basis alleging misrepresentations made in
connection with the purchase and sale of securities of Bay Networks in
violation of California statutory and common law. On March 11, 2002, the
California Court granted the defendants motion to strike the class
allegations. The plaintiffs were permitted to proceed on their individual
claims. The intervenor-plaintiffs are appealing the dismissal of their class
allegations.      
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Except as otherwise described herein, in each of the matters described above,
plaintiffs are seeking an unspecified amount of monetary damages.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|    |  | Nortel Networks is also a defendant in various other suits, claims,
proceedings and investigations which arise in the normal course of business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|    |  | Nortel Networks is unable to ascertain the ultimate aggregate amount of
monetary liability or financial impact to Nortel Networks of the above
matters which, unless otherwise specified, seek damages from the defendants
of material or indeterminate amounts. 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 and financial condition of Nortel Networks. Nortel Networks and
any named directors and officers of Nortel Networks intend to vigorously
defend these actions, suits, claims and proceedings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|15. |  | Supplemental consolidating financial information                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|    |  | As a result of Nortel Networks current credit ratings, various liens, pledges
and guarantees are effective under certain credit and security agreements
entered into by Nortel Networks and various of its subsidiaries. In
addition, in accordance with the covenants in the trust indentures for all
Nortel Networks current consolidated public debt securities, which represent
primarily all of Nortel Networks consolidated long-term debt at March 31,
2003, all such public debt securities are also secured equally and ratably
with the obligations under Nortel Networks and NNIs credit facilities by
pledges of substantially all of the assets of Nortel Networks and those of
most of its United States and Canadian subsidiaries and by pledges of shares
in certain of Nortel Networks other subsidiaries. In addition, certain of
Nortel Networks wholly owned subsidiaries have guaranteed Nortel Networks
obligations under the credit and support facilities and outstanding public
debt securities (the Guarantor Subsidiaries). Non-guarantor subsidiaries
(the Non-Guarantor Subsidiaries) represent either wholly owned subsidiaries
of Nortel Networks whose shares have been pledged, or are the remaining
subsidiaries of Nortel Networks which are not providing liens, pledges or
guarantees. Nortel Networks obligations under the EDC Support Facility are
also secured on an equal and ratable basis under the security agreements.
|   
|    |  | The liens, pledges and guarantees described above also apply equally and
ratably to NNCs $1,800
4.25 percent senior notes due September 1, 2008 as well as Nortel Networks obligations under the guarantee of the senior notes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|    |  | If Nortel Networks senior long-term debt rating by Moodys returns to Baa2
(with a stable outlook) and its rating by Standard & Poors returns to BBB
(with a stable outlook), the security will be released in full. If
both the $750 April 2000 five year credit facilities and the EDC
Support Facility are
terminated, or expire, the security will also be released in full. Nortel
Networks may provide EDC with cash collateral (or any other alternative
collateral acceptable to EDC), in an amount equal to the total amount of our
outstanding obligations and undrawn commitments and expenses under the EDC
Support Facility, in lieu of the security provided under the security
agreements (see note 7).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|    |  | The following supplemental consolidating financial data illustrates, in
separate columns, the composition of Nortel Networks, the Guarantor
Subsidiaries, the Non-Guarantor Subsidiaries, eliminations and the
consolidated total as at March 31, 2003 and December 31, 2002, and for the
three months ended March 31, 2003 and 2002, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

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| |  | Investments in subsidiaries are accounted for by the equity method for
purposes of the supplemental consolidating financial data. Net earnings
(loss) of subsidiaries are therefore reflected in the investment account and
net loss. The principal elimination entries eliminate investments in
subsidiaries and intercompany balances and transactions. The financial data
may not necessarily be indicative of the results of operations or financial
position had the subsidiaries been operated as independent entities.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Supplemental Consolidating Statements of Operations for the three months ended March 31, 2003:

|                                                                   |                |         |          |     |              |           |       |              |           |      |             |    |   |       |      |   |  |   |       |     |  
|------------------------------------------------------------------ | -------------- | ------- | -------- | --- | ------------ | --------- | ----- | ------------ | --------- | ---- | ----------- | -- | - | ----- | ---- | - |  | - | ----- | --- | -
|                                                                  
|                                                                   |                |         | Nortel   |     |              |           |       |              |           | Non- |             |    |   |       |      |   |  |   |      
|                                                                   |                |         | Networks |     |              | Guarantor |       |              | Guarantor |      |             |    |   |       |      |   |  |  
|(millions of U.S. dollars)                                         |                | Limited |          |     | subsidiaries |           |       | subsidiaries |           |      | Elimination |    |   | Total
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Revenues                                                           |                | $       | 880      |     |              | $         | 1,712 |              |           | $    | 676         |    |   | $     | (871 | ) |  | $ | 2,397 |    
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Cost of revenues                                                   |                |         | 440      |     |              |           | 1,351 |              |           |      | 439         |    |   |       | (871 | ) |  |   | 1,359 |    
|                                                                  
|Gross profit                                                       |                |         | 440      |     |              |           | 361   |              |           |      | 237         |    |   |       |     |   |  |   | 1,038 |    
|                                                                   |                |         |          |     |              |           |       |              |           |      |             |    |   |       |      |   |  |   |       |    
|Selling, general and administrative expense                        |                |         | 134      |     |              |           | 297   |              |           |      | 54          |    |   |       |     |   |  |   | 485   |    
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Research and development expense                                   |                |         | 199      |     |              |           | 234   |              |           |      | 55          |    |   |       |     |   |  |   | 488   |    
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Amortization of acquired technology                                |                |         |         |     |              |           |      |              |           |      |            |    |   |       |     |   |  |   |      |    
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Special charges                                                    |                |         | 35       |     |              |           | 78    |              |           |      | 20          |    |   |       |     |   |  |   | 133   |    
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|(Gain) loss on sale of businesses                                  |                |         | (2       | )   |              |           | 2     |              |           |      |            |    |   |       |     |   |  |   |      |    
|                                                                  
|Operating earnings (loss)                                          |                |         | 74       |     |              |           | (250  | )            |           |      | 108         |    |   |       |     |   |  |   | (68   | )  
|                                                                  
|Other income (expense)  net                                       |                |         | 46       |     |              |           | (18   | )            |           |      | 21          |    |   |       |     |   |  |   | 49    |    
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Interest expense                                                   |                |         |          |     |              |           |       |              |           |      |             |    |   |       |      |   |  |   |       |    
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Long-term debt |         |          | (17 | )            |           |       |             |           |      |             | (7 | ) |       |      |  |  |   |       | (24 | )
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Other          |         |          | (2  | )            |           |       | (14          | )         |      |             | 9  |   |       |      |  |  |   |       | (7  | )
|                                                                  
|Earnings (loss) from continuing operations before
income taxes     |                |         | 101      |     |              |           | (282  | )            |           |      | 131         |    |   |       |     |   |  |   | (50   | )  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Income tax benefit (provision)                                     |                |         | 142      |     |              |           | (297  | )            |           |      | 145         |    |   |       |     |   |  |   | (10   | )  
|                                                                  
|                                                                   |                |         | 243      |     |              |           | (579  | )            |           |      | 276         |    |   |       |     |   |  |   | (60   | )  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Equity in net earnings (loss)
of associated companies  net of tax |                |         | (310     | )   |              |           | 390   |              |           |      | 5           |    |   |       | (92  | ) |  |   | (7    | )  
|                                                                  
|Net earnings (loss) from continuing operations                     |                |         | (67      | )   |              |           | (189  | )            |           |      | 281         |    |   |       | (92  | ) |  |   | (67   | )  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Net loss from discontinued operations  net of tax                 |                |         | 164      |     |              |           | 107   |              |           |      |            |    |   |       | (107 | ) |  |   | 164   |    
|                                                                  
|Net earnings (loss)                                                |                |         | 97       |     |              |           | (82   | )            |           |      | 281         |    |   |       | (199 | ) |  |   | 97    |    
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Dividends on preferred shares                                      |                |         | (5       | )   |              |           |      |              |           |      |            |    |   |       |     |   |  |   | (5    | )  
|                                                                  
|Net earnings (loss) applicable to common shares                    |                | $       | 92       |     |              | $         | (82   | )            |           | $    | 281         |    |   | $     | (199 | ) |  | $ | 92    |    
|                                                                  

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Supplemental Consolidating Statements of Operations for the three months ended March 31, 2002:

|                                                                   |                |         |          |     |              |           |       |              |           |      |             |    |   |       |      |   |  |   |        |     |  
|------------------------------------------------------------------ | -------------- | ------- | -------- | --- | ------------ | --------- | ----- | ------------ | --------- | ---- | ----------- | -- | - | ----- | ---- | - |  | - | ------ | --- | -
|                                                                  
|                                                                   |                |         | Nortel   |     |              |           |       |              |           | Non- |             |    |   |       |      |   |  |   |       
|                                                                   |                |         | Networks |     |              | Guarantor |       |              | Guarantor |      |             |    |   |       |      |   |  |  
|(millions of U.S. dollars)                                         |                | Limited |          |     | subsidiaries |           |       | subsidiaries |           |      | Elimination |    |   | Total
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Revenues                                                           |                | $       | 756      |     |              | $         | 2,038 |              |           | $    | 798         |    |   | $     | (682 | ) |  | $ | 2,910  |    
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Cost of revenues                                                   |                |         | 693      |     |              |           | 1,539 |              |           |      | 679         |    |   |       | (682 | ) |  |   | 2,229  |    
|                                                                  
|Gross profit                                                       |                |         | 63       |     |              |           | 499   |              |           |      | 119         |    |   |       |     |   |  |   | 681    |    
|                                                                  
|Selling, general and administrative expense                        |                |         | 134      |     |              |           | 543   |              |           |      | 63          |    |   |       |     |   |  |   | 740    |    
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Research and development expense                                   |                |         | 197      |     |              |           | 303   |              |           |      | 77          |    |   |       |     |   |  |   | 577    |    
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Amortization of acquired technology                                |                |         |         |     |              |           | 5     |              |           |      |            |    |   |       |     |   |  |   | 5      |    
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Special charges                                                    |                |         | 78       |     |              |           | 226   |              |           |      | 139         |    |   |       |     |   |  |   | 443    |    
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|(Gain) loss on sale of businesses                                  |                |         | (1       | )   |              |           | (3    | )            |           |      | 1           |    |   |       |     |   |  |   | (3     | )  
|                                                                  
|Operating earnings (loss)                                          |                |         | (345     | )   |              |           | (575  | )            |           |      | (161        | )  |   |       |     |   |  |   | (1,081 | )  
|                                                                  
|Other income (expense)  net                                       |                |         |         |     |              |           | (22   | )            |           |      | 8           |    |   |       |     |   |  |   | (14    | )  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Interest expense                                                   |                |         |          |     |              |           |       |              |           |      |             |    |   |       |      |   |  |   |        |    
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Long-term debt |         |          | (29 | )            |           |       |             |           |      |             | (7 | ) |       |      |  |  |   |        | (36 | )
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Other          |         |          |    |              |           |       | (12          | )         |      |             |   |   |       |      |  |  |   |        | (12 | )
|                                                                  
|Loss from continuing operations before
income taxes                |                |         | (374     | )   |              |           | (609  | )            |           |      | (160        | )  |   |       |     |   |  |   | (1,143 | )  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Income tax benefit (provision)                                     |                |         | 121      |     |              |           | 151   |              |           |      | 90          |    |   |       |     |   |  |   | 362    |    
|                                                                  
|                                                                   |                |         | (253     | )   |              |           | (458  | )            |           |      | (70         | )  |   |       |     |   |  |   | (781   | )  
|Equity in net earnings (loss)
of associated companies  net of tax |                |         | (532     | )   |              |           | (114  | )            |           |      | 1           |    |   |       | 641  |   |  |   | (4     | )  
|                                                                  
|Net loss from continuing operations                                |                |         | (785     | )   |              |           | (572  | )            |           |      | (69         | )  |   |       | 641  |   |  |   | (785   | )  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Net loss from discontinued operations
 net of tax                 |                |         |         |     |              |           |      |              |           |      |            |    |   |       |     |   |  |   |       |    
|                                                                  
|Net loss                                                           |                |         | (785     | )   |              |           | (572  | )            |           |      | (69         | )  |   |       | 641  |   |  |   | (785   | )  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Dividends on preferred shares                                      |                |         | (5       | )   |              |           |      |              |           |      |            |    |   |       |     |   |  |   | (5     | )  
|                                                                  
|Net loss applicable to common shares                               |                | $       | (790     | )   |              | $         | (572  | )            |           | $    | (69         | )  |   | $     | 641  |   |  | $ | (790   | )  
|                                                                  

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##### Table of Contents



Supplemental Consolidating Balance Sheets as at March 31, 2003:

|                                                       |                                                |         |          |       |              |           |         |              |           |      |             |       |  |       |        |        |   |   |         |       | 
|------------------------------------------------------ | ---------------------------------------------- | ------- | -------- | ----- | ------------ | --------- | ------- | ------------ | --------- | ---- | ----------- | ----- |  | ----- | ------ | ------ | - | - | ------- | ----- | 
|                                                      
|                                                       |                                                |         | Nortel   |       |              |           |         |              |           | Non- |             |       |  |       |        |        |   |   |        
|                                                       |                                                |         | Networks |       |              | Guarantor |         |              | Guarantor |      |             |       |  |       |        |        |   |  
|(millions of U.S. dollars)                             |                                                | Limited |          |       | subsidiaries |           |         | subsidiaries |           |      | Elimination |       |  | Total
|                                                      
|                                                      
|                                                      
|                                                      
|                                                      
|ASSETS                                                 |                                                |         |          |       |              |           |         |              |           |      |             |       |  |       |        |        |   |   |         |      
|                                                      
|                                                      
|                                                      
|                                                      
|Current assets                                         |                                                |         |          |       |              |           |         |              |           |      |             |       |  |       |        |        |   |   |         |      
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Cash and cash equivalents                      |         | $        | (11   | )            |           | $       | 2,886        |           |      | $           | 1,038 |  |       | $      |       |   |   | $       | 3,913 | 
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Restricted cash and cash equivalents           |         |          | 18    |              |           |         | 170          |           |      |             | 39    |  |       |        |       |   |   |         | 227   | 
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Accounts receivable  net                      |         |          | 284   |              |           |         | 1,157        |           |      |             | 413   |  |       |        |       |   |   |         | 1,854 | 
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Intercompany/related party accounts receivable |         |          | 4,629 |              |           |         | 997          |           |      |             | 617   |  |       |        | (6,069 | ) |   |         | 174   | 
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Inventories  net                              |         |          | 446   |              |           |         | 226          |           |      |             | 174   |  |       |        |       |   |   |         | 846   | 
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Income taxes recoverable                       |         |          | 2     |              |           |         | 58           |           |      |             |      |  |       |        |       |   |   |         | 60    | 
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Deferred income taxes  net                    |         |          | 263   |              |           |         | 520          |           |      |             | 1     |  |       |        |       |   |   |         | 784   | 
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Other current assets                           |         |          | 57    |              |           |         | 239          |           |      |             | 123   |  |       |        |       |   |   |         | 419   | 
|                                                      
|Total current assets                                   |                                                |         | 5,688    |       |              |           | 6,253   |              |           |      | 2,405       |       |  |       | (6,069 | )      |   |   | 8,277   |      
|                                                      
|Investments at cost and associated companies at equity |                                                |         | 486      |       |              |           | (7,200  | )            |           |      | 111         |       |  |       | 6,814  |        |   |   | 211     |      
|                                                      
|                                                      
|                                                      
|                                                      
|Plant and equipment  net                              |                                                |         | 418      |       |              |           | 697     |              |           |      | 281         |       |  |       |       |        |   |   | 1,396   |      
|                                                      
|                                                      
|                                                      
|                                                      
|Goodwill                                               |                                                |         |         |       |              |           | 1,956   |              |           |      | 65          |       |  |       |       |        |   |   | 2,021   |      
|                                                      
|                                                      
|                                                      
|                                                      
|Intangible assets  net                                |                                                |         |         |       |              |           |        |              |           |      |            |       |  |       |       |        |   |   |        |      
|                                                      
|                                                      
|                                                      
|                                                      
|Deferred income taxes  net                            |                                                |         | 1,386    |       |              |           | 1,384   |              |           |      | 256         |       |  |       |       |        |   |   | 3,026   |      
|                                                      
|                                                      
|                                                      
|                                                      
|Other assets                                           |                                                |         | 534      |       |              |           | 959     |              |           |      | 2,077       |       |  |       | (2,821 | )      |   |   | 749     |      
|                                                      
|Total assets                                           |                                                | $       | 8,512    |       |              | $         | 4,049   |              |           | $    | 5,195       |       |  | $     | (2,076 | )      |   | $ | 15,680  |      
|                                                      
|                                                      
|                                                      
|                                                      
|                                                      
|LIABILITIES AND SHAREHOLDERS EQUITY                   |                                                |         |          |       |              |           |         |              |           |      |             |       |  |       |        |        |   |   |         |      
|                                                      
|                                                      
|                                                      
|                                                      
|Current liabilities                                    |                                                |         |          |       |              |           |         |              |           |      |             |       |  |       |        |        |   |   |         |      
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Notes payable                                  |         | $        | 2     |              |           | $       | 3            |           |      | $           | 73    |  |       | $      |       |   |   | $       | 78    | 
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Trade and other accounts payable               |         |          | 336   |              |           |         | 419          |           |      |             | 48    |  |       |        |       |   |   |         | 803   | 
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Intercompany/related party accounts payable    |         |          |      |              |           |         | 3,632        |           |      |             | 2,437 |  |       |        | (6,069 | ) |   |         |      | 
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Payroll and benefit-related liabilities        |         |          | 59    |              |           |         | 480          |           |      |             | 125   |  |       |        |       |   |   |         | 664   | 
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Contractual liabilities                        |         |          | 96    |              |           |         | 873          |           |      |             | 488   |  |       |        |       |   |   |         | 1,457 | 
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Restructuring                                  |         |          | 200   |              |           |         | 302          |           |      |             | 178   |  |       |        |       |   |   |         | 680   | 
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Other accrued liabilities                      |         |          | 616   |              |           |         | 1,725        |           |      |             | 293   |  |       |        |       |   |   |         | 2,634 | 
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Long-term debt due within one year             |         |          | 174   |              |           |         | 7            |           |      |             | 53    |  |       |        |       |   |   |         | 234   | 
|                                                      
|Total current liabilities                              |                                                |         | 1,483    |       |              |           | 7,441   |              |           |      | 3,695       |       |  |       | (6,069 | )      |   |   | 6,550   |      
|                                                      
|Long-term debt                                         |                                                |         | 1,559    |       |              |           | 3       |              |           |      | 302         |       |  |       |       |        |   |   | 1,864   |      
|                                                      
|                                                      
|                                                      
|                                                      
|Deferred income taxes  net                            |                                                |         | 265      |       |              |           | 97      |              |           |      | 69          |       |  |       |       |        |   |   | 431     |      
|                                                      
|                                                      
|                                                      
|                                                      
|Other liabilities                                      |                                                |         | 848      |       |              |           | 1,793   |              |           |      | 2,588       |       |  |       | (2,821 | )      |   |   | 2,408   |      
|                                                      
|                                                       |                                                |         | 4,155    |       |              |           | 9,334   |              |           |      | 6,654       |       |  |       | (8,890 | )      |   |   | 11,253  |      
|                                                      
|Minority interest in subsidiary companies              |                                                |         |         |       |              |           |        |              |           |      | 70          |       |  |       |       |        |   |   | 70      |      
|                                                      
|SHAREHOLDERS EQUITY                                   |                                                |         |          |       |              |           |         |              |           |      |             |       |  |       |        |        |   |   |         |      
|                                                      
|                                                      
|                                                      
|                                                      
|Preferred shares                                       |                                                |         | 536      |       |              |           | 342     |              |           |      |            |       |  |       | (342   | )      |   |   | 536     |      
|                                                      
|                                                      
|                                                      
|                                                      
|Common shares                                          |                                                |         | 1,211    |       |              |           | 6,024   |              |           |      | 703         |       |  |       | (6,727 | )      |   |   | 1,211   |      
|                                                      
|                                                      
|                                                      
|                                                      
|Additional paid-in capital                             |                                                |         | 21,991   |       |              |           | 1,552   |              |           |      | 4,049       |       |  |       | (5,601 | )      |   |   | 21,991  |      
|                                                      
|                                                      
|                                                      
|                                                      
|Deficit                                                |                                                |         | (18,000  | )     |              |           | (13,857 | )            |           |      | (6,177      | )     |  |       | 20,034 |        |   |   | (18,000 | )    
|                                                      
|                                                      
|                                                      
|                                                      
|Accumulated other comprehensive income (loss)          |                                                |         | (1,381   | )     |              |           | 654     |              |           |      | (104        | )     |  |       | (550   | )      |   |   | (1,381  | )    
|                                                      
|Total shareholders equity                             |                                                |         | 4,357    |       |              |           | (5,285  | )            |           |      | (1,529      | )     |  |       | 6,814  |        |   |   | 4,357   |      
|                                                      
|Total liabilities and shareholders equity             |                                                | $       | 8,512    |       |              | $         | 4,049   |              |           | $    | 5,195       |       |  | $     | (2,076 | )      |   | $ | 15,680  |      
|                                                      

23



---



##### Table of Contents



Supplemental Consolidating Balance Sheets as at December 31, 2002:

|                                                       |                                                |         |          |       |              |           |         |              |           |      |             |       |  |       |        |        |   |   |         |       | 
|------------------------------------------------------ | ---------------------------------------------- | ------- | -------- | ----- | ------------ | --------- | ------- | ------------ | --------- | ---- | ----------- | ----- |  | ----- | ------ | ------ | - | - | ------- | ----- | 
|                                                      
|                                                       |                                                |         | Nortel   |       |              |           |         |              |           | Non- |             |       |  |       |        |        |   |   |        
|                                                       |                                                |         | Networks |       |              | Guarantor |         |              | Guarantor |      |             |       |  |       |        |        |   |  
|(millions of U.S. dollars)                             |                                                | Limited |          |       | subsidiaries |           |         | subsidiaries |           |      | Elimination |       |  | Total
|                                                      
|                                                      
|                                                      
|                                                      
|                                                      
|ASSETS                                                 |                                                |         |          |       |              |           |         |              |           |      |             |       |  |       |        |        |   |   |         |      
|                                                      
|                                                      
|                                                      
|                                                      
|Current assets                                         |                                                |         |          |       |              |           |         |              |           |      |             |       |  |       |        |        |   |   |         |      
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Cash and cash equivalents                      |         | $        | 251   |              |           | $       | 2,452        |           |      | $           | 1,110 |  |       | $      |       |   |   | $       | 3,813 | 
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Restricted cash and cash equivalents           |         |          | 6     |              |           |         | 176          |           |      |             | 67    |  |       |        |       |   |   |         | 249   | 
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Accounts receivable  net                      |         |          | 316   |              |           |         | 1,189        |           |      |             | 405   |  |       |        |       |   |   |         | 1,910 | 
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Intercompany/related party accounts receivable |         |          | 4,200 |              |           |         | 976          |           |      |             | 459   |  |       |        | (5,552 | ) |   |         | 83    | 
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Inventories  net                              |         |          | 515   |              |           |         | 211          |           |      |             | 163   |  |       |        |       |   |   |         | 889   | 
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Income taxes recoverable                       |         |          | 3     |              |           |         | 46           |           |      |             | 9     |  |       |        |       |   |   |         | 58    | 
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Deferred income taxes  net                    |         |          | 178   |              |           |         | 615          |           |      |             |      |  |       |        |       |   |   |         | 793   | 
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Other current assets                           |         |          | 182   |              |           |         | 427          |           |      |             | 97    |  |       |        |       |   |   |         | 706   | 
|                                                      
|Total current assets                                   |                                                |         | 5,651    |       |              |           | 6,092   |              |           |      | 2,310       |       |  |       | (5,552 | )      |   |   | 8,501   |      
|                                                      
|Investments at cost and associated companies at equity |                                                |         | 707      |       |              |           | (7,679  | )            |           |      | 118         |       |  |       | 7,100  |        |   |   | 246     |      
|                                                      
|                                                      
|                                                      
|                                                      
|Plant and equipment  net                              |                                                |         | 399      |       |              |           | 741     |              |           |      | 301         |       |  |       |       |        |   |   | 1,441   |      
|                                                      
|                                                      
|                                                      
|                                                      
|Goodwill                                               |                                                |         |         |       |              |           | 1,956   |              |           |      | 65          |       |  |       |       |        |   |   | 2,021   |      
|                                                      
|                                                      
|                                                      
|                                                      
|Intangible assets  net                                |                                                |         |         |       |              |           |        |              |           |      |            |       |  |       |       |        |   |   |        |      
|                                                      
|                                                      
|                                                      
|                                                      
|Deferred income taxes  net                            |                                                |         | 1,143    |       |              |           | 1,582   |              |           |      | 72          |       |  |       |       |        |   |   | 2,797   |      
|                                                      
|                                                      
|                                                      
|                                                      
|Other assets                                           |                                                |         | 472      |       |              |           | 1,271   |              |           |      | 916         |       |  |       | (1,912 | )      |   |   | 747     |      
|                                                      
|Total assets                                           |                                                | $       | 8,372    |       |              | $         | 3,963   |              |           | $    | 3,782       |       |  | $     | (364   | )      |   | $ | 15,753  |      
|                                                      
|                                                      
|                                                      
|                                                      
|                                                      
|LIABILITIES AND SHAREHOLDERS EQUITY                   |                                                |         |          |       |              |           |         |              |           |      |             |       |  |       |        |        |   |   |         |      
|                                                      
|                                                      
|                                                      
|                                                      
|Current liabilities                                    |                                                |         |          |       |              |           |         |              |           |      |             |       |  |       |        |        |   |   |         |      
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Notes payable                                  |         | $        | 2     |              |           | $       | 3            |           |      | $           | 95    |  |       | $      |       |   |   | $       | 100   | 
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Trade and other accounts payable               |         |          | 400   |              |           |         | 429          |           |      |             | 102   |  |       |        |       |   |   |         | 931   | 
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Intercompany/related party accounts payable    |         |          |      |              |           |         | 3,336        |           |      |             | 2,216 |  |       |        | (5,552 | ) |   |         |      | 
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Payroll and benefit-related liabilities        |         |          | 32    |              |           |         | 397          |           |      |             | 84    |  |       |        |       |   |   |         | 513   | 
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Contractual liabilities                        |         |          | 107   |              |           |         | 932          |           |      |             | 507   |  |       |        |       |   |   |         | 1,546 | 
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Restructuring                                  |         |          | 183   |              |           |         | 415          |           |      |             | 163   |  |       |        |       |   |   |         | 761   | 
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Other accrued liabilities                      |         |          | 641   |              |           |         | 1,768        |           |      |             | 394   |  |       |        |       |   |   |         | 2,803 | 
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Long-term debt due within one year             |         |          | 174   |              |           |         | 8            |           |      |             | 51    |  |       |        |       |   |   |         | 233   | 
|                                                      
|Total current liabilities                              |                                                |         | 1,539    |       |              |           | 7,288   |              |           |      | 3,612       |       |  |       | (5,552 | )      |   |   | 6,887   |      
|                                                      
|Long-term debt                                         |                                                |         | 1,603    |       |              |           | 3       |              |           |      | 313         |       |  |       |       |        |   |   | 1,919   |      
|                                                      
|                                                      
|                                                      
|                                                      
|Deferred income taxes  net                            |                                                |         | 263      |       |              |           | 95      |              |           |      | 8           |       |  |       |       |        |   |   | 366     |      
|                                                      
|                                                      
|                                                      
|                                                      
|Other liabilities                                      |                                                |         | 814      |       |              |           | 1,761   |              |           |      | 1,688       |       |  |       | (1,912 | )      |   |   | 2,351   |      
|                                                      
|                                                       |                                                |         | 4,219    |       |              |           | 9,147   |              |           |      | 5,621       |       |  |       | (7,464 | )      |   |   | 11,523  |      
|                                                      
|Minority interest in subsidiary companies              |                                                |         |         |       |              |           |        |              |           |      | 78          |       |  |       |       |        |   |   | 78      |      
|                                                      
|SHAREHOLDERS EQUITY                                   |                                                |         |          |       |              |           |         |              |           |      |             |       |  |       |        |        |   |   |         |      
|                                                      
|                                                      
|                                                      
|                                                      
|Preferred shares                                       |                                                |         | 536      |       |              |           | 342     |              |           |      |            |       |  |       | (342   | )      |   |   | 536     |      
|                                                      
|                                                      
|                                                      
|                                                      
|Common shares                                          |                                                |         | 1,211    |       |              |           | 6,061   |              |           |      | 982         |       |  |       | (7,043 | )      |   |   | 1,211   |      
|                                                      
|                                                      
|                                                      
|                                                      
|Additional paid-in capital                             |                                                |         | 21,991   |       |              |           | 1,551   |              |           |      | 4,051       |       |  |       | (5,602 | )      |   |   | 21,991  |      
|                                                      
|                                                      
|                                                      
|                                                      
|Deficit                                                |                                                |         | (18,092  | )     |              |           | (13,753 | )            |           |      | (6,825      | )     |  |       | 20,577 |        |   |   | (18,093 | )    
|                                                      
|                                                      
|                                                      
|                                                      
|Accumulated other comprehensive income (loss)          |                                                |         | (1,493   | )     |              |           | 615     |              |           |      | (125        | )     |  |       | (490   | )      |   |   | (1,493  | )    
|                                                      
|Total shareholders equity                             |                                                |         | 4,153    |       |              |           | (5,184  | )            |           |      | (1,917      | )     |  |       | 7,100  |        |   |   | 4,152   |      
|                                                      
|Total liabilities and shareholders equity             |                                                | $       | 8,372    |       |              | $         | 3,963   |              |           | $    | 3,782       |       |  | $     | (364   | )      |   | $ | 15,753  |      
|                                                      

24



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##### Table of Contents



Supplemental Consolidating Statements of Cash Flows for the three months ended March 31, 2003:

|                                                       |                                                                                                                                                                                |                                                                   |                                          |      |              |      |       |              |      |      |             |      |      |       |   |     |    |   |       |      |     |      |  
|------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------- | ---------------------------------------- | ---- | ------------ | ---- | ----- | ------------ | ---- | ---- | ----------- | ---- | ---- | ----- | - | --- | -- | - | ----- | ---- | --- | ---- | -
|                                                      
|                                                       |                                                                                                                                                                                |                                                                   |                                          |      | Nortel       |      |       |              |      |      |             | Non- |      |       |   |     |    |   |       |      |    
|                                                       |                                                                                                                                                                                |                                                                   |                                          |      | Networks     |      |       | Guarantor    |      |      | Guarantor   |      |      |       |   |     |    |   |       |     
|(millions of U.S. dollars)                             |                                                                                                                                                                                | Limited                                                           |                                          |      | subsidiaries |      |       | subsidiaries |      |      | Elimination |      |      | Total |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                      
|Cash flows from (used in) operating activities         |                                                                                                                                                                                |                                                                   |                                          |      |              |      |       |              |      |      |             |      |      |       |   |     |    |   |       |     
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Net loss from continuing operations                                                                                                                                            |                                                                   | $                                        | (67  | )            |      | $     | (189         | )    |      | $           | 281  |      |       | $ | (92 | )  |   | $     | (67  | )  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Adjustments to reconcile net loss from (used in)
continuing operations to net cash from operating
activities, net of effects from acquisitions and
divestitures of businesses: |                                                                   |                                          |      |              |      |       |              |      |      |             |      |      |       |   |     |    |   |       |      |    
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                                                                                                                                | Amortization and depreciation                                     |                                          |      | 24           |      |       |              | 51   |      |             |      | 29   |       |   |     |   |   |       |      | 104 |     
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                                                                                                                                | Non-cash portion of special charges
and related asset write downs |                                          |      | (3           | )    |       |              | 1    |      |             |      | (3   | )     |   |     |   |   |       |      | (5  | )   
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                                                                                                                                | Equity in net loss of associated companies                        |                                          |      | 310          |      |       |              | (390 | )    |             |      | (5   | )     |   |     | 92 |   |       |      | 7   |     
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                                                                                                                                | Current stock option compensation                                 |                                          |      | 1            |      |       |              | 3    |      |             |      | 1    |       |   |     |   |   |       |      | 5   |     
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                                                                                                                                | Deferred income taxes                                             |                                          |      |             |      |       |              |     |      |             |      | 7    |       |   |     |   |   |       |      | 7   |     
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                                                                                                                                | Other liabilities                                                 |                                          |      | 16           |      |       |              | 10   |      |             |      |     |       |   |     |   |   |       |      | 26  |     
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                                                                                                                                | Gain on repurchases of outstanding debt securities                |                                          |      | (4           | )    |       |              |     |      |             |      |     |       |   |     |   |   |       |      | (4  | )   
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                                                                                                                                | (Gain) loss on sale or write down of investments
and businesses   |                                          |      |             |      |       |              | 33   |      |             |      |     |       |   |     |   |   |       |      | 33  |     
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                                                                                                                                | Other  net                                                       |                                          |      | 96           |      |       |              | (58  | )    |             |      | (4   | )     |   |     |   |   |       |      | 34  |     
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                                                                                                                                | Change in operating assets and liabilities:                       |                                          |      |              |      |       |              |      |      |             |      |      |       |   |     |    |   |       |      |     |     
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                                                                                                                                |                                                                   | Accounts receivable                      |      |              | (51  | )     |              |      | 48   |             |      |      | (43   | ) |     |    |  |       |      |     | (46  | )
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                                                                                                                                |                                                                   | Inventories                              |      |              | 66   |       |              |      | 16   |             |      |      | 29    |   |     |    |  |       |      |     | 111  |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                                                                                                                                |                                                                   | Income taxes                             |      |              | 8    |       |              |      | (22  | )           |      |      | 8     |   |     |    |  |       |      |     | (6   | )
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                                                                                                                                |                                                                   | Restructuring                            |      |              | (39  | )     |              |      | (120 | )           |      |      | (28   | ) |     |    |  |       |      |     | (187 | )
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                                                                                                                                |                                                                   | Accounts payable and accrued liabilities |      |              | (20  | )     |              |      | (58  | )           |      |      | (52   | ) |     |    |  |       |      |     | (130 | )
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                                                                                                                                |                                                                   | Other operating assets and liabilities   |      |              | (263 | )     |              |      | 158  |             |      |      | 109   |   |     |    |  |       |      |     | 4    |  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       |                                                                                                                                                                                | Intercompany/related party activity                               |                                          |      | (377         | )    |       |              | 773  |      |             |      | (396 | )     |   |     |   |   |       |      |    |     
|                                                      
|Net cash from (used in) operating activities           |                                                                                                                                                                                |                                                                   | (303                                     | )    |              |      | 256   |              |      |      | (67         | )    |      |       |  |     |    |   | (114  | )   
|                                                      
|                                                      
|                                                      
|                                                      
|                                                      
|Cash flows from (used in) investing activities         |                                                                                                                                                                                |                                                                   |                                          |      |              |      |       |              |      |      |             |      |      |       |   |     |    |   |       |     
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Expenditures for plant and equipment                                                                                                                                           |                                                                   |                                          | (3   | )            |      |       | (10          | )    |      |             | (5   | )    |       |   |    |    |   |       | (18  | )  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Proceeds on disposals of plant and equipment                                                                                                                                   |                                                                   |                                          |     |              |      |       | 6            |      |      |             |     |      |       |   |    |    |   |       | 6    |    
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Decrease (increase) in restricted cash and
cash equivalents                                                                                                                    |                                                                   |                                          | (11  | )            |      |       | 9            |      |      |             | 22   |      |       |   |    |    |   |       | 20   |    
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Increase in long-term receivables                                                                                                                                              |                                                                   |                                          |     |              |      |       | (8           | )    |      |             | (1   | )    |       |   |    |    |   |       | (9   | )  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Decrease in long-term receivables                                                                                                                                              |                                                                   |                                          | 5    |              |      |       |             |      |      |             |     |      |       |   |    |    |   |       | 5    |    
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Acquisitions of investments and businesses
 net of cash acquired                                                                                                              |                                                                   |                                          |     |              |      |       | (2           | )    |      |             |     |      |       |   |    |    |   |       | (2   | )  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Proceeds on sale of investments and businesses                                                                                                                                 |                                                                   |                                          | 1    |              |      |       | 6            |      |      |             |     |      |       |   |    |    |   |       | 7    |    
|                                                      
|Net cash from (used in) investing activities           |                                                                                                                                                                                |                                                                   | (8                                       | )    |              |      | 1     |              |      |      | 16          |      |      |       |  |     |    |   | 9     |     
|                                                      
|                                                      
|                                                      
|                                                      
|                                                      
|Cash flows from (used in) financing activities         |                                                                                                                                                                                |                                                                   |                                          |      |              |      |       |              |      |      |             |      |      |       |   |     |    |   |       |     
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Dividends on preferred shares                                                                                                                                                  |                                                                   |                                          | (5   | )            |      |       |             |      |      |             |     |      |       |   |    |    |   |       | (5   | )  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Increase
(decrease) in notes payable  net                                                                                                                                     |                                                                   |                                          |     |              |      |       |             |      |      |             | (17  | )    |       |   |    |    |   |       | (17  | )  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Proceeds from long-term debt                                                                                                                                                   |                                                                   |                                          |     |              |      |       |             |      |      |             |     |      |       |   |    |    |   |       |     |    
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Repayments of long-term debt                                                                                                                                                   |                                                                   |                                          | (34  | )            |      |       |             |      |      |             | (9   | )    |       |   |    |    |   |       | (43  | )  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Decrease in capital leases payable                                                                                                                                             |                                                                   |                                          |     |              |      |       | (1           | )    |      |             |     |      |       |   |    |    |   |       | (1   | )  
|                                                      
|                                                       | Net cash from (used in) financing activities                                                                                                                                   |                                                                   |                                          | (39  | )            |      |       | (1           | )    |      |             | (26  | )    |       |   |    |    |   |       | (66  | )  
|                                                      
|                                                       | Effect of foreign exchange rate changes
on cash and cash equivalents                                                                                                           |                                                                   |                                          |     |              |      |       | 13           |      |      |             | 5    |      |       |   |    |    |   |       | 18   |    
|                                                      
|                                                       | Net cash from (used in) continuing operations                                                                                                                                  |                                                                   |                                          | (350 | )            |      |       | 269          |      |      |             | (72  | )    |       |   |    |    |   |       | (153 | )  
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Net cash from (used in) discontinued operations                                                                                                                                |                                                                   |                                          | 88   |              |      |       | 165          |      |      |             |     |      |       |   |    |    |   |       | 253  |    
|                                                      
|Net increase (decrease) in cash and
cash equivalents   |                                                                                                                                                                                |                                                                   | (262                                     | )    |              |      | 434   |              |      |      | (72         | )    |      |       |  |     |    |   | 100   |     
|                                                      
|Cash and cash equivalents at beginning of
period  net |                                                                                                                                                                                |                                                                   | 251                                      |      |              |      | 2,452 |              |      |      | 1,110       |      |      |       |  |     |    |   | 3,813 |     
|                                                      
|Cash and cash equivalents at end of period
 net       |                                                                                                                                                                                | $                                                                 | (11                                      | )    |              | $    | 2,886 |              |      | $    | 1,038       |      |      | $     |  |     |    | $ | 3,913 |     
|                                                      

25



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##### Table of Contents



Supplemental Consolidating Statements of Cash Flows for the three months ended March 31, 2002:

|                                                                     |                                                                                                                                                                                |                                                                   |                                          |      |              |     |       |              |      |      |             |      |      |       |   |     |      |   |       |      |      |      |  
|-------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------- | ---------------------------------------- | ---- | ------------ | --- | ----- | ------------ | ---- | ---- | ----------- | ---- | ---- | ----- | - | --- | ---- | - | ----- | ---- | ---- | ---- | -
|                                                                    
|                                                                     |                                                                                                                                                                                |                                                                   |                                          |      | Nortel       |     |       |              |      |      |             | Non- |      |       |   |     |      |   |       |      |     
|                                                                     |                                                                                                                                                                                |                                                                   |                                          |      | Networks     |     |       | Guarantor    |      |      | Guarantor   |      |      |       |   |     |      |   |       |     
|(millions of U.S. dollars)                                           |                                                                                                                                                                                | Limited                                                           |                                          |      | subsidiaries |     |       | subsidiaries |      |      | Elimination |      |      | Total |  
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Cash flows from (used in) operating activities                       |                                                                                                                                                                                |                                                                   |                                          |      |              |     |       |              |      |      |             |      |      |       |   |     |      |   |       |     
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Net loss from continuing operations                                                                                                                                            |                                                                   | $                                        | (785 | )            |     | $     | (572         | )    |      | $           | (69  | )    |       | $ | 641 |      |   | $     | (785 | )   
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Adjustments to reconcile net loss from (used in)
continuing operations to net cash from operating
activities, net of effects from acquisitions and
divestitures of businesses: |                                                                   |                                          |      |              |     |       |              |      |      |             |      |      |       |   |     |      |   |       |      |     
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                                                                                                                                | Amortization and depreciation                                     |                                          |      | 31           |     |       |              | 110  |      |             |      | 16   |       |   |     |     |   |       |      | 157  |     
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                                                                                                                                | Non-cash portion of special charges
and related asset write downs |                                          |      | 25           |     |       |              | 40   |      |             |      | 10   |       |   |     |     |   |       |      | 75   |     
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                                                                                                                                | Equity in net loss of associated companies                        |                                          |      | 532          |     |       |              | 114  |      |             |      | (1   | )     |   |     | (641 | ) |       |      | 4    |     
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                                                                                                                                | Deferred income taxes                                             |                                          |      | (94          | )   |       |              | (268 | )    |             |      | (9   | )     |   |     |     |   |       |      | (371 | )   
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                                                                                                                                | Other liabilities                                                 |                                          |      | 8            |     |       |              | (31  | )    |             |      | (14  | )     |   |     |     |   |       |      | (37  | )   
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                                                                                                                                | Gain on sale of investments and businesses                        |                                          |      | (6           | )   |       |              | (5   | )    |             |      |     |       |   |     |     |   |       |      | (11  | )   
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                                                                                                                                | Other  net                                                       |                                          |      |             |     |       |              | 55   |      |             |      | 72   |       |   |     |     |   |       |      | 127  |     
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                                                                                                                                | Change in operating assets and liabilities:                       |                                          |      |              |     |       |              |      |      |             |      |      |       |   |     |      |   |       |      |      |     
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                                                                                                                                |                                                                   | Accounts receivable                      |      |              | (90 | )     |              |      | 263  |             |      |      | (8    | ) |     |      |  |       |      |      | 165  |  
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                                                                                                                                |                                                                   | Inventories                              |      |              | 16  |       |              |      | 34   |             |      |      | 24    |   |     |      |  |       |      |      | 74   |  
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                                                                                                                                |                                                                   | Income taxes                             |      |              | 222 |       |              |      | 327  |             |      |      | (30   | ) |     |      |  |       |      |      | 519  |  
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                                                                                                                                |                                                                   | Restructuring                            |      |              | (66 | )     |              |      | (281 | )           |      |      | (40   | ) |     |      |  |       |      |      | (387 | )
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                                                                                                                                |                                                                   | Accounts payable and accrued liabilities |      |              | 12  |       |              |      | 94   |             |      |      | 74    |   |     |      |  |       |      |      | 180  |  
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                                                                                                                                |                                                                   | Other operating assets and liabilities   |      |              | (42 | )     |              |      | (51  | )           |      |      | (11   | ) |     |      |  |       |      |      | (104 | )
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     |                                                                                                                                                                                | Intercompany/related party activity                               |                                          |      | 159          |     |       |              | (24  | )    |             |      | (135 | )     |   |     |     |   |       |      |     |     
|                                                                    
|Net cash from (used in) operating activities                         |                                                                                                                                                                                |                                                                   | (78                                      | )    |              |     | (195  | )            |      |      | (121        | )    |      |       |  |     |      |   | (394  | )   
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Cash flows from (used in) investing activities                       |                                                                                                                                                                                |                                                                   |                                          |      |              |     |       |              |      |      |             |      |      |       |   |     |      |   |       |     
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Expenditures for plant and equipment                                                                                                                                           |                                                                   |                                          | (15  | )            |     |       | (69          | )    |      |             | (19  | )    |       |   |    |      |   |       | (103 | )   
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Proceeds on disposals of plant and equipment                                                                                                                                   |                                                                   |                                          |     |              |     |       | 44           |      |      |             |     |      |       |   |    |      |   |       | 44   |     
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Increase in long-term receivables                                                                                                                                              |                                                                   |                                          | 64   |              |     |       | (49          | )    |      |             | (122 | )    |       |   |    |      |   |       | (107 | )   
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Decrease in long-term receivables                                                                                                                                              |                                                                   |                                          | 17   |              |     |       | 59           |      |      |             | 13   |      |       |   |    |      |   |       | 89   |     
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Acquisitions of investments and businesses
 net of cash acquired                                                                                                              |                                                                   |                                          |     |              |     |       | (19          | )    |      |             |     |      |       |   |    |      |   |       | (19  | )   
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Proceeds on sale of investments and businesses                                                                                                                                 |                                                                   |                                          | 16   |              |     |       | 8            |      |      |             |     |      |       |   |    |      |   |       | 24   |     
|                                                                    
|Net cash used in investing activities                                |                                                                                                                                                                                |                                                                   | 82                                       |      |              |     | (26   | )            |      |      | (128        | )    |      |       |  |     |      |   | (72   | )   
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Cash flows from (used in) financing activities                       |                                                                                                                                                                                |                                                                   |                                          |      |              |     |       |              |      |      |             |      |      |       |   |     |      |   |       |     
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Dividends on preferred shares                                                                                                                                                  |                                                                   |                                          | (5   | )            |     |       |             |      |      |             |     |      |       |   |    |      |   |       | (5   | )   
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Increase (decrease) in notes payable  net                                                                                                                                     |                                                                   |                                          |     |              |     |       | 19           |      |      |             | (30  | )    |       |   |    |      |   |       | (11  | )   
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Proceeds from long-term debt                                                                                                                                                   |                                                                   |                                          |     |              |     |       |             |      |      |             | 11   |      |       |   |    |      |   |       | 11   |     
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Repayments of long-term debt                                                                                                                                                   |                                                                   |                                          |     |              |     |       |             |      |      |             | (2   | )    |       |   |    |      |   |       | (2   | )   
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                     | Decrease in capital leases payable                                                                                                                                             |                                                                   |                                          |     |              |     |       | (4           | )    |      |             |     |      |       |   |    |      |   |       | (4   | )   
|                                                                    
|Net cash from (used in) financing activities                         |                                                                                                                                                                                |                                                                   | (5                                       | )    |              |     | 15    |              |      |      | (21         | )    |      |       |  |     |      |   | (11   | )   
|                                                                    
|Effect of foreign exchange rate changes
on cash and cash equivalents |                                                                                                                                                                                |                                                                   | 1                                        |      |              |     | (5    | )            |      |      | (2          | )    |      |       |  |     |      |   | (6    | )   
|                                                                    
|Net cash from (used in) continuing operations                        |                                                                                                                                                                                |                                                                   |                                         |      |              |     | (211  | )            |      |      | (272        | )    |      |       |  |     |      |   | (483  | )   
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Net cash used in discontinued operations                             |                                                                                                                                                                                |                                                                   | 17                                       |      |              |     | 33    |              |      |      |            |      |      |       |  |     |      |   | 50    |     
|                                                                    
|Net increase (decrease) in cash and
cash equivalents                 |                                                                                                                                                                                |                                                                   | 17                                       |      |              |     | (178  | )            |      |      | (272        | )    |      |       |  |     |      |   | (433  | )   
|                                                                    
|Cash and cash equivalents at beginning of
period  net               |                                                                                                                                                                                |                                                                   | (41                                      | )    |              |     | 2,340 |              |      |      | 1,158       |      |      |       |  |     |      |   | 3,457 |     
|                                                                    
|Cash and cash equivalents at end of period
 net                     |                                                                                                                                                                                | $                                                                 | (24                                      | )    |              | $   | 2,162 |              |      | $    | 886         |      |      | $     |  |     |      | $ | 3,024 |     
|                                                                    

26



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##### Table of Contents








|ITEM 2. |  | Managements Discussion
and Analysis of Financial Condition and Results of Operations
|------- |  | -------------------------------------------------------------------------------------

You should read this section in combination with the accompanying unaudited
consolidated financial statements prepared in accordance with accounting
principles generally accepted in the United States. This section contains
forward looking statements and should be read in conjunction with the factors
described below under Forward looking statements. All dollar amounts in this
Managements Discussion and Analysis of Financial Condition and Results of
Operations are in millions of United States dollars unless otherwise stated.

Where we say we, us, our, or Nortel Networks, we mean Nortel Networks
Limited, or Nortel Networks Limited and its subsidiaries, as applicable. Where we refer to the industry, we mean the
telecommunications industry.

Business overview

Nortel Networks is an industry leader and innovator focused on transforming how
the world communicates and exchanges information. We supply products and
services that support the Internet and other public and private data, voice and
multimedia communications networks using wireline and wireless technologies,
which we refer to as networking solutions. A substantial portion of our
company has a technology focus and is dedicated to research and development.
This focus forms a core strength and a factor differentiating us from many of
our competitors. We envision an information society where people will be able
to connect and interact with information and with each other instantly, simply
and reliably, seamlessly accessing data, voice and multimedia communications
services and sharing experiences anywhere, anytime.

Our operations are organized in four reportable segments: Wireless Networks;
Enterprise Networks; Wireline Networks; and Optical Networks.

We are the principal direct operating subsidiary of Nortel Networks
Corporation. Nortel Networks Corporation holds all of our outstanding common
shares but none of our outstanding preferred shares. Nortel Networks
Corporations common shares are publicly traded on the New York and Toronto
stock exchanges under the symbol NT. Acquisitions involving any share
consideration are completed by Nortel Networks Corporation, while acquisitions
involving only cash consideration are generally completed by us.

Recent developments

Discontinued operations

During the first quarter of 2003, we substantially completed the wind-down of
our access solutions operations. We closed a number of transactions in the
first quarter of 2003, including:



| |  |  | the sale of 8 million common shares of Arris Group Inc. for cash
consideration of $28 on March 24, 2003 which resulted in a gain of $12
and the assignment of our membership interest in Arris Interactive LLC
to ANTEC Corporation, an Arris company, on March 18, 2003 for cash
consideration of $89 which resulted in a gain for the full amount; and                                                                                                                 
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | the restructuring of approximately $465 of trade and customer
financing receivables owed to us by a customer, the majority of which was
previously provisioned. As a result of the restructuring agreement, we
received consideration including cash of $125, notes and an ownership
interest which have been fully provided for, and the mutual
release of all other claims between the parties. The transaction closed
on March 20, 2003 and resulted in a gain of $95.

EDC support facility

On February 14, 2003, we entered into an agreement with Export Development
Canada, or EDC, regarding arrangements to provide for support, on a secured
basis, of certain of our performance related obligations arising out of normal
course business activities. This facility provides for up to $750 in
performance related support for our operations and is expected to facilitate
improved liquidity. Currently, $300 is committed support for performance
bonds. See Available credit and support
facilities for additional information.

27



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Stock options

We adopted fair value accounting for new grants or modifications of stock
options beginning January 1, 2003. As a result, all stock option grants or
modifications in 2003 and beyond will be expensed over the stock option vesting
period based on their fair value at the date the options are granted or
modified. The effect of the adoption of Statement of Financial Accounting
Standards No. 148, or SFAS 148, was a stock option expense of $5 in the first
quarter of 2003. If we continue to grant options in 2003 at a similar level to
2002, the expected impact on net earnings (loss) per share will be
approximately ($0.01) per common share for 2003. For additional information,
you should refer to Significant accounting policies in note 2(t) of our
financial statements in our Annual Report on Form 10-K for the year ended
December 31, 2002 filed with the Securities and Exchange Commission on March
10, 2003.

Results of operations  continuing operations

Segment revenues

|                    |  |                                  |       |  |      |   |       |          |  |   |          |   |  |  |     |  
|------------------- |  | -------------------------------- | ----- |  | ---- | - | ----- | -------- |  | - | -------- | - |  |  | --- | -
|                   
|                    |  | For the 3 months ended March 31,
|                    |  | 2003                             |       |  | 2002 |   |       | $ Change |  |   | % Change
|                   
|                   
|                   
|                   
|                   
|Wireless Networks   |  | $                                | 953   |  |      | $ | 1,136 |          |  | $ | (183     | ) |  |  | (16 | )
|                   
|                   
|                   
|                   
|Enterprise Networks |  |                                  | 611   |  |      |   | 675   |          |  |   | (64      | ) |  |  | (9  | )
|                   
|                   
|                   
|                   
|Wireline Networks   |  |                                  | 562   |  |      |   | 682   |          |  |   | (120     | ) |  |  | (18 | )
|                   
|                   
|                   
|                   
|Optical Networks    |  |                                  | 270   |  |      |   | 405   |          |  |   | (135     | ) |  |  | (33 | )
|                   
|                   
|                   
|                   
|Other (a)           |  |                                  | 1     |  |      |   | 12    |          |  |   | (11      | ) |  |  | (92 | )
|                   
|Consolidated        |  | $                                | 2,397 |  |      | $ | 2,910 |          |  | $ | (513     | ) |  |  | (18 | )
|                   
|                   
|                   
|                   
|                   

|(a) |  | Other represented miscellaneous business activities and corporate functions
|--- |  | -----------------------------------------------------------------------------

Geographic revenues

|                |  |                                  |       |  |      |   |       |          |  |   |          |   |  |  |     |  
|--------------- |  | -------------------------------- | ----- |  | ---- | - | ----- | -------- |  | - | -------- | - |  |  | --- | -
|               
|                |  | For the 3 months ended March 31,
|                |  | 2003                             |       |  | 2002 |   |       | $ Change |  |   | % Change
|               
|               
|               
|               
|               
|United States   |  | $                                | 1,202 |  |      | $ | 1,405 |          |  | $ | (203     | ) |  |  | (14 | )
|               
|               
|               
|               
|EMEA (a)        |  |                                  | 641   |  |      |   | 724   |          |  |   | (83      | ) |  |  | (11 | )
|               
|               
|               
|               
|Canada          |  |                                  | 130   |  |      |   | 218   |          |  |   | (88      | ) |  |  | (40 | )
|               
|               
|               
|               
|Other regions   |  |                                  | 424   |  |      |   | 563   |          |  |   | (139     | ) |  |  | (25 | )
|               
|Consolidated(b) |  | $                                | 2,397 |  |      | $ | 2,910 |          |  | $ | (513     | ) |  |  | (18 | )
|               
|               
|               
|               
|               

|(a) |  | The Europe, Middle East and Africa region
|--- |  | -----------------------------------------

|(b) |  | Revenues by geographic region were based on the location of the customer
|--- |  | ------------------------------------------------------------------------

|(c) |  | Included the Asia Pacific and
Caribbean and Latin America regions
|--- |  | -----------------------------------------------------------------

Consolidated revenues

First quarter 2003 compared to first quarter 2002

Our consolidated revenues declined 18% in the first quarter of 2003 compared to
the first quarter of 2002. The decline was primarily due to the continuing
industry adjustment and capital spending constraints experienced by our service
provider and enterprise customers. Many of our customers continued to realign
capital spending with their current levels of revenue and profits in order to
maximize their return on invested capital. Also, excess network capacity
continued to exist in the industry which has led to continued pricing pressures
on the sale of certain of our products. As a result, our customers continued
to change their focus from building new networks to conserving capital,
decreasing their debt levels, reducing costs and/or increasing the capacity
utilization rates and efficiency of existing networks.

From a geographic perspective, the 18% decline in revenues was primarily due to
a:

28



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| |  |  | 14% decline in revenues in the United States primarily due to
customer capital spending constraints by service provider and enterprise
customers;                                     
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | 11% decline in revenues in EMEA primarily due to capital spending
constraints by service provider and enterprise customers;                                                           
| |  |  | 40% decline in revenues in Canada primarily related to continued
capital spending constraints experienced by our service provider and
enterprise customers;                           
| |  |  | 18% decline in revenues in the Asia Pacific region primarily due to
continued capital spending constraints by service provider customers and maturing wireless technologies; and      
| |  |  | 35% decline in revenues in the Caribbean and Latin America region, or
CALA, primarily related to continued capital spending constraints
experienced by our service provider customers.



| | First quarter 2003 compared to fourth quarter 2002
| | --------------------------------------------------

Our consolidated revenue declined $123 from $2,520 in the fourth quarter of
2002 to $2,397 in the first quarter of 2003. The decline was primarily due to
the seasonality more traditionally associated with the first quarter of our
fiscal year as well as a result of the continued capital spending constraints
experienced by our customers.

Geographic revenues for the first quarter of 2003 compared to fourth quarter of
2002:



| |  |  | decreased 26% in the Asia Pacific region;
| | - |  | -----------------------------------------
| |  |  | decreased 3% in the United States;       
| |  |  | decreased 9% in Canada;                  
| |  |  | increased 16% in CALA; and               
| |  |  | were relatively flat in EMEA.            



| | Remainder of 2003
| | -----------------

We expect overall spending in the telecommunications equipment market to be
down modestly in fiscal 2003 compared to fiscal 2002. We also expect that
capital spending levels in the second quarter will be similar to the first
quarter of 2003. Given the ongoing economic and geopolitical uncertainty,
customers continue to spend cautiously. We cannot predict the economic impact
of acts of war or terrorism on the global market or the transmission of
contagious diseases such as Severe Acute Respiratory Syndrome, or SARS, in the
Asia Pacific region. We expect to see continued constraints on capital
spending by customers due to:



| |  |  | our customers realigning their investment levels with their current
levels of revenue and returns, and focusing on maximizing their return
on invested capital;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | the high debt levels of many service providers;                                                                                                                
| |  |  | excess network assets;                                                                                                                                         
| |  |  | the financial difficulties of certain service providers;                                                                                                       
| |  |  | a lack of available funding from the capital markets;                                                                                                          
| |  |  | a longer, more stringent spending approval process by enterprises when making capital investment decisions;                                                    
| |  |  | excess and shared bandwidth capacity; and                                                                                                                      
| |  |  | the compounding impact of economic and geopolitical concerns.                                                                                                  

Also, we expect that we will continue to experience pricing pressures on sales
of our products as a result of increased competition. It is difficult to
predict the duration of the current industry adjustment, as growth in industry
spending is not expected to occur until global geopolitical uncertainty and
economic and financial concerns have subsided. Market visibility remains
limited and we do not expect that our results of operations for any quarter
will necessarily be consistent with our historical quarterly profile or
indicative of our expected results in future quarters. See Forward looking
statements for factors that may affect our revenues.

29



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Wireless Networks revenues

The following chart summarizes recent quarterly revenues for Wireless
Networks:

(BAR CHART)

First quarter 2003 compared to first quarter 2002

The 16% decline in Wireless Networks revenues in the first quarter of 2003
compared to the first quarter of 2002 was primarily due to an ongoing focus by
wireless service providers on capital and cash flow management, reflecting
slower subscriber growth and increased competition for customers by wireless
service providers. As a result of this focus, many customers continued to
delay capital expenditures.

Code Division Multiple Access, or CDMA, revenues declined significantly in the
first quarter of 2003 compared to the first quarter of 2002, primarily due to
customers, particularly in the United States, continuing to experience capital
spending constraints driven by their continued focus on capital and cash flow management.
Time Division Multiple Access, or TDMA, revenues declined substantially in the
first quarter of 2003 compared to the first quarter of 2002 primarily due to
the continued transition to newer wireless technologies. The substantial
decline was primarily due to United States customers continuing to migrate from
the mature TDMA technology to CDMA and Global System for Mobile communications,
or GSM, technologies. However, TDMA revenues continued to be a smaller portion of
Wireless Networks revenues in the first quarter of 2003 compared to the first
quarter of 2002.

Overall GSM revenues, which includes General Packet Radio Standard, or GPRS,
and Enhanced Data Rates for Global Evolution, or EDGE, declined significantly in the first quarter of 2003 compared to the first
quarter of 2002 due to a substantial decline in the Asia Pacific region and a
significant decline in the United States. The substantial decline in the Asia
Pacific region was primarily due to a decline in the overall growth rate of GSM
technology deployments by wireless service providers in the second half of 2002
and the first quarter of 2003. As of the first quarter of 2003, many of our
GSM customers in the Asia Pacific region have completed their network
deployments, and as a result, have sufficient capacity to currently meet
additional subscriber demands. In the United States, the significant decline
was primarily due to continued slow subscriber growth and completion of some networks by certain service providers. In EMEA and CALA, GSM revenues
increased substantially in the first quarter of 2003 primarily due to new
contracts won with certain service providers in the second half of 2002.

Universal Mobile Telecommunications Systems, or UMTS, revenues increased
significantly in the first quarter of 2003 compared to 2002. The significant
increase was primarily due to the resolution of contractual issues, including
collectibility, with a certain customer experienced in the second half of 2002.
However, larger network deployment delays continued in the first quarter of
2003 primarily due to the technology issues associated with third generation, or 3G,
handsets and network performance by certain vendors. In the first quarter of
2003, UMTS revenues continued to be a small but growing portion of our Wireless
Networks revenues.

From a geographic perspective, the 16% decrease in Wireless Networks revenues
in the first quarter of 2003 compared to the same period in 2002 was primarily
due to a:



| |  |  | 16% decline in revenues in the
United States primarily due to customers focus on capital and cash
flow management, technology migration and a slower
subscriber growth;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  |  | 49% decline in revenues in the Asia Pacific region primarily due to
capital spending constraints, network completion and a slower subscriber
growth; and                                                                                                                          
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | 69% decline in revenues in Canada primarily due to customer capital
spending constraints; partially offset by                                                                                                                                                                     
| |  |  | 26% increase in revenues in EMEA primarily due to the resolution of
contractual issues, including collectibility, with a certain customer experienced in the second half of 2002 and the award of new GSM
contracts with certain service providers in the second half of 2002; and
| |  |  | 37% increase in revenues in CALA
primarily due to new GSM contracts with certain service providers in the second half of 2002.                                                                                                                                                    

First quarter 2003 compared to fourth quarter 2002

Compared to the fourth quarter of 2002, Wireless Networks revenues
decreased 6%, primarily due to:



| |  |  | a significant decline in CDMA revenues primarily due to customer
capital spending constraints driven by their continued focus on
capital and cash
flow management; and                     
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | a significant decline in GSM revenues primarily due to continued slow
subscriber growth and delays in capital expenditures by service
providers; partially offset by                       
| |  |  | a substantial increase in UMTS revenue primarily due to the
resolution of contractual issues, including collectibility, with a
certain customer experienced in the second half of 2002; and
| |  |  | a substantial increase in TDMA revenues primarily due to a certain
customer continuing their network expansion.                                                                            

From a geographic perspective, Wireless Networks revenues decreased 6%
 in the first quarter of 2003 compared to the fourth quarter of 2002 as a result of considerable declines in the Asia Pacific region and a decline
in the United States, which were partially offset by a significant
increase in EMEA and considerable increases in CALA and Canada.

Remainder of 2003

In the first quarter of 2003, Wireless Networks revenues continued to be
primarily generated by sales of CDMA and GSM technologies. We continue to
expect that revenues associated with our TDMA technologies will decline in
2003. Overall GSM sales are also expected to decline as networks are built out
and subscriber growth slows. In 2003, our CDMA 3G and UMTS technology sales
are expected to grow, compared to 2002, and represent a larger proportion of
Wireless Networks revenues as 3G technologies are expected to gain a greater
foothold in the market due to increased wireless data traffic and requirements
for greater wireless spectrum efficiency. Also, we expect to experience
increased pricing pressures on sales of certain of our Wireless Networks
products as a result of increased competition.

As with the rest of the industry, our wireless customers are experiencing
significant pressure and are adapting to a new, more stringent spending
environment due to the lack of available financing and a slower subscriber
growth in the overall wireless market. We anticipate a reduction in global
capital expenditures for wireless operators in 2003 and 2004, compared to 2002,
but cannot predict the complete impact. We also expect some consolidation in this marketplace, including a reduction in the number of
service providers in certain regions due to competition and/or adjustments in
deployment plans and schedules. In addition, the timing of the anticipated
change in revenue mix from the different wireless technologies has become
increasingly difficult to predict as a result of the complexities and potential
for delays in the implementation of UMTS network deployments. All of these
factors could adversely affect our Wireless Networks revenues in the future.

31



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Enterprise Networks revenues

The following chart summarizes recent quarterly revenues for Enterprise
Networks:

(BAR CHART)

First quarter 2003 compared to first quarter 2002

The 9% reduction in Enterprise Networks revenues in the first quarter of 2003
compared to the first quarter of 2002 was primarily a result of our enterprise
customers continuing to delay their purchase decisions on certain products due
to the economic uncertainty in the industry.

Revenues from the circuit and packet voice portion of this segment were
essentially flat in the first quarter of 2003 compared to the first quarter of
2002. We experienced a reduction in revenue associated with our integrated
voice recognition products due to enterprises employing more
stringent capital spending approval processes resulting in purchase
decision delays. This decrease was partially
offset by an increase in revenues associated with our internet protocol, or IP,
telephony solutions as customers continued to migrate towards packet voice
solutions.

The data networking and security portion of this segment experienced
significant declines in the first quarter of 2003 compared to the first quarter
of 2002. The significant decrease in revenues was primarily due to continued
customer spending constraints and delayed purchasing decisions by
customers. Also, we experienced a
reduction in the number of service contract renewals associated with our legacy
routing portfolio in the first quarter of 2003 compared to the first quarter of
2002.

From a geographic perspective, the 9% decline in Enterprise Networks revenues
in the first quarter of 2003 compared to the first quarter of 2002 was
primarily due to a:



| |  |  | 13% decline in revenues in the United States primarily due to
customer spending constraints and a reduction in the number of service
contract renewals;                                                   
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | 9% decline in revenues in EMEA
primarily due to customer spending constraints; and                                                                                                                        
| |  |  | 27% decline in revenues in CALA primarily due to the continued
deterioration of the socio-economic situation in Argentina and Venezuela
and the associated delays in certain government related contracts.

First quarter 2003 compared to fourth quarter 2002

Enterprise Networks revenues decreased 7% in the first quarter of 2003
compared to the fourth quarter of 2002. The decline was primarily due to:



| |  |  | a significant decline in the data network and security portion of
this segment primarily due to the more traditional seasonality associated with the first quarter of our fiscal year and continuing customer spending constraints;
and                                                                                                                          
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | a moderate decline in the circuit and packet voice portion of this
segment primarily due to the more traditional seasonality associated
with the first quarter of our fiscal year and a
reduction in revenue associated with our integrated voice recognition
products due to enterprises beginning to employ more stringent capital
spending approval processes.

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From a geographic perspective, the 7%
decline in the first quarter of 2003 compared to the fourth quarter of 2002 decline was due to a decline across all
regions except the Asia Pacific region, which increased.

Remainder of 2003

We anticipate that communications networks will continue to increase the use of
voice over packet technologies. We expect that data, voice and multimedia
communications technologies will continue to converge, and enterprises will
look for ways to maximize the effectiveness of their existing networks while
reducing ongoing capital expenditures and operating costs. However, the timing
of this progression is unclear. We also anticipate that demand will continue
for our traditional circuit switching products. Overall, we expect that the continuing
industry adjustment will have a negative impact on the level of spending by our
enterprise customers.

Wireline Networks revenues

The following chart summarizes recent quarterly revenues for Wireline
Networks:

(BAR CHART)

First quarter 2003 compared to first quarter 2002

The 18% decline in Wireline Networks revenues in the first quarter of 2003
compared to the first quarter of 2002 was primarily due to a substantial
reduction in capital spending by our service provider customers as a result of
the continuing industry adjustment.

Compared to the first quarter of 2002, revenues decreased in the circuit and
packet voice portion of this segment due to a substantial decrease in revenue
associated with our traditional circuit switching products. The substantial
decline in our traditional switching products was primarily due to the
tightened capital markets and continued capital spending constraints
experienced by our service provider customers. This substantial decline was
partially offset by a substantial increase in revenues in our packet based
technologies due to certain new service provider contracts awarded in the
second half of 2002 and the first quarter of 2003.

The significant decline in revenues in the data networking and security portion
of this segment was primarily due to a decline in demand for mature products,
compounded by the ongoing industry adjustment as our service provider
customers, in all regions, continued to reduce their capital expenditures.

From a geographic perspective, the 18% decline in Wireline Networks revenues in
the first quarter of 2003 compared to the first quarter of 2002 was primarily
due to a:



| |  |  | 83% decline in revenues in CALA primarily due to the completion of a
major contract in the first quarter of 2002 and continued capital
spending constraints experienced by our service provider customers;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | 18% decline in revenues in EMEA primarily due to a reduction in
capital spending by our service provider customers; and                                                                                   
| |  |  | revenues in all other regions remaining essentially flat.                                                                                                                                                 

33



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First quarter 2003 compared to fourth quarter 2002

Our Wireline Networks revenues
increased 11% in the first quarter of 2003 compared to the fourth quarter of
2002, primarily due to:



| |  |  | a substantial increase in the circuit and packet voice portion of
this segment primarily due to a substantial increase in revenues in our
packet based technologies due to certain new service provider contracts
in the second half of 2002 and first quarter of 2003; partially offset
by
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | a significant decline in the data networking and security portion of
this segment primarily due to the more traditional seasonality
associated with the first quarter of our fiscal year.                                                                                                  

From a geographic perspective,
Wireline Networks revenues increased 11% in the first quarter of 2003
compared to the fourth quarter of 2002 primarily as a result of considerable increases in the United States and
Canada, which were partially offset by a substantial decrease in the Asia
Pacific region.

Remainder of 2003

In the future, we anticipate that service providers will continue to increase
the use of packet-based technologies in their communications networks as they
look for ways to optimize their existing networks and offer new revenue
generating services while controlling capital expenditures and operating costs.
Although we experienced an increase in revenues in our packet-based
technologies in the first quarter of 2003 compared to the same period in 2002,
the timing of when there will be continued and sustainable demand is unclear.
We expect that the continuing industry adjustment and reduction in capital spending by our customers will have a
negative impact on the level of spending by our service provider customers and
could adversely affect Wireline Networks revenues in the future.

Optical Networks revenues

The following chart summarizes recent quarterly revenues for Optical
Networks:

(BAR CHART)

First quarter 2003 compared to first quarter 2002

The 33% decline in Optical Networks revenues in the first quarter of 2003
compared to the first quarter of 2002 was primarily the result of the
continuing industry adjustment and substantial reductions in capital spending
by our United States and EMEA customers in the long-haul portion of this
segment.

Revenue in the long-haul portion of this segment declined substantially in the
first quarter of 2003 compared to the first quarter of 2002. The substantial
decline was primarily due to the continuing industry adjustment and continued
capital spending constraints in the United States and EMEA as customers
continued to focus on maximizing return on invested capital by increasing the
capacity utilization rates and efficiency of existing networks. In addition,
significant excess inventories continued to exist in this portion of the
segment which resulted in ongoing pricing pressures.

Also, in the fourth quarter of 2002, we sold certain optical components assets
to Bookham Technology plc, or Bookham. As a result, our first quarter results
in 2003 in the long-haul portion of this segment do not reflect revenues
generated from these assets. In the first quarter of 2002, revenues generated
from the optical components assets sold to Bookham were less than 5% of the
total revenue of $405. For additional information relating to the sale of
these assets to Bookham, you should refer

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to information contained in our
Annual Report on Form 10-K for the year ended December 31, 2002 filed with the
Securities and Exchange Commission.

Revenue in the metro optical portion of this segment increased significantly in
the first quarter of 2003 compared to the same period in 2002. The significant
increase was primarily due to a substantial increase in the Asia Pacific region
due to new customer contracts in 2003 compared to the insignificant revenues in
the first quarter of 2002. The substantial increase in the Asia Pacific region
was partially offset by a substantial decline in EMEA primarily due to EMEA
customers continuing to focus on maximizing return on invested capital by
increasing the capacity utilization rates and efficiency of existing networks.

From a geographic perspective, the 33% decline in Optical Networks revenues in
the first quarter of 2003 compared to the first quarter of 2002 was primarily
due to a:



| |  |  | 48% decline in revenues in EMEA primarily related to a substantial
reduction in capital spending as a result of the continuing industry
adjustment and customers continuing to focus on maximizing return on
invested capital;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | 47% decline in revenues in the United States and a 42% decline in
Canada primarily related to a substantial reduction in capital spending;
and                                                                                
| |  |  | 50% decline in revenues in CALA primarily related to a reduction in
capital spending and excess network capacity and assets; partially
offset by                                                                              
| |  |  | 37% increase in revenues in the Asia Pacific region primarily due to
new customer contracts.                                                                                                                                  

First quarter 2003 compared to fourth quarter 2002

Optical Networks revenues decreased
22% in the first quarter of 2003 compared to the fourth quarter of 2002
primarily due to substantial declines in both the optical long-haul and metro
optical portions of this segment. The substantial declines were primarily due
to the more traditional seasonality associated with the first quarter of our
fiscal year and the continued capital spending constraints in the United States
and EMEA.

From a geographic perspective, Optical
Networks revenues decreased 22% in the first quarter of 2003 compared
to the fourth quarter of 2002 primarily as a result of considerable declines in the United States and Canada,
and a decrease in EMEA.

Remainder of 2003

Our major customers in the optical long-haul portion of this segment remain
focused on maximizing return on their invested capital by increasing the
capacity utilization rates and efficiency of existing networks. We expect that
any additional capital spending by those customers will be increasingly
directed to opportunities that enhance customer performance, revenue generation
and cost reduction in the near term. We expect that customers in this portion
of the segment will continue to focus on route by route activities, adding
channels to existing networks, and interconnectivity and bandwidth as it is
required in the short term. Further, we believe that building out networks for
increased bandwidth will remain longer term projects. Revenues in the optical
long-haul portion of the segment are primarily based on network build-outs and,
consequently, generally include a number of long-haul products packaged together in an
end-to-end solution. As a result, almost all products within this portion of
the segment are generally affected in the same manner as fluctuations in the
needs of our customers typically result in corresponding increases or decreases
in overall optical long-haul revenue.

In the metro optical portion of this segment, we expect to see an increase in
demand for metro Dense Wavelength Division Multiplexing, or metro DWDM, as our
customers begin to deploy inter-office fiber infrastructure. As a result, we
expect that the metro optical portion of this segment will continue to become a
larger percentage of the overall Optical Networks revenues.

Due to the severe reduction, in number and size, of new optical long-haul
network build-outs and due to the nature of the relationship between the
products within the optical long-haul portion of this segment, we do not expect
a meaningful recovery in the optical long-haul market before early 2004. Also,
we anticipate that pricing pressures on optical system vendors will continue
due to intense competition, large inventories and a diminished market. As a
result, we expect that our Optical Networks revenues will decline in 2003
compared to 2002 and will be one of our last segments to recover from the
significant industry adjustment.

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Gross profit and gross margin

|             |  |                                  |       |   |      |   |      |        |  |   |          |  |  |  |    | 
|------------ |  | -------------------------------- | ----- | - | ---- | - | ---- | ------ |  | - | -------- |  |  |  | -- | 
|            
|             |  | For the 3 months ended March 31,
|             |  | 2003                             |       |   | 2002 |   |      | Change |  |   | % Change | 
|            
|Gross profit |  | $                                | 1,038 |   |      | $ | 681  |        |  | $ | 357      |  |  |  | 52 | 
|            
|            
|            
|            
|Gross margin |  |                                  | 43.3  | % |      |   | 23.4 | %      |  |   | 19.9     |  |  |  | 85 | 
|            

Gross margin improved 19.9 percentage points in the first quarter of 2003
compared to the first quarter of 2002 primarily due to:



| |  |  | approximately $200 of increased provisions in the first quarter of
2002 related to incremental inventory provisions and contract and
customer settlement costs not repeated in the first quarter of 2003;                                                   
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | an increase of approximately 7
percentage points related to continued improvements in
our cost structure primarily as a result of more favorable supplier
pricing which was partially offset by continued pricing pressures on the
sale of our products; and
| |  |  | an improvement of approximately 1 percentage point related to favorable changes in product mix; partially offset by                                                                                                                                         
| |  |  | an accrual for the employee return to profitability bonus plan.                                                                                                                                                                                             

While we cannot predict the extent to which changes in product mix and pricing
pressures will impact our gross margin, we continue to see the effects of our
restructuring work plan which we began implementing in 2001 to create a cost
structure that is more reflective of the current industry and economic
environment. As a result, we expect that gross margin will continue to trend
in the low 40% range for the remainder of 2003. See Forward looking
statements for factors that may affect our gross margins.

Segment gross profit and gross margin

Wireless Networks

Wireless Networks gross margin improved by approximately 11 percentage points in the first
quarter of 2003 compared to the same period in 2002. The improvement was
primarily due to changes in our customer and product mix and ongoing
product cost improvements.

Enterprise Networks

Enterprise Networks gross margin improved by approximately 9 percentage points in the first
quarter of 2003 compared to the same period in 2002. The improvement in gross
margin was primarily due to:



| |  |  | improvements in our cost structure as a result of more favorable
supplier pricing; and                                                                                                                                                          
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | increased provisions recorded in the first quarter of 2002 related to
negotiations with our major suppliers which resulted in inventory
related provisions and contract and customer settlement costs not repeated in the first quarter of 2003.

Wireline Networks

Wireline Networks gross margin decreased by approximately 8 percentage points in the first
quarter of 2003 compared to the same period in 2002. The decline in gross
margin was primarily due to:



| |  |  | changes in product mix; partially offset by                                                                                                                                                                                                     
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | increased provisions recorded in the first quarter of 2002 related to
negotiations with our major suppliers which resulted in inventory
related provisions and contract and customer settlement costs not repeated in the first quarter of 2003.

36



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Optical Networks

Optical Networks gross margin improved by approximately 71 percentage points in the first
quarter of 2003 compared to the same period in 2002. The improvement in gross
margin was primarily due to:



| |  |  | significant increased provisions recorded in the first quarter of
2002 related to negotiations with our major suppliers which resulted in
inventory related provisions and contract and customer settlement costs;                                                                    
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | the sale of certain optical
components assets to Bookham in the fourth quarter of 2002, and as a
result, our gross margin in the first quarter of 2003 in the
optical long-haul portion of this segment excluded the impact of
excess capacity of those optical components assets; and
| |  |  | improvements in our cost structure
and favorable
supplier pricing.                                                                                                                                                                                                                    

Operating expenses

Selling,
general and administrative expense

|             |                             |   |                                  |      |   |      |     |      |        |   |      |          |  |  |     |     | 
|------------ | --------------------------- | - | -------------------------------- | ---- | - | ---- | --- | ---- | ------ | - | ---- | -------- |  |  | --- | --- | 
|            
|             |                             |   | For the 3 months ended March 31,
|             |                             |   | 2003                             |      |   | 2002 |     |      | Change |   |      | % Change | 
|            
|SG&A expense |                             | $ | 485                              |      |   | $    | 740 |      |        | $ | (255 | )        |  |  | (34 | )  
|            
|            
|            
|            
|             | As a percentage of revenues |   |                                  | 20.2 | % |      |     | 25.4 | %      |   |      | N/A      |  |  |     | N/A | 
|            

Selling, general and administrative, or SG&A, expense declined $255 in the
first quarter of 2003 compared to the same period in 2002. The substantial
decline in the first quarter of 2003 compared to the first quarter of 2002 was
primarily due to:



| |  |  | the continued impact of our workforce reductions and associated
reductions in other related costs such as information services and real
estate; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | decreased provisioning for customer financing receivables; partially offset by                                                                     
| |  |  | an accrual for the employee return to profitability bonus plan.                                                                                    

We will continue to manage SG&A expense according to the requirements of our
business, allocating resources and investment where customer demand dictates,
and reducing resources and investment where opportunities for improved
efficiencies present themselves. We expect that SG&A expense will continue to trend lower in the second quarter of
2003 compared to the first quarter of 2003.

Segment selling, general and administrative expense

Wireless Networks

Wireless Networks SG&A expense
decreased significantly in the first quarter of
2003 compared to the first quarter of 2002. The decrease was primarily due to
the continued impact of our workforce reductions across all regions and
associated reductions in other related costs such as information services and
real estate.

Enterprise Networks

Enterprise Networks SG&A expense decreased significantly in the first quarter
of 2003 compared to the first quarter of 2002. The decrease was primarily due
to the continued impact of our workforce reductions, primarily in the United
States and Canada, and associated reductions in other related costs such as
information services and real estate.

Wireline Networks

Wireline Networks SG&A expense decreased substantially in the first quarter of
2003 compared to the first quarter of 2002. The decrease was primarily due to:



| |  |  | the continued impact of our workforce reductions, primarily in the
United States and Canada, and associated reductions in other related
costs such as information services and real estate; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

37



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| |  |  | a decrease in provisioning for customer financing receivables.
| | - |  | --------------------------------------------------------------

Optical Networks

Optical Networks SG&A expense decreased substantially in the first quarter of
2003 compared to the first quarter of 2002. The decrease in SG&A expense was
primarily due to:



| |  |  | the continued impact of our workforce reductions across all regions
and associated reductions in other related costs such as information
services and real estate; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | a decrease in provisioning for customer financing receivables.                                                                                                        

Segment contribution margin

|                    |  |                                  |     |   |      |   |      |        |  |   |          |  |  |  |     | 
|------------------- |  | -------------------------------- | --- | - | ---- | - | ---- | ------ |  | - | -------- |  |  |  | --- | 
|                   
|                    |  | For the 3 months ended March 31,
|                    |  | 2003                             |     |   | 2002 |   |      | Change |  |   | % Change | 
|                   
|                   
|                   
|                   
|                   
|Wireless Networks   |  | $                                | 316 |   |      | $ | 244  |        |  | $ | 72       |  |  |  | 30  | 
|                   
|                   
|                   
|                   
|Enterprise Networks |  |                                  | 145 |   |      |   | 84   |        |  |   | 61       |  |  |  | 73  | 
|                   
|                   
|                   
|                   
|Wireline Networks   |  |                                  | 152 |   |      |   | 96   |        |  |   | 56       |  |  |  | 58  | 
|                   
|                   
|                   
|                   
|Optical Networks    |  |                                  | 10  |   |      |   | (358 | )      |  |   | 368      |  |  |  | 103 | 
|                   
|                   
|                   
|                   
|Other               |  |                                  | (70 | ) |      |   | (125 | )      |  |   | 55       |  |  |  | 44  | 
|                   
|Consolidated        |  | $                                | 553 |   |      | $ | (59  | )      |  | $ | 612      |  |  |  | N/A | 
|                   

As a result of the gross margin and SG&A expense improvements mentioned above,
our consolidated contribution margin improved by $612 in the first quarter of
2003 compared to the same period in 2002. All of our four reportable segments
contributed positive contribution margin in the first quarter of 2003.

Research and development expense

|            |                             |   |                                  |      |   |      |     |      |        |   |     |          |  |  |     |     | 
|----------- | --------------------------- | - | -------------------------------- | ---- | - | ---- | --- | ---- | ------ | - | --- | -------- |  |  | --- | --- | 
|           
|            |                             |   | For the 3 months ended March 31,
|            |                             |   | 2003                             |      |   | 2002 |     |      | Change |   |     | % Change | 
|           
|           
|           
|           
|           
|R&D expense |                             | $ | 488                              |      |   | $    | 577 |      |        | $ | (89 | )        |  |  | (15 | )  
|           
|           
|           
|           
|            | As a percentage of revenues |   |                                  | 20.4 | % |      |     | 19.8 | %      |   |     | N/A      |  |  |     | N/A | 
|           

Research and development, or R&D, expense represents our planned investment in
our next generation core products across all businesses. R&D expense decreased
$89 in the first quarter of 2003 compared to the first quarter of 2002,
reflecting workforce reductions and focused investments to drive market leadership across our product portfolios. Included in R&D
expense in the first quarter of 2003 was an accrual for the employee return to
profitability bonus plan.

Our continuing strategic investments in R&D are aligned with technology
leadership in anticipated growth areas, while targeting a level of R&D expense
that is more representative of our overall cost structure. We will continue to
manage R&D expense according to the requirements of our business, allocating
resources and investment where customer demand dictates, and reducing resources
and investment where opportunities for improved efficiencies present
themselves. Our research and development efforts are currently focused on key
next generation networking solutions including wireless data, wireless LAN
(local area networks), packet voice solutions, broadband connectivity, internet
protocol, or IP, multimedia services and security. We expect that R&D expense
in the second quarter of 2003 will trend lower from the first quarter of
2003.

Special charges

In the first quarter of 2003, we recorded special charges of $133 related to
our continued restructuring work plan to streamline operations and activities
around core markets and leadership strategies. Net workforce reduction charges
of $60 related to the cost of severance and benefits associated with
approximately 800 employees notified of termination during the first quarter of
2003. Net contract settlement and lease costs of $78 related to the
cancellation of existing contracts across all

38



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segments. Also, we recorded a
net increase in the carrying value of plant and equipment of $5 for valuation
increases related to special charges recorded in previous periods.

In the first quarter of 2002, we recorded special charges of $443 related to
our restructuring work plan. Workforce reduction charges of $312 were related
to the cost of severance and benefits associated with the approximately 4,000
employees notified of termination. Contract settlement and lease costs
included negotiated settlements of approximately $56 to either cancel contracts
or renegotiate existing contracts across all of our segments. Also, we
recorded $75 in plant and equipment write downs within global operations, a
function that supports all of our segments, and within our Optical Networks
reporting segment.

Currently, we expect that approximately $20 to $30 of special charges related
to our restructuring work plan will be incurred in the second quarter of 2003.

For additional information related to our restructuring activities, see
Special charges in note 5 of the accompanying unaudited consolidated
financial statements.

Other income (expense)  net

In the first quarter of 2003, other income  net was $49, which primarily
included a payment received from a settlement related to intellectual property
use and reductions in accruals principally related to: the wind-down of
integration activities of previously acquired companies, operations originally
structured as joint ventures, and miscellaneous tax matters; which were
partially offset by foreign exchange and investment losses.

Interest expense

The decrease in interest expense of $17 in the first quarter of 2003 compared
to the same period in 2002 was primarily related to the reduction in the
outstanding balances of our notes payable and long-term debt.

Income tax benefit (provision)

In the first quarter of 2003, we recorded a full valuation allowance on the tax
benefit of the pre-tax loss from continuing operations of $50. The valuation
allowance was recorded in accordance with Statement of Financial Accounting
Standards, or SFAS, No. 109, Accounting for Income taxes, which requires that
tax valuation allowances be established when it is more likely than not that
some portion or all of a companys deferred tax assets will not be realized.
The valuation allowances can be primarily attributed to continued
uncertainty in the industry. If market conditions improve and future results of
operations exceed our current expectations, our existing tax valuation
allowances may be adjusted, resulting in recognition of additional future tax
benefits. Alternatively, if market conditions deteriorate further or future
results of operations are less than expected, additional tax valuation
allowances may be required for all or a portion of our deferred tax assets.

Approved tax legislation in the first quarter of 2002 in the United States
extended the net operating loss carryback period from two years to five years.
As a result, we were able to carryback available United States losses from 2001
and utilize approximately $700 of deferred income tax assets previously
recognized, generating additional cash recoveries of approximately $700 in the
first quarter of 2002.

Other

In the first quarter of 2003, our SG&A, R&D and Other income  net included
approximately $80 of favorable impacts associated with reductions in
accruals which principally related to the accumulation of charges associated
with the integration activities of previously acquired companies and operations
originally structured as joint ventures as well as miscellaneous tax matters.
During the three months ended March 31, 2003, we reviewed the matters related
to the wind-down and settlement of balances associated integration activities of previously acquired companies and operations originally structured as joint ventures with the above and
determined that based on decreases in transactional activity and magnitude of
their net position that it was appropriate to reduce certain accruals. Such
amounts and matters included foreign exchange, transfer pricing and other
statutory assessments, charges in transit and acquisition and divestiture and
disposal activities. These balances were considered to be in dispute,
erroneous and/or for amounts which could not be resolved. These items were
more than offset by costs related to the return to profitability employee bonus plan and stock-based compensation expense.

Net loss from continuing operations

As a result of the items discussed under our results of operations, our
reported net loss from continuing operations improved by $718 in the first
quarter of 2003 compared to the first quarter of 2002.

Results of operations  discontinued operations

During the first quarter of 2003, we substantially completed the wind-down of
our access solutions operations and recorded net earnings of $164 (net of tax)
related to the sale of certain components of this business. The $164 in net
earnings was primarily related to a $101 gain from the disposition of certain
shares and a membership interest in certain Arris Group Inc. companies and a
gain of $95 from the settlement of certain trade and customer financing
receivables. Our intent to exit this

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business was originally approved by our
Board of Directors on June 14, 2001. The continued deterioration in industry
and market conditions delayed certain disposal activities beyond the original
planned timeframe of one year. In particular, actions involving negotiations
with customers, who have also been affected by industry conditions, took longer
than expected. Although disposal activities continued beyond the one-year
period, we have continued to present the access solutions operations as
discontinued operations in the accompanying unaudited consolidated financial
statements.

For additional information, see Discontinued operations in note 13 of the
accompanying unaudited consolidated financial statements.

Application of critical accounting policies

There have been no changes to our critical accounting policies since December
31, 2002. For a description of our critical accounting policies, see our
Annual Report on Form 10-K for the year ended December 31, 2002 filed with the
Securities and Exchange Commission.

Liquidity and capital resources

Cash flows

The following table summarizes our cash flows by activity and cash on hand:

|                                                                      |  |                          |       |   |      |   |       |  
|--------------------------------------------------------------------- |  | ------------------------ | ----- | - | ---- | - | ----- | -
|                                                                     
|                                                                      |  | 3 months ended March 31,
|                                                                      |  | 2003                     |       |   | 2002
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Net cash used in operating activities of continuing operations        |  | $                        | (114  | ) |      | $ | (394  | )
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Net cash from (used in) investing activities of continuing operations |  |                          | 9     |   |      |   | (72   | )
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Net cash used in financing activities of continuing operations        |  |                          | (66   | ) |      |   | (11   | )
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Effect of foreign exchange rate changes on cash and cash equivalents  |  |                          | 18    |   |      |   | (6    | )
|                                                                     
|Net cash used in continuing operations                                |  |                          | (153  | ) |      |   | (483  | )
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Net cash from discontinued operations                                 |  |                          | 253   |   |      |   | 50    |  
|                                                                     
|Net increase (decrease) in cash and cash equivalents                  |  |                          | 100   |   |      |   | (433  | )
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Cash and cash equivalents at beginning of period  net                |  |                          | 3,813 |   |      |   | 3,457 |  
|                                                                     
|Cash and cash equivalents at end of period  net                      |  | $                        | 3,913 |   |      | $ | 3,024 |  
|                                                                     

As of March 31, 2003, our primary source of liquidity was our current cash and
cash equivalents, or cash. At March 31, 2003, we had cash of $3,913, excluding
$227 of restricted cash and cash equivalents. We believe this cash will be
sufficient to fund our current business model, manage our investments and meet
our customer commitments for at least the next 12 months. However, if capital
spending by service providers and other customers declines more significantly
than we currently expect, we may be required to adjust our current business
model. As a result, our revenues and cash flows may be materially lower than
we expect and we may be required to further reduce our investments or take
other measures in order to meet our cash requirements. We may seek additional
funds from liquidity generating transactions and other conventional sources of
external financing. We cannot provide any assurance that our net cash
requirements will be as we currently expect, that we will continue to have
access to our credit facilities when and as needed, or that liquidity
generating transactions or financings will be available to us on acceptable
terms or at all.

Cash flows used in operating activities were $114 due to a net loss from
continuing operations of $67, less an adjustment of $207 for non-cash related
items, plus a net cash outflow of $254 from operating assets and liabilities.
Cash outflows of $46 from accounts receivable were primarily due to an increase
in outstanding receivables with Nortel Networks Corporation in the first quarter of 2003. Cash
inflows of $111 from inventories were primarily due to product shipments
exceeding additions to inventories in the first quarter 2003. The net cash
outflows of $319 from the remaining operating assets and liabilities were
primarily due to:



| |  |  | $187 relating to restructuring payments; and                                                                                                 
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | the proportionate decrease in our assets and liabilities as a result
of the decline in sales volumes and the associated size of the business.

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Cash flows from investing activities were $9 and were primarily due to: a
decrease of $20 in restricted cash and cash equivalents held as cash collateral
for certain bid, performance related and other bonds; proceeds of $7
from the sale of certain investments and businesses; and proceeds of $6 from
the sale of plant and equipment. These amounts were partially offset by $18 in
plant and equipment expenditures and a net increase in long-term receivables of
$4.

Cash flows used in financing activities were $66 and were primarily due to $43
used to reduce our long-term debt, a net reduction of $17 used to reduce our
notes payable and dividend payments of $5 on our outstanding preferred shares.

Uses of liquidity

Our cash requirements for the next 12 months are primarily to fund:



| |  |  | operations;                                            
| | - |  | -------------------------------------------------------
| |  |  | research and development;                              
| |  |  | workforce reduction and other restructuring activities;
| |  |  | pension and post retirement benefits;                  
| |  |  | debt service;                                          
| |  |  | capital expenditures;                                  
| |  |  | customer financings; and                               
| |  |  | committed investments.                                 

Also, from time to time, we may purchase our outstanding debt securities and/or
convertible notes in privately negotiated or open market transactions, by
tender offer or otherwise, in compliance with applicable laws.

Obligations under special charges

The remaining cash payments of $346 relating to workforce reduction initiatives
are expected to be substantially completed by mid 2004. The remaining cash
payments of $691 related to contract settlement and lease costs are expected to
be substantially completed by the end of 2010. We expect to incur
approximately $600 to $700 in restructuring work plan related cash outflows
during the remainder of 2003.

Contractual cash obligations

Our contractual cash obligations for long-term debt, outsourcing contracts,
operating leases and unconditional purchase obligations remained substantially
unchanged from the amounts disclosed as at December 31, 2002 in our Annual
Report on Form 10-K filed with the Securities and Exchange Commission.

In the first quarter 2003, we purchased $39 of our 6.125% Notes due February
15, 2006. Also in 2003, we plan to repay the remaining $164 of our 6.00% Notes
due September 1, 2003.

Commitments and guarantees

Bid,
performance related and other bonds

We enter into bid, performance related and other bonds in connection with
various contracts. Bid bonds generally have a term less than twelve months,
depending on the length of the bid period for the applicable contract.
Performance related bonds generally have a term of twelve months and are
typically renewed, as required, over the term of the applicable contract.
Other bonds generally have a term of twenty four months. The various contracts
to which these bonds apply generally have terms ranging from two to five years.
Any potential payments that we would be required to make are related to our
performance under the applicable contract.

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The following table provides information related to these types of bonds, as
at:

|                                               |  |           |     |  |              |   |     | 
|---------------------------------------------- |  | --------- | --- |  | ------------ | - | --- | 
|                                              
|                                               |  | March 31, |     |  | December 31,
|                                               |  | 2003      |     |  | 2002        
|                                              
|Bid and performance related bonds (a)          |  | $         | 318 |  |              | $ | 400 | 
|Other bonds (b)                                |  |           | 39  |  |              |   | 35  | 
|                                              
|Total bid, performance related and other bonds |  | $         | 357 |  |              | $ | 435 | 
|                                              
|                                              
|                                              
|                                              
|                                              

|(a) |  | Net of restricted cash amounts of $184 as at March 31, 2003 and $195 as
at December 31, 2002
|--- |  | --------------------------------------------------------------------------------------------
|(b) |  | Net of restricted cash amounts of $22 as at March 31, 2003 and $19 as at
December 31, 2002  

Historically, we have not had to make material payments and we do not
anticipate that we will be required to make material payments under these types
of bonds.

The criteria under which bid, performance related and other bonds can
be obtained have changed due to declines in the economic and industry
environment and our current credit condition. In addition to the payment of fees, we have experienced
cash collateral requirements in connection with obtaining
new bid, performance related and other bonds. However, we do not
expect that the requirements and/or fees to obtain bid, performance
related and other bonds will have a material adverse effect on our ability to win
contracts from potential customers.

Our support facility with EDC provides support for certain of our obligations
under bid and performance related bonds and may reduce the requirement for us
to provide cash collateral to support these obligations. Although this
facility provides for up to $750 in support, only $300 is committed support for
these bonds. In addition, any bid or performance
related bonds with terms that extend beyond June 30, 2004, which is the expiry
date of this facility, are currently not eligible for the support provided by
this facility. Unless EDC agrees to an extension of the facility or agrees to
provide support in respect of any such bid or performance related bonds on a
case-by-case basis outside the scope of the facility, we may be required to
provide cash collateral to support these obligations. In addition to the
support facility with EDC, our existing security agreements permit us to secure
additional obligations under bid and performance related bonds with the assets
pledged under the security agreements and to provide cash collateral as
security for these types of bonds. See Available credit and support
facilities for additional information on this support facility and the
security agreements.

Third party debt agreements

In the normal course of business, we have guaranteed the debt of certain
customers. These third party debt agreements require us to make debt payments
throughout the term of the related debt instrument if the customer fails to
make a scheduled payment. Historically, we have not had to make material
payments and currently we do not anticipate that we will be required to make
material payments under these debt instruments. Our third party debt
agreements remain substantially unchanged from the amounts disclosed as at
December 31, 2002 in our Annual Report on Form 10-K filed with the Securities
and Exchange Commission.

Supply and network outsourcing contracts

We enter into supply contracts with customers for products and services, which
in some cases involve new, undeveloped technologies or requirements for us to
build and operate networks. We also enter into network outsourcing contracts
with customers to operate their networks. Some of these supply and network
outsourcing contracts contain delivery and installation timetables, performance
criteria and other contractual obligations. If we do not meet these
requirements, it could result in:



| |  |  | our having to pay substantial penalties or liquidated damages;               
| | - |  | -----------------------------------------------------------------------------
| |  |  | the termination of the related supply or network outsourcing contract; and/or
| |  |  | the reduction of shared revenues, in certain circumstances.                  

As is common in our industry, our supply and network outsourcing contracts are
highly customized to address each customers particular needs and concerns.
The nature of the triggering events and the amounts and timing of the penalties
associated with these contracts can vary significantly due to a variety of
complex, interrelated factors. We have not experienced material penalty
payments on our supply and network outsourcing contracts in any recent
reporting period.

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Certain of our key supply arrangements were negotiated prior to the current
industry and economic downturn. As a result of the extent and duration of this
downturn, in respect of one of these arrangements, based on our current revenue
levels, we will not meet the minimum volume levels contained in the contract.
As a result, we may be obligated to compensate the supplier for certain direct
costs. The amount of such direct costs cannot be reasonably estimated at this
time. The amount of any such compensation would be based on a variety of
complex, interrelated factors (including applicable factors that could mitigate
such direct costs). An obligation to pay such compensation could have a
material adverse effect on our business, results of operations, financial
condition and/or supply relationships.

Customer financing

Generally, customer financing arrangements may include financing in connection
with the sale of our products and services, as well as funding for non-product
costs associated with network installation and integration of our products and
services. We may also provide funding for working capital purposes and equity
financing.

The following table provides information related to our customer financing
commitments, excluding our discontinued operations, as at:

|                                  |  |           |      |   |              |   |       |  
|--------------------------------- |  | --------- | ---- | - | ------------ | - | ----- | -
|                                 
|                                  |  | March 31, |      |   | December 31,
|                                  |  | 2003      |      |   | 2002        
|                                 
|Drawn and outstanding  gross (a) |  | $         | 962  |   |              | $ | 1,091 |  
|Provisions for doubtful accounts  |  |           | (699 | ) |              |   | (799  | )
|                                 
|Drawn and outstanding  net       |  |           | 263  |   |              |   | 292   |  
|Undrawn commitments               |  |           | 649  |   |              |   | 801   |  
|                                 
|Total customer financing          |  | $         | 912  |   |              | $ | 1,093 |  
|                                 
|                                 
|                                 
|                                 
|                                 

|(a) |  | Included short-term and long-term amounts
|--- |  | -----------------------------------------

In the first quarter of 2003, our gross customer financing commitments and
related provisions each decreased by approximately $100 as a result of the
securitization of outstanding balances associated with two of our customers and
the write down of a third customer balance as a result of the customers
bankruptcy restructuring.

We currently have customer financing commitments and/or balances outstanding in
connection with the construction of new networks, including 3G wireless
networks. Although we may commit to provide customer financing to customers in
areas that are strategic to our core businesses, we remain focused on reducing
our overall customer financing exposures in accordance with any obligations
under our financing agreements. During the first quarter of 2003, we reduced
undrawn commitments by $152 reflecting commitment expiration, cancellations and
changing customer business plans. As of March 31, 2003, approximately $500 of
the $649 in undrawn commitments was not available for funding under the terms
of our financing agreements. In addition to being highly selective in
providing customer financing, we have programs in place to monitor and mitigate
customer credit risk, including performance milestones and other conditions of
funding. Management is focused on the strategic use of our customer financing
capacity and on reducing the amount of our existing and future customer
financing exposure.

We continue to regularly assess the levels of our customer financing provisions
based on a loan-by-loan review to evaluate whether they reflect current market
conditions. We review the ability of our customers to meet their repayment
obligations and determine our provisions accordingly. Any misinterpretation or
misunderstanding of these factors by us may result in losses in excess of our
provisions. These losses could have a material adverse effect on our business,
results of operations, financial condition and customer relationships.

Our ability to place customer financing with third party lenders has been
significantly reduced primarily due to:



| |  |  | reduced demand for telecommunications financings in capital and bank
markets as a result of network overcapacity, bankruptcies and financial
difficulties in the industry;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | our current credit condition;                                                                                                                                             
| |  |  | adverse changes in the credit quality of our customers; and                                                                                                               

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| |  |  | economic downturns in various countries.
| | - |  | ----------------------------------------

As a result, we are currently directly supporting most commitments and
outstanding balances and expect this to continue in the future as well. While
we will continue to seek to arrange for third party lenders to assume our
customer financing obligations, we expect to fund most customer financings in
the normal course of our business from working capital and conventional sources
of external financing. Commitments to extend future financing generally have
conditions for funding, fixed expiration or termination dates and specific
interest rates and purposes. Based on the terms of the existing agreements, we
expect that a substantial amount of these undrawn commitments will not be
funded in 2003. However, we cannot predict with certainty the extent to which
our customers will satisfy the applicable conditions for funding, and
subsequently request funding, prior to the termination date of the commitments.

Joint ventures/minority interests

On October 19, 2002, we entered into a number of put option and call option
agreements as well as a share exchange agreement with our partner in three
European joint ventures. If the options and share exchange are exercised, we
would be required to deliver to our joint venture partner net consideration of
approximately $114, consisting of approximately $42 in cash, and an in-kind
component of approximately $72, representing the return of a loan note
currently owed to us by an affiliate of our joint venture partner. The option
agreements and the share exchange agreement can be exercised between July 1,
2003 and December 31, 2003 subject to certain terms and conditions. If the
transactions are completed, we will acquire the minority interests in two of
these joint ventures and dispose of our minority interest in the third joint
venture.

Discontinued operations

As of March 31, 2003, the remaining accruals of the discontinued access
solutions operations totaled $66 and were related to future contractual
obligations and estimated liabilities during the planned period of disposition.
The remaining accruals are expected to be substantially drawn down by cash
payments over the period of disposition. During the first quarter of 2003, we
generated cash of approximately $264 on the disposition of various assets from
the access solutions operations.

For additional information related to our discontinued operations, see
Discontinued operations in note 12 of the accompanying unaudited consolidated
financial statements.

Sources of liquidity

Available credit facilities

We currently have $750 in available and undrawn credit facilities which expire
in April 2005. These credit facilities were entered into on April 12, 2000 by
us and Nortel Networks Inc. and permit borrowings for general corporate
purposes. As of March 31, 2003, there were no balances drawn under our
available credit facilities.

The $750 April 2000 five year credit facilities contain a financial covenant
requiring that our consolidated tangible net worth at any time be not less than
$1,888. As of March 31, 2003, we were in compliance with this covenant. We
continue to monitor our financial position in light of this covenant and if we
incur net losses or record additional charges relating to our restructuring
work plan, the accounting of our registered pension plans, the valuation of
deferred income tax assets or for other events, our consolidated tangible net
worth may be reduced below the $1,888 threshold. If we are unable to comply
with the consolidated tangible net worth covenant, we will be unable to access
the $750 April 2000 five year credit facilities.

Available support facilities

On February 14, 2003, we entered into an agreement with EDC regarding
arrangements to provide support, on a secured basis, of certain of our
performance related obligations arising out of normal course business
activities. This facility, which expires on June 30, 2004, provides for up to
$750 in support including $300 of committed revolving support for
performance bonds or similar instruments of which $95 was utilized as
at March 31, 2003. The remainder is uncommitted support for
performance bonds, receivables sales and/or securitizations of which
$65 was utilized as at March 31, 2003.

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The support facility with EDC does not materially restrict our ability to sell
any of our assets (subject to certain maximum amounts) or to purchase or
pre-pay any of our currently outstanding debt. EDC is not obligated to make
any support available unless certain customary conditions are satisfied and our
senior long-term debt rating by Moodys has not been downgraded to less than B3
and our debt rating by Standard & Poors has not been downgraded to less than
B. If we default on our obligations under the support facility
with EDC and EDC calls
upon the security provided under the security agreements in an amount exceeding
$100, we would also, as a result, be in default under our $750 April 2000 five
year credit facilities and our outstanding public debt.

Our obligations under the support facility with EDC are secured on an equal
and ratable basis under the existing security agreements entered into by us and various of
our subsidiaries that pledge substantially all of our assets in favor of
certain banks, including the banks under the $750 April 2000 five year credit
facilities and the holders of our public debt securities, the holders
of Nortel Networks Corporations
4.25% convertible senior notes. The security provided under the security agreements is comprised
of:



| |  |  | pledges of substantially all of our assets and those of most of our United States and Canadian subsidiaries;
| | - |  | ------------------------------------------------------------------------------------------------------------
| |  |  | share pledges in certain of our other subsidiaries; and                                                     
| |  |  | guarantees by certain of our wholly owned subsidiaries.                                                     

If our senior long-term debt rating by Moodys returns to Baa2 (with a stable
outlook) and our rating by Standard & Poors returns to BBB (with a stable
outlook), the security will be released in full. If both the $750 April 2000
five year credit facilities and the support facility with EDC are terminated or
expire, the security will also be released in full. We may provide EDC with
cash collateral (or any other alternative collateral acceptable to EDC), in an
amount equal to the total amount of our outstanding obligations and undrawn
commitments and expenses under this facility, in lieu of the security provided
under the security agreements.

For additional information relating to our outstanding public debt, the $750
April 2000 five year credit facilities and the support facility with EDC, see
Long-term debt, credit and support facilities in note 7 of the accompanying
unaudited consolidated financial statements. For additional financial
information related to those subsidiaries providing guarantees, see
Supplemental consolidating financial information in note 15 of the
accompanying unaudited consolidated financial statements. For information
relating to our debt ratings, see Credit ratings below. See Forward looking
statements for factors that may affect our ability to comply with covenants
and conditions in our credit and support facilities in the future.

Shelf registration statement and base shelf prospectus

In the second quarter of 2002, Nortel Networks Corporation and Nortel Networks
Limited filed a shelf registration statement with the United States Securities
and Exchange Commission and a base shelf prospectus with the applicable
securities regulatory authorities in Canada, to qualify for the potential sale
of up to $2,500 of various types of securities in the United States and/or
Canada. The qualifying securities include guaranteed debt securities of Nortel
Networks Limited. As of March 31, 2003, approximately $1,700 of the $2,500
available under the shelf registration statement and base shelf prospectus has
been utilized. Approximately $800 remains available for use.

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Credit ratings

|                                  |                             |  |    |                         |      |  |                    |  |  |  |  | 
|--------------------------------- | --------------------------- |  | -- | ----------------------- | ---- |  | ------------------ |  |  |  |  | 
|                                 
|                                  | Rating on long-term debt    |  |    |                         |      |  |                    |  | 
|                                  | issued or guaranteed by     |  |    | Rating on preferred     |      |  |                   
|                                  | Nortel Networks Limited/    |  |    | shares issued by        |      |  |                    | 
|Rating agency                     | Nortel Networks Corporation |  |    | Nortel Networks Limited |      |  | Last update       
|                                 
|Standard & Poors Ratings Service |                             |  | B  |                         | CCC  |  | September 18, 2002
|                                 
|Moodys Investor Services, Inc.   |                             |  | B3 |                         | Caa3 |  | November 1, 2002  
|                                 

The ratings remain on negative outlook by Moodys and Standard & Poors. There
can be no assurance that our credit ratings will not be lowered further or that
such ratings agencies will not issue adverse commentaries, potentially
resulting in higher financing costs and further reduced access to capital
markets or alternative financing arrangements. Our credit ratings may also
affect our ability, and the cost, to securitize receivables, obtain bid, performance related and other bonds, access the support facility with EDC
and/or enter into normal course derivative or hedging transactions.

Off-balance sheet arrangements, contractual obligations and contingent
liabilities and commitments

Off-balance sheet arrangements

We currently conduct certain receivable sales and lease financing transactions
through special purpose entities and are in the process of assessing the
structure of these transactions against the criteria set out in the Financial
Accounting Standards Board Interpretation No. 46  Consolidation of Variable
Interest Entities, or FIN 46.

Our receivable sales transactions are generally conducted either directly with
financial institutions or with multi-seller conduits. We do not expect that we
will be required to consolidate any of these entities or provide any of the
additional disclosures set out in FIN 46.

Certain lease financing transactions are structured through single transaction
special purpose entities that currently do not have sufficient equity at risk
as defined in FIN 46. In addition, we retain certain risks associated with
guaranteeing recovery of the unamortized principal
balance of debt which is expected to represent the majority of the risks
associated with the special purpose entities activities. The
amount of the guarantee will
be adjusted over time as the underlying debt matures. Therefore, we expect
that unless the existing arrangements are modified prior to July 1, 2003, we
will be required to consolidate the assets, liabilities and any non-controlling
interests of these special purpose entities effective July 1, 2003. The total
assets and total liabilities held by these entities at March 31, 2003 were each
approximately $176 and these amounts represent the collateral and maximum
exposure to loss, respectively, as a result of our involvement with these
entities.

Contractual obligations

Our contractual cash obligations for long-term debt, outsourcing contracts,
operating leases and unconditional purchase obligations remain substantially
unchanged from the amounts disclosed as at December 31, 2002 in our Annual
Report on Form 10-K filed with the Securities and Exchange Commission.

In the first quarter of 2003, we purchased $39 of our 6.125% Notes due February
15, 2006. Also in 2003, we plan to repay the remaining $164 of our 6.00% Notes
due September 1, 2003. In the first quarter of 2003, we also reduced our
unconditional purchase obligations by $24 through normal business related
activity.

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Contingent liabilities and commitments

Customer financing commitments

In certain instances, we are committed to provide future financing to certain
customers in connection with their purchases of our products and services. The
undrawn commitments were $649 at March 31, 2003 and $801 at December 31, 2002.
Commitments to extend future financing generally have conditions for funding,
fixed expiration or termination dates and specific interest rates and purposes.
Based on the terms of the existing agreements, we expect that a substantial
amount of these undrawn commitments will not be funded in 2003. However, we
cannot predict with certainty the extent to which our customers will satisfy
the applicable conditions for funding, and subsequently request funding, prior
to the termination date of the commitments.

Purchase commitments

Our purchase commitments remain substantially unchanged from the amounts
disclosed as at December 31, 2002 in our Annual Report on Form 10-K filed with
the Securities and Exchange Commission.

Joint ventures/minority interests

On October 19, 2002, we entered into a number of put option and call option
agreements as well as a share exchange agreement with our partner in three
European joint ventures. If the options and share exchange are exercised, we
would be required to deliver to our joint venture partner net consideration of
approximately $114, consisting of approximately $42 in cash, and an in-kind
component of approximately $72, representing the return of a loan note
currently owed to us by an affiliate of our joint venture partner. The option
agreements and the share exchange agreement can be exercised between July 1,
2003 and December 31, 2003, subject to certain terms and conditions. If the
transactions are completed, we will acquire the minority interests in two of
these joint ventures and dispose of our minority interest in the third joint
venture.

Other contingent liabilities and commitments

Through our normal course of business, we have also entered into other
indemnifications or guarantees that arise in various types of arrangements
including:



| |  |  | business sale agreements;                                         
| | - |  | ------------------------------------------------------------------
| |  |  | intellectual property indemnification obligations;                
| |  |  | lease agreements;                                                 
| |  |  | third party debt agreements;                                      
| |  |  | indemnification of lenders and agents under credit facilities; and
| |  |  | other indemnification agreements.                                 

Historically, we have not made any significant payments under any of these
indemnifications or guarantees. In certain cases, due to the nature of the
agreement, we have not been able to estimate our maximum potential loss or the
maximum potential loss has not been specified. However, for those agreements
where we have been able to make an estimate, the maximum amount that we would
be obliged to pay remains substantially unchanged from the amounts disclosed in
our Annual Report on Form 10-K for the year ended December 31, 2002 filed with
the Securities and Exchange Commission.

Legal proceedings

Nortel Networks Corporation and/or certain of its directors and officers have
been named as defendants in various class action lawsuits. We are unable to
determine the ultimate aggregate amount of monetary liability or financial
impact to us in these legal matters, which unless otherwise specified, seek
damages from the defendants of material or indeterminate amounts. We and
Nortel Networks Corporation are also defendants in various other suits, claims,
proceedings and
investigations which are in the normal course of business. We cannot determine
whether these matters will, individually or collectively, have a material
adverse effect on our business, results of operations and financial condition.
We, and any of our named directors and officers intend to vigorously defend
these actions, suits, claims, proceedings and investigations.

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For additional information related our legal proceedings, see Contingencies
in note 14 of the accompanying unaudited consolidated financial statements.

Forward looking statements

Certain statements in this Quarterly Report, contain words such as could,
expects, may, anticipates, believes, intends, estimates, plans,
envisions, and other similar language and are considered forward looking
statements. These statements are based on our current expectations, estimates,
forecasts and projections about the operating environment, economies and
markets in which we operate. In addition, other written or oral statements
which are considered forward looking may be made by us or others on our behalf.
These statements are subject to important risks, uncertainties and
assumptions, which are difficult to predict and the actual outcome may be
materially different. Some of the factors which could cause results or events
to differ from current expectations include, but are not limited to, the
factors described below. Unless required by applicable securities laws, we do
not have any intention or obligation to publicly update or revise any forward
looking statements, whether as a result of new information, future events or
otherwise.

We have restructured our business to respond to industry and market conditions.
The assumptions underlying our restructuring efforts may prove to be
inaccurate and we may have to restructure our business again in the future.

We have substantially completed our efforts to restructure our business to
realign resources and achieve desired cost savings. We have based our
restructuring efforts on certain assumptions regarding the cost structure of
our business and the nature, severity and duration of the industry downturn.
These assumptions may or may not be correct and as a result, we may determine
that further restructuring in the future will be needed. Our restructuring
efforts may not be sufficient for us to achieve ongoing profitability and meet
the changes in industry and market conditions. We must manage the potentially
higher growth areas of our business, as well as the non-core areas, in order
for us to achieve ongoing profitability.

While restructuring, we have made, and will continue to make, judgments as to
whether we should further reduce our workforce or exit, or dispose of, certain
businesses. These workforce reductions may impair our ability to achieve our
current or future business objectives. Costs incurred in connection with
restructuring efforts may be higher than estimated. Any decision by management
to further limit investment or exit, or dispose of, businesses may result in
the recording of additional charges. As a result, the costs actually incurred
in connection with the restructuring efforts may be higher than originally
planned and may not lead to the anticipated cost savings and a return to
ongoing profitability.

As part of our review of restructured businesses, we also look at the
recoverability of their tangible and intangible assets. Future market
conditions may trigger further write downs of these assets due to uncertainties
in:



| |  |  | the estimates and assumptions used in asset valuations, which are
based on our forecasts of future business performance; and                                                                  
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | accounting estimates relating to the useful life and recoverability
of the net book value of these assets, including goodwill, net deferred
taxes, pension assets and other intangible assets.

We will continue to review our restructuring work plan based on our ongoing
assessment of the industry adjustment and the business environment.

We may be materially and adversely affected by continued reductions in spending
by our customers.

A continued slowdown in capital spending by service providers and other
customers may affect our revenues more than we currently expect. Moreover, the
significant slowdown in capital spending by our customers, coupled with
existing economic and geopolitical uncertainties and the potential impact on
customer demand, has created uncertainty as to market demand. As a result,
revenues and operating results for a particular period can be difficult to
predict. In addition, there can be no certainty as to the severity or duration
of the current industry adjustment. Our revenues and operating results have
been and may continue to be materially and adversely affected by the continued
reductions in capital spending by our customers. If the reduction of capital
spending continues longer than we expect and we incur net losses as a result or
if we are required to
record additional charges relating to our restructuring work plan, the
valuation of deferred income tax assets or for other events, we may be unable
to comply with the financial covenant under our current credit facilities. As
well, we have focused on the larger customers in certain markets, which provide
a substantial portion of our revenues. A reduction or delay in

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business from
one or more of these customers, or a failure to achieve a significant market
share with these customers, could have a material adverse effect on our
business, results of operations and financial condition.

Our operating results have historically been subject to yearly and quarterly
fluctuations and are expected to continue to fluctuate.

Our operating results have historically been and are expected to continue to be
subject to quarterly and yearly fluctuations as a result of a number of
factors. These factors include:



| |  |  | our ability to successfully implement programs to stimulate customer
spending by anticipating and offering the kinds of products and services
customers will require in the future to increase the efficiency and
profitability of their networks;                                                                                                                                                                 
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | our ability to successfully complete programs on a timely basis to
reduce our cost structure, including fixed costs, to streamline our
operations and to reduce product costs;                                                                                                                                                                                                                                     
| |  |  | our ability to focus our business on what we believe to be
potentially higher growth, higher margin businesses and to dispose of or
exit non-core businesses;                                                                                                                                                                                                                                                      
| |  |  | increased price and product competition in the networking industry;                                                                                                                                                                                                                                                                                                                                                
| |  |  | the inherent uncertainties of using forecasts, estimates and
assumptions for asset valuations and in determining the amounts of
accrued liabilities and other items in our consolidated financial
statements;                                                                                                                                                                                                      
| |  |  | the impact of changes in global capital markets and interest rates on
our pension plan assets and obligations;                                                                                                                                                                                                                                                                                                     
| |  |  | our ability to implement our restructuring work plan without
negatively impacting our relationships with our customers, the delivery
of products based on new and developing technologies, the delivery of
high quality robust products at competitive prices, the maintenance of
technological leadership, the effectiveness of our internal processes
and organizations and the retention of qualified personnel;
| |  |  | fluctuations in our gross margins;                                                                                                                                                                                                                                                                                                                                                                                 
| |  |  | the development, introduction and market acceptance of new
technologies, and integrated networking solutions, as well as the
adoption of new networking standards;                                                                                                                                                                                                                                                 
| |  |  | variations in sales channels, product costs and the mix of products sold;                                                                                                                                                                                                                                                                                                                                          
| |  |  | the size and timing of customer orders and shipments;                                                                                                                                                                                                                                                                                                                                                              
| |  |  | our ability to continue to obtain customer performance bonds and contracts;                                                                                                                                                                                                                                                                                                                                        
| |  |  | our ability to maintain appropriate inventory levels;                                                                                                                                                                                                                                                                                                                                                              
| |  |  | the impact of acquired businesses and technologies;                                                                                                                                                                                                                                                                                                                                                                
| |  |  | the impact of our product development schedules, product quality
variances, manufacturing capacity and lead times required to produce our
products; and                                                                                                                                                                                                                                                            
| |  |  | the impact of higher insurance premiums and deductibles and greater
limitations on insurance coverage.                                                                                                                                                                                                                                                                                                             

Our decision to adopt fair value accounting for employee stock options on a
prospective basis commencing January 1, 2003 will cause us to record an expense
over the stock option vesting period, based on the fair value at the date the
options are granted, and could have a significant negative effect on our
reported results.

Additionally, we are required to perform goodwill impairment tests on an annual
basis and between annual tests in certain circumstances, to value our deferred
tax assets and to accrue unfunded pension liabilities, each of which may result
in a negative effect on our reported results.

We enter into agreements that may require us to make certain indemnification
payments to third parties in the event of certain changes in an underlying
economic characteristic related to assets, liabilities or equity securities of
such third parties. We have historically not made any significant
indemnification payments under such agreements. The occurrence of events that
may cause us to become liable to make an indemnification payment is not within
our control and an obligation to make a significant indemnification payment
under such agreements could have a significant negative effect on our reported
results.

Global economic conditions affecting the industry, as well other trends and
factors affecting the industry, are beyond our control and may result in
reduced demand and pricing pressure on our products.

There are trends and factors affecting the industry that are beyond our control
and may affect our operations. Such trends and factors include:

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| |  |  | adverse changes in the public and private equity and debt markets and
our ability, as well as the ability of our customers and suppliers, to
obtain financing or to fund working capital and capital expenditures;                                                                                                            
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | adverse changes in our current credit condition or the credit quality of our customers and suppliers;                                                                                                                                                                                                                         
| |  |  | adverse changes in the market conditions in our industry and the specific markets for our products;                                                                                                                                                                                                                           
| |  |  | the trend towards the sale of integrated networking solutions;                                                                                                                                                                                                                                                                
| |  |  | visibility to, and the actual size and timing of, capital expenditures by our customers;                                                                                                                                                                                                                                      
| |  |  | inventory practices, including the timing of product and service deployment, of our customers;                                                                                                                                                                                                                                
| |  |  | the amount of network capacity and the network capacity utilization
rates of our customers, and the amount of sharing and/or acquisition of
new and/or existing network capacity by our customers;                                                                                                                            
| |  |  | policies of our customers regarding utilization of single or multiple
vendors for the products they purchase;                                                                                                                                                                                                                 
| |  |  | the overall trend toward industry consolidation and rationalization
among our customers, competitors and suppliers;                                                                                                                                                                                                           
| |  |  | conditions in the broader market for communications products,
including data networking products and computerized information access
equipment and services;                                                                                                                                                                  
| |  |  | changes in legislation or accounting rules and governmental
regulation or intervention affecting communications or data networking;                                                                                                                                                                                           
| |  |  | computer viruses, break-ins and similar disruptions from unauthorized
tampering with our computer systems; and                                                                                                                                                                                                                
| |  |  | acts of war or terrorism or transmission of contagious
diseases, such as Severe Acute Respiratory Syndrome, or SARS, in the
Asia Pacific region, that could lead to disruptions in general global
economic activity, changes in logistics and security arrangements and
reduced customer demand for our products and services.

Economic conditions affecting the industry, which affect market conditions in
the telecommunications and networking industry, in the United States, EMEA ,
Canada and globally, affect our business. Reduced capital spending and/or
negative economic conditions in these and/or other areas of the world have
resulted in, and could continue to result in, reduced demand for or increased
pricing pressures on our products.

Our gross margins may be negatively affected, which in turn would negatively
affect our operating results.

Our gross margins may be negatively affected as a result of a number of
factors, including:



| |  |  | increased price competition;                                                            
| | - |  | ----------------------------------------------------------------------------------------
| |  |  | excess capacity or excess fixed assets;                                                 
| |  |  | customer and contract settlement costs;                                                 
| |  |  | higher product, material or labour costs;                                               
| |  |  | increased inventory provisions or contract and customer settlement costs;               
| |  |  | warranty costs;                                                                         
| |  |  | obsolescence charges;                                                                   
| |  |  | loss of cost savings on future inventory purchases as a result of high inventory levels;
| |  |  | introduction of new products and costs of entering new markets;                         
| |  |  | increased levels of customer services;                                                  
| |  |  | changes in distribution channels;                                                       
| |  |  | changes in product and geographic mix; and                                              
| |  |  | accruals for employee return to profitability bonus or other incentive bonuses.         

Lower than expected gross margins would negatively affect our operating
results.

We may not be able to attract or retain the specialized technical and
managerial personnel necessary to achieve our business objectives.

Competition for certain key positions and specialized technical personnel in
the high-technology industry remains strong, despite current economic
conditions. We believe that our future success depends in part on our
continued ability to hire, assimilate in a timely manner, and retain qualified
personnel, particularly in key senior management positions and in our key areas
of potential growth. An important factor in attracting and retaining qualified
employees is our ability to provide
employees with the opportunity to participate in the potential growth of our
business through programs such as stock option plans and employee investment
plans. The scope of these programs for employees and the value of these
opportunities have been adversely affected by the volatility or negative
performance of the market price for Nortel Networks Corporations

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common shares
(including the possible consolidation of Nortel Networks Corporations common
shares). We may also find it more difficult to attract or retain qualified
employees because of our recent significant workforce reductions and business
performance which has negatively impacted our level of incentive programs and
incentive compensation plans. In addition, if we have not properly sized our
workforce and retained those employees with the appropriate skills, our ability
to compete effectively may be adversely affected. We are also more dependent
on those employees we have retained, as many have taken on increased
responsibilities due to the workforce reductions. If we are not successful in
attracting, recruiting or retaining qualified employees, including members of
senior management, we may not have the necessary personnel to effectively
compete in the highly dynamic, specialized and volatile industry in which we
operate or to achieve our business objectives.

Future cash flow fluctuations may affect our ability to fund our working
capital requirements or achieve our business objectives in a timely manner.

Our working capital requirements and cash flows historically have been, and are
expected to continue to be, subject to quarterly and yearly fluctuations,
depending on such factors as timing and size of capital expenditures, levels of
sales, timing of deliveries and collection of receivables, inventory levels,
customer payment terms, customer financing obligations and supplier terms and
conditions. In addition, due to the current general economic and industry
environment, and our current credit condition, an increased portion of our cash
and cash equivalents may be restricted as cash collateral for customer
performance bonds and contracts, notwithstanding our support facility with EDC.
Our $750 April 2000 five year credit facilities are our only remaining credit
facilities. We continue to have ongoing discussions with our banks and other
financial institutions to explore additional financing opportunities and credit
and support arrangements. As we continue to assess our overall liquidity and
business needs as well as our expected financial performance, we may elect or
it may be necessary to reduce or terminate our $750 April 2000 five year credit
facilities prior to their expiries. We believe our cash on hand will be
sufficient to fund our current business model, manage our investments and meet
our customer commitments for at least the next 12 months. However, a greater
than expected slow down in capital spending by service providers and other
customers may require us to adjust our current business model. As a result,
our revenues and cash flows may be materially lower than we expect and we may
be required to further reduce our capital expenditures and investments or take
other measures in order to meet our cash requirements. We may seek additional
funds from liquidity-generating transactions and other conventional sources of
external financing (which may include a variety of debt, convertible debt
and/or equity financings). We cannot provide any assurance that our net cash
requirements will be as we currently expect, that we will continue to have
access to the $750 April 2000 five year credit facilities or the support
facility with EDC when and as needed, or that liquidity-generating
transactions or financings will be available to us on acceptable terms or at
all. Our inability to manage cash flow fluctuations resulting from the above
factors and the potential reduction or termination of our $750 April 2000 five
year credit facilities or the support facility with EDC could have a material
adverse effect on our ability to fund our working capital requirements from
operating cash flows and other sources of liquidity or to achieve our business
objectives in a timely manner.

Our business may be materially and adversely affected by our high level of
debt.

In order to finance our business we have incurred, and have credit facilities
allowing for drawdowns of, and have a shelf registration statement and a base
shelf prospectus for potential offerings of, significant levels of debt
compared to historical levels, and we may need to secure additional sources of
funding, which may include debt or convertible debt financing, in the future.
A high level of debt, arduous or restrictive terms and conditions relating to
accessing certain sources of funding, failure to meet the financial and/or
other covenants in our credit and/or support facilities and any significant
reduction in, or access to, such facilities, poor business performance or lower
than expected cash inflows could have adverse consequences on our ability to
fund the operation of our business.

Other effects of a high level of debt include the following:



| |  |  | we may have difficulty borrowing money in the future or accessing
other sources of funding;                                                                                                                                     
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | we may need to use a large portion of our cash flow from operations
to pay principal and interest on our indebtedness, which would reduce
the amount of cash available to finance our operations and other
business activities; 
| |  |  | a high debt level, arduous or restrictive terms and conditions, or
lower than expected cash flows would make us more vulnerable to economic
downturns and adverse developments in our business; and                             
| |  |  | if operating cash flows are not sufficient to meet our operating
expenses, capital expenditures and debt service requirements as they
become due, we may be required, in order to meet our debt service
obligations, to delay or

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| |  |  | reduce capital expenditures or the introduction
of new products, sell assets and/or forego business opportunities
including acquisitions, research and development projects or product
design enhancements.
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our $750 April 2000 five year credit facilities contain a financial covenant.
If we are unable to comply with this covenant, it will adversely affect our
ability to access these credit facilities.

Our $750 April 2000 five year credit facilities include a financial covenant
which requires that our consolidated tangible net worth at any time be not less
than $1,888. We continue to monitor our financial position in light of this
covenant and we expect that if we incur net losses or record additional charges
relating to our restructuring work plan, the accounting of our registered
pension plans, the valuation of deferred income tax assets or for other events,
our consolidated tangible net worth may be reduced below the $1,888 threshold.
If we are unable to comply with this covenant, we will be unable to access
these credit facilities.

An increased portion of our cash and cash equivalents may be restricted as cash
collateral if we are unable to conclude satisfactory arrangements for
alternative support for certain obligations arising out of our normal course
business activities.

Our support facility with EDC may not provide all the support we require in
respect of certain of our obligations arising out of our normal course of
business activities. In particular, although this facility provides for up to
$750 in support, only $300 is committed support for performance bonds. In
addition, bid and performance related bonds with terms that extend beyond June
30, 2004, which is the expiry date of this facility, are currently not eligible
for the support provided by this facility. Unless EDC agrees to an extension
of the facility or agrees to provide support outside the scope of the facility,
we may be required to provide cash collateral to support these obligations. We
cannot provide any assurance that we will reach an agreement with EDC on these
matters. We are also in discussions with banks and financial institutions
regarding arrangements, in addition to the support facility with EDC, that
would provide for additional support, possibly on a secured basis, of these
obligations, which include letters of credit, letters of guarantee, indemnity
arrangements, performance bonds, surety bonds, receivables purchases,
securitizations and similar instruments and arrangements. We cannot provide
any assurance that such discussions will result in satisfactory arrangements.
If we are unable to successfully conclude these arrangements and do not have
access to sufficient support for such obligations under the support facility
with EDC, an increased portion of our cash and cash equivalents may be
restricted as cash collateral provided as security for these obligations, which
could adversely affect our ability to support some of our normal course
business activities and our ability to borrow in the future.

Changes in respect of our public debt ratings or current credit condition may
materially and adversely affect the availability, the cost and the terms and
conditions of our debt and alternative financing arrangements.

Certain of our outstanding debt instruments are publicly rated by independent
rating agencies, which ratings are below investment grade. These public debt
ratings and our current credit condition affect our ability to raise debt, our
access to the commercial paper market (which is currently closed to us), our
ability to engage in alternative financing arrangements, our ability to engage
in normal course derivative or hedging transactions and our ability to obtain
customer performance bonds and contracts. These public debt ratings have also
caused the security that we granted to certain banks and holders of our
outstanding public debt under our existing security agreements to become
effective. This security, which consists of pledges of substantially all of
our assets, will continue to apply to our obligations under the $750 April 2000
five year credit facilities, the support facility with EDC and our outstanding
public debt, unless such credit facilities are terminated or expire, and such
support facility expires or alternative collateral is provided, or such public
debt ratings return to investment grade (as specified in the credit facilities)
or higher. The continued existence of such security arrangements may adversely
affect our ability to incur additional debt or secure alternative financing
arrangements. In addition, EDC is not obligated to make any support available
unless certain customary conditions are satisfied, and our senior long-term
debt rating by Moodys has not been downgraded to less than B3 and that our
debt rating by S&P has not been downgraded to less than B.

Our current credit condition requires
us, in addition to the payment of fees, to also post cash
collateral to secure certain bid, performance related and other bonds and may
also negatively affect the cost to us and terms and conditions of debt and
alternative financing arrangements. Additionally, any negative developments
regarding our cash flow, public debt ratings,
current credit condition and/or our incurring significant levels of debt, or
our failure to meet certain covenants under our credit and/or support
facilities, could cause us to lose access to and/or cause a default under such
facilities and/or adversely affect further the cost and terms and conditions of
our debt and alternative financing arrangements.

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We have risks related to our defined benefit plans.

We currently maintain various defined benefit plans in North America and the
United Kingdom which cover various categories of employees and retirees. Our
obligations to make contributions to fund benefit obligations under these plans
are based on actuarial valuations, which themselves are based on certain
assumptions about the long-term operation of the plans, including employee
turnover and retirement rates, the performance of the financial markets and
interest rates. If the actual operation of the plans differs from the
assumptions, additional contributions by us may be required. The equity
markets can be, and recently have been, very volatile, and therefore our
estimate of future contribution requirements can change significantly in a
short period of time. Similarly, changes in interest rates can impact our
contribution requirements. In a low interest rate environment, the likelihood
of required contributions in the future increases. If we are required to make
significant contributions to fund the defined benefit plans, our reported
results could be materially and adversely affected and our cash flow available
for other uses may be significantly reduced.

If market conditions deteriorate further or future results of operations are
less than expected, additional valuation allowances may be required for all or
a portion of our deferred tax assets.

We currently have deferred tax assets, which may be used to reduce taxable
income in the future. We assess the realization of these deferred tax assets
quarterly, and if we determine that it is more likely than not that some
portion of these assets will not be realized, an income tax valuation allowance
is recorded. If market conditions deteriorate further or future results of
operations are less than expected, future assessments may result in a
determination that it is more likely than not that some or all of the net
deferred tax assets are not realizable. As a result, we may need to establish
additional tax valuation allowances for all or a portion of the net deferred
tax assets, which may have a material adverse effect on our business, results
of operations and financial condition.

Our performance may be materially and adversely affected if our expectations
regarding market demand for particular products prove to be wrong.

We expect that data communications traffic will grow at a faster rate than the
growth expected for voice traffic and that the use of the Internet will
continue to increase. We expect the growth of data traffic and the use of the
Internet will significantly impact traditional voice networks, both wireline
and wireless. We believe that this will create market discontinuities. By
market discontinuities, we mean opportunities for new technologies,
applications, products and services that enable the secure, rapid and efficient
transport of large volumes of information over networks and allow service
providers and carriers to increase revenues and improve operating results.
Market discontinuities will also make traditional voice network products and
services less effective as they were not designed for data traffic. We believe
that these market discontinuities in turn will lead to the convergence of data
and voice through upgrades of traditional voice networks to transport large
volumes of data traffic or through the construction of new networks designed to
transport both voice and data traffic. Either approach would require
significant capital expenditures by service providers. We also believe that
such developments will give rise to the demand for Internet Protocol, or IP,
optimized networking solutions, and third generation, or 3G, wireless networks.
IP is the predominant method by which data is sent from one
computer to another on the Internet  a data message is divided into smaller
packets which contain both the senders unique IP address and the receivers
unique IP address, and each packet is sent, potentially by different routes and
as independent units, across the Internet. There is no continuing connection
between the end points which are communicating versus traditional telephone
communications which involve establishing a fixed circuit that is maintained
for the duration of the voice or data communications call. 3G wireless
networks are an evolution of communications networks from second generation
wireless networks for voice and low speed data communications that are based on
circuit switching  when a call is dialed, a circuit is established between
the mobile handset and the third party, and the connection lasts for the
duration of the call. By comparison, 3G networks allow devices to be always
on because the networks are packet-based. We expect 3G wireless networks to
include such features as voice, high speed data communications and high
bandwidth multimedia capabilities, and usability on a variety of different
communications devices, such as cellular telephones and pagers, with the user
having accessibility anywhere and at any time to these features.

We cannot be sure what the rate of such convergence of voice and data networks
will be, due to the dynamic and rapidly evolving nature of the communications
business, the technology involved and the availability of capital.
Consequently,
market discontinuities and the resulting demand for IP-optimized networking
solutions or 3G wireless networks may not materialize. Alternatively, the pace
of that development may be slower than currently anticipated. It may also be
the case that the market may develop in an unforeseen direction. Certain
events, including the commercial availability and actual implementation of new
technologies, including 3G networks, or the evolution of other technologies,
may occur which would

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affect the extent or timing of anticipated market demand,
or increase demand for products based on other technologies, or reduce the
demand for IP-optimized networking solutions or 3G wireless networks, which in
turn may reduce purchases of our networking solutions by our customers, require
increased expenditures to develop and market different technologies, or provide
market opportunities for our competitors. Our performance may also be
materially and adversely affected by a lack of growth in the rate of data
traffic, a reduction in the use of the Internet or a reduction in the demand
for IP-optimized networking solutions or 3G wireless networks in the future.

We have made, and may continue to make, strategic acquisitions in order to
enhance our business. 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.

In the past, we acquired companies to enhance the expansion of our business and
products. We may consider selective opportunistic acquisitions of companies or
businesses with resources and product or service offerings capable of providing
us with additional product and/or market strengths to help fulfill our vision
of transforming how the world communicates and exchanges information.
Acquisitions involve significant risks and uncertainties. These risks and
uncertainties include:



| |  |  | the risk that the industry may develop in a different direction than
anticipated and that the technologies we acquire do not prove to be
those we need to be successful in the industry;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | the risk that future valuations of acquired businesses may decrease
from the market price we paid for these acquisitions;                                                               
| |  |  | the generation of insufficient revenues by acquired businesses to
offset increased operating expenses associated with these acquisitions;                                               
| |  |  | the potential difficulties in completing in-process research and
development projects and delivering high quality products to our
customers;                                            
| |  |  | the potential difficulties in integrating new products, businesses
and operations in an efficient and effective manner;                                                                 
| |  |  | the risk that our customers or customers of the acquired businesses
may defer purchase decisions as they evaluate the impact of the
acquisitions on our future product strategy;        
| |  |  | the potential loss of key employees of the acquired businesses;                                                                                                                         
| |  |  | the risk that acquired businesses will divert the attention of our
senior management from the operation of our business;                                                                
| |  |  | the risks of entering new markets in which we have limited experience
and where competitors may have a stronger market presence; and                                                    
| |  |  | potential assumption of liabilities.                                                                                                                                                    

Our inability to successfully operate and integrate newly-acquired businesses
appropriately, effectively and in a timely manner could have a material adverse
effect on our ability to take advantage of further growth in demand for
IP-optimized network solutions and other advances in technology, as well as on
our revenues, gross margins and expenses.

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.

The markets for our products are characterized by rapidly changing
technologies, evolving industry standards, frequent new product introductions
and short product life cycles. We expect our success to depend, in substantial
part, on the timely and successful introduction of high quality, new products
and upgrades, as well as cost reductions on current products to address the
operational speed, bandwidth, efficiency and cost requirements of our
customers. Our success will also depend on our ability to comply with emerging
industry standards, to operate with products of other suppliers, to address
emerging market trends, to provide our customers with new revenue-generating
opportunities and to compete with technological and product developments
carried out by others. The development of new, technologically advanced
products, including IP-optimized networking solutions and 3G wireless networks,
is a complex and uncertain process requiring high levels of innovation, as well
as the accurate anticipation of technological and market trends. Investments
in such development may result in expenses growing at a faster rate than
revenues, particularly since the initial investment to bring a product to
market may be
high. We may not be successful in targeting new market opportunities, in
developing and commercializing new products in a timely manner or in achieving
market acceptance for our new products.

The success of new or enhanced products, including IP-optimized networking
solutions and 3G wireless networks, depends on a number of other factors,
including the timely introduction of such products, market acceptance of new
technologies and

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industry standards, the quality and robustness of new or
enhanced products, competing product offerings, the pricing and marketing of
such products and the availability of funding for such networks. Products and
technologies developed by our competitors may render our products obsolete.
Hackers may attempt to disrupt or exploit our customers use of our
technologies. If we fail to respond in a timely and effective manner to
unanticipated changes in one or more of the technologies affecting
telecommunications and data networking or our new products or product
enhancements fail to achieve market acceptance, our ability to compete
effectively in our industry, and our sales, market share and customer
relationships could be materially and adversely affected.

In addition, unanticipated changes in market demand for products based on a
specific technology, particularly lower than anticipated, or delays in, demand
for IP-optimized networking solutions, particularly long-haul and metro optical
networking solutions, or 3G wireless networks, could have a material adverse
effect on our business, results of operations and financial condition if we
fail to respond to such changes in a timely and effective manner.

We face significant competition and may not be able to maintain our market
share and may suffer from competitive pricing practices.

We operate in a highly volatile industry that is characterized by industry
rationalization and consolidation, vigorous competition for market share and
rapid technological development. Competition is heightened in periods of slow
overall market growth. These factors could result in aggressive pricing
practices and growing competition from smaller niche companies, established
competitors, as well as well-capitalized computer systems and communications
companies, which, in turn, could have a material adverse effect on our gross
margins.

Our major competitors in Wireless Networks have traditionally included
Telefonaktiebolagat LM Ericsson, Lucent Technologies Inc., Motorola, Inc.,
Siemens Aktiengesellschaft and Nokia Corporation. More recently, Samsung
Electronics Co., Ltd. and Huawei Technologies Co., Ltd. have emerged as
competitors. Our principal competitors in the sale of our Enterprise Networks
solutions to enterprises are Cisco Systems, Inc., Avaya Inc., Alcatel S.A., and
Siemens. We also compete with smaller companies that address specific niches,
such as Foundry Networks, Inc., Extreme Networks, Inc., Enteresys Networks,
Inc., 3Com Corporation and Genesys Telecommunications Laboratories, Inc. Our
principal competitors in the sale of our Wireline Networks products to service
providers are large communications companies such as Cisco, Lucent, Alcatel and
Siemens. In addition, we compete with smaller companies that address specific
niches within this market, such as Sonus Systems Limited, BroadSoft, Inc.,
Taqua Inc., Redback Networks Inc., Equipe Communications Corporation, Laurel
Networks, Inc. and WaveSmith Networks, Inc. Certain competitors are also
strong on a regional basis, such as ZTE Corporation and Huawei. Our major
competitors in Optical Networks include Alcatel, Lucent, Siemens, Marconi plc,
Cisco, Huawei, NEC Corporation, Ciena Corporation and ADVA International Inc.
Since some of the markets in which we compete are characterized by the
potential for rapid growth and, in certain cases, low barriers to entry and
rapid technological changes, smaller, specialized companies and start-up
ventures are now or may become principal competitors in the future. We may
also face competition from the resale of used telecommunications equipment,
including our own on occasion, by failed, downsized or consolidated high
technology enterprises and telecommunications service providers. In addition,
one way to maximize market growth, enhance existing products and introduce new
products is through acquisitions of companies, where advisable. Certain of our
competitors may enter into additional business combinations, to accelerate
product development, or to engage in aggressive price reductions or other
competitive practices, creating even more powerful or aggressive competitors.

We expect that we will face additional competition from existing competitors
and from a number of companies that have entered or may enter our existing and
future markets. Some of our current and potential competitors have greater
marketing, technical and financial resources, including access to capital
markets and/or the ability to provide customer financing in connection with the
sale of products. Many of our current and potential competitors have also
established, or may in the future establish, relationships with our current and
potential customers. Other competitive factors include the ability to provide
new technologies and products, end-to-end networking solutions, and new product
features, such as security, as well as conformance to industry standards.
Increased competition could result in price reductions, negatively affecting
our operating results, reducing profit margins and potentially leading to a
loss of market share.

We face certain barriers in our efforts to expand internationally.

We intend to continue to pursue international and emerging market growth
opportunities. In many international markets, long-standing relationships
between potential customers and their local suppliers and protective
regulations, including local content requirements and type approvals, create
barriers to entry. In addition, pursuing international opportunities may

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require significant investments for an extended period before we realize
returns on such investments, if any, and such investments may result in
expenses growing at a faster rate than revenues. Furthermore, such projects
and investments could be adversely affected by:



| |  |  | reversals or delays in the opening of foreign markets to new competitors;                                
| | - |  | ---------------------------------------------------------------------------------------------------------
| |  |  | trade protection measures;                                                                               
| |  |  | exchange controls;                                                                                       
| |  |  | currency fluctuations;                                                                                   
| |  |  | investment policies;                                                                                     
| |  |  | restrictions on repatriation of cash;                                                                    
| |  |  | nationalization of local industry;                                                                       
| |  |  | economic, social and political risks;                                                                    
| |  |  | taxation;                                                                                                
| |  |  | interest rates;                                                                                          
| |  |  | challenges in staffing and managing international opportunities;                                         
| |  |  | other factors, depending on the country involved; and                                                    
| |  |  | acts of war or terrorism or transmission of contagious
diseases, such as SARS in the Asia Pacific region.

Difficulties in foreign financial markets and economies and of foreign
financial institutions, particularly in emerging markets, could adversely
affect demand from customers in the affected countries. An inability to
maintain or expand our business in international and emerging markets could
have a material adverse effect on our business, results of operations and
financial condition.

Fluctuating foreign currencies may negatively impact our business, results of
operations and financial condition.

As an increasing proportion of our business may be denominated in currencies
other than United States dollars, fluctuations in foreign currencies may have
an impact on our business, results of operations, and financial condition. Our
primary currency exposures are to Canadian dollars, United Kingdom pounds and
the Euro. These exposures may change over time as we change the geographic mix
of our global business and as our business practices evolve. For instance, if
we increase our presence in emerging markets, we may see an increase in our
exposure to such emerging market currencies, such as, for example, the Chinese
Renminbi. These currencies may be affected by internal factors, and external
developments in other countries, all of which can have an adverse impact on a
countrys currency. Also, availability to enter into normal course derivative
or hedging transactions in the future may be impacted by our current credit
condition. We cannot predict whether foreign exchange losses will be incurred
in the future, and significant foreign exchange fluctuations may have a
material adverse effect on our results of operations.

We may become involved in disputes regarding intellectual property rights that
could materially and adversely affect our business if we do not prevail.

Our industry is subject to uncertainty over adoption of industry standards and
protection of intellectual property rights. Our success is dependent on our
proprietary technology, which we rely on patent, copyright, trademark and trade
secret laws to protect. While our business is global in nature, the level of
protection of our proprietary technology provided by such laws varies by
country. Our issued patents may be challenged, invalidated or circumvented,
and our rights under issued patents may not provide us with competitive
advantages. Patents may not be issued from pending applications, and claims in
patents issued in the future may not be sufficiently broad to protect our
proprietary technology. In addition, claims of intellectual property
infringement or trade secret misappropriation may be asserted against us or our
customers in connection with their use of our products and the outcome of any
such claims are uncertain. A failure by us to react to changing industry
standards, the lack of broadly-accepted industry standards, successful claims
of intellectual property infringement or other intellectual property claims
against us or our customers, or a failure by us to protect our proprietary
technology, could have a
material adverse effect on our business, results of operations and financial
condition. In addition, if others infringe on our intellectual property
rights, we may not be able to successfully contest such challenges.

Rationalization and consolidation in the industry may cause us to experience a
loss of customers and increased competition.

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The industry has experienced the consolidation and rationalization of industry
participants and this trend may continue. There have been adverse changes in
the public and private equity and debt markets for industry participants which
have affected their ability to obtain financing or to fund capital
expenditures. Some operators have experienced financial difficulty and have,
or may, file for bankruptcy protection or be acquired by other operators.
Other operators may merge and we and one or more of our competitors may each
supply products to the companies that have merged or will merge. This
rationalization and/or consolidation could result in our dependence on a
smaller number of customers, purchasing decision delays by the merged companies
and/or our playing a lesser role, or no longer playing a role, in the supply of
communications products to the merged companies. This rationalization and/or
consolidation could also cause increased competition among our customers and
pressure on the pricing of their products and services, which could cause
further financial difficulties for our customers. A rationalization of
industry participants could also increase the supply of used communications
products for resale by affected industry participants, resulting in increased
competition and pressure on the pricing for our new products. In addition,
telecommunications equipment suppliers may enter into business combinations, or
may be acquired by or sell a substantial portion of their assets to other
competitors, resulting in accelerated product development, increased financial
strength, or a broader base of customers, creating even more powerful or
aggressive competitors. We may also see rationalization among
equipment/component suppliers. The business failures of operators, competitors
or suppliers may cause uncertainty among investors and in the industry
generally.

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.

There are currently few domestic or international laws or regulations that
apply directly to access to or commerce on the Internet. We could be
materially and adversely affected by regulation of the Internet in any country
where we operate in respect of such technologies as voice over the Internet,
encryption technology and access charges for Internet service providers. We
could also be materially and adversely affected by increased competition, or by
reduced capital spending by our customers, as a result of the change in the
regulation of the industry. In particular, on February 20, 2003, the United
States Federal Communications Commission, or the FCC, announced a decision in
its trienniel review proceeding of the rules regarding unbundled network
elements, or UNEs. The text of the FCCs order and reasons for the decision
has not yet been released. Although the decision may impact the business
decisions of our United States based service provider customers, the extent of
that impact has not been determined. If a jurisdiction in which we operate
adopts measures which affect the regulation of the Internet and/or other
aspects of the industry, we could experience both decreased demand for our
products and increased costs of selling such products. Changes in laws or
regulations governing the Internet, Internet commerce and/or other aspects of
the industry could have a material adverse effect on our business, results of
operations and financial condition.

The current downturn in the economy has increased, and could continue to
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.

The competitive environment in which we operate has required us in the past to
provide significant amounts of medium-term and long-term customer financing.
Customer financing arrangements may include financing in connection with the
sale of our products and services, funding for certain non-product and service
costs associated with network installation and integration of our products and
services, financing for working capital and equity financing. While we are
seeking to reduce our customer financing exposure, we expect we may continue in
the future to provide customer financing to customers in areas that are
strategic to our core business activity. If we do, we may be required to
directly hold a significantly greater amount of such financings than in the
past, when we were able to place a large amount of our customer financing
obligations with third party lenders.

We expect to continue to hold most current and future customer financing
obligations for longer periods prior to any possible placement with third-party
lenders, due to, among other factors, recent economic uncertainty in various
countries, adverse capital market conditions, our current credit condition,
adverse changes in the credit quality of our customers and reduced demand for
telecommunications financing in capital and bank markets. In addition, risks
generally associated with customer
financing, including the risks associated with new technologies, new network
construction, market demand and competition, customer business plan viability
and funding risks, may require us to hold certain customer financing
obligations over a longer term. We may not be able to place any of our current
or future customer financing obligations with third-party lenders on acceptable
terms.

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Certain customers have been experiencing financial difficulties and have failed
to meet their financial obligations. As a result, we have incurred charges for
increased provision related to certain trade and customer financed receivables.
If there are further increases in the failure of our customers to meet their
customer financing and receivables obligations to us or if the assumptions
underlying the amount of provisions we have taken with respect to customer
financing and receivables obligations do not reflect actual future financial
conditions and customer payment levels, we could incur losses in excess of our
provisions, which could have a material adverse effect on our cash flow and
operating results.

Negative developments associated with our supply and network outsourcing
contracts and contract manufacturing agreements may materially and adversely
affect our business, results of operations, financial condition and supply
relationships.

We have entered into supply contracts with customers to provide products and
services, which in some cases involve new technologies currently being
developed, or which we have not yet commercially deployed, or which require us
to build and operate networks. We have also entered into network outsourcing
contracts with customers to operate their networks. Some of these supply and
network outsourcing contracts contain delivery and installation timetables,
performance criteria and other contractual obligations which, if not met, could
result in our having to pay substantial penalties or liquidated damages, the
termination of the related supply or network outsourcing contract, and/or the
reduction of shared revenues, in certain circumstances. Unexpected
developments in these supply and outsourcing contracts could have a material
adverse effect on our revenues, cash flows and relationships with our
customers.

Our ability to meet customer demand is, in part, dependent on us obtaining
timely and adequate component parts and products from suppliers, contract
manufacturers, and internal manufacturing capacity. As part of the
transformation of our supply chain from a vertically integrated manufacturing
model to a virtually integrated model, we have outsourced a substantial portion
of our manufacturing capacity to contract manufacturers. We work closely with
our suppliers and contract manufacturers to address quality issues and to meet
increases in customer demand, when needed, and we also manage our internal
manufacturing capacity, quality, and inventory levels as required. However, we
may encounter shortages of quality components and/or products in the future.
In addition, our component suppliers and contract manufacturers have
experienced, and may continue to experience, a consolidation in the industry
and financial difficulties, both of which may result in fewer sources of
components or products and greater exposure to the financial stability of our
suppliers. A reduction or interruption in component supply or external
manufacturing capacity, a significant increase in the price of one or more
components, or excessive inventory levels could materially and negatively
affect our gross margins and our operating results and could materially damage
customer relationships.

Further, certain of our key supply arrangements were negotiated prior to the
current industry and economic downturn. As a result of the extent and duration
of this downturn, in respect of one of these arrangements based on our current
revenue levels, we will not meet the minimum volume level contained in the
contract. As a result, we may be obligated to compensate the supplier for
certain direct costs. The amount of such compensation would be based on a
variety of complex, interrelated factors (including applicable factors that
could mitigate such direct costs). An obligation to pay such compensation
could have a material adverse effect on our business, results of operations,
financial condition, and/or supply relationships.

Our business may suffer if strategic alliances which we have entered into are
not successful.

We have entered into a number of strategic alliances with suppliers, developers
and members in our industry to facilitate product compatibility, encourage
adoption of industry standards or to offer complementary product or service
offerings to meet customer needs. In some cases, the companies with which we
have strategic alliances also compete against us in some of our business areas.
If a member of a strategic alliance fails to perform its obligations, if the
relationship fails to develop as expected or if the relationship is terminated,
we could experience delays in product availability or impairment of our
relationships with our customers.

The adverse resolution of litigation against us could negatively impact our
business.

We and/or Nortel Networks Corporation are currently a defendant in numerous
class actions and other lawsuits, including lawsuits initiated against Nortel
Networks Corporation and certain of its officers and directors on behalf of
holders of Nortel Networks Corporations common shares, which seek damages of
material and indeterminate amounts, as well as lawsuits in the normal course of
business. We are and may in the future be subject to other litigation arising
in the normal course of our business. Litigation may be time consuming,
expensive and distracting from the conduct of our business and the outcome of

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litigation is difficult to predict. The adverse resolution of any specific
lawsuit could have a material adverse effect on our business, results of
operations and financial condition.

Recent accounting pronouncements

For a discussion of recent pronouncements, see Significant accounting
policies in note 1 of the accompanying unaudited consolidated financial
statements.

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ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk represents the risk of loss that may impact the consolidated
financial statements of Nortel Networks due to adverse changes in financial
market prices and rates. Nortel Networks market risk exposure is primarily a
result of fluctuations in interest rates and foreign exchange rates.
Disclosure of market risk is contained in our Annual Report on Form 10-K for
the year ended December 31, 2002 filed with the Securities and Exchange Commission on March 10, 2003.




ITEM 4.   CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Within the 90-day period prior to the filing of this report, an evaluation was
carried out under the supervision and with the participation of Nortel Networks
management, including our President and Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-14(c) under the
Securities Exchange Act of 1934). Based upon that evaluation, the
President and Chief Executive Officer and Chief Financial Officer concluded that the
design and operation of these disclosure controls and procedures were
effective.

Changes in Internal Control

There were no significant changes in our internal controls or in other factors
that could significantly affect these internal controls subsequent to the date
of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

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PART II
OTHER INFORMATION




ITEM 1.   LEGAL PROCEEDINGS

For a discussion of our material legal proceedings, see Legal
proceedings in Managements Discussion and Analysis of Financial Condition and
Results of Operations.




ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K



|a)   |  | Exhibits:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|10.1 |  | Nortel Networks Limited Restricted Stock Unit Plan, as amended and restated
effective January 23, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    
|10.2 |  | Nortel Networks Limited SUCCESS Plan, as amended and restated effective
January 1, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    
|99.1 |  | Certification of the President and Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of The
Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    
|b)   |  | Reports on Form 8-K:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    
|     |  | Nortel Networks Limited furnished a Current Report on Form 8-K dated
January 23, 2003 related to Nortel Networks Corporations financial
results for the fourth quarter and year 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    
|     |  | Nortel Networks Limited filed a Current Report on Form 8-K dated January
24, 2003 related to Nortel Networks Corporations financial results for
the fourth quarter and year 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    
|     |  | Nortel Networks Limited filed a Current Report on Form 8-K dated February
14, 2003 related to the announcement of a US$750 million support facility
between Nortel Networks Limited and Export Development Canada, and the
announcement by Nortel Networks Corporation of special matters to be
considered at the upcoming annual and special meeting of shareholders of
Nortel Networks Corporation, including a proposal for shareholders to
grant the Board of Directors of Nortel Networks Corporation the authority
to implement a consolidation of outstanding common shares, in its sole
discretion, and a proposal reconfirming and approving amendments to Nortel
Networks Corporations shareholder rights plan.
|    
|     |  | Nortel Networks Limited filed a Current Report on Form 8-K dated April 24,
2003 related to Nortel Networks Corporations financial results for the
first quarter of 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    
|     |  | Nortel Networks Limited furnished a Current Report on Form 8-K dated April
30, 2003 related to Nortel Networks Corporations financial results for
the first quarter of 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

NORTEL NETWORKS LIMITED
(Registrant)

|                                    |  |                         
|----------------------------------- |  | ------------------------
|Chief Financial Officer             |  | Chief Accounting Officer
|                                    |  |                         
|D.C. BEATTY                       |  | M.J. GOLLOGLY         
|                                    |  |                         
|D.C. BEATTY
Chief Financial Officer |  | M.J. GOLLOGLY
Controller

Date: May 9, 2003

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CERTIFICATION

I, FRANK A. DUNN, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Nortel Networks
Limited;

2.     Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and

c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5.     The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6.     The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: May 9, 2003

|                                                                     |  | 
|-------------------------------------------------------------------- |  | 
|FRANK A. DUNN

FRANK A. DUNN
President and Chief Executive Officer |  | 

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CERTIFICATION

I, DOUGLAS C. BEATTY, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Nortel Networks
Limited;

2.     Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and

c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5.     The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6.     The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: May 9, 2003

|                                                               |  | 
|-------------------------------------------------------------- |  | 
|DOUGLAS C. BEATTY

DOUGLAS C. BEATTY
Chief Financial Officer |  | 

64