<PAGE>   1
================================================================================
                                  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 June 30, 2001

                                       OR


              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                                      NOT APPLICABLE
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization)


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 [ X ]               No

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as at JULY 31, 2001

                   1,456,889,064 WITHOUT NOMINAL OR PAR VALUE

================================================================================
<PAGE>   2


                                TABLE OF CONTENTS

                                     PART I
                              FINANCIAL INFORMATION


                                                                            PAGE
                                                                            ----

ITEM 1.     Consolidated Financial Statements (unaudited)................    3

ITEM 2.     Management's Discussion and Analysis of Financial
                Condition and Results of Operations......................   21

ITEM 3.     Quantitative and Qualitative Disclosures About
                Market Risk..............................................   45



                                     PART II
                               OTHER INFORMATION




ITEM 1.     Legal Proceedings............................................   46

ITEM 2.     Changes in Securities and Use of Proceeds....................   46

ITEM 4.     Submission of Matters to a Vote of Security Holders..........   46

ITEM 6.     Exhibits and Reports on Form 8-K.............................   46

SIGNATURES  .............................................................   48




            ALL DOLLAR AMOUNTS IN THIS DOCUMENT ARE IN UNITED STATES
                        DOLLARS UNLESS OTHERWISE STATED.




Nortel Networks is a trademark of Nortel Networks Limited



                                       2
<PAGE>   3




                                     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
<PAGE>   4
                             NORTEL NETWORKS LIMITED
                CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
                           (MILLIONS OF U.S. DOLLARS)


<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
                                                                            THREE MONTHS ENDED          SIX MONTHS ENDED
                                                                                 JUNE 30,                    JUNE 30,
                                                                              2001          2000         2001          2000
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                      <C>           <C>         <C>           <C>
Revenues                                                                 $   4,571     $   7,207   $   10,260    $   13,024
Cost of revenues                                                             4,206         3,931        8,081         7,281
-----------------------------------------------------------------------------------------------------------------------------
Gross profit                                                                   365         3,276        2,179         5,743
Selling, general and administrative expense (excluding
  stock option compensation)                                                 1,603         1,407        2,911         2,538
Research and development expense                                               870           925        1,776         1,697
In-process research and development expense                                      -             -            -           623
Amortization of intangibles
  Acquired technology                                                          203           203          406           384
  Goodwill                                                                     679           660        1,361         1,127
Stock option compensation                                                        -            67            -            67
Special charges                                                              3,275             -        3,630           195
Gain on sale of businesses                                                       -          (174)           -          (174)
-----------------------------------------------------------------------------------------------------------------------------
                                                                            (6,265)          188       (7,905)         (714)

Equity in net loss of associated companies                                    (116)           (3)        (132)           (6)
Other income (expense) - net                                                   (44)           74           61           591
Interest expense
  Long-term debt                                                               (45)          (24)         (84)          (47)
  Other                                                                        (44)          (16)         (62)          (32)
-----------------------------------------------------------------------------------------------------------------------------
Earnings (loss) from continuing operations before income taxes              (6,514)          219       (8,122)         (208)

Income tax recovery (provision)                                              1,133          (366)       1,390          (617)
-----------------------------------------------------------------------------------------------------------------------------
Net loss from continuing operations                                         (5,381)         (147)      (6,732)         (825)

Net loss from discontinued operations - net of tax                          (2,351)         (132)      (2,538)         (176)
-----------------------------------------------------------------------------------------------------------------------------
Net loss before cumulative effect of accounting change                      (7,732)         (279)      (9,270)       (1,001)

Cumulative effect of accounting change (net of income tax of $9)                 -             -           15             -
-----------------------------------------------------------------------------------------------------------------------------
Net loss                                                                    (7,732)         (279)      (9,255)       (1,001)

Dividends on preferred shares                                                   (7)           (8)         (15)          (16)
-----------------------------------------------------------------------------------------------------------------------------
Net loss applicable to common shares                                     $  (7,739)       $ (287)  $   (9,270)   $   (1,017)
=============================================================================================================================
</TABLE>
            See notes to unaudited consolidated financial statements.

                                       4
<PAGE>   5

                             NORTEL NETWORKS LIMITED
                     CONSOLIDATED BALANCE SHEETS (UNAUDITED)
                           (MILLIONS OF U.S. DOLLARS)


<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
                                                                                                  JUNE 30,     DECEMBER 31,
                                                                                                      2001             2000
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                              <C>              <C>
ASSETS
CURRENT ASSETS
  Cash and cash equivalents                                                                      $   1,877        $   1,567
  Accounts receivable (less provisions of - $528 at June 30, 2001;
    $363 at December 31, 2000)                                                                       5,551            7,234
  Inventories                                                                                        2,583            3,811
  Income taxes receivable                                                                              581                -
  Deferred income taxes - net                                                                          514              653
  Other current assets                                                                               1,105            1,588
  Current assets of discontinued operations                                                          1,340            1,511
-----------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS                                                                                13,551           16,364

Long-term receivables (less provisions of - $545 at June 30, 2001;
    $383 at December 31, 2000)                                                                         855            1,116
Investments at cost and associated companies at equity                                                 458              767
Plant and equipment - net                                                                            3,247            3,292
Intangible assets - net                                                                              3,372            7,347
Deferred income taxes - net                                                                          1,120              280
Other assets                                                                                           849              556
Long-term assets of discontinued operations                                                            393            1,190
-----------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS                                                                                     $  23,845        $  30,912
=============================================================================================================================

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
  Notes payable                                                                                  $   1,731        $     315
  Trade and other accounts payable                                                                   2,179            3,389
  Payroll and benefit-related liabilities                                                              671              911
  Other accrued liabilities                                                                          4,430            3,588
  Income taxes payable                                                                                   -              306
  Long-term debt due within one year                                                                    78              445
  Current liabilities of discontinued operations                                                     1,387              181
-----------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES                                                                           10,476            9,135

Deferred income                                                                                        129               93
Long-term debt                                                                                       2,616            1,177
Deferred income taxes - net                                                                            402              680
Other liabilities                                                                                    1,021            1,024
Minority interest in subsidiary companies                                                              118              161
Long-term liabilities of discontinued operations                                                        20               74
-----------------------------------------------------------------------------------------------------------------------------
                                                                                                    14,782           12,344
-----------------------------------------------------------------------------------------------------------------------------

CONTINGENCIES (NOTE 15)

SHAREHOLDERS' EQUITY
Preferred shares, without par value - Authorized shares: unlimited; Issued
  and outstanding shares: 30,000,200 at June 30, 2001 and December 31, 2000                            609              609
Common shares, without par value - Authorized shares: unlimited; Issued and outstanding
  shares: 1,453,706,507 at June 30, 2001 and 1,453,437,535 at December 31, 2000                      2,049           17,024
Additional paid-in capital                                                                          16,915            1,878
Deficit                                                                                             (9,672)            (402)
Accumulated other comprehensive loss                                                                  (838)            (541)
-----------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY                                                                           9,063           18,568
-----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                                       $  23,845        $  30,912
=============================================================================================================================
</TABLE>

            See notes to unaudited consolidated financial statements.

                                       5
<PAGE>   6
                             NORTEL NETWORKS LIMITED
                CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
                           (MILLIONS OF U.S. DOLLARS)

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
                                                                                                         SIX MONTHS ENDED
                                                                                                              JUNE 30,
                                                                                                      2001             2000
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                              <C>              <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
 Net loss from continuing operations                                                               $(6,732)        $   (825)
 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                                                                    2,096            1,852
    In-process research and development expense                                                          -              623
    Non-cash portion of special charges and related asset write downs                                2,607                -
    Equity in net loss of associated companies                                                         132                6
    Stock option compensation                                                                            -               67
    Tax benefit from stock options                                                                      34              231
    Deferred income taxes                                                                             (936)             125
    Other liabilities                                                                                  (18)              87
    Gain on sale of investments and businesses                                                         (24)            (731)
    Other - net                                                                                         66              255
    Change in operating assets and liabilities:
      Accounts receivable                                                                            2,344              128
      Inventories                                                                                    1,208             (456)
      Income taxes                                                                                    (887)            (161)
      Accounts payable and accrued liabilities                                                        (580)            (187)
      Other operating assets and liabilities                                                           184             (707)
-----------------------------------------------------------------------------------------------------------------------------
 Net cash from (used in) operating activities of continuing operations                                (506)             307
-----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
  Expenditures for plant and equipment                                                                (821)            (700)
  Proceeds on disposals of plant and equipment                                                          20                8
  Increase in long-term receivables                                                                   (502)            (410)
  Decrease in long-term receivables                                                                     92              800
  Acquisitions of investments and businesses - net of cash acquired                                    (74)             (61)
  Proceeds on sale of investments and businesses                                                        64            1,546
-----------------------------------------------------------------------------------------------------------------------------
  Net cash from (used in) investing activities of continuing operations                             (1,221)           1,183
-----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
  Dividends on common and preferred shares                                                             (15)             (69)
  Increase (decrease) in notes payable - net                                                         1,421              (25)
  Proceeds from long-term debt                                                                       1,500               33
  Repayments of long-term debt                                                                        (407)             (25)
  Increase (decrease) in capital leases payable                                                        (24)              23
  Issuance of common shares                                                                              -              207
-----------------------------------------------------------------------------------------------------------------------------
  Net cash from financing activities of continuing operations                                        2,475              144
-----------------------------------------------------------------------------------------------------------------------------
  Effect of foreign exchange rate changes on cash and cash equivalents                                 (17)             (12)
  Net cash from continuing operations                                                                  731            1,622
  Net cash used in discontinued operations                                                            (421)            (507)
-----------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS                                                              310            1,115
-----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD - NET                                               1,567            2,153
-----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD - NET                                                   $ 1,877          $ 3,268
=============================================================================================================================
</TABLE>

            See notes to unaudited consolidated financial statements.

                                       6
<PAGE>   7

                             NORTEL NETWORKS LIMITED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
               (MILLIONS OF U.S. DOLLARS, UNLESS OTHERWISE STATED)

1.   NORTEL NETWORKS LIMITED

     Effective May 1, 2000, Nortel Networks Limited (the "Company"; also
     referred to herein as "Old Nortel") and a newly formed Canadian corporation
     ("New Nortel") participated in a Canadian court-approved plan of
     arrangement (the "Arrangement") with BCE Inc. ("BCE"). As a result of the
     Arrangement: Old Nortel and its subsidiaries became direct and indirect
     subsidiaries, respectively, of New Nortel; New Nortel assumed the name
     "Nortel Networks Corporation"; New Nortel's common shares began to trade
     publicly on the New York and Toronto stock exchanges under the symbol "NT";
     Old Nortel was renamed "Nortel Networks Limited"; and 100 percent of Old
     Nortel's common shares were acquired by New Nortel and ceased to be
     publicly traded. The preferred shares and debt securities of Old Nortel
     outstanding immediately prior to the Arrangement remained outstanding and
     continued to be obligations of the Company immediately after the
     Arrangement. All of the business and operations conducted by Old Nortel and
     its subsidiaries immediately prior to the effective date of the Arrangement
     continued to be conducted by Old Nortel and its subsidiaries as
     subsidiaries of New Nortel immediately after the Arrangement.

     The accompanying unaudited Consolidated Financial Statements and notes
     thereto relate to the operations of the Company and its subsidiary
     companies (collectively, "Nortel Networks").

2.   BASIS OF PRESENTATION

     The accompanying unaudited Consolidated Financial Statements of the Company
     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. Accordingly, they do not
     include all information and notes as required by United States generally
     accepted accounting principles ("GAAP") in the preparation of annual
     consolidated financial statements. The accounting policies used in the
     preparation of the accompanying unaudited Consolidated Financial Statements
     are as those described in the Company's audited Consolidated Financial
     Statements and notes thereto prepared in accordance with GAAP for the year
     ended December 31, 2000, restated for discontinued operations, and included
     in the Company's Current Report on Form 8-K, filed with the SEC on August
     8, 2001 (the "2001 Form 8-K"), except as described in note 3. Although the
     Company is headquartered in Canada, the accompanying unaudited Consolidated
     Financial Statements are expressed in United States dollars as the greater
     part of the Company's 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 and six months ended June 30, 2001, are not
     necessarily indicative of financial results for the full year. The
     accompanying unaudited Consolidated Financial Statements should be read in
     conjunction with the Company's Annual Report on Form 10-K for the year
     ended December 31, 2000, and the 2001 Form 8-K.

     The preparation of the Company's consolidated financial statements requires
     management to make estimates and assumptions that affect the reported
     amounts of assets and liabilities and disclosures of contingent assets and
     liabilities at the date of the financial statements and the reported
     amounts of revenues and expenses during the reporting period. Actual
     results could differ from those estimates. Estimates are used when
     accounting for items and matters such as long-term contracts, allowance for
     uncollectible accounts receivable, inventory obsolescence, product
     warranty, amortization, asset valuations, employee benefits, taxes,
     restructuring and other provisions, in-process research and development,
     and contingencies.


                                       7
<PAGE>   8


3.   ACCOUNTING CHANGES

     (a)  Impairment of intangible assets and other long-lived assets

          When events and circumstances warrant a review, the Company evaluates
          the carrying value of long-lived assets, certain identifiable
          intangibles, and goodwill related to those assets to be held and used
          in accordance with SFAS No. 121, "Accounting for the Impairment of
          Long-lived Assets and for Long-lived Assets to be Disposed Of" and
          evaluates the carrying value of enterprise level intangible assets in
          accordance with the provisions of Accounting Principles Board Opinion
          No. 17, "Intangible Assets" ("APB 17"). An impairment review is
          performed whenever events or circumstances indicate that the carrying
          value may not be recoverable. Certain factors that the Company
          considers important which could trigger an impairment review include,
          but are not limited to, significant underperformance relative to
          historical or projected future operating results, significant changes
          in the manner of use of the acquired assets or the strategy for the
          Company's overall business, significant negative industry or economic
          trends, a significant decline in the Company's stock price for a
          sustained period, and the Company's market capitalization relative to
          net book value.

          The carrying value of long-lived assets, certain identifiable
          intangibles, and goodwill related to those assets are considered
          impaired when the anticipated undiscounted cash flow from such assets
          is less than its carrying value. In that event, a loss is recognized
          based on the amount by which the carrying value exceeds the fair
          value. Fair value is determined using the anticipated cash flows
          discounted at a rate commensurate with the risk involved. Losses on
          long-lived assets to be disposed of are determined in a similar
          manner, except that fair values are reduced by the cost to dispose of
          such assets.

          During the three months ended June 30, 2001, the Company changed its
          method of evaluating impairment of enterprise level goodwill in
          accordance with APB 17. The Company changed from the undiscounted cash
          flows method to the market value method. Under the market value method
          the Company's net book value is compared to the value of the Company's
          equity securities. As the Company comprises substantially all of the
          operations of Nortel Networks Corporation, the value of the Company's
          equity securities is determined based on the Nortel Networks
          Corporation's market capitalization attributable to the Company. If
          net book value exceeds this value, the excess carrying amount of
          goodwill is written off. The Company believes that the market value
          method is preferable since it provides a more realistic valuation than
          the undiscounted cash flow method. There was no impairment in
          enterprise level goodwill during the period ended June 30, 2001. This
          change had no effect on the business, results of operations, and
          financial condition of Nortel Networks.

     (b)  Derivative financial instruments

          Effective January 1, 2001, the Company adopted Statement of
          Financial Accounting Standards ("SFAS") No. 133, "Accounting for
          Derivative Instruments and Hedging Activities" ("SFAS 133"), and the
          corresponding amendments under SFAS No. 138, "Accounting for Certain
          Derivative Instruments and Certain Hedging Activities - an amendment
          of SFAS No. 133" ("SFAS 138"). SFAS 133 requires that all derivative
          financial instruments be recognized in the financial statements and
          measured at fair value regardless of the purpose or intent for holding
          them. If the derivative is designated as a fair value hedge, changes
          in the fair value of the derivative and of the hedged item
          attributable to the hedged risk are recognized in net earnings
          (loss). If the derivative is designated as a cash flow hedge, the
          effective portions of changes in the fair value of the derivative are
          recorded in other comprehensive income (loss) ("OCI") and are
          recognized in net earnings (loss) when the hedged item affects net
          earnings (loss). Ineffective portions of changes in the fair value of
          cash flow hedges are recognized in net earnings (loss). If the
          derivative used in an economic hedging relationship is not designated
          in an accounting hedging relationship, changes in the fair value of
          the derivative are recognized in net earnings (loss).

          The adoption of SFAS 133 resulted in a cumulative decrease to net loss
          of $15 (pre-tax $24) and a charge to OCI of $7 (pre-tax $11). The
          decrease in net loss is primarily attributable to embedded
          derivatives. The charge to OCI is primarily attributable to the
          effective portion of option and forward contracts related to the
          Canadian dollar hedge program that are designated as cash flow hedges.


                                       8
<PAGE>   9

          Nortel Networks net earnings (loss) and cash flows may be negatively
          impacted by fluctuating interest rates, foreign exchange rates, and
          equity prices. To effectively manage these market risks, Nortel
          Networks enters into foreign currency forward, foreign currency swap,
          foreign currency option contracts, interest rate swaps, and equity
          forward contracts.

          Foreign Currency Risk

          Nortel Networks enters into option contracts to limit its exposure to
          exchange fluctuations on future revenue or expenditure streams, and
          forward contracts, which are denominated in various currencies, to
          limit its exposure to exchange fluctuations on existing assets and
          liabilities and on future revenue or expenditure streams. Principal
          currencies hedged include the Canadian dollar, British pound, and
          Euro. Option and forward contracts used to hedge future revenue or
          expenditure streams are designated as cash flow hedges and hedge these
          exposures out to a maximum of 24 months. Forward contracts used to
          hedge foreign exchange exposure on existing assets and liabilities are
          designated as fair value hedges. Option and forward contracts not
          designated as hedging instruments under SFAS 133 are also used to
          economically hedge the impact of fluctuations in exchange rates on
          existing assets and liabilities and on future revenue and expenditure
          streams.

          Interest Rate Risk

          Nortel Networks enters into interest rate swap contracts to minimize
          financing costs on long-term debt and to manage interest rate risk on
          existing liabilities and receivables due to interest rate
          fluctuations. The contracts swap floating interest rate payments to
          fixed interest rate payments or vice versa. Contracts that are used to
          swap fixed interest rates to floating interest rates are designated as
          fair value hedges. Nortel Networks also enters into United States to
          Canadian dollar cross currency swap contracts, which are not
          designated as hedging instruments, to limit its exposure to foreign
          currency fluctuations on the non-cumulative preferential cash
          dividends with respect to the outstanding Non-cumulative Redeemable
          Class A Preferred Shares Series 7 of the Company.

          Other Derivatives

          Nortel Networks may invest in warrants to purchase securities of other
          companies as a strategic investment. Warrants that relate to publicly
          traded companies or that can be net share settled are deemed
          derivative financial instruments under SFAS 133. Such warrants are
          generally not eligible to be designated as hedging instruments as
          there is no corresponding underlying exposure. In addition, Nortel
          Networks may enter into certain commercial contracts containing
          derivative financial instruments.

          For option contracts designated either as fair value or cash flow
          hedges, changes in the time value are excluded from the assessment of
          hedge effectiveness. Hedge ineffectiveness, determined in accordance
          with SFAS 133, had no material impact on the net loss for the three
          months and six months ended June 30, 2001. No material fair value
          hedges or cash flow hedges were derecognized or discontinued for the
          three months and six months ended June 30, 2001.

          Selling, general and administrative expenses for the three months and
          six months ended June 30, 2001 included net gains of $8 and $46,
          respectively. Revenues for the three months and six months ended June
          30, 2001, included a net gain of $17. The net gains included in
          selling, general and administrative expenses and revenues are
          primarily related to changes in the fair value of derivative
          instruments not designated as hedging instruments.

          Derivative gains and losses included in OCI are reclassified into
          earnings (loss) at the time the underlying transaction is recognized.
          During the three months and six months ended June 30, 2001, nil and
          $5, respectively, of net derivative losses were reclassified to
          selling, general and administrative expense. Nortel Networks estimates
          that $8 of net derivative losses included in OCI will be reclassified
          into earnings (loss) within the next twelve months.


                                       9
<PAGE>   10


4.   DISCONTINUED OPERATIONS

     On June 14, 2001, the Company's Board of Directors approved a plan to
     discontinue Nortel Networks access solutions operations consisting of all
     of Nortel Networks narrowband and broadband solutions, including copper,
     cable, and fixed wireless solutions, as well as Nortel Networks current
     consolidated membership interest in Arris Interactive LLC ("Arris") and
     equity investment in Elastic Networks Inc. Also affected by the decision
     are Nortel Networks prior acquisitions of Promatory Communications, Inc.
     ("Promatory"), Aptis Communications, Inc., and Broadband Networks Inc.
     Nortel Networks is currently working to dispose of or transition the
     ownership of certain operations. Any operations not disposed of or so
     transitioned are expected to be closed. This plan is expected to be
     completed over the next twelve months.

     Pursuant to Accounting Principles Board Opinion No. 30, "Reporting the
     Results of Operations - Reporting the Effects of Disposal of a Segment of a
     Business, and Extraordinary, Unusual and Infrequently Occurring Events and
     Transactions," the accompanying unaudited Consolidated Financial Statements
     and notes thereto of the Company have been restated to reflect the decision
     to discontinue Nortel Networks access solutions operations for all
     comparative periods presented. Accordingly, the revenues, costs and
     expenses, assets and liabilities, and cash flows of Nortel Networks access
     solutions operations have been segregated in the accompanying unaudited
     Consolidated Statements of Operations, Consolidated Balance Sheets, and
     Consolidated Statements of Cash Flows, and are reported as "Discontinued
     Operations".

     The results of discontinued operations, presented in the accompanying
     unaudited Consolidated Statements of Operations, were as follows:
<TABLE>
<CAPTION>

     -----------------------------------------------------------------------------------------------------------------------
                                                                    THREE MONTHS ENDED                SIX MONTHS ENDED
                                                                          JUNE 30,                         JUNE 30,
                                                                    2001            2000             2001             2000
     -----------------------------------------------------------------------------------------------------------------------
     <S>                                                       <C>               <C>            <C>               <C>
     Revenues                                                  $     287         $   614        $     711         $  1,119
     -----------------------------------------------------------------------------------------------------------------------

     Net loss from discontinued operations - net (a)           $    (167)        $  (132)       $    (354)        $   (176)
     Net loss on disposal of operations - net (b)                 (2,184)              -           (2,184)               -
     -----------------------------------------------------------------------------------------------------------------------
     Total net loss from discontinued operations               $  (2,351)        $  (132)       $  (2,538)        $   (176)
     =======================================================================================================================
</TABLE>

     (a)  Loss from discontinued operations was net of applicable income tax
          recovery of $60 and $39 for the three months ended June 30, 2001 and
          2000, respectively, and an income tax recovery of $122 and $34 for the
          six months ended June 30, 2001 and 2000, respectively.

     (b)  Loss on disposal of operations was net of applicable income tax
          recovery of $596 for the three months and six months ended June 30,
          2001.

     The pre-tax loss on disposal of the access solutions operations of $2,780
     reflects the estimated costs directly associated with Nortel Networks plan
     of disposition. The loss reflects the write-off of goodwill associated with
     the acquisition of Promatory in the amount of $417; provisions for both
     short-term and long-term receivables of $600; a provision for inventories
     of $381; other asset write-offs totalling $151; future contractual
     obligations and estimated liabilities of $1,059; and estimated operating
     losses during the planned period of disposition of $172.

     At June 30, 2001, the remaining accruals of $1,231 related to the above
     noted future contractual obligations and estimated liabilities, and
     estimated operating losses during the planned period of disposition were
     included in current liabilities of discontinued operations. The remaining
     accruals are expected to be drawn down by cash payments over the planned
     period of disposition.


                                       10
<PAGE>   11
     On August 3, 2001, Nortel Networks Corporation announced the completion of
     the previously announced transfer of Nortel Networks ownership interest in
     Arris to Arris Group, Inc. ("Arris Group"), ANTEC Corporation's new parent
     company. Under the terms of the agreement, Nortel Networks will own a 49.2
     percent non-controlling interest in Arris Group, compared to the previous
     81.25 percent controlling interest in Arris.


     The assets and liabilities of discontinued operations, presented in the
     accompanying unaudited Consolidated Balance Sheets, were as follows as at:

<TABLE>
<CAPTION>
     -----------------------------------------------------------------------------------------------------------------------
                                                                                               JUNE 30,      DECEMBER 31,
                                                                                                   2001              2000
     -----------------------------------------------------------------------------------------------------------------------
     <S>                                                                                      <C>                <C>
     Accounts receivable -net                                                                 $     410          $    922
     Inventories                                                                                    332               499
     Other current assets                                                                           598                90
     -----------------------------------------------------------------------------------------------------------------------
     Total current assets of discontinued operations                                              1,340             1,511

     Intangibles - net                                                                               24               600
     Other long-term assets                                                                         369               590
     -----------------------------------------------------------------------------------------------------------------------
     Total assets of discontinued operations                                                  $   1,733          $  2,701
     =======================================================================================================================

     Current liabilities                                                                      $   1,387          $    181
     Long-term liabilities                                                                           20                74
     -----------------------------------------------------------------------------------------------------------------------
     Total liabilities of discontinued operations                                             $   1,407          $    255
     =======================================================================================================================

</TABLE>

     The net cash used in discontinued operations for the six months ended June
     30, 2001 and 2000, presented in the accompanying unaudited Consolidated
     Statements of Cash Flows, was as follows:

<TABLE>
<CAPTION>


     -----------------------------------------------------------------------------------------------------------------------
                                                                                                2001               2000
     -----------------------------------------------------------------------------------------------------------------------
     <S>                                                                                     <C>                <C>
     CASH FLOWS USED IN DISCONTINUED OPERATIONS
       Operating activities                                                                  $   (316)          $   (272)
       Investing activities                                                                      (105)              (235)
     -----------------------------------------------------------------------------------------------------------------------
     Net cash used in discontinued operations                                                $   (421)          $   (507)
     =======================================================================================================================
</TABLE>

5.   SEGMENTED INFORMATION

     General description

     Nortel Networks customers, markets, and solutions continue to evolve. As a
     result, the specific customer groups identified within our previous Service
     Provider and Carrier segment and Enterprise segment have now merged or
     become uniform. In response to this change, Nortel Networks has changed the
     way it manages its business to reflect a focus on providing seamless
     networking solutions and service capabilities to its customers.
     Consequently, financial information by segment and customer solution has
     been restated and reported on a new basis commencing in the three month
     period ended March 31, 2001.


                                       11
<PAGE>   12
     Nortel Networks operations include two reportable operating segments: the
     Network Infrastructure segment ("Network Infrastructure"); and the
     Photonics Components segment ("Photonics Components"). Network
     Infrastructure consists of all networking solutions and includes optical
     inter-city transmission products, metropolitan optical transmission
     products, core Internet Protocol networking solutions (including packet and
     circuit switching), eBusiness and service solutions, and applications
     solutions and services for wireless networks. These networking solutions
     are used by service provider, carrier, and enterprise customers, including
     incumbent and competitive local exchange carriers, interexchange carriers,
     global carriers, wireless network providers, Internet service providers,
     application service providers, resellers, public utilities, cable
     television companies, large enterprises and their branch offices, small
     businesses, and home offices, as well as government, education, and utility
     organizations. Photonics Components consists of the optical and electronic
     component design and manufacturing operations for incorporation into Nortel
     Networks own products and for sale to other networking systems
     manufacturers and includes active and passive optical components, lasers
     and filters, transmitters and receivers, modules and subsystems, and
     microelectronics devices.

     "Other" represents operating segments and business activities which include
     certain customer premises-based voice and data networking solutions, global
     professional services, and civil works and original equipment manufacturer
     offerings. None of these operating segments or business activities meet the
     criteria to be disclosed as reportable segments.

     As described in note 4, Nortel Networks has reclassified the results of
     operations of its access solutions operations as discontinued
     operations. These operations were previously included as a separate
     operating segment within Other. The segment data included below excludes
     amounts related to the operations of the access solutions operating
     segment.

     The Company's President and Chief Executive Officer ("CEO") has been
     identified as the chief operating decision maker in assessing the
     performance of the segments and the allocation of resources to the
     segments. The CEO relies on the information derived directly from Nortel
     Networks management reporting system which provides revenue and gross
     profit information by segment. The CEO reviews selling, general and
     administrative expense, research and development expense, and the costs
     associated with acquisitions on a total Nortel Networks basis. Therefore,
     Nortel Networks does not allocate these costs to the segments as the CEO
     does not use this information to either assess the performance of or
     allocate resources to the segments. In addition, the CEO does not review
     asset information on a segmented basis. Intersegment sales are based on
     fair market values. All intersegment profit, including any unrealized
     profit on ending inventories, is eliminated on consolidation. The
     accounting policies of the segments are the same as those described in note
     2 of the 2001 Form 8-K.


                                       12
<PAGE>   13
     Segments

     The following tables set forth information by segments:

<TABLE>
<CAPTION>

     ----------------------------------------------------------------------------------------------------------------------
                                                                      THREE MONTHS ENDED            SIX MONTHS ENDED
                                                                            JUNE 30,                     JUNE 30,
                                                                     2001             2000          2001           2000
     ----------------------------------------------------------------------------------------------------------------------
     <S>                                                        <C>              <C>           <C>            <C>
     REVENUES
     Network Infrastructure                                     $   3,527        $   5,869     $   8,041      $  10,489
     Photonics Components                                             105              535           405            937
     Other                                                          1,002            1,245         2,087          2,351
     Intersegment sales elimination                                   (63)            (442)         (273)          (753)
     ----------------------------------------------------------------------------------------------------------------------
     Total                                                      $   4,571        $   7,207     $  10,260      $  13,024
     ======================================================================================================================

     GROSS PROFIT
     Network Infrastructure                                     $     365        $   2,609     $   1,868      $   4,661
     Photonics Components                                            (171)             204          (115)           332
     Other                                                            175              463           436            760
     Intersegment inventory unrealized profit
       elimination - net                                               (4)               -           (10)           (10)
     ----------------------------------------------------------------------------------------------------------------------
     Total                                                      $     365        $   3,276     $   2,179      $   5,743
     ======================================================================================================================

     GROSS MARGIN
     Network Infrastructure                                          10.3%            44.5%         23.2%          44.4%
     Photonics Components                                         (162.9)%            38.1%       (28.4)%          35.4%
     Other                                                           17.5%            37.2%         20.9%          32.3%
     Nortel Networks                                                  8.0%            45.5%         21.2%          44.1%

</TABLE>

     Customer solutions revenues

     The following table sets forth external revenues by customer solutions:

<TABLE>
<CAPTION>

     ----------------------------------------------------------------------------------------------------------------------
                                                                         THREE MONTHS ENDED            SIX MONTHS ENDED
                                                                               JUNE 30,                     JUNE 30,
                                                                         2001           2000          2001           2000
     ----------------------------------------------------------------------------------------------------------------------
     <S>                                                              <C>            <C>           <C>            <C>
     Optical inter-city                                               $   292        $ 1,799      $  1,284       $  3,223
     Local internet                                                     1,713          2,802         3,770          4,936
     Wireless internet                                                  1,522          1,268         2,987          2,330
     Other (a)                                                          1,044          1,338         2,219          2,535
     ----------------------------------------------------------------------------------------------------------------------
     Total                                                            $ 4,571        $ 7,207      $ 10,260       $ 13,024
     ======================================================================================================================
</TABLE>


     (a)  Other includes the external customer solutions revenue of the
          Photonics Components segment of $42 and $93 for the three months ended
          June 30, 2001 and 2000, respectively, and $132 and $184 for the six
          months ended June 30, 2001 and 2000, respectively.



                                       13
<PAGE>   14
     Geographic information

     The following table sets forth external revenues by geographic regions:

<TABLE>
<CAPTION>

     ----------------------------------------------------------------------------------------------------------------------
                                                                          THREE MONTHS ENDED            SIX MONTHS ENDED
                                                                               JUNE 30,                     JUNE 30,
                                                                         2001           2000          2001           2000
     ----------------------------------------------------------------------------------------------------------------------
     <S>                                                             <C>            <C>          <C>            <C>
     EXTERNAL REVENUES (a)
     United States                                                   $  2,227       $  4,539     $   5,039      $   8,168
     Canada                                                               207            352           512            641
     Other countries                                                    2,137          2,316         4,709          4,215
     ----------------------------------------------------------------------------------------------------------------------
     Total                                                           $  4,571       $  7,207     $  10,260      $  13,024
     ======================================================================================================================
</TABLE>

     (a)  Revenues are attributable to geographic regions based on the location
          of the customer.


     The following table sets forth long-lived assets by geographic regions as
     at:

<TABLE>
<CAPTION>

     ----------------------------------------------------------------------------------------------------------------------
                                                                                               JUNE 30,      DECEMBER 31,
                                                                                                   2001              2000
     ----------------------------------------------------------------------------------------------------------------------
     <S>                                                                                       <C>              <C>
     LONG-LIVED ASSETS (a)
     United States                                                                             $  4,105         $   8,029
     Canada                                                                                       1,249             1,257
     Other countries                                                                              1,265             1,353
     ----------------------------------------------------------------------------------------------------------------------
     Total                                                                                     $  6,619         $  10,639
     ======================================================================================================================
</TABLE>

     (a)  Represents plant and equipment - net and intangible assets - net that
          are identified with each geographic region.

6.   ACQUISITIONS

     Contingent consideration

     In certain acquisition transactions, Nortel Networks has agreed to
     additional purchase consideration to be paid upon the achievement of
     specific objectives by the acquired business. The maximum contingent
     consideration was fixed as at the date of acquisition.

     The business performance objectives relating to the remaining $200 of
     contingent consideration available to the former shareholders, option
     holders and warrant holders of Qtera Corporation ("Qtera") were not
     achieved during the six months ended June 30, 2001, and as a result such
     remaining contingent consideration will not be paid.


                                       14
<PAGE>   15

     In-process research and development

     A brief description of the in-process research and development ("IPR&D")
     project in process during the three months ended June 30, 2001, including
     an estimated percentage-of-completion of product within the project at its
     acquisition date, is set forth in the table below:

<TABLE>
<CAPTION>
     -------------------------------------------------------------------------------------------------------------
                                                                        ESTIMATED        EXPECTED
     YEAR &                                                            PERCENTAGE        COST TO        DISCOUNT
     ACQUISITION         IPR&D PROJECT                                  COMPLETE         COMPLETE         RATE
     -------------------------------------------------------------------------------------------------------------
     <S>                                                                   <C>           <C>                <C>
     2000
     Qtera               Photonic Networking Systems                       56%           $ 15.8             22%

                         Photonic Networking Systems are ultra-long-reach optical networking systems. These
                         systems allow for scalable optical Internet capabilities, which enable high performance,
                         rapid wavelength provisioning and restoration, and low cost survivable bandwidth. The
                         project was completed in the first quarter of 2001 and began contributing to consolidated
                         revenues in the second quarter of 2001.
------------------------------------------------------------------------------------------------------------------
</TABLE>

     In order for Nortel Networks to succeed in the highly competitive and
     rapidly changing marketplace in which it operates, acquired assets must be
     integrated quickly into its customer solutions as enhancements of existing
     technology or as part of a larger platform. It is Nortel Networks normal
     practice to begin the integration of all acquired businesses (including
     management responsibilities, financial reporting, and human resources)
     immediately following the closing of the transaction. As such, Nortel
     Networks does not specifically track revenues generated from completed
     IPR&D projects of acquired businesses subsequent to the closing and
     integration of acquisitions.


7.   SPECIAL CHARGES

     Special charges were as follows:


<TABLE>
<CAPTION>
     --------------------------------------------------------------------------------------------------------------------
                                                                                 CUMULATIVE DRAWDOWNS
                                            THREE MONTHS ENDED                  ----------------------    PROVISION
                                         MARCH 31,       JUNE 30,                 CASH       NON-CASH   BALANCE AS AT
                                              2001          2001         TOTAL   PAYMENTS     CHARGES    JUNE 30, 2001
     --------------------------------------------------------------------------------------------------------------------
     <S>                                   <C>         <C>           <C>         <C>         <C>              <C>
     Restructuring activities:
       Workforce reduction                 $   247     $     426     $     673   $   336     $       -        $   337
       Contract settlement
         and lease costs                        20           302           322        10             -            312
       Plant and equipment write downs           -           410           410         -           410              -
       Intangible asset write-off               64             -            64         -            64              -
       Other                                    24             4            28         1             -             27
     --------------------------------------------------------------------------------------------------------------------
                                               355         1,142         1,497       347           474            676

     Intangible assets write down                -         2,133         2,133         -         2,133              -
     --------------------------------------------------------------------------------------------------------------------
     Special charges                       $   355     $   3,275     $   3,630   $   347     $   2,607        $   676
     ====================================================================================================================

</TABLE>

     For the three months and six months ended June 30, 2001, Nortel Networks
     recorded special charges of $3,275 and $3,630, respectively, related to
     both restructuring activities and intangible assets write down.

     In light of the industry and economic environment, and capital market
     trends impacting both Nortel Networks current operations and expected
     future growth rates, Nortel Networks has augmented its initiatives that
     began in 2000 to optimize results and drive efficiencies in its business by
     further streamlining operations and activities that are not aligned with
     its core markets and leadership strategies.


                                       15
<PAGE>   16
     In addition, Nortel Networks, as part of its review of financial results
     during the three months ended June 30, 2001, performed an assessment of the
     carrying values of its intangible assets. The conclusion of that assessment
     resulted in a write down in the amount of $2,133 for the three months ended
     June 30, 2001.

     Restructuring activities

     Workforce reduction charges of $426 and $673 for the three months and six
     months ended June 30, 2001, were related to the cost of severance and
     benefits associated with approximately 12,000 and 20,000 employees notified
     of termination, respectively. Of the 20,000 employees notified by June 30,
     2001, approximately 8,500 were direct employees performing manufacturing,
     assembly, test and inspection activities associated with the production of
     Nortel Networks solutions, and approximately 11,500 were indirect sales,
     marketing, and administrative employees, and manufacturing managers.
     Included in the current period charge of $426 is approximately $16 related
     to the approximately 8,000 employees notified during the three months ended
     March 31, 2001. The workforce reduction was primarily in North America and
     the United Kingdom and extended across all of Nortel Networks operating
     segments. As at June 30, 2001, the workforce reduction provision balance
     has been drawn down by cash payments of $336 resulting in an ending
     provision balance of $337. The remaining provision is expected to be
     substantially drawn down by the fourth quarter of 2001.

     In conjunction with the above noted workforce reduction, Nortel Networks
     identified a number of leased facilities comprised of office and warehouse
     and manufacturing space, as well as leased manufacturing equipment, that
     were no longer required. As a result, Nortel Networks recorded net lease
     costs of approximately $256 for the three months and six months ended June
     30, 2001. The costs primarily related to Nortel Networks future contractual
     obligations under operating leases. Offsetting the total lease charge is
     approximately $300 in expected sublease revenue on leases that Nortel
     Networks cannot terminate. Contract settlement costs included negotiated
     settlements of approximately $46 and $66 for the three months and six
     months ended June 30, 2001, respectively, to either cancel contracts or
     renegotiate existing contracts within Network Infrastructure and Other. As
     at June 30, 2001, the provision balance has been drawn down by cash
     payments of $10 resulting in an ending provision balance of $312. The
     remaining provision is expected to be substantially drawn down by the
     second quarter of 2002.

     Plant and equipment write downs of $185 for the three months and six months
     ended June 30, 2001 consisted of the write down of leasehold improvements
     and certain information technology equipment associated with the exiting of
     the above noted leased facilities.

     In addition, as a result of the significant negative industry and economic
     trends impacting both Nortel Networks current operations and expected
     future growth rates, Nortel Networks performed an assessment of certain
     plant and equipment assets as part of its review of financial results
     during the three months ended June 30, 2001. The conclusion of that
     assessment was a write down of certain plant and equipment for the three
     months and six months ended June 30, 2001, of $225.

     Within global operations, a function that supports all of Nortel Networks
     segments, it was determined that there was excess test equipment at a
     number of system houses that would no longer be required as a result of the
     current industry and economic environment. As a result, Nortel Networks
     recorded a charge of approximately $58 to write down the value of this
     equipment to its net realizable value based on the current fair value for
     this type of specialized equipment. Nortel Networks expects to dispose of
     this equipment by the end of the fourth quarter of 2001.

     Within Photonics Components, Nortel Networks wrote down the net carrying
     value of a specialized manufacturing facility for the production of optical
     components within North America. The write down of approximately $91
     reflects the net realizable value based on market assessments for a general
     purpose facility. In addition, within Photonics Components, it was
     determined that there was excess manufacturing equipment at a number of
     facilities that would no longer be required as a result of the current
     industry and economic environment. As a result, Nortel Networks recorded a
     charge of approximately $76 to write down the value of this equipment to
     its net realizable value based on the current fair market value for this
     type of specialized equipment. Nortel Networks expects to dispose of this
     equipment by the end of the fourth quarter of 2001.


                                       16
<PAGE>   17
     The intangible asset write-off of nil and $64 for the three months and six
     months and six months ended June 30, 2001, respectively, is related to the
     remaining net book value of goodwill recorded on the prior acquisition of
     MICOM Communications Corp ("MICOM"). As part of Nortel Networks current
     initiative to strategically realign resources, Nortel Networks has made the
     decision to exit the technologies associated with the MICOM acquisition
     completely. The results of this prior acquisition were not material to the
     business, results of operations, and financial condition of Nortel
     Networks.

     Intangible assets write down

     Nortel Networks, as part of its review of financial results during the
     three months ended June 30, 2001, also performed an assessment of the
     carrying values of intangible assets recorded in connection with its
     various acquisitions. The assessment was performed in light of the
     significant negative industry and economic trends impacting both Nortel
     Networks current operations and expected future growth rates, and the
     adjustment of technology valuations. The conclusion of that assessment was
     that the decline in market conditions within Nortel Networks industry was
     significant and other than temporary. As a result, Nortel Networks recorded
     a $2,133 write down of intangible assets in the three months ended June 30,
     2001, bases on the amount by which the carrying amount of these assets
     exceeded the fair value. the write down is primarily related to the
     goodwill associated with the acquisitions of Qtera and Clarify Inc. within
     Network Infrastructure.

     Fair value was determined based on discounted future cash flows for the
     businesses that had separately distinguishable intangible asset balances
     and whose operations had not yet been fully integrated into Nortel
     Networks. The cash flow periods used were five years, the discount rate
     used was 20 percent, and the terminal values were estimated based upon
     terminal growth rates ranging from 5 to 11 percent. The assumptions
     supporting the estimated future cash flows, including the discount rate and
     estimated terminal values, reflect management's best estimates. The
     discount rate was based upon Nortel Networks weighted average cost of
     capital as adjusted for the risks associated with the operations.

     There was no impairment in enterprise level goodwill during the three month
     period ended June 30, 2001. The Company has determined that the remaining
     intangible asset balances will continue to be amortized on a straight-line
     basis over the remaining useful lives established at the time of the
     related acquisition as the remaining useful life of these intangible assets
     has not changed.

8.   LONG-TERM DEBT

     On February 8, 2001, the Company completed an offering of $1,500 of 6.125
     percent notes which mature on February 15, 2006 (the "Notes"). The Notes
     will pay interest on a semi-annual basis on February 15 and August 15,
     beginning on August 15, 2001. The Notes are redeemable, at any time at the
     Company's option, at a redemption price equal to the principal amount
     thereof plus accrued and unpaid interest and a make-whole premium.

9.   INCOME TAXES

     Nortel Networks effective tax rate from continuing operations, excluding
     the impact of Acquisition Related Costs (IPR&D expense and the amortization
     of acquired technology and goodwill from all acquisitions subsequent to
     July 1998), stock option compensation, and where applicable certain of the
     one-time gains and charges, for both the three months and six months ended
     June 30, 2001 and 2000 was 32.0 percent and 33.0 percent, respectively. The
     change in Nortel Networks effective tax rate was primarily due to the
     change in Nortel Networks geographic mix of earnings.

     Global investment tax credits of $10 and $35 for the three months ended
     June 30, 2001 and 2000, respectively, and $46 and $74 for the six months
     ended June 30, 2001 and 2000, respectively, have been applied against the
     income tax provision.

                                       17
<PAGE>   18
10.  RELATED PARTY TRANSACTIONS

     The Company engages in certain transactions with both its parent company,
     Nortel Networks Corporation, and with a directly owned subsidiary of its
     parent. These transactions include cash borrowings between the parties in
     addition to funding activities pursuant to reciprocal credit agreements. As
     at June 30, 2001 and December 31, 2000, the balance included in trade and
     other accounts payable owing to the Company's parent was $141 and $101,
     respectively, and to a directly owned subsidiary of the Company's parent
     was $206 and $252, respectively.

11.  INVENTORIES

     The following table sets forth inventories as at:

<TABLE>
<CAPTION>

    ------------------------------------------------------------------------------------------------------------------------
                                                                                                JUNE 30,     DECEMBER 31,
                                                                                                    2001             2000
    ------------------------------------------------------------------------------------------------------------------------
     <S>                                                                                       <C>               <C>
     Raw materials                                                                             $     790         $     677
     Work in process                                                                                 729               852
     Finished goods                                                                                1,064             2,282
    ------------------------------------------------------------------------------------------------------------------------
     Inventories                                                                               $   2,583         $   3,811
    ========================================================================================================================
</TABLE>


12.  COMMON SHARES

     On June 14, 2001, Nortel Networks Corporation, as the holder of all of the
     Company's issued and outstanding common shares, approved a reduction in the
     Company's legal stated capital for its common shares in the amount of
     $15,000.


13.  CONSOLIDATED STATEMENTS OF CASH FLOWS

     The following table sets forth interest and income taxes paid:

<TABLE>
<CAPTION>

     ---------------------------------------------------------------------------------------------------------------
                                                                                               SIX MONTHS ENDED
                                                                                                    JUNE 30,
                                                                                              2001          2000
     ---------------------------------------------------------------------------------------------------------------

<S>                                                                                          <C>           <C>
     Interest paid                                                                           $ 111         $  71
     Income taxes paid                                                                       $ 386         $ 443
</TABLE>


                                       18
<PAGE>   19
14.  COMPREHENSIVE LOSS

     The components of comprehensive loss, net of tax, were as follows:
<TABLE>
<CAPTION>
     ---------------------------------------------------------------------------------------------------------------
                                                                      THREE MONTHS ENDED        SIX MONTHS ENDED
                                                                           JUNE 30,                 JUNE 30,
                                                                       2001        2000         2001        2000
     ---------------------------------------------------------------------------------------------------------------
     <S>                                                            <C>          <C>        <C>          <C>
     Net loss                                                       $ (7,732)    $ (279)    $ (9,255)    $ (1,001)
     Other comprehensive income (loss):
       Change in foreign currency translation adjustment (a)              41        (98)        (218)        (119)
       Unrealized gain (loss) on investments - net (b)                    14        (90)         (73)          39
       Unrealized derivative gains (losses) on cash flow
         hedges - net (c)                                                 17          -           (6)           -
     ---------------------------------------------------------------------------------------------------------------
     Comprehensive loss                                             $ (7,660)    $ (467)    $ (9,552)    $ (1,081)
     ===============================================================================================================
</TABLE>

     (a)  The change in the foreign currency translation adjustment is not
          adjusted for income taxes as it relates to indefinite 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 are excluded from net loss and are included in
          comprehensive loss until they are realized.

     (c)  Includes $7 (pre-tax $11) of net derivative losses related to the
          adoption of SFAS 133. During the three months and six months ended
          June 30, 2001, nil and $5, respectively, of net derivative losses were
          reclassified to selling, general and administrative expense.

15.  CONTINGENCIES

     Subsequent to the February 15, 2001 announcement in which Nortel Networks
     Corporation provided revised guidance for financial performance for the
     2001 fiscal year and the first quarter of 2001, Nortel Networks Corporation
     and certain of its then current officers and directors have been named as
     defendants in more than twenty-five purported class action lawsuits. These
     lawsuits, which have been filed through June 26, 2001, 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 in the
     provinces of Ontario and Quebec in Canada, on behalf of shareholders who
     acquired Nortel Networks Corporation's securities as early as October 24,
     2000 and as late as February 15, 2001, allege violations of United States
     federal and Canadian provincial securities laws. In addition, a class
     action lawsuit was 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 between January 18, 2001 and
     February 15, 2001, alleging violations of the same United States federal
     securities laws as the other lawsuits. On May 11, 2001, Nortel Networks
     Corporation filed motions to dismiss and/or stay in connection with the
     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.

     On February 12, 2001, Nortel Networks Inc., a subsidiary of the Company,
     was served with a consolidated amended class action complaint (the
     "Complaint") that purported to add Nortel Networks Corporation as a
     defendant to a lawsuit commenced in July 2000 against Entrust, Inc.
     ("Entrust", formerly known as Entrust Technologies, Inc.) and three of its
     then current officers in the United States District Court of Texas,
     Marshall Division. The Complaint alleges that Entrust, certain then current
     officers of Entrust, and Nortel Networks Corporation violated the
     Securities Exchange Act of 1934 with respect to certain statements made by
     Entrust. Nortel Networks Corporation is alleged to be a controlling person
     of Entrust. On April 6, 2001, Nortel Networks Corporation filed a motion to
     dismiss the Complaint. On July 31, 2001, the Complaint was dismissed
     without prejudice. In order to bring another action, the plaintiffs must
     file an amended complaint meeting the standards set forth by the court in
     the July 31, 2001 opinion by August 30, 2001.

     On March 4, 1997, Bay Networks, Inc. ("Bay Networks"), a company acquired
     by the Company 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


                                       19
<PAGE>   20
     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 and on
     September 8, 2000, a notice of appeal of that order and judgment was filed
     by the plaintiffs. In January 2001, the plaintiffs filed their opening
     brief in the United States Court of Appeal for the Ninth Circuit and the
     defendants filed their responsive brief in April 2001. The oral arguments
     for the appeal were heard on July 11, 2001 and on August 1, 2001, the Ninth
     Circuit denied the plaintiffs' appeal. On April 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 June 18, 2001, the defendants
     removed the consolidated state court actions to the Federal Court, on the
     grounds that the class claims asserted by the complaint are barred by the
     Securities Litigation Uniform Standards Act. The defendants have filed a
     motion to dismiss that complaint, while the various plaintiffs have sought
     to have the case remanded to the California Court. The defendants' motion
     to dismiss and the plaintiffs' motion to remand are noticed for hearing on
     September 24, 2001.

     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 of the above matters which seek
     damages of material or indeterminate amounts, and therefore cannot
     determine whether these actions, suits, claims, proceedings and
     investigations will, individually or collectively, have a material adverse
     effect on the business, results of operations, and financial condition of
     Nortel Networks. Unless otherwise noted, Nortel Networks and any named
     directors and officers of Nortel Networks intend to vigorously defend these
     actions, suits, claims, proceedings and investigations.


16.  RECENT PRONOUNCEMENTS

     On June 29, 2001, the Financial Accounting Standards Board approved for
     issuance Statement of Financial Accounting Standards ("SFAS") No. 141,
     "Business Combinations" ("SFAS 141"), and SFAS No. 142, "Goodwill and Other
     Intangible Assets" ("SFAS 142"). SFAS 141 requires that the purchase method
     of accounting be used for all business combinations initiated after June
     30, 2001. As a result, the pooling-of-interests method will be
     prohibited. SFAS 142 changes the accounting for goodwill from an
     amortization method to an impairment-only approach. Thus, amortization of
     goodwill, including goodwill recorded in past business combinations, will
     cease upon adoption of this Statement, which for Nortel Networks will be
     January 1, 2002. However, for any acquisitions completed after June 30,
     2001, goodwill and intangible assets with an indefinite life will not be
     amortized.

     The adoption of SFAS 141 will not have an impact on the business, results
     of operations, and financial condition of Nortel Networks. The Company is
     still evaluating the impact of the adoption of SFAS 142 and has not yet
     determined the effect of adoption on the business, results of operations,
     and financial condition of Nortel Networks.

17.  COMPARATIVE FIGURES

     Certain comparative figures in the accompanying unaudited Consolidated
     Financial Statements have been reclassified to conform with the current
     period's presentation.


                                       20
<PAGE>   21
ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS

     You should read this section in conjunction with our unaudited consolidated
financial statements and notes, which begin on page 4. This section adds
additional analysis of our operations and current financial condition and also
contains forward-looking statements and should be read in conjunction with the
factors set forth below under "Forward-looking statements," on page 37. 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 the "Company," we mean Nortel Networks Limited without its
subsidiaries. Where we say "we," "us," "our," or "Nortel Networks," we mean the
Company and its subsidiaries.

OVERVIEW

     Nortel Networks Corporation's common shares are publicly-traded on the New
York and Toronto stock exchanges under the symbol "NT". The Company is the
principal direct operating subsidiary of Nortel Networks Corporation. Nortel
Networks Corporation owns all of the Company's outstanding common shares and
none of the Company's preferred shares. Acquisitions involving any share
consideration are completed by Nortel Networks Corporation and acquisitions
involving only cash consideration are generally completed by the Company.

DEVELOPMENTS IN 2001

Discontinued operations

     On June 15, 2001, as a result of the initiatives to streamline our
businesses, we announced plans to discontinue our access solutions operations.
We expect to exit, dispose of, or otherwise transition our ownership in the
various businesses and investments associated with the access solutions
operations over the next 12 months.

     The access solutions operations were previously included as a separate
operating segment within other, in addition to the global professional services
operating segment and customer premises-based solutions operating segment.
Pursuant to Accounting Principles Board Opinion No. 30, "Reporting the Results
of Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,"
we have restated our unaudited consolidated financial statements and related
notes to reflect the decision to discontinue Nortel Networks access solutions
operations for all comparative periods presented. Accordingly, the revenues,
costs and expenses, assets and liabilities, and cash flows of Nortel Networks
access solutions operations have been segregated in the accompanying unaudited
consolidated statements of operations, consolidated balance sheets, and
consolidated statements of cash flows, and are reported as "discontinued
operations". In conjunction with this decision, we have restated certain
historical financial statements and we refer you to the Company's audited
consolidated financial statements and notes thereto for the year ended December
31, 2000 and unaudited consolidated financial statements and notes thereto for
the three months ended March 31, 2001, restated for discontinued operations, and
included in the Company's Current Report on Form 8-K, filed with the United
States Securities and Exchange Commission on August 8, 2001.

     We recorded a net loss of $2,538 from discontinued operations for the six
months ended June 30, 2001. The net loss is comprised of a $354 net loss from
operations and a $2,184 net loss on disposal. The estimated loss on disposal of
the access solutions operations reflects the costs directly associated with
discontinuing operations and the net loss of the access solutions operations
during the phase-out period. Major components of the loss include future
contractual obligations and estimated liabilities of $1,059 (pre-tax);
provisions for both short-term and long-term receivables of $600 (pre-tax); the
write-off of goodwill associated with the acquisition of Promatory
Communications, Inc. of $417 (pre-tax); and provisions for inventories of $381
(pre-tax).

     At June 30, 2001, the remaining accrual of $1,231 primarily related to
future contractual obligations and estimated liabilities during the planned
period of disposition. The remaining accruals are expected to be drawn down by
cash payments, the impact of which will be partially offset to the extent of any
cash inflows from the realization of the remaining assets related to
discontinued operations, over the planned period of disposition.


                                       21
<PAGE>   22
     On August 3, 2001, Nortel Networks Corporation announced the completion of
the previously announced transfer of Nortel Networks ownership interest in
Arris Interactive LLC to Arris Group, Inc., ANTEC Corporation's new parent
company. Under the terms of the agreement, Nortel Networks will own a 49.2
percent non-controlling interest in Arris Group, compared to the previous 81.25
percent controlling interest in Arris Interactive.

     For additional information related to discontinued operations, see
"Discontinued operations" on page 10 in note 4.

     The following discussion focuses on our results from continuing operations.

Special charges

     Restructuring activities

     In an effort to reset our cost structure to the current business level, on
June 15, 2001 Nortel Networks Corporation announced plans for further aggregate
net reductions of employees, bringing the total aggregate net reductions of
employees announced to date during 2001 to 30,000. The 30,000 workforce
reductions are expected to be substantially completed by the end of the third
quarter of 2001. Special charges with respect to the notification of
approximately 20,000 employees, contract settlement and lease costs, the write
down of plant and equipment, and the write-off of goodwill associated with
restructuring activities in the first six months of 2001 were $1,503. An
additional charge will be recorded in the third quarter of 2001 as the
previously announced workforce reduction initiative is completed and criteria
for the recording of such charges are met. See "Special charges" on page 31 for
additional details related to restructuring activities undertaken up to June 30,
2001.

     Write down of intangible assets

     As part of our review of financial results during the three months ended
June 30, 2001, we performed an assessment of the carrying values of intangible
assets recorded in connection with our various acquisitions. The assessment was
performed in light of the significant negative industry and economic trends
impacting both our current operations and expected future growth rates, and the
adjustment of technology valuations. The conclusion of that assessment was that
the decline in market conditions within our industry was significant and other
than temporary. As a result, we recorded a $2,133 (pre-tax) write down of
intangible assets in the three months ended June 30, 2001, based on the amount
by which the carrying amount of these assets exceeded their fair value. The
write down is primarily related to the goodwill associated with the acquisitions
of Qtera Corporation and Clarify Inc. within the network infrastructure
segment. See "In-process research and development expense and amortization of
intangibles" on page 30 and "Special charges" on page 31 for additional details.

Conversion of preferred shares

     On July 26, 2001, Nortel Networks Corporation announced that it will issue
common shares to those registered holders of Cumulative Redeemable Class A
Preferred Shares Series 4 of the Company who have exercised their rights to
exchange their Series 4 preferred shares for common shares of Nortel Networks
Corporation. The number of common shares to be issued for each Series 4
preferred share will be determined by dividing $0.5 (Canadian) by the greater of
$2.50 per common share (Canadian) and 95 percent of the weighted average trading
price per common share of Nortel Networks Corporation on The Toronto Stock
Exchange for the 10 trading days immediately preceding the date on which such
common shares will be issued in the exchange. Of the 200 outstanding Series 4
preferred shares, 173 Series 4 preferred shares will be exchanged on August 14,
2001. The other 27 Series 4 preferred shares remain outstanding, without any
change to the terms, conditions or rights attaching to such shares.

Legal proceedings

     Subsequent to Nortel Networks Corporation's February 15, 2001 announcement
in which it provided revised guidance for financial performance for the fiscal
year and first quarter 2001, Nortel Networks Corporation and certain of its then
current officers and directors were named as defendants in more than twenty-five
purported class action lawsuits. These lawsuits, which have been filed through
June 26, 2001 in the United States, and in Ontario and Quebec, Canada, on behalf
of shareholders who acquired Nortel Networks Corporation's securities as early
as October 24, 2000 and as late as February 15, 2001, allege violations of
United States federal and Canadian provincial securities laws. In addition, a
class action lawsuit


                                       22
<PAGE>   23
was 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 between January 18, 2001 and February 15, 2001, alleging violation
of the same United States federal securities laws as the other lawsuits. This
case arose after the acquisition on February 13, 2001 by the Company of JDS
Uniphase Corporation's Zurich, Switzerland-based subsidiary, a designer and
manufacturer of strategic 980 nanometer pump-laser chips, and related assets in
Poughkeepsie, New York in exchange for common shares of Nortel Networks
Corporation. In connection with the January 28, 2000 acquisition of Qtera
Corporation, currently an indirect subsidiary of the Company, Qtera and two of
its employees were named as defendants in a lawsuit filed by Siemens ICN in the
15th Judicial Circuit for Palm Beach County, Florida. The lawsuit alleges
various claims, including purported misappropriation of trade secrets. Nortel
Networks Corporation intends to vigorously defend all such served actions. See
"Legal proceedings" on page 35 for additional details.

Debt issuance

     On February 8, 2001, the Company completed an offering of $1,500 of 6.125
percent notes which mature on February 15, 2006. The notes will pay interest on
a semi-annual basis on February 15 and August 15, beginning on August 15, 2001.
The notes are redeemable, at any time at the Company's option, at a redemption
price equal to the principal amount thereof plus accrued and unpaid interest and
a "make-whole" premium. See "Liquidity and capital resources" on page 33 for
additional details.

FINANCIAL RESULTS

     Revenues for the three months and six months ended June 30, 2001 decreased
substantially compared to the same periods in 2000. We reported net losses from
continuing operations for the three months and six months ended June 30, 2001,
of $5,381 and 6,732, respectively, primarily due to substantial decreases in
revenues and gross margins as a result of the significant adjustment in the
global telecom industry, particularly in the United States, and continuing
economic concerns, fixed infrastructure costs that no longer reflected the lower
sales volumes during the first half of 2001, the write down of intangible assets
during the second quarter of 2001, and increased inventory provisions. Gross
margins for the three months and six months ended June 30, 2001 were 8 percent
and 21 percent, respectively, compared to 46 percent and 44 percent,
respectively, for the same periods in 2000.

RESULTS OF OPERATIONS - THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2001 VERSUS
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000

     Our customers, markets, and solutions continue to evolve. As a result, the
specific customer groups identified within our previous service provider and
carrier segment and enterprise segment have now merged or become uniform. In
response to this change, we have changed the way we manage our business to
reflect a focus on providing seamless networking solutions and service
capabilities to our customers. Financial information by segment and customer
solution has been restated and reported on the new basis commencing in the three
month period ended March 31, 2001.

NETWORK INFRASTRUCTURE - This operating segment consists of all networking
solutions and includes optical inter-city transmission products, metropolitan
optical transmission products, core Internet Protocol networking solutions
(including packet and circuit switching), eBusiness and service solutions, and
applications solutions and services for wireless networks. These networking
solutions are used by service provider, carrier, and enterprise customers,
including incumbent and competitive local exchange carriers, interexchange
carriers, global carriers, wireless network providers, Internet service
providers, application service providers, resellers, public utilities, cable
television companies, large enterprises and their branch offices, small
businesses, and home offices, as well as government, education, and utility
organizations.

PHOTONICS COMPONENTS - This operating segment consists of the optical and
electronic component design and manufacturing operations for incorporation into
Nortel Networks own products and for sale to other networking systems
manufacturers and includes active and passive optical components, lasers and
filters, transmitters and receivers, modules and subsystems, and
microelectronics devices.

OTHER - Other represents operating segments and business activities which
include certain customer premises-based voice and data networking solutions,
global professional services, and civil works and original equipment
manufacturer offerings. None of these operating segments or business activities
meet the criteria to be disclosed as reportable segments.



                                       23
<PAGE>   24


REVENUES

Segment revenues

The following table sets forth information by segment for the three months and
six months ended June 30, 2001 and 2000:

<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------------------------------------------
                                                                THREE MONTHS ENDED JUNE 30,       SIX MONTHS ENDED JUNE 30,
                                                                 2001              2000              2001              2000
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>               <C>              <C>               <C>
Network infrastructure                                      $   3,527         $   5,869        $    8,041        $   10,489
Photonics components                                              105               535               405               937
Other                                                           1,002             1,245             2,087             2,351
Intersegment sales elimination                                    (63)             (442)             (273)             (753)
-----------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED                                                $   4,571         $   7,207        $   10,260        $   13,024
=============================================================================================================================
</TABLE>


Customer solutions revenues

The following table sets forth external revenues by customer solutions for the
three months and six months ended June 30, 2001 and 2000:

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
                                                            THREE MONTHS ENDED JUNE 30,          SIX MONTHS ENDED JUNE 30,
                                                              2001              2000              2001              2000
---------------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>               <C>              <C>               <C>
Optical inter-city                                       $     292         $   1,799        $    1,284        $    3,223
Local internet                                               1,713             2,802             3,770             4,936
Wireless internet                                            1,522             1,268             2,987             2,330
Other (a)                                                    1,044             1,338             2,219             2,535
---------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED                                             $   4,571         $   7,207        $   10,260        $   13,024
=============================================================================================================================
</TABLE>

(a)  Other includes the external customer solutions revenue of the photonics
     components segment of $42 and $93 for the three months ended June 30, 2001
     and 2000, respectively, and $132 and $184 for the six months ended June 30,
     2001 and 2000, respectively.

CONSOLIDATED

     The $2,636, or 37 percent, decline in revenues for the three months ended
June 30, 2001, compared to the same period in 2000, was due to a
substantial decline in network infrastructure segment revenues, a
significant decline in other revenues, and a substantial decline in photonics
components external revenues. The $2,764, or 21 percent, decline in revenues
for the six months ended June 30, 2001, compared to the same period in 2000, was
due to a substantial decline in network infrastructure segment
revenues, a significant decline in other revenues, and a substantial decline
in photonics components external revenues. Consolidated revenues for
the three months and six months ended June 30, 2001 declined substantially
overall compared to the same periods in 2000 as a result of reduced and/or
deferred capital spending by our customers, particularly in the United States,
as they changed their focus from building new networks to increasing the
capacity utilization rates and the efficiency of existing networks.


                                       24
<PAGE>   25


     The global telecom industry is undergoing a significant adjustment,
particularly in the United States. Following a period of rapid infrastructure
build-out and strong economic conditions in 1999 and 2000, we saw tighter
capital markets and a slowdown in the telecom industry in the first six months
ended June 30, 2001, which resulted in lower capital spending by industry
participants and less demand for our products and services as service providers
focused on driving return on invested capital. As a result, overall revenues in
the United States declined substantially for the first six months ended June 30,
2001 compared to the same period in 2000. We expect that the severe lack of
available funding from capital markets, high debt levels at many service
providers, and the compounding impact of economic concerns will continue to
constrain capital spending by service providers. While there can be no certainty
as to the duration or severity of this industry adjustment, meaningful growth in
spending is not expected to occur before the second half of 2002 after economic
concerns subside and anticipated rationalization of the telecom industry is well
underway. As a result, it is not currently possible to provide specific guidance
for the Company's financial performance for the third quarter or full year 2001
and we do not expect that results of operations for any quarter will necessarily
be consistent with our quarterly historical profile or indicative of results to
be expected for future quarters.

     The significant adjustment in the telecom industry, which was initially
felt and continues to be most severe in the United States, has begun to impact
other countries and geographic regions in which we conduct business. We cannot
predict the extent and duration of the impact of the significant adjustment in
the United States on economies in Canada, Europe, and other countries and
geographic regions. A comparable impact on the telecom industry in those
countries and regions could result in further reductions in our overall revenues
as there have been increasing shifts in the geographic mix of our sales from the
United States to Europe and the Asia Pacific region during the first and second
quarters of 2001.

     We expect to continue to focus on potentially higher-growth areas,
including wireless internet and optical inter-city customer solutions and the
metro and core Internet Protocol networks portions of our local internet
customer solutions, and to continue to reduce our investment in lower margin,
lower growth, and/or non-strategic businesses, which may include disposing of
or otherwise exiting certain businesses.

NETWORK INFRASTRUCTURE

     The $2,342, or 40 percent, decline in revenues for the three months ended
June 30, 2001, compared to the same period in 2000, was due to substantial
declines in sales of optical inter-city and local internet customer solutions,
partially offset by a significant increase in sales of wireless internet
customer solutions.

     The $2,451, or 23 percent, decline in revenues for the six months ended
June 30, 2001, compared to the same period in 2000, was due to substantial
declines in sales of optical inter-city and local internet customer solutions,
partially offset by a considerable increase in sales of wireless internet
customer solutions.

Optical inter-city

     The $1,507, or 84 percent, decline in revenues for the three months ended
June 30, 2001, compared to the same period in 2000, was primarily the result of
substantial declines in the United States, Canada, and Europe, partially offset
by a considerable increase in the Asia Pacific region. The $1,939, or 60
percent, decline in revenues for the six months ended June 30, 2001, compared to
the same period in 2000, was the result of substantial declines in the United
States and Canada, and a significant decline in the Caribbean and Latin America
region, partially offset by a substantial increase in the Asia Pacific region,
and a substantial increase in Europe driven by strong demand during the first
quarter of 2001. The substantial declines in sales for the three months and six
months ended June 30, 2001, compared to the same periods in 2000, were the
result of reductions and/or continuing deferrals in capital spending, primarily
by our major United States customers. Our major customers are currently focusing
on driving return on invested capital by increasing the capacity utilization
rates and efficiency of existing networks, and we expect that any additional
capital spending by those customers will be increasingly directed to
opportunities that enhance customer performance in the near term.

Local internet

     The $1,089, or 39 percent, decline in revenues for the three months ended
June 30, 2001, compared to the same period in 2000, was primarily the result of
substantial declines in sales of the circuit switching portion of our local
internet customer solutions and sales of certain optical products having a metro
application, and a significant decline in sales of the

                                       25
<PAGE>   26
core Internet Protocol networks portion of our local internet customer
solutions, partially offset by considerable growth in sales of the next
generation metro portion of our local internet customer solutions. The
substantial decrease in sales of the circuit switching portion of our local
internet customer solutions was primarily the result of reduced demand in the
exchange carrier market due to the significant adjustment in the telecom
industry and the tightening capital markets. The considerable decrease in sales
of the optical products having a metro application was due to declines in the
sales volumes of mature products in this category. The significant decline in
sales of the core Internet Protocol networks portion of our local internet
customer solutions was primarily the result of a decline in demand for
multi-service wide area network, or WAN, switch products due to the continuing
industry adjustment. The considerable growth in sales of the next generation
metro portion of our local internet customer solutions was primarily due to the
continued build-out of metro networks by our major customers in order to
interconnect the previous build-out of inter-city networks and reduce capacity
bottlenecks. The substantial decline in overall sales of local internet customer
solutions for the three months ended June 30, 2001, compared to the same period
in 2000, was primarily due to substantial declines in the United States, Europe,
and Canada.

     The $1,169, or 24 percent, decline in revenues for the six months ended
June 30, 2001, compared to the same period in 2000, was primarily the result of
substantial declines in sales of the circuit switching portion of our local
internet customer solutions and certain optical products having a metro
application, partially offset by considerable growth in sales of the next
generation metro portion of our local internet customer solutions and a
significant increase in sales of the core Internet Protocol networks portion of
our local internet customer solutions. The substantial decrease in sales of the
circuit switching portion of our local internet customer solutions was primarily
the result of reduced demand in the exchange carrier market due to the
significant adjustment in the telecom industry and the tightening capital
markets. The substantial decrease in sales of the optical products having a
metro application was due to declines in the sales volumes of mature products in
this category. The considerable growth in sales of the next generation metro
portion of our local internet customer solutions was primarily due to the
continued build-out of metro networks by our major customers in order to
interconnect the previous build-out of inter-city networks and reduce capacity
bottlenecks. The significant growth in sales of the core Internet Protocol
networks portion of our local internet customer solutions was primarily driven
by strong demand for multi-service WAN switch products during the first quarter
of 2001 compared to the same period in 2000. Demand for these products remained
strong in the first quarter of 2001 as major customers completed existing
network build-outs, but declined in the second quarter of 2001 as the industry
adjustment continued. The substantial decline in overall sales of local internet
customer solutions for the six months ended June 30, 2001, compared to the same
period in 2000, was primarily due to a substantial decline in the United States
and a decline in Europe, partially offset by a considerable increase in the
Caribbean and Latin America region and an increase in the Asia Pacific region.

Wireless internet

     The $254, or 20 percent, growth in revenues for the three months ended June
30, 2001, compared to the same period in 2000, was primarily the result of
considerable growth in the Asia Pacific region and the United States, partially
offset by a substantial decline in the Caribbean and Latin America region and a
significant decline in Europe. The $657, or 28 percent, growth in revenues for
the six months ended June 30, 2001, compared to the same period in 2000, was
primarily the result of considerable growth in the United States and the Asia
Pacific region, partially offset by a substantial decline in the Caribbean and
Latin America region and a significant decline in Europe. The growth in sales
for the three months and six months ended June 30, 2001 was primarily the result
of continuing network expansions by major United States and Asia Pacific region
customers, partially offset by lower sales in the Caribbean and Latin America
region due to our providing limited, incremental customer financing as a result
of the current market conditions and the decline of customers' financial
condition.

PHOTONICS COMPONENTS

     Revenues declined $430, or 80 percent, for the three months ended June 30,
2001, and $532, or 57 percent, for the six months ended June 30, 2001, compared
to the same periods in 2000. The substantial declines for the three months and
six months ended June 30, 2001, compared to the same periods in 2000, were
primarily the result of substantial declines in internal sales to the network
infrastructure segment due to the reductions and/or continuing deferrals in
capital spending by our major United States customers and declines in sales to
external customers. The decrease in sales of photonics components to external
customers, compared to the same periods in 2000, was primarily the result of
substantial declines in the United States and Europe for the three months ended
June 30, 2001, and a substantial decline in the United States and a significant
decline in Europe for the six months ended June 30, 2001, respectively.

                                       26
<PAGE>   27

OTHER

     Other declined $243, or 20 percent, for the three months ended June 30,
2001, compared to the same period in 2000, primarily due to substantial declines
in sales of customer premises-based solutions and civil works and original
equipment manufacturer offerings, which more than offset a considerable increase
in global professional services revenues. The significant decline overall in
other revenues was primarily due to substantial declines in the United States
and the Caribbean and Latin America region, and a significant decline in Europe.
Other declined $261, or 11 percent, for the six months ended June 30, 2001,
compared to the same period in 2000, primarily due to a significant decline in
sales of customer premises-based solutions and a substantial decline in sales of
civil works and original equipment manufacturer offerings, which more than
offset a considerable increase in global professional services revenues. The
significant decline overall in other revenues for the six months ended June 30,
2001 was primarily due to a significant decline in the United States, and
substantial declines in Canada and the Caribbean and Latin America region,
partially offset by a modest increase in Europe. The substantial increase in
global professional services revenues for the three months and six months ended
June 30, 2001, compared to the same periods in 2000, was due to increasing
professional services opportunities in the market as a result of customers'
focus on improving capacity utilization rates and the efficiency of existing
networks due to tightening capital markets and accelerating industry
rationalization. The declines in sales of customer premises-based solutions of
$201, to $616, for the three months ended June 30, 2001, and $284, to $1,298,
for the six months ended June 30, 2001, compared to the same periods in 2000,
were primarily due to lower sales of mature voice products as a result of the
business and economic environment, primarily in the United States, and as a
result of the shift in the market from the legacy voice products to next
generation products.

GROSS PROFIT AND GROSS MARGIN

The following tables set forth information by segment for the three months and
six months ended June 30, 2001 and 2000:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------
                                                                THREE MONTHS ENDED JUNE 30,       SIX MONTHS ENDED JUNE 30,
                                                                 2001              2000              2001              2000
------------------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>               <C>               <C>               <C>
GROSS PROFIT
Network infrastructure                                      $     365         $    2,609        $   1,868         $    4,661
Photonics components                                             (171)               204             (115)               332
Other                                                             175                463              436                760
Intersegment inventory unrealized profit elimination -
net                                                                (4)                 -              (10)               (10)
------------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED                                                $     365         $    3,276        $   2,179         $    5,743
==============================================================================================================================

GROSS MARGIN
Network infrastructure                                           10.3 %             44.5%            23.2 %              44.4%
Photonics components                                           (162.9)%             38.1%           (28.4)%              35.4%
Other                                                            17.5 %             37.2%            20.9 %              32.3%
Consolidated                                                      8.0 %             45.5%            21.2 %              44.1%

</TABLE>

CONSOLIDATED

     Gross profit decreased substantially for the three months and six months
ended June 30, 2001, compared to the same periods in 2000, due to substantial
declines in revenues and gross margin. The decreases in gross margin of 37.5
percentage points, or 82 percent, for the three months ended June 30, 2001, and
22.9 percentage points, or 52 percent, for the six months ended June 30, 2001,
compared to the same periods in 2000, were due to substantial decreases in gross
margins in the network infrastructure and photonics components segments, and
other. The decrease in gross margin was, in large part, due to approximately
$750 of increased inventory provisions, and contract and customer settlements as
a result of the significant adjustment in the telecom industry. We review the
levels of our inventory provisions on a regular basis, and as a result of our
review during the three months ended June 30, 2001 we increased our inventory
provisions based on our standard policies to reflect both current and
anticipated future market demand.

                                       27
<PAGE>   28

NETWORK INFRASTRUCTURE

     Gross margins decreased 34.2 percentage points, or 77 percent, for the
three months ended June 30, 2001, and 21.2 percentage points, or 48 percent, for
the six months ended June 30, 2001, compared to the same periods in 2000. The
substantial declines in gross margins were primarily the result of fixed
infrastructure costs that no longer reflected the lower sales volumes during the
first half of 2001, the increased inventory provisions and contract and customer
settlements recorded during the second quarter of 2001, as outlined above, and
shifts in the geographical mix of sales from the United States to Europe and the
Asia Pacific region, where we generally earn lower gross margins. We are
currently undertaking the initiatives announced during the second quarter of
2001, and have continued with our initiatives that began during the first
quarter of 2001, to streamline our businesses and reduce our cost structure to
reflect the current business environment. Any inability to proportionately
reduce our fixed infrastructure costs to reflect the expected business level
could result in further reductions in gross margin. The significant adjustment
in the global telecom industry, particularly in the United States, has lead to
increasing shifts in the geographic mix of sales from the United States to
Europe and the Asia Pacific region during the first and second quarters of 2001.
Further shifts in the geographic mix could result in further reductions in gross
margin.

PHOTONICS COMPONENTS

     Gross margin decreased 201.0 percentage points, or 528 percent, for the
three months ended June 30, 2001, and 63.8 percentage points, or 180 percent,
for the six months ended June 30, 2001, compared to the same periods in 2000.
The substantial declines in gross margins for the three months and six months
ended June 30, 2001, compared to the same periods in 2000, were primarily due to
fixed infrastructure costs, which, in part, related to significant capital
expenditures incurred in 2000 to meet the then expected future increase in
demand for photonics components, and the increased inventory provisions and
contract and customer settlements recorded during the second quarter of 2001, as
outlined above. During the second quarter, we recorded a charge to write down
certain fixed assets within this segment and we will continue to review the
recoverability of fixed assets and capacity requirements in relation to the
current business environment and outlook for the industry.

OTHER

     Gross margin for other decreased by 19.7 percentage points, or 53 percent,
for the three months ended June 30, 2001, compared to the same period in 2000,
primarily due to a substantial decrease in gross margin for global professional
services and a significant decrease in gross margin for customer premises-based
solutions. Gross margin for other decreased by 11.4 percentage points, or 35
percent, for the six months ended June 30, 2001, compared to the same period in
2000, primarily due to a significant decline in gross margin for global
professional services and a decrease in gross margin for customer premises-based
solutions. The substantial decrease in gross margin for global professional
services for the three months ended June 30, 2001, and the significant decrease
in gross margin for the six months ended June 30, 2001, compared to the same
periods in 2000, were primarily due to erosions of gross margins for certain
service offerings. The significant decrease in gross margin for customer
premises-based solutions of 6.6 percentage points, to 34.7 percent, for the
three months ended June 30, 2001, and the decrease in gross margin of 2.3
percentage points, to 37.3 percent, for the six months ended June 30, 2001,
compared to the same periods in 2000, were primarily due to increased inventory
provisions recorded in the second quarter to reflect the current business
outlook and fixed infrastructure costs that did not reflect current sales
volumes.


                                       28
<PAGE>   29


SELLING, GENERAL AND ADMINISTRATIVE EXPENSE

The following table sets forth selling, general and administrative expense for
the three months and six months ended June 30, 2001 and 2000:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
                                                             THREE MONTHS ENDED JUNE 30,          SIX MONTHS ENDED JUNE 30,
                                                                 2001              2000              2001              2000
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>               <C>               <C>               <C>
Selling, general and administrative expense                 $   1,603         $   1,407         $   2,911         $   2,538
  As a percentage of revenues                                   35.1%             19.5%             28.4%             19.5%

</TABLE>



     For the three months ended June 30, 2001, selling, general and
administrative expense, or SG&A expense, increased by $196, compared to the same
period in 2000. SG&A expense has increased significantly for the three months
ended June 30, 2001, compared to the three months ended March 31, 2001,
primarily due to increased provisions related to various customer receivables
and financings, but is flat compared to the three months ended March 31, 2001,
excluding the impact of these increased provisions. For the six months ended
June 30, 2001, SG&A expense increased by $373, compared to the same period in
2000. SG&A expense has increased slightly for the six months ended June 30,
2001, compared to the six months ended December 31, 2000, but has decreased
approximately $222, excluding the impact of increased provisions recorded in the
second quarter of 2001 related to various customer receivables and financings.
The significant increase in SG&A expense for the three months and six months
ended June 30, 2001, compared to the same periods in 2000, reflected the
increased investment in North American and international markets across the
network infrastructure and photonics components segments during the second half
of 2000 to support our revenue growth during that period. SG&A expense is
expected to decline during the second half of 2001 as the full impact of
initiatives undertaken by us to streamline our business and reduce our cost
structure are expected to be realized. The considerable increase in SG&A expense
as a percentage of revenue for the three months and six months ended June 30,
2001, compared to the same periods in 2000, was primarily due to the substantial
decrease in revenues.

RESEARCH AND DEVELOPMENT EXPENSE

The following table sets forth research and development expense for the three
months and six months ended June 30, 2001 and 2000:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
                                                                THREE MONTHS ENDED JUNE 30,       SIX MONTHS ENDED JUNE 30,
                                                                 2001              2000              2001              2000
----------------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>               <C>              <C>               <C>
Research and development expense                             $    870          $    925         $   1,776         $   1,697
  As a percentage of revenues                                   19.0%             12.8%             17.3%             13.0%
</TABLE>

     For the three months ended June 30, 2001, research and development expense
decreased by $55, compared to the same period in 2000. The decrease in research
and development expense reflects the initiatives undertaken by us to focus our
spending on key potential growth areas. For the six months ended June 30, 2001,
research and development expense increased by $79, compared to the same period
in 2000. The slight increase in research and development expense for the six
months ended June 30, 2001, compared to the same period in 2000, was the result
of a significant increase in the first quarter of 2001 following the increase in
research and development expense in the second half of 2000 supporting the
higher business level in that period. Research and development expense
represents our planned investment in the network infrastructure segment,
including wireless internet, optical inter-city customer solutions, and the core
Internet Protocol networks and metro optical portions of our local internet
customer solutions. The considerable increase in research and development
expense as a percentage of revenues for the three months and six months ended
June 30, 2001, compared to the same periods in 2000, was due to the substantial
decline in revenues during the same periods. Research and development expense in
absolute dollars has declined for the three months ended June 30, 2001, compared
to the three months ended March 31, 2001, and for the six months ended June 30,
2001, compared to the six months ended December 31, 2000, as a result of the
initiatives undertaken to focus our spending on key potential growth areas. As a
result, research and development expense in absolute dollars is expected to
decline in full year 2001, compared to full year 2000.


                                       29
<PAGE>   30

IN-PROCESS RESEARCH AND DEVELOPMENT EXPENSE AND AMORTIZATION OF INTANGIBLES

The following table sets forth in-process research and development expense and
amortization of intangibles for the three months and six months ended June 30,
2001 and 2000:

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
                                                                THREE MONTHS ENDED JUNE 30,       SIX MONTHS ENDED JUNE 30,
                                                                 2001              2000              2001              2000
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                <C>               <C>        <C>               <C>
In-process research and development expense                   $     -           $     -         $       -         $     623
Amortization of intangibles
  Acquired technology                                         $   203           $   203         $     406         $     384
  Goodwill                                                    $   679           $   660         $   1,361         $   1,127
</TABLE>

In-process research and development expense

     For the six months ended June 30, 2000, in-process research and development
expense primarily related to the acquisition of Qtera Corporation.

Amortization of intangibles

Acquired technology

     The amortization of acquired technology for the three months and six months
ended June 30, 2001 and 2000 primarily reflected the charges related to the
acquisition of Bay Networks, Inc. As at June 30, 2001 and December 31, 2000, the
capitalized amount of acquired technology - net was $218 and $623, respectively.

Goodwill

     The amortization of goodwill for the three months and six months ended June
30, 2001 and 2000 primarily reflected the charges related to the acquisitions of
Bay Networks, Qtera, Clarify Inc. As at June 30, 2001 and December 31, 2000, the
capitalized amount of goodwill - net was $3,154 and $6,724, respectively.

     The above impacts to our results of operations for the three months and six
months ended June 30, 2001 were primarily a result of the large number and value
of acquisitions completed from 1998 to 2000.

     As part of our review of financial results during the three months ended
June 30, 2001, we performed an assessment of the carrying values of intangible
assets recorded in connection with our various acquisitions. The assessment was
performed in light of the significant negative industry and economic trends
impacting both our current operations and expected future growth rates, and the
adjustment of technology valuations. The conclusion of that assessment was that
the decline in market conditions within our industry was significant and other
than temporary. As a result, we recorded a $2,133 write down of intangible
assets in the three months ended June 30, 2001, based on the amount by which the
carrying amount of these assets exceeded their fair value. The write down is
primarily related to the goodwill associated with the acquisitions of Qtera and
Clarify within the network infrastructure segment. This charge was in addition
to the ongoing amortization of intangibles of $882 in the second
quarter of 2001, as previously discussed above.

     Fair value was determined based on discounted future cash flows for the
businesses that had separately distinguishable intangible asset balances and
whose operations had not yet been fully integrated into Nortel Networks. The
cash flow periods used were five years, the discount rate used was 20 percent,
and the terminal values were estimated based upon terminal growth rates ranging
from 5 to 11 percent. The assumptions supporting the estimated future cash
flows, including the discount rate and estimated terminal values, reflect
management's best estimates. The discount rate was based upon Nortel Networks
weighted average cost of capital as adjusted for the risks associated with the
operations.


                                       30
<PAGE>   31

     There was no impairment in enterprise level goodwill during the three month
period ended June 30, 2001. The Company has determined that the remaining
intangible asset balances will continue to be amortized on a straight-line basis
over the remaining useful lives established at the time of the related
acquisition as the remaining useful life of these intangible assets has not
changed. As a result, the ongoing amortization of intangibles for the third and
fourth quarters of 2001, based on balances as at June 30, 2001, is expected to
be approximately $500 and $400, respectively.

SPECIAL CHARGES

2001

     For the three months and six months ended June 30, 2001, we recorded
special charges of $3,275 and $3,630 respectively. In part, these special
charges related to restructuring and other costs associated with our initiatives
that began in 2000 to optimize results and drive efficiencies in our business by
streamlining operations and activities that are not aligned with our core
markets and leadership strategies. In addition, given the current adjustment
within the telecommunication industry, we reviewed the remaining carrying values
of intangible assets and certain plant and equipment as part of our review of
financial results for the three months ended June 30, 2001 and recorded special
charges as a result of that review.

     Restructuring activities primarily related to workforce reduction costs
announced during the six months ended June 30, 2001 to reduce the number of
employees from December 31, 2000 levels, contract settlement and lease costs,
and the write-off of goodwill and equipment and leaseholds associated with the
restructuring activities. Special charges for such actions for the six months
ended June 30, 2001 was $1,503. Workforce reduction charges for the three
months and six months ended June 30, 2001, related to the cost of severance and
benefits associated with approximately 12,000 and 20,000 employees notified of
termination, respectively. Of the 20,000 employees notified by June 30, 2001,
approximately 8,500 were direct employees performing manufacturing, assembly,
test and inspection activities associated with the production of our solutions,
and approximately 11,500 were indirect sales, marketing, and administrative
employees, and manufacturing managers. The workforce reduction was primarily in
North America and the United Kingdom and extended across all of our operating
segments. Additional charges are expected in the third quarter of 2001 as the
previously announced workforce reduction initiative is completed and criteria
for the recording of such charges are met. Workforce reduction cost savings as a
result of the restructuring activities will reduce overall employee expense in
the areas of cost of revenues, selling general and administrative expense, and
research and development expense. The reduction in employee expense began in the
first quarter of 2001.

     In conjunction with the above noted workforce reduction, we identified a
number of leased facilities comprised of office and warehouse and manufacturing
space, as well as leased manufacturing equipment, that were no longer required.
As a result, we recorded a charge related to our future contractual obligations
under these operating leases. Additionally, we recorded a charge for contract
settlement costs that included negotiated settlements to either cancel contracts
or renegotiate existing contracts within the network infrastructure segment and
other.

     Plant and equipment write downs of $185 for the three months and six months
ended June 30, 2001 consisted of the write down of leasehold improvements and
certain information technology equipment associated with the exiting of the
above noted leased facilities.

     In addition, as a result of the significant negative industry and economic
trends impacting our current operations and expected future growth rates, we
performed an assessment of certain plant and equipment assets as part of our
review of financial results during the three months ended June 30, 2001. As a
result, we wrote down plant and equipment by $225, primarily composed of
manufacturing equipment and leaseholds, to their estimated net realizable value.
The write down of plant and equipment will impact cost of revenues and selling,
general and administrative expense.

     Within global operations, a function that supports all of our segments, it
was determined that there existed excess test equipment at a number of system
houses that was no longer required as a result of the current industry and
economic environment. We recorded a charge to write down the value of this
equipment to its net realizable value based on the current fair market value for
this type of specialized equipment.


                                       31
<PAGE>   32


     Within photonics components, we wrote down the net carrying value of a
specialized manufacturing facility for the production of optical components
within North America. The write down reflects the current market value based on
market assessments for a general purpose facility. In addition, within photonics
components, it was determined that there existed excess manufacturing equipment
at a number of facilities that was no longer required given the current industry
and economic environment. We recorded a charge to write down the value of this
equipment to its net realizable value based on the current fair market value for
this type of specialized equipment.

     The annual costs and amortization associated with the contract and lease
obligations, write-off of plant and equipment, and the write-off of goodwill
related to the remaining net book value of goodwill recorded on the prior
acquisition of MICOM Communications Corp, will not have a significant impact on
our business, results of operations, or financial condition. The decrease in
costs as a result of the restructuring activities outlined above will primarily
impact cost of revenues, selling, general and administrative expense, and
research and development expense.

     The remaining cash outlays of $676 related to the above restructuring
activities are expected to be substantially completed by the fourth quarter of
2001 and are expected to be funded from available sources of liquidity.

     In the course of reviewing the financial results during the three months
ended June 30, 2001, we determined that the carrying values of intangible assets
significantly exceeded their estimated fair value. Given this assessment, we
determined that intangible assets, primarily composed of goodwill from various
acquisitions within the network infrastructure segment, exceeded their fair
value by $2,133. Refer to "In-process research and development expense and
amortization of intangibles" above for additional details related to the write
down of intangible assets.

     For additional information related to these restructuring activities see
"Special charges" on page 15 in note 7.

OTHER INCOME (EXPENSE)- NET

     For the three months ended June 30, 2001, other expense - net was $44
compared to other income - net of $74 for the same period in 2000. Other expense
- net for the three months ended June 30, 2001 primarily related to the write
down of certain investments to reflect the significant adjustment in the telecom
industry, partially offset by interest income from customer financing. For the
three months ended June 30, 2000, other income - net primarily related to gains
on the disposition of certain investments.

     For the six months ended June 30, 2001, other income - net was $61 compared
to $591 for the same period in 2000. The decrease in other income - net
primarily related to a pre-tax gain of $513 (after-tax $344), due to a sale, in
the first quarter of 2000, of a portion of our share ownership in Entrust, Inc.
(formerly Entrust Technologies, Inc.).

INCOME TAX PROVISION (RECOVERY)

     Our effective tax rates from continuing operations for the three months and
six months ended June 30, 2001 were 32.0 percent compared to 33.0 percent for
the same periods in 2000, excluding the impact of after-tax charges of
Acquisition Related Costs (in-process research and development expense and the
amortization of acquired technology and goodwill from all acquisitions
subsequent to July 1998), stock option compensation and, where applicable,
certain of the one-time gains and one-time charges. The lower effective tax rate
for the three months and six months ended June 30, 2001, compared to the same
periods in 2000, primarily reflected changes in geographic earnings mix. We had
an income tax recovery for the three months and six months ended June 30, 2001
of $1,133 and $1,390, respectively, compared to an income tax provision of $366
and $617, respectively, for the same periods in 2000, primarily as a result of
the net loss before tax for the three months and six months ended June 30, 2001
compared to net earnings before tax for the same periods in 2000.

     Our earnings are subject to different effective tax rates in each of the
countries in which we operate. A change in our overall tax rate can result when
there is a change in our geographic earnings mix.



                                       32
<PAGE>   33


LIQUIDITY AND CAPITAL RESOURCES

Cash flows

     Cash and cash equivalents, or cash, were $1,877 at June 30, 2001, an
increase of $310 from December 31, 2000. The increase in cash was the result of
the Company's debt offering of $1,500 of 6.125 percent notes completed on
February 8, 2001, and an increase of approximately $1,400 in notes payable,
nearly offset by cash requirements for operations, expenditures for plant and
equipment, and increases in long-term receivables.

     Cash flows used in operating activities were $506 for the six months ended
June 30, 2001. Cash flows used in operating activities resulted from a net loss
of $2,775, adjusted for non-cash items, partially offset by cash from operating
assets and liabilities. Cash from operating assets and liabilities was primarily
the result of a decrease in accounts receivable and inventories, partially
offset by a decrease in accounts payable and accrued liabilities. Cash flows
used in operations were, in part, due to cash payments related to the
implementation of the alignment plan.

     Cash flows used in investing activities were $1,221 for the six months
ended June 30, 2001. The use of cash was primarily due to expenditures for plant
and equipment, and a net increase in long-term receivables during the period.
The expenditures of $821 for plant and equipment largely reflect the previously
committed capacity expansion for the network infrastructure and photonics
components segments and purchases related to general infrastructure. We are
currently focusing expenditures for plant and equipment on the core areas of the
business. The previously announced investment plan to expand optical components
and systems production capacity and capability was discontinued during the
second quarter of 2001 as a result of the current business environment. The net
increase in long-term receivables during the period was approximately $410,
primarily attributable to increased funding of customer financings.

     Cash flows generated from financing activities were $2,500 for the six
months ended June 30, 2001. Cash flows primarily resulted from the Company's
debt offering of $1,500 of 6.125 percent notes completed on February 8, 2001,
and net increases in notes payable of $1,421 primarily related to an increase in
borrowings under our commercial paper program, partially offset by repayments of
debt.

Uses of liquidity

     Discontinued operations

     The remaining accruals of $1,231 related to certain future contractual
obligations and estimated contingencies of the discontinued access solutions
operations, and estimated operating losses during the planned period of
disposition, are expected to be drawn down by cash payments, the impact of which
will be partially offset to the extent of any cash inflows from the realization
of the remaining assets related to discontinued operations, over the planned
period of disposition. See "Discontinued operations" on page 10 in note 4 for
additional details.

     Special charges

     The remaining cash outlays of $676 related to workforce reduction costs
announced during the six months ended June 30, 2001 to reduce the number of
employees from December 31, 2000 levels by approximately 20,000 employees, and
contract settlement and lease costs are expected to be substantially completed
by the fourth quarter of 2001. An additional cash charge will be recorded in the
third quarter of 2001 as the previously announced workforce reduction initiative
is completed and criteria for the recording of such charges are met. See
"Special charges" on page 31 for additional details.

     Customer financing and related credit risk

     The competitive environment in which we operate has required in the past,
and we expect may continue to require in the future, that we, and many of our
principal competitors, 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, as well as funding for
certain non-product and service costs associated with network installation and
integration of our products and services, and financing for working capital
purposes and equity financing. At June 30, 2001, we had entered into certain
financing agreements of which the remaining future provision of unfunded
customer financing was up to approximately $2,000.


                                       33
<PAGE>   34
     We expect to continue to hold certain current 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, current capital market conditions, and reduced demand for
telecommunications financings in capital and bank markets. In addition, specific
risks 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. There can be no
assurance that we will be able to place any or all of our current, or future,
customer financing obligations with third-party lenders on terms that we find
acceptable.

     As well, recently certain of our customers, including competitive local
exchange carriers, have filed for bankruptcy or have been experiencing financial
difficulties. Should customers fail to meet their customer financing obligations
to us, we could experience reduced cash flows and losses in excess of
provisions. We review the levels of our customer financing provisions on a
regular basis, and as a result of our review during the three months ended June
30, 2001 we increased our customer financing provisions to reflect the fact that
customers may be unable to meet their repayment obligations to us in the future
as a result of the current market conditions. In addition to being increasingly
selective in providing customer financing, we have various programs in place to
monitor and mitigate customer credit risk, including performance milestones,
other conditions of funding, and active customer financing portfolio reviews.
Management is focused on the strategic use of our limited customer financing
capacity, on revolving that capacity as quickly and efficiently as possible, and
on managing the absolute dollar amount of our customer financing obligations.
However, there can be no assurance that such measures will reduce or eliminate
our exposure to customers' credit risk.

     As part of the selective use of our customer financing capacity, we may
provide customer financing in the future for such customer requirements as
turnkey construction of new networks, particularly 3G wireless operators. We
anticipate that, due to current capital market conditions, we will be required
to directly support a significantly greater amount of such financings compared
to our past experience, in which we have traditionally been able to place a
large amount of our customer financings with third-party lenders. We will
continue to seek to arrange for third-party lenders to assume our customer
financing obligations and to fund other customer financings from working capital
and conventional sources of external financing in the normal course.

     Any unexpected developments in our customer financing arrangements could
have a material adverse effect on our business, results of operations, and
financial condition.

     Supply contracts, network outsourcing contracts, and turnkey arrangements

     We have entered into supply contracts with customers for 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 on a turnkey basis. We have also entered into
network outsourcing contracts with customers to operate their networks. These
supply and network outsourcing contracts may 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 under a turnkey arrangement. Any
unexpected developments in these supply and outsourcing contracts could have a
material adverse effect on our business, results of operations, and financial
condition.

Sources of liquidity

     Subsequent to the February 8, 2001 offering of $1,500 of 6.125 percent
notes by the Company, we have remaining capacity to issue from time to time up
to an aggregate of $1,000 of debt securities and warrants to purchase debt
securities, pursuant to a shelf registration statement filed with the United
States Securities and Exchange Commission.

     Additionally, the Company has also filed in each of the provinces of Canada
a short form prospectus under the Canadian shelf prospectus program qualifying
it to issue up to $500 Canadian of debt securities and warrants to purchase debt
securities. This program will expire on February 23, 2002.



                                       34
<PAGE>   35


     On April 12, 2000, we entered into new five-year syndicated credit
agreements, which permit borrowings in an aggregate amount of up to $750. On
April 11, 2001, we extended and increased our April 12, 2000, 364-day syndicated
credit agreements to permit borrowings in an aggregate amount of up to $1,750
from $1,250, with a one-year term out option to convert outstanding amounts
under the 364-day syndicated credit agreements into term loans on the
termination date of the credit agreements. As a result, total borrowings
permitted under these syndicated credit agreements is $2,500. We had not drawn
on these syndicated credit agreements at June 30, 2001. The agreements continue
to be used to support borrowings under our commercial paper program. At June 30,
2001, borrowings related to the commercial paper program were approximately
$1,400. Refer to the discussion below regarding our debt ratings and also see
"Forward-looking statements" on page 37 for factors which may affect our
commercial paper. On June 14, 2001, we entered into new 364-day credit
agreements to permit additional borrowings in an aggregate amount up to $2,000
with certain banks, with a one-year term out option to convert outstanding
amounts under the credit agreements into term loans on the termination date of
the credit agreements. We had not drawn on these credit agreements as at June
30, 2001. Our credit agreements contain customary covenants, events of default
and conditions to drawdown, including satisfaction of a minimum level of
consolidated tangible net worth. As of June 30, 2001, we were in compliance with
such covenants and conditions. See "Forward-looking statements" on page 37 for
factors which may affect our ability to comply with such covenants and
conditions.

     The total debt to total capitalization ratio of the Company was thirty-two
percent at June 30, 2001, compared to nine percent at December 31, 2000 and
eight percent at June 30, 2000. The increase in the total debt to total
capitalization ratio at June 30, 2001, compared to December 31, 2000, was due to
the reduction in retained earnings as a result of the operating losses and the
write-off of intangible assets, and the increase in total debt due to the
issuance of $1,500 of 6.125 percent notes on February 8, 2001 and commercial
paper borrowings, effected to meet our cash flow requirements.

     On July 3, 2001, Moody's Investors Service lowered the credit ratings on
long term unsecured debt issued or guaranteed by the Company from A2 to A3 and
on preferred shares issued by the Company from a3 to Baa1. Moody's also lowered
the rating on commercial paper guaranteed by the Company from Prime-1 to
Prime-2. In addition, Moody's placed the long term ratings under review for
possible further downgrade. On August 2, 2001, Moody's lowered the ratings on
long term unsecured debt issued or guaranteed by the Company from A3 to Baa1 and
on preferred shares issued by the Company from Baa2 to Baa3. Moody's rating for
commercial paper guaranteed by the Company remained at Prime-2. Moody's ratings
outlook remains negative. On July 18, 2001, Standard & Poor's lowered the credit
ratings on long term unsecured debt issued or guaranteed by the Company from A
to BBB and on the commercial paper issued or guaranteed by the Company from A-1
to A-2. Standard & Poor's also assigned a global scale rating of BB+ and a
Canadian national scale rating of P-3 (High) on preferred shares issued by the
Company. As at July 31, 2001, Standard & Poor's ratings remain on negative
outlook. In their press releases, Moody's and Standard & Poor's stated that the
lowered ratings reflect the considerable decline in purchasing of our products
by service providers and uncertainties as to the duration and severity of the
industry adjustment. Despite the lowered ratings, our ratings remain within
investment grade levels. There can be no assurance that such credit ratings will
not be lowered further or that such rating agencies will not issue adverse
commentaries, resulting in higher financing costs and reduced access to the
capital markets.

     We believe that our current cash and cash equivalents, potential proceeds
from the sale of non-core businesses and/or investments and additional unused
sources of cash available to us as outlined above, and potential proceeds from
other conventional sources of external financing (which may include a variety of
debt and/or convertible debt financings) will satisfy our expected working
capital, capital expenditure, and investment requirements through at least the
next 12 months. However, there can be no assurance that our cash requirements
will not be greater than we currently expect. See "Forward-looking statements"
on page 37 for factors which may affect our cash flows and debt levels.

LEGAL PROCEEDINGS

     Subsequent to Nortel Networks Corporation's February 15, 2001 announcement
in which Nortel Networks Corporation provided revised guidance for financial
performance for the fiscal year and first quarter 2001, Nortel Networks
Corporation and certain of its then current officers and directors have been
named as defendants in more than twenty-five  purported class action lawsuits.
These lawsuits, which have been filed through June 26, 2001 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 in the provinces of Ontario
and Quebec in Canada on behalf of shareholders who acquired Nortel Networks
Corporation's securities as early as October 24, 2000 and as late as February
15, 2001, allege violations of United States federal and Canadian provincial
securities laws. In addition, a class action lawsuit was filed in the United
States District Court for the

                                       35
<PAGE>   36
Southern District of New York on behalf of shareholders who acquired the
securities of JDS Uniphase Corporation between January 18, 2001 and February 15,
2001, alleging violation of the same United States federal securities laws as
the other lawsuits. This case arose after the acquisition on February 13, 2001
by the Company of JDS Uniphase Corporation's Zurich, Switzerland-based
subsidiary, a designer and manufacturer of strategic 980 nanometer pump-laser
chips, and related assets in Poughkeepsie, New York in exchange for common
shares of Nortel Networks Corporation. On May 11, 2001 the Nortel Networks
Corporation filed motions to dismiss and/or stay in connection with the
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.

     On February 12, 2001, Nortel Networks Inc., a subsidiary of the Company,
was served with a consolidated amended class action complaint that purported to
add Nortel Networks Corporation, as a defendant to a lawsuit commenced in July
2000 against Entrust, Inc. (formerly Entrust Technologies, Inc.) and three of
its then current officers in the United States District Court of Texas, Marshall
Division. The complaint alleges that Entrust, certain then current officers of
Entrust, and Nortel Networks Corporation violated the Securities Exchange Act of
1934 with respect to certain statements made by Entrust. Nortel Networks
Corporation is alleged to be a controlling person of Entrust. On April 6, 2001,
Nortel Networks Corporation filed a motion to dismiss the complaint against
it. On July 31, 2001, the complaint was dismissed without prejudice. In order to
bring another action, the plaintiffs must file an amended complaint meeting the
standards set forth by the court in the July 31, 2001 opinion by August 30,
2001.

     On March 4, 1997, Bay Networks, Inc., a company acquired by the Company on
August 31, 1998, announced that some of its shareholders had filed two separate
lawsuits against Bay Networks and ten of Bay Networks' current and former
officers and directors. Both lawsuits sought damages on behalf of a class of
shareholders who purchased Bay Networks' common shares during the period of May
1, 1995 through October 14, 1996. Shareholders filed one lawsuit in the United
States District Court for the Northern District of California and alleged
violations of the federal securities laws. In September 1998, the California
District Court dismissed the plaintiffs' complaint, granting leave for the
plaintiffs to amend the complaint. In November 1998, the California District
Court ordered a stay of the proceedings until the United States Court of Appeals
for the Ninth Circuit rendered a decision regarding pleading standards in
securities litigation in an unrelated case involving Silicon Graphics, Inc.
After this decision was rendered on July 2, 1999 favourably to the defense, the
plaintiffs filed a third amended complaint in December 1999, and the defendants
filed a motion to dismiss on January 31, 2000. On August 17, 2000, the
defendants' motion to dismiss the federal complaint was granted and judgment in
favour of defendants was entered August 18, 2000. On September 8, 2000, the
plaintiffs filed a notice of appeal of that order and judgment. Briefing in the
Ninth Circuit has been completed and oral arguments were held on July 11, 2001.
On August 1, 2001, the Ninth Circuit denied the plaintiffs' appeal. Plaintiffs
filed the other lawsuit announced on March 4, 1997 in the California Superior
Court, County of Santa Clara, alleging violations of the California Corporations
Code. On April 18, 1997, a shareholder (represented by some of the same
plaintiffs' law firms as in the cases discussed above) filed a second lawsuit in
the California Superior Court, alleging violations of the federal securities
laws and California Corporations Code by Bay Networks and nine of its current
and former officers and directors. The second action before the California
Superior Court sought damages 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. In April 1998, the
California Superior Court granted the defendants' motion to consolidate the two
state court actions and denied the plaintiffs' motion for class certification.
The plaintiffs in the consolidated California actions appealed the order denying
class certification. On January 19, 2000, the California Court of Appeals
affirmed the order denying the class certification. The plaintiffs filed a
petition for review with the California Supreme Court which 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
consolidated California Superior Court actions; they seek to become the
representatives of a class of shareholders alleged in their complaint in
intervention. The motion for intervention 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 June 18, 2001, defendants removed the
consolidated state court actions to the California District Court on the grounds
that the class claims asserted by the complaint in intervention are barred by
Securities Litigation Uniform Standards Act. The defendants have filed a motion
to dismiss that complaint while the various plaintiffs have sought to have the
case remanded to the California Superior Court. Defendants' motions to dismiss
and plaintiffs' motions to remand are noticed for hearing on September 24, 2001.


                                       36
<PAGE>   37
 In connection with the January 28, 2000 acquisition of Qtera Corporation,
currently an indirect subsidiary of the Company, Qtera and two of its employees
were named as defendants in a lawsuit filed by Siemens ICN in the 15th Judicial
Circuit for Palm Beach County, Florida. The lawsuit alleges various claims,
including purported misappropriation of trade secrets. Discovery is underway and
trial is scheduled for the first quarter of 2002.

     We are also a defendant in various other suits, claims, proceedings and
investigations arising in the normal course of business.

     We cannot determine our total aggregate amount of monetary liability or the
financial impact of the above matters. We do not therefore know whether these
actions, suits, claims, proceedings and investigations, which seek damages of
material or indeterminate amounts, will, individually or collectively, have a
material adverse effect on our business, results of operations, and financial
condition. Unless we have otherwise noted, we and any of our named directors and
officers and those of any of our subsidiaries intend to vigorously defend these
actions, suits, claims, proceedings and investigations.

ENVIRONMENTAL MATTERS

     Nortel Networks, primarily as a result of its manufacturing operations, is
subject to numerous environmental protection laws and regulations in various
jurisdictions around the world, and is exposed to liabilities and compliance
costs arising from its past and current generation, management and disposition
of hazardous substances and wastes.

     Nortel Networks has remedial activities under way at six of its facilities
and seven previously occupied sites. An estimate of Nortel Networks anticipated
remediation costs associated with all such facilities and sites, to the extent
probable and reasonably estimable, is included in the Company's environmental
accruals in an approximate amount of $26.

     For a discussion of Environmental matters, see "Environmental matters" in
note 20 to the Company's audited Consolidated Financial Statements and notes
thereto for the year ended December 31, 2000, restated for discontinued
operations, and included in the Company's Current Report on Form 8-K, filed on
August 8, 2001.

FORWARD-LOOKING STATEMENTS

     Certain information and statements contained in this Management's
Discussion and Analysis of Financial Condition and Results of Operations and
other sections of this report, including statements containing words such as
"could," "expects," "may," "anticipates," "believes," "intends," "estimates,"
"plans," and similar expressions, are forward-looking statements. These address
our business, results of operations, and financial condition, and include
statements based on current expectations, estimates, forecasts, and projections
about the operating environment, economies and markets in which we operate and
our beliefs and assumptions regarding such operating environment, economies and
markets. In addition, we or others on our behalf may make other written or oral
statements which constitute forward-looking statements. This information and
such statements are subject to important risks, uncertainties and assumptions,
which are difficult to predict. The results or events predicted in these
statements may differ materially from actual results or events. Some of the
factors which could cause results or events to differ from current expectations
include, but are not limited to, the factors set forth below. Except as
otherwise required by applicable securities laws, we disclaim any intention or
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.

     Restructuring and our alignment plan. In response to changes in industry
and market conditions we are restructuring, and may continue to restructure, our
activities to more strategically realign our resources. Our alignment plan is
based on certain assumptions regarding the cost structure of our business and
the nature and severity of the current industry adjustment which may not prove
to be accurate. Our alignment plan has involved the implementation of a number
of initiatives to streamline our business and focus our investments on
delivering key next-generation solutions, including discontinuing our access
solutions operations, writing off tangible and intangible assets, and otherwise
exiting businesses. There can be no assurance that our alignment plan will be
sufficient in light of current or future capital markets and telecommunications
and networking industry conditions. As well, there can be no assurance that we
will not be required to refine, expand or extend our alignment plan, or that we
will return to profitability as a result of our alignment plan. In addition,
there can be no assurance that the reductions in employee positions and
disposition of assets associated with our alignment plan have not impaired our
ability to realize our current or future business objectives.



                                       37
<PAGE>   38


     There can be no assurance that the costs actually incurred in connection
with restructuring actions will not be higher than the estimated costs of such
actions. Additional restructuring actions may include assessing whether we
should consider disposing of or otherwise exiting additional businesses and
reviewing the recoverability of remaining tangible and intangible assets. Any
decision to further limit investment or to dispose of or otherwise exit
additional businesses may result in the recording of additional accrued
liabilities for one-time or other charges such as workforce reduction costs,
asset write downs, and contractual settlements. Current and additional
restructuring actions may result in further cash and/or non-cash charges, which
could have a material adverse effect on our business, results of operations, and
financial condition.

     Fluctuations in operating results, general industry, economic, and market
conditions, and volatility. Our results of operations for any quarter or year
are not necessarily indicative of results to be expected in future periods. Our
future operating results may be affected by various trends and factors that must
be managed in order to achieve favourable operating results. The inability to
accurately forecast and manage these trends and factors could have a material
adverse effect on our business, results of operations, and financial condition.
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:

   o    fixed costs and our ability to successfully complete programs on a
        timely basis to reduce our cost structure and streamline our operations;


   o    our ability to focus our business on what we believe to be potentially
        higher growth, higher margin businesses, and to dispose of or exit other
        non-core businesses;

   o    inherent uncertainties underlying the estimates and assumptions used in
        calculating asset valuations, changes in accounting estimates with
        respect to the useful life and ultimate recoverability of our carrying
        basis of assets, including goodwill and other intangible assets;

   o    our ability to implement our alignment plan without negatively impacting
        our relationships with our customers;

   o    fluctuations in our current cash flows and our estimates of future cash
        requirements;

   o    the impact of acquired businesses and technologies;

   o    increased price and product competition in the networking industry;

   o    the introduction and market acceptance of new technologies and
        integrated networking solutions, as well as the adoption of new
        networking standards;

   o    variations in sales channels, product costs and the mix of products
        sold;

   o    the size and timing of customer orders and shipments;

   o    correctly sizing inventory levels; and

   o    product development schedules, manufacturing capacity and lead times.

     In addition, there are trends and factors beyond our control which may
affect our businesses. Such potential trends and factors include:

   o    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;

   o    adverse changes in the credit ratings of our customers, suppliers, and
        ourselves;

   o    adverse changes in the conditions in our industry and the specific
        markets for our products;

   o    the trend towards sales of integrated network solutions;


                                       38
<PAGE>   39
   o    visibility to, and the actual size and timing of, capital expenditures
        by our customers;

   o    inventory practices, including the timing of deployment, of our
        customers;

   o    the amount of network capacity, sharing and/or acquisition of existing
        network capacity, and network capacity utilization rates, of our
        customers, and by our customers;

   o    policies of our customers regarding utilization of single or multiple
        vendors for the products they purchase;

   o    conditions in the broader market for communications, including data
        networking, computerized information access equipment and services, and
        the domestic or global economy generally;

   o    geographic mix of revenues, and the associated impact on gross margins;

   o    governmental regulation or intervention affecting communications or data
        networking; and

   o    other factors.

     We cannot assure you that the slowdown in capital spending by service
providers will not affect our revenues more than we currently expect. Moreover,
the significant slowdown in capital spending by service providers has created
uncertainty as to market demand. As a consequence of these and the above
factors, 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. Any of the above factors could have
a material adverse effect on our business, results of operations, and financial
condition.

     General economic conditions, and specifically market conditions in the
telecommunications and networking industry, in the United States and globally
affect our business. Reduced capital spending and/or negative economic
conditions in the United States, Europe, Asia, Latin America and/or other areas
of the world could have a material adverse effect on our business, results of
operations, and financial condition.

     Gross margins may be adversely affected by increased price competition,
excess capacity, higher material or labour costs, warranty costs, obsolescence
charges, loss of cost savings on future inventory purchases as a result of high
inventory levels, introductions of new products, increased levels of customer
services, changes in distribution channels, and changes in product and
geographic mix. Lower than expected gross margins could have a material adverse
effect on our business, results of operations, and financial condition.

     Senior management. Our President and Chief Executive Officer, John Roth,
has announced his intention to retire in April 2002. If we are not able to
replace Mr. Roth with an appropriate successor in a timely manner, or if we are
not able to retain or replace other key members of senior management or for key
positions generally, it could have a material adverse effect on our business,
results of operations, and financial condition.

     Employees. Competition for technical personnel in the high-technology
industry is intense, despite current economic conditions. We believe that our
future success depends in part on our continued ability to hire, assimilate and
retain qualified personnel in a timely manner, particularly in areas such as
optical networking. A key to attracting and retaining qualified employees is our
ability to provide employees with the opportunity to participate in the
potential growth of our business through such programs as stock option plans and
employee investment plans, the value of which may be adversely affected by stock
price volatility or negative stock price performance. We may also find it more
difficult to attract or retain qualified employees due to our recent significant
reductions in employee positions. In addition, if we have not properly sized our
workforce, our ability to compete effectively may be adversely affected. There
can be no assurance that we will be successful in attracting, retaining or
recruiting qualified employees in the future and a failure to do so could have a
material adverse effect on our business, results of operations, and financial
condition.



                                       39
<PAGE>   40


     Cash flows, liquidity, debt levels, and debt ratings. 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 levels of sales, timing and size of capital expenditures, timing of
deliveries and collection of receivables, inventory levels, customer payment
terms, customer financing obligations, and supplier terms and conditions. The
inability to manage cash flow fluctuations resulting from such factors could
have a material adverse effect on our business, results of operations, and
financial condition.

     In order to finance our business we have incurred, or have entered into
credit facilities allowing for drawdowns of, significant levels of debt compared
to historical levels, and we may be required to secure additional sources of
funding, including debt or convertible debt financing, in the future. A higher
level of debt could have important consequences on the operation of our
business, including the following:

   o    we may have difficulty borrowing money in the future;

   o    we may need to use a larger 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;

   o    a high debt level would make us more vulnerable to economic downturns
        and adverse developments in our business; and

   o    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 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.

     Certain of our debt instruments are publicly rated by independent rating
agencies. Our public debt ratings affect our ability to raise debt, including
our access to the commercial paper market, and the cost of such debt. Any
negative developments regarding our cash flows, public debt ratings and/or our
incurring significant levels of debt could have a material adverse effect on our
business, results of operations, and financial condition.

     Voice and data convergence. We expect that data communications traffic will
grow at a faster rate than the growth expected for voice traffic. We also expect
that use of the Internet will continue to increase. We expect the growth of data
traffic and the use of the Internet to have a significant impact on traditional
voice networks, both wireline and wireless, and we believe that this will create
market discontinuities, which will drive the convergence of data and telephony
and give rise to the demand for Internet Protocol (or IP)-optimized networking
solutions and third generation, or 3G, wireless networks. Many of our
traditional customers have already begun to invest in data networking and/or in
transitioning from voice to include data traffic. We cannot be sure what the
rate of such convergence will be due to the dynamic and rapidly evolving nature
of the communications business, the technology involved, and capital
availability. Consequently, there is no assurance that the market
discontinuities and the resulting demand for IP-optimized networking solutions
or 3G wireless networks will continue to develop or any assurance as to the pace
of that development. Certain events (including the availability of required new
technologies and products or the evolution of other technologies) may occur
which would affect the extent or timing of anticipated market demand or increase
the demand for products based on other technologies and reduce the demand for
IP-optimized networking solutions or 3G wireless networks. A lack of growth in
the rate of data traffic, in the use of the Internet, or in demand for
IP-optimized networking solutions or 3G wireless networks in the future could
have a material adverse effect on our business, results of operations, and
financial condition.



                                       40
<PAGE>   41


     Costs of the business, and related factors. We must implement our alignment
plan in a timely manner to adjust the costs of our business to reflect current
and expected future economic conditions, market demands and revenues, and to
achieve future profitability. We must also manage what we believe to be the
potentially higher growth areas of our business and the non-core areas of our
business effectively in light of current and future market demands and trends.
In addition, in order for us to take advantage of the anticipated growth in
demand for IP-optimized networking solutions, we have made, and may continue to
make, strategic acquisitions, involving significant risks and uncertainties.
These risks and uncertainties include:

   o    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 needed to be successful in the industry;

   o    the risk that future valuations of acquired businesses may vary
        materially from the market price we paid for such businesses;

   o    the generation of insufficient revenues by acquired businesses to offset
        increased operating expenses associated with such businesses;

   o    the potential difficulties in completing in-process research and
        development projects;

   o    the difficulties in integrating new products, businesses and operations
        in an efficient and effective manner;

   o    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;

   o    the potential loss of key employees of the acquired businesses;

   o    the risk that acquired businesses may divert the attention of senior
        management from the operation of our business; and

   o    the risks of entering new markets in which we have limited experience.

     Our inability to successfully implement and/or refine our alignment plan on
a timely basis, to operate and integrate significant acquired businesses, to
manage the business effectively, or size our business appropriately could have a
material adverse effect on our business, results of operations, and financial
condition.

     Rapid technological change. 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 new
products and upgrades and cost reductions of current products to address the
operational speed, bandwidth, efficiency, and cost requirements of our
customers, to comply with emerging industry standards and to operate with
products of other suppliers, and to address emerging market trends as well as
competing 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. 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
industry standards, competing product offerings, the pricing and marketing of
such products, and the availability of funding for such networks. An
unanticipated change in one or more of the technologies affecting
telecommunications and data networking, or 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
metropolitan 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 in a timely and effective manner to such
changes.



                                       41
<PAGE>   42


     Competition. We participate in a highly volatile industry that is
characterized by 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 both from start-up companies and established competitors, and from
well-capitalized computer systems and communications companies, which, in turn,
could have a material adverse effect on our business, results of operations, and
financial condition.

     Our principal competitors are large telecommunications equipment suppliers,
such as Alcatel, Lucent Technologies Inc., Siemens Aktiengesellschaft, and
Telefonaktiebolagat LM Ericsson, and data networking companies, such as Cisco
Systems, Inc. and Avaya Inc. Other principal competitors include providers of
wireless networking equipment, such as Nokia Corporation and Motorola, Inc., and
providers of optical networking equipment, including Fujitsu Limited and Marconi
plc. 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 niche market companies and start-up
ventures are now and may become principal competitors in the future. We may also
face competition from resales of used telecommunications equipment,
including our own on occasion, by failed, downsized or consolidated
high-technology enterprises and telecommunications service providers.

     One way to maximize market growth, enhance existing products and introduce
new products is through acquisitions of companies, where advisable. These
acquisitions or general market conditions may cause certain of our competitors
to 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 financial (which includes the ability to provide customer financing in
connection with the sale of its products), marketing and technical resources.
Many of our current and potential competitors have also established, or may in
the future establish, relationships with our current and potential customers.
Increased competition could result in price reductions, reduced profit margins
and loss of market share, each of which could have a material adverse effect on
our business, results of operations, and financial condition.

     International and emerging markets. We intend to continue to maintain our
operations and expand in international and emerging markets. In many
international markets, long-standing relationships between our potential
customers and their local providers and protective regulations, including local
content requirements and type approvals, create barriers to entry. In addition,
pursuing international and emerging growth opportunities may require significant
investments for an extended period before we realize returns on such
investments, if any. Investments in international and emerging markets may
result in expenses growing at a faster rate than revenues. Such projects and
investments could be adversely affected by:

   o    reversals or delays in the opening of foreign markets to new
        competitors;

   o    trade protection measures;

   o    exchange controls;

   o    currency fluctuations;

   o    investment policies;

   o    restrictions on repatriation of cash;

   o    nationalization of local industry;

   o    economic, social and political risks;

   o    taxation;


                                       42
<PAGE>   43
   o    interest rates; and

   o    other factors, depending on the country involved.

     Difficulties in foreign financial markets and economies, and difficulties
experienced by 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.

     Foreign exchange. We continue to expand our business globally. Accordingly,
an increasing proportion of our business may be denominated in currencies other
than United States dollars. As a result, 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. These currencies may be affected by
internal factors, and external developments in other countries, which can have
an adverse impact on a country's currency. We will continue to monitor our
exposure and we may hedge against these or any other emerging market currencies
as we consider necessary.

     We try to minimize the impact of currency fluctuations through our ongoing
commercial practices and by attempting to hedge our exposures to major
currencies. In attempting to manage our foreign exchange risk, we identify
operations and transactions that may have foreign exchange exposure based upon,
among other factors, the excess or deficiency of foreign currency receipts over
foreign currency expenditures in each of our significant foreign currencies. We
continuously monitor all of our foreign currency exposures and, given our
exposure to emerging markets, monitor the volatility in the foreign exchange
markets. 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 business, results of operations, and financial condition.

     Industry standards and intellectual property. 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 patents, copyrights, trademarks 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. There can be no
assurance that any of our issued patents will not be challenged, invalidated, or
circumvented, or that any of our rights under issued patents will provide us
with competitive advantages. There can be no assurance that patents will be
issued from pending applications, or that claims in patents issued in the future
will be sufficiently broad to protect our proprietary technology. As well, we or
our subsidiaries may be subject to claims of intellectual property infringement
or trade secret misappropriation, and there can be no assurance as to the
outcome of any such claims or similar claims that may be asserted against our
customers in connection with their use of our products. A failure by us to react
to changing industry standards, lack of broadly-accepted industry standards,
successful claims of intellectual property infringement or trade secret
misappropriation 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.

     Rationalization and consolidation in telecommunications industry. The
telecommunications industry has experienced the consolidation and
rationalization of industry participants and we expect this trend to continue.
There have been adverse changes in the public and private equity and debt
markets for telecommunications 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/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 in the supply of
communications products to the merged companies. In addition, various
telecommunications equipment suppliers may enter into business combinations, or
may be acquired by or sell a substantial portion of their assets to another
competitor, 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
suppliers. The business failure of operators, competitors or suppliers may cause
uncertainty among investors and the telecommunications market generally.
Industry consolidation and rationalization could have a material adverse effect
on our business, results of operations, and financial condition.



                                       43
<PAGE>   44


     Uncertainties of the Internet. There are currently few laws or regulations
that apply directly to access or commerce on the Internet. We could be
materially 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, as well
as the continuing deregulation of the telecommunications industry. If a
jurisdiction adopts such measures then we could experience both decreased demand
for our products and increased costs of selling such products. Changes in laws
or regulations governing the Internet and Internet commerce could have a
material adverse effect on our business, results of operations, and financial
condition.

     Customer financing and customer credit risk. The competitive environment in
which we operate has required in the past, and we expect may continue to require
in the future, that we, and many of our principal competitors, 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, as well as funding for certain non-product and service
costs associated with network installation and integration of our products and
services, and financing for working capital purposes and equity financing.

     We expect to continue to hold certain current 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, current capital market conditions, and reduced demand for
telecommunications financings in capital and bank markets. In addition, specific
risks 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. There can be no
assurance that we will be able to place any or all of our current, or future,
customer financing obligations with third-party lenders on terms that we find
acceptable.

     As well, recently certain of our customers, including competitive local
exchange carriers, have filed for bankruptcy or have been experiencing financial
difficulties. Should customers fail to meet their customer financing obligations
to us, we could experience reduced cash flows and losses in excess of
provisions. We review the levels of our customer financing provisions on a
regular basis, and as a result of our review during the three months ended June
30, 2001 we increased our customer financing provisions to reflect the fact that
customers may be unable to meet their repayment obligations to us in the future
as a result of the current market conditions. In addition to being increasingly
selective in providing customer financing, we have various programs in place to
monitor and mitigate customer credit risk, including performance milestones,
other conditions of funding, and active customer financing portfolio reviews.
Management is focused on the strategic use of our limited customer financing
capacity, on revolving that capacity as quickly and efficiently as possible, and
on managing the absolute dollar amount of our customer financing obligations.
However, there can be no assurance that such measures will reduce or eliminate
our exposure to customers' credit risk.

     As part of the selective use of our customer financing capacity, we may
provide customer financing in the future for such customer requirements as
turnkey construction of new networks, particularly 3G wireless operators. We
anticipate that, due to current capital market conditions, we will be required
to directly support a significantly greater amount of such financings compared
to our past experience, in which we have traditionally been able to place a
large amount of our customer financings with third-party lenders. We will
continue to seek to arrange for third-party lenders to assume our customer
financing obligations and to fund other customer financings from working capital
and conventional sources of external financing in the normal course.

     Any unexpected developments in our customer financing arrangements could
have a material adverse effect on our business, results of operations, and
financial condition.

     Supply contracts, network outsourcing contracts, and turnkey
arrangements. We have entered into supply contracts with customers for 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 on a turnkey basis. We have also entered into
network outsourcing contracts with customers to operate their networks. These
supply and network outsourcing contracts may 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 under a turnkey arrangement. Any
unexpected developments in these supply and outsourcing contracts could have a
material adverse effect on our business, results of operations, and financial
condition.


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<PAGE>   45
     Component supply, manufacturing capacity, and inventories. Our ability to
meet customer demand is, in part, dependent on us obtaining timely and adequate
component parts from suppliers and internal manufacturing capacity. We work
closely with our suppliers to meet increases in customer demand, when needed,
and also manage our internal manufacturing capacity and inventory levels as
required. However, there can be no assurance that we will not encounter
component shortages in the future. In addition, our component suppliers may
experience a consolidation in the industry, which may result in fewer sources of
components. Also, inventory purchases and commitments are based upon future
sales forecasts. If inventory levels are higher than required to meet actual
sales levels, obsolescence charges and loss of cost savings on future inventory
purchases may result, adversely affecting gross margins. A reduction or
interruption in component supply, a significant increase in the price of one or
more components, or excessive inventory levels could have a material adverse
effect on our business, results of operations, and financial condition or our
relationships with our customers.

     Strategic Alliances. We have entered into a number of strategic alliances
with suppliers, developers, and members of our industry to facilitate product
compatibility, encourage adoption of industry standards, or to bundle
complementary product or service offerings to meet customer needs. In some
cases, we compete in business areas with companies with which we also have
strategic alliances. If a member of a strategic alliance fails to perform its
obligations, or if the relationship fails to develop as expected, we could
experience delays in product availability or impairment of our relationships
with our customers. Negative developments with respect to, or terminations of,
strategic alliances could have a material adverse effect on our business,
results of operations, and financial condition.

     Litigation. We are currently a defendant in over twenty-five class action
and other lawsuits as well as lawsuits 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 litigation may be 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 PRONOUNCEMENTS

     On June 29, 2001, the Financial Accounting Standards Board approved for
issuance Statement of Financial Accounting Standards, or SFAS, No. 141,
"Business Combinations", or SFAS 141 and SFAS No. 142, "Goodwill and Other
Intangible Assets", or SFAS 142. SFAS 141 prohibits the use of the
pooling-of-interests method and requires that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001. SFAS 142
changes the accounting for goodwill from an amortization method to an
impairment-only approach and, as a result, the amortization of goodwill will
cease upon adoption of this Statement on January 1, 2002. However, goodwill and
intangible assets with an indefinite life will not be amortized for any
acquisitions completed after June 30, 2001.

     The adoption of SFAS 141 will not have an impact on the business, results
of operations, or financial condition of Nortel Networks. We are currently
evaluating the impact of the adoption of SFAS 142 and have not yet determined
the effect of adoption on our business, results of operations, or financial
condition.

     For a discussion of recent pronouncements, see "Recent pronouncements" on
page 20 in note 16.

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Market risk represents the risk of loss that may impact the Consolidated
Financial Statements of the Company due to adverse changes in financial market
prices and rates. The Company's market risk exposure is primarily a result of
fluctuations in interest rates and foreign exchange rates. Disclosure of market
risk is contained on page 47 of the Company's Annual Report on Form 10-K for the
year ended December 31, 2000.



                                       45
<PAGE>   46



                                     PART II
                                OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS

     For a discussion of our material legal proceedings, see "Legal proceedings"
commencing on page 35 in Management's Discussion and Analysis of Financial
Condition and Results of Operations.

ITEM 2.   CHANGES IN SECURITIES AND USE OF PROCEEDS

     Effective March 5, 2001, Nortel Networks organized its High Performance
Optical Component Solutions business into a number of wholly-owned subsidiaries,
including Nortel Networks Optical Components Inc. (the "Reorganization"). In
connection with the Reorganization, the Company issued two common shares to
Nortel Networks Corporation in consideration for the purchase of Class A common
stock of Nortel Networks Optical Components Inc., having an estimated value of
US$680,000, pursuant to a purchase agreement made as of June 6, 2001. This
transaction occurred outside the United States within the meaning of Regulation
S under the United States Securities Act of 1933.


ITEM 4.   SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS

     Pursuant to an unanimous written resolution dated April 26, 2001 by the
sole holder of the common shares of the Company, Nortel Networks Corporation,
the following items of business were passed:

1.   The following individuals were elected as directors of the Company to hold
     office in accordance with By-law No. 1 of the Company:

       Directors
       ---------
       Honourable J.J. Blanchard
       R.E. Brown
       C.J. Chandran
       Frank A. Dunn
       L.Y. Fortier
       R.A. Ingram
       J.A. Roth
       G. Saucier
       S.H. Smith Jr.
       L.R. Wilson


2.   The reappointment of Deloitte & Touche LLP as independent auditors was
     approved.

3.   The adoption of By-law No. 1 of the Company was confirmed and approved.

ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

a)   Exhibits:

     10.1 Agreement between a director of Nortel Networks Corporation and Nortel
          Networks Limited and the respective companies dated June 22, 2001
          setting forth the arrangements with respect to serving as
          non-executive chairman of each of the board of directors of Nortel
          Networks Corporation and the Company.

     10.2 364 Day Credit Agreement dated as of April 12, 2000, among the
          Company, as borrower, various banks, as lenders, Royal Bank of Canada
          and Toronto Dominion Bank, as co-syndication agents, and J.P. Morgan
          Canada, as administrative agent.


                                       46
<PAGE>   47
     10.3 364 Day Credit Agreement dated as of April 12, 2000, among the
          Company, as guarantor, Nortel Networks Inc., as borrower, various
          banks, as lenders, ABN AMRO Bank N.V., Bank of America N.A. and
          Citibank N.A., as co-syndication agents, and Morgan Guaranty Trust
          Company of New York, as administrative agent.

     10.4 Five Year Credit Agreement dated as of April 12, 2000, among the
          Company, as borrower, various banks, as lenders, Royal Bank of Canada
          and Toronto Dominion Bank, as co-syndication agents, and J.P. Morgan
          Canada, as administrative agent.

     10.5 Five Year Credit Agreement dated as of April 12, 2000, among the
          Company, as guarantor, Nortel Networks Inc., as borrower, various
          banks, as lenders, ABN AMRO Bank N.V., Bank of America N.A. and
          Citibank N.A., as co-syndication agents, and Morgan Guaranty Trust
          Company of New York, as administrative agent.

     10.6 Amended and Restated Credit Agreement dated as of April 11, 2001,
          among the Company and various banks (amending and restating 364 Day
          Credit Agreement dated April 12, 2000).

     10.7 Amended and Restated Credit Agreement dated as of April 11, 2001,
          among the Company, Nortel Networks Inc. and various banks (amending
          and restating 364 Day Credit Agreement dated April 12, 2000).

     10.8 Credit Agreement dated as of June 14, 2001, as amended by Amendment
          No. 1 to the Credit Agreement dated as of July 31, 2001, among the
          Company, as borrower, various banks, as lenders, Credit Suisse First
          Boston Canada, as syndication agent, and The Chase Manhattan Bank of
          Canada, as administrative agent.

     10.9 Credit Agreement dated as of June 14, 2001, as amended by Amendment
          No. 1 to the Credit Agreement dated as of July 31, 2001, among the
          Company, as guarantor, Nortel Networks Inc., as borrower, various
          banks, as lenders, Credit Suisse First Boston, as syndication agent,
          and The Chase Manhattan Bank, as administrative agent.

     18   Letter of Deloitte & Touche LLP dated August 8, 2001 relating to a
          change in the methodology of accounting for evaluating the impairment
          of enterprise level goodwill in accordance with APB 17 from the
          undiscounted cash flow method to the market value method.

b)   Reports on Form 8-K:

     The Company filed a Report on Form 8-K dated April 19, 2001 related to the
     financial results for the first quarter of 2001 of Nortel Networks
     Corporation, its parent corporation.

     The Company filed a Report on Form 8-K dated May 11, 2001 related to the
     announcement with respect to its chief operating officer of his resignation
     as an officer and director of the Company and Nortel Networks Corporation,
     its parent corporation.

     The Company filed a Report on Form 8-K dated June 15, 2001 related to the
     financial outlook for the second quarter of 2001 of Nortel Networks
     Corporation, its parent corporation, and certain charges related to Nortel
     Networks Corporation's alignment plan, discontinuance of certain
     operations, and the obtaining of additional unsecured credit facilities and
     the discontinuance of Nortel Networks Corporation's future common share
     dividends.

     The Company filed a Report on Form 8-K dated July 23, 2001 related to the
     financial results for the second quarter of 2001 of Nortel Networks
     Corporation, its parent corporation.


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<PAGE>   48

                                   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




     "F.A. DUNN"                                            "D.C. BEATTY"
-----------------------                                -----------------------
      F.A. DUNN                                              D.C. BEATTY
Chief Financial Officer                                      Controller




DATE:    AUGUST 8, 2001


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