##### 



---

---

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q/AAmendment No. 1

x
    
    Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934For the Quarterly Period Ended September 30, 2003o
    
    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
    
    62-12-62580(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)8200 Dixie Road, Suite 100
Brampton, Ontario, Canada
    
    L6T 5P6(Address of principal executive offices)
    
    (Zip Code)


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

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

Yes ü
    
    No


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

Indicate the number of shares outstanding of each of the issuers classes of
common stock, as at October 31, 2003

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



---

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---



##### 



EXPLANATORY NOTE

We are filing this Amendment No. 1 to our Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2003 initially filed with the Securities
and Exchange Commission on November 19, 2003 (the Originally Filed 10-Q)
solely to correct certain amounts in note 19. Supplemental
consolidating financial information in the columns of the (unaudited)
supplemental consolidating statements of cash flows for the nine months ended
September 30, 2002 as reported in the Originally Filed 10-Q with respect to
cash flows from (used in) operating activities relating to the allocation of
cash flows and reconciling adjustments among Nortel Networks Limited, its
guarantor subsidiaries, its non-guarantor subsidiaries and
eliminations. All dollar amounts in this Amendment No. 1 to
the Originally Filed 10-Q are in millions of United States dollars unless
otherwise stated.

This Amendment No. 1 to the Originally Filed
10-Q reflects changes to amounts within the following columns
in the (unaudited) supplemental consolidating statements of cash flows for the
nine months ended September 30, 2002: (i) allocations of net earnings (loss)
from continuing operations, and (ii) adjustments reconciling net earnings
(loss) from continuing operations to net cash from (used in) operating
activities, net of effects from acquisitions and divestitures of businesses,
comprising adjustments in (a) equity in net loss of associated companies, (b)
change in operating assets and liabilities and
(c) other  net. In
aggregate, the corrections resulted in changes in net cash from (used in)
operating activities in the nine-month period ended September 30, 2002 as
follows: (i) for Nortel Networks Limited, a decrease of $3 from $(1,651) to
$(1,654), (ii) for our guarantor subsidiaries, a decrease of $1 from $1,099 to
$1,098, and (iii) for our non-guarantor subsidiaries, an increase of $4 from
$(7) to $(3).

There was no impact on total consolidated net cash from (used in) operating
activities as reported in the (unaudited) supplemental consolidating statements
of cash flows for the nine months ended September 30, 2002. There were
consequent changes to the (unaudited) supplemental consolidating statements of
cash flows for each of Nortel Networks Limited, the guarantor subsidiaries and
the non-guarantor subsidiaries with respect to the following items: (i) net
cash from (used in) continuing operations, (ii) net increase (decrease) in cash
and cash equivalents, and (iii) cash and cash equivalents both at the beginning
and the end of the period. There was, however, no impact on the consolidated
totals of such items.

We believe that the corrections noted above are not material to the information
as reported in the (unaudited) supplemental consolidating statements of cash
flows for the nine months ended September 30, 2002 as included in the
Originally Filed 10-Q. Such (unaudited) supplemental consolidating statements of cash flows for
the nine months ended September 30, 2002, as included in the Originally Filed
10-Q, have been restated as more fully described in note 2 to the (unaudited)
consolidated financial statements in Item 1 and in Item 2. Managements Discussion and
Analysis of Financial Condition and Results of Operations  Developments in
2003  Restatements therein.

References to we, our, us, or Nortel Networks means Nortel Networks
Limited or Nortel Networks Limited and its subsidiaries, as applicable.

This Amendment No. 1 to the Originally Filed
10-Q amends and restates Item 1 of Part I of the Originally Filed
10-Q, and no other information in the Originally Filed 10-Q is amended hereby.
For a discussion of events and developments subsequent to September 30, 2003,
see our subsequent filings.

2



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##### 



TABLE OF CONTENTS

PART I
FINANCIAL INFORMATION

PAGEITEM 1.
    
    Consolidated Financial Statements (unaudited)
    
    4PART II
OTHER INFORMATIONITEM 6.
    
    Exhibits and Reports on Form 8-K
    
    46Signatures
    
    
    
    47


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

NORTEL NETWORKS, NORTEL NETWORKS LOGO, NT and the GLOBEMARK are trademarks of
Nortel Networks.
MOODYS is a trademark of Moodys Investor Services,
Inc.
STANDARD & POORS is a trademark of The McGraw-Hill Companies, Inc.

3



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##### 



PART I
FINANCIAL INFORMATION

ITEM 1.        Consolidated Financial Statements (unaudited)

PAGEConsolidated Statements of Operations
    
    
    5Consolidated Balance Sheets
    
    
    6Consolidated Statements of Cash Flows
    
    
    7Notes to Consolidated Financial Statements
    
    
    8


4



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##### 



NORTEL NETWORKS LIMITED

Consolidated Statements of Operations (unaudited)


Three months ended September 30,
    
    
    Nine months ended September 30,(millions of U.S. dollars)
    
    2003
    
    
    2002
    
    
    2003
    
    
    2002As Restated *
    
    
    
    
    
    As Restated *Revenues
    
    $
    2,266
    
    
    $
    2,349
    
    
    $
    6,982
    
    
    $
    8,034Cost of revenues
    
    
    1,089
    
    
    
    1,500
    
    
    
    3,730
    
    
    
    5,491Gross profit
    
    
    1,177
    
    
    
    849
    
    
    
    3,252
    
    
    
    2,543Selling, general and administrative expense
    
    
    482
    
    
    
    695
    
    
    
    1,408
    
    
    
    2,150Research and development expense
    
    
    480
    
    
    
    544
    
    
    
    1,454
    
    
    
    1,667Amortization of acquired technology
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    17Special chargesGoodwill impairment
    
    
    
    
    
    
    264
    
    
    
    
    
    
    
    264Other special charges
    
    
    70
    
    
    
    563
    
    
    
    180
    
    
    
    1,251Gain on sale of businesses
    
    
    (20
    )
    
    
    (3
    )
    
    
    (28
    )
    
    
    (11
    )Operating earnings (loss)
    
    
    165
    
    
    
    (1,220
    )
    
    
    238
    
    
    
    (2,795
    )Other income (expense)  net
    
    
    100
    
    
    
    (18
    )
    
    
    130
    
    
    
    (43
    )Interest expenseLong-term debt
    
    
    (25
    )
    
    
    (37
    )
    
    
    (71
    )
    
    
    (110
    )Other
    
    
    
    
    
    
    (13
    )
    
    
    (9
    )
    
    
    (35
    )Earnings (loss) from continuing operations before income taxes,
minority interests and equity in net loss of associated companies
    
    
    240
    
    
    
    (1,288
    )
    
    
    288
    
    
    
    (2,983
    )Income tax benefit (expense)
    
    
    (35
    )
    
    
    (75
    )
    
    
    (43
    )
    
    
    430205
    
    
    
    (1,363
    )
    
    
    245
    
    
    
    (2,553
    )Minority interests  net of tax
    
    
    (14
    )
    
    
    (1
    )
    
    
    (18
    )
    
    
    6Equity in net loss of associated companies  net of tax
    
    
    (5
    )
    
    
    (7
    )
    
    
    (35
    )
    
    
    (26
    )Net earnings (loss) from continuing operations
    
    
    186
    
    
    
    (1,371
    )
    
    
    192
    
    
    
    (2,573
    )Net earnings from discontinued operations  net of tax
    
    
    44
    
    
    
    2
    
    
    
    206
    
    
    
    21Net earnings (loss) before cumulative effect of accounting
change  net of tax
    
    
    230
    
    
    
    (1,369
    )
    
    
    398
    
    
    
    (2,552
    )Cumulative effect of accounting change  net of tax
    
    
    
    
    
    
    
    
    
    
    (8
    )
    
    
    Net earnings (loss)
    
    
    230
    
    
    
    (1,369
    )
    
    
    390
    
    
    
    (2,552
    )Dividends on preferred shares
    
    
    (6
    )
    
    
    (6
    )
    
    
    (18
    )
    
    
    (16
    )Net earnings (loss) applicable to common shares
    
    $
    224
    
    
    $
    (1,375
    )
    
    $
    372
    
    
    $
    (2,568
    )


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

5



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##### 



NORTEL NETWORKS LIMITED

Consolidated Balance Sheets (unaudited)


September 30,
    
    
    December 31,(millions of U.S. dollars)
    
    2003
    
    
    2002As Restated *ASSETSCurrent assetsCash and cash equivalents
    
    $
    3,493
    
    
    $
    3,743Restricted cash and cash equivalents
    
    
    113
    
    
    
    249Accounts receivable  net
    
    
    2,250
    
    
    
    2,247Inventories  net
    
    
    928
    
    
    
    986Income taxes recoverable
    
    
    59
    
    
    
    58Deferred income taxes  net
    
    
    415
    
    
    
    793Other current assets
    
    
    418
    
    
    
    668Total current assets
    
    
    7,676
    
    
    
    8,744Investments
    
    
    183
    
    
    
    248Plant and equipment  net
    
    
    1,468
    
    
    
    1,464Goodwill
    
    
    2,053
    
    
    
    2,021Deferred income taxes  net
    
    
    3,224
    
    
    
    2,653Other assets
    
    
    565
    
    
    
    766Total assets
    
    $
    15,169
    
    
    $
    15,896LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesNotes payable
    
    $
    23
    
    
    $
    30Trade and other accounts payable
    
    
    766
    
    
    
    899Payroll and benefit-related liabilities
    
    
    705
    
    
    
    499Contractual liabilities
    
    
    768
    
    
    
    1,213Restructuring
    
    
    269
    
    
    
    537Other accrued liabilities
    
    
    2,293
    
    
    
    2,894Long-term debt due within one year
    
    
    112
    
    
    
    233Total current liabilities
    
    
    4,936
    
    
    
    6,305Long-term debt
    
    
    1,958
    
    
    
    1,949Deferred income taxes  net
    
    
    280
    
    
    
    366Other liabilities
    
    
    2,288
    
    
    
    2,321Total liabilities
    
    
    9,462
    
    
    
    10,941Minority interests in subsidiary companies
    
    
    77
    
    
    
    129Guarantees, commitments and contingencies (notes 11, 12 and 17)SHAREHOLDERS EQUITYPreferred shares, without par value  Authorized shares: unlimited; issued and outstanding shares:30,000,000 at September 30, 2003 and December 31, 2002
    
    
    536
    
    
    
    536Common shares, without par value  Authorized shares: unlimited; issued and outstanding shares:1,460,978,638 at September 30, 2003 and December 31, 2002
    
    
    1,211
    
    
    
    1,211Additional paid-in capital
    
    
    22,024
    
    
    
    22,004Accumulated deficit
    
    
    (17,235
    )
    
    
    (17,607
    )Accumulated other comprehensive loss
    
    
    (906
    )
    
    
    (1,318
    )Total shareholders equity
    
    
    5,630
    
    
    
    4,826Total liabilities and shareholders equity
    
    $
    15,169
    
    
    $
    15,896


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

6



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##### 



NORTEL NETWORKS LIMITED

Consolidated Statements of Cash Flows (unaudited)


Nine months ended September 30,(millions of U.S. dollars)
    
    2003
    
    
    2002As Restated *Cash flows from (used in) operating activitiesNet earnings (loss) from continuing operations
    
    $
    192
    
    
    $
    (2,573
    )Adjustments
to reconcile net earnings (loss) from continuing operations to net cash used
in operating activities,
net of effects from acquisitions and divestitures of businesses:Amortization and depreciation
    
    
    326
    
    
    
    415Non-cash portion of special charges and related asset write downs
    
    
    8
    
    
    
    840Equity in net loss of associated companies
    
    
    35
    
    
    
    25Stock option compensation
    
    
    19
    
    
    
    Deferred income taxes
    
    
    44
    
    
    
    (438
    )Other liabilities
    
    
    119
    
    
    
    (29
    )Gain on repurchases of outstanding debt securities
    
    
    (4
    )
    
    
    Gain on sale of investments and businesses
    
    
    (67
    )
    
    
    (17
    )Other  net
    
    
    38
    
    
    
    595Change in operating assets and liabilities
    
    
    (1,315
    )
    
    
    623Net cash used in operating activities of continuing operations
    
    
    (605
    )
    
    
    (559
    )Cash flows from (used in) investing activitiesExpenditures for plant and equipment
    
    
    (94
    )
    
    
    (289
    )Proceeds on disposals of plant and equipment
    
    
    22
    
    
    
    356Decrease (increase) in restricted cash and cash equivalents
    
    
    147
    
    
    
    (420
    )Increase in long-term receivables
    
    
    (12
    )
    
    
    (249
    )Decrease in long-term receivables
    
    
    207
    
    
    
    253Acquisitions of investments and businesses  net of cash acquired
    
    
    (54
    )
    
    
    (29
    )Proceeds on sale of investments and businesses
    
    
    51
    
    
    
    44Net cash from (used in) investing activities of continuing operations
    
    
    267
    
    
    
    (334
    )Cash flows from (used in) financing activitiesDividends on preferred shares
    
    
    (18
    )
    
    
    (16
    )Decrease in notes payable  net
    
    
    (39
    )
    
    
    (314
    )Proceeds from long-term debt
    
    
    
    
    
    
    32Repayments of long-term debt
    
    
    (267
    )
    
    
    (22
    )(Increase) decrease in capital leases payable
    
    
    (3
    )
    
    
    (7
    )Issuance of common shares
    
    
    
    
    
    
    1,997Stock option fair value increment
    
    
    
    
    
    
    (525
    )Net cash (used in) from financing activities of continuing operations
    
    
    (327
    )
    
    
    1,145Effect of foreign exchange rate changes on cash and cash equivalents
    
    
    97
    
    
    
    16Net cash from continuing operations
    
    
    (568
    )
    
    
    268Net cash from discontinued operations
    
    
    318
    
    
    
    337Net (decrease) increase in cash and cash equivalents
    
    
    (250
    )
    
    
    605Cash and cash equivalents at beginning of period
    
    
    3,743
    
    
    
    3,404Cash and cash equivalents at end of period
    
    $
    3,493
    
    
    $
    4,009


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

7



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##### 



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



|1. |  | Significant accounting policies
|-- |  | -------------------------------



| |  | Basis of presentation
| |  | ---------------------



| |  | The accompanying unaudited consolidated financial statements of Nortel
Networks Limited (Nortel Networks) have been prepared in accordance with
accounting principles generally accepted in the United States (GAAP) and
the rules and regulations of the United States Securities and Exchange
Commission (the SEC) for the preparation of interim financial information.
They do not include all information and notes required by GAAP in the
preparation of annual consolidated financial statements. The accounting
policies used in the preparation of the accompanying unaudited consolidated
financial statements are the same as those described in Nortel Networks
audited consolidated financial statements prepared in accordance with GAAP
for the year ended December 31, 2002, except as described in note 3.
Although Nortel Networks is headquartered in Canada, the accompanying
unaudited consolidated financial statements are expressed in United States
dollars as the greater part of Nortel Networks financial results and net
assets are denominated in United States dollars.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | As described in note 2, the consolidated statements of operations for the
three months and nine months ended September 30, 2002, the consolidated
balance sheet as at December 31, 2002 and the consolidated statement of cash
flows for the nine months ended September 30, 2002, including the applicable
notes, were restated. At the earliest possible time in the fourth quarter of
2003, Nortel Networks expects to file with the SEC an amended Annual Report
on Form 10-K/A for the year ended December 31, 2002 (Nortel Networks Form
10-K/A). In addition, the results of operations and cash flows for the six
months ended June 30, 2003, as reflected in the consolidated statements of
operations and cash flows for the nine months ended September 30, 2003, were
restated. At the earliest possible time in the fourth quarter of 2003,
Nortel Networks also expects to file with the SEC amended Quarterly Reports
on Form 10-Q/A for the quarterly periods ended March 31, 2003 and June 30,
2003.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In the opinion of management, all adjustments necessary for a fair statement
of the results for the periods presented have been made and all such
adjustments were of a normal recurring nature. The financial results for the
three months and nine months ended September 30, 2003 are not necessarily
indicative of financial results for the full year. The accompanying
unaudited consolidated financial statements should be read in conjunction
with Nortel Networks Annual Report on Form 10-K for the year ended December
31, 2002 filed with the SEC on March 10, 2003 and, when filed with the SEC,
the Nortel Networks Form 10-K/A (collectively, Nortel Networks Annual
Report), subject to the restated financial information described above.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Comparative figures
| |  | -------------------



| |  | Certain 2002 figures in the accompanying unaudited consolidated financial
statements have been reclassified to conform to the 2003 presentation and
have been restated as set out in note 2.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|2. |  | Restatements
|-- |  | ------------



| |  | In 2001, Nortel Networks entered into an unprecedented period of business
realignment in response to a significant adjustment in the telecommunications
industry. Industry demand for networking equipment dramatically declined in
response to the industry adjustment, severe economic downturns in various
regions around the world and a tightening in global capital markets. Nortel
Networks implemented a company-wide restructuring plan to streamline its
operations and activities around core markets and operations, which included
significant workforce reductions, global real estate closures and
dispositions, substantial write-downs of its capital assets, goodwill and
other intangible assets and extensive contract settlements with customers and
suppliers around the world. As a result of these actions, Nortel Networks
workforce declined significantly from January 1, 2001 to September 30, 2003
and over the same time period Nortel Networks significantly reduced its
facilities.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Nortel Networks initiated, and disclosed in its Quarterly Report on Form 10-Q
for the period ended June 30, 2003, a comprehensive review and analysis of
its assets and liabilities. On October 23, 2003, Nortel Networks announced
it would restate its consolidated financial statements for the years ended
December 31, 2000, 2001 and 2002 and for the quarters ended March 31, 2003
and June 30, 2003.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

8



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##### 





| |  | Based on the completion of the comprehensive review and certain related
reviews (collectively, the comprehensive review), Nortel Networks has
determined that approximately $948 of certain liabilities (primarily accruals
and provisions) carried on its previously reported consolidated balance sheet as at June
30, 2003 needed to be released to income in prior periods as part of the
restatements. These provisions were either initially recorded incorrectly in
prior periods or not properly released or adjusted for changes in estimates
in the appropriate periods. In certain cases, costs were incorrectly charged
to operations rather than to the appropriate provisions. Following its
determination to restate certain consolidated financial statements, Nortel
Networks also determined that it would correct certain known errors that were
previously not recorded because the amount of the errors was not material to
the consolidated financial statements. Specifically, among other items,
Nortel Networks has made certain revenue adjustments to reflect revenue which
should have been deferred instead of recognized in a particular period.
Also, as part of the restatements, Nortel Networks made adjustments to
correct errors related to its deferred income tax assets and foreign currency
translation accounts. In addition, Nortel Networks made reclassification
adjustments within the consolidated balance sheet to better reflect the underlying nature
of certain items; these reclassifications did not impact the net assets as at
the end of any period. The net effect of all of these adjustments was a
reduction in accumulated deficit as at June 30, 2003 of $492.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Nortel Networks has also undertaken a series of physical counts and
reconciliations of plant and equipment. While Nortel Networks believes that
the portion of the work completed to date supports the carrying value of the
plant and equipment recorded in its consolidated balance sheet as at September 30, 2003,
the conclusion of this work could result in adjustments to the carrying value
of certain assets.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The following presents Nortel Networks accumulated deficit as previously
reported and after giving effect to the restatement adjustments as at June
30, 2003, March 31, 2003, December 31, 2002, December 31, 2001 and December
31, 2000:
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Accumulated deficit
| |  | -------------------



December 31,June 30,
    
    
    March 31,
    
    
    
    
    
    Prior(a)2003
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000
    
    
    yearsAccumulated deficitAs previously reported
    
    $
    17,951
    
    
    $
    18,001
    
    
    $
    18,093
    
    
    $
    14,507
    
    
    $
    402As restated
    
    
    17,459
    
    
    
    17,559
    
    
    
    17,607
    
    
    
    14,336
    
    
    
    370Cumulative adjustment
    
    $
    (492
    )
    
    $
    (442
    )
    
    $
    (486
    )
    
    $
    (171
    )
    
    $
    (32
    )
    
    $
    (4
    )
 (a)
    
    The amount in prior years relates to net adjustments in the years
1997 through 1999 which have been reflected as an adjustment to
accumulated deficit as of January 1, 2000.




| |  | The following presents the impact on revenues and earnings (loss) of the
restatement adjustments for the quarterly periods ended June 30, 2003 and
March 31, 2003 and the years ended December 31, 2002, 2001 and 2000:
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9



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##### 





| |  | Restated revenues and earnings (loss)
| |  | -------------------------------------



Three months endedDecember 31,June 30,
    
    
    March 31,
    
    
    
    
    
    Prior(a)
    
    
    Total2003
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000
    
    
    years
    
    
    adjustmentsRevenuesAs previously reported
    
    $
    2,328
    
    
    $
    2,397
    
    
    $
    10,546
    
    
    $
    17,375
    
    
    $
    27,853Adjustments
    
    
    12
    
    
    
    (21
    )
    
    
    8
    
    
    
    (103
    )
    
    
    (17
    )
    
    $
    (1
    )
    
    $
    (122
    )As restated
    
    $
    2,340
    
    
    $
    2,376
    
    
    $
    10,554
    
    
    $
    17,272
    
    
    $
    27,836Earnings (loss)Earnings (loss) from
continuing operationsAs previously reported
    
    $
    57
    
    
    $
    (67
    )
    
    $
    (3,039
    )
    
    $
    (11,555
    )
    
    $
    (871
    )Adjustments
    
    
    52
    
    
    
    (36
    )
    
    
    294
    
    
    
    125
    
    
    
    28
    
    
    $
    4
    
    
    $
    467As restated
    
    $
    109
    
    
    $
    (103
    )
    
    $
    (2,745
    )
    
    $
    (11,430
    )
    
    $
    (843
    )Earnings
(loss) from discontinued
operations-net of taxAs previously reported
    
    $
    
    
    
    $
    164
    
    
    $
    
    
    
    $
    (2,538
    )
    
    $
    (414
    )Adjustments
    
    
    (2
    )
    
    
    
    
    
    
    21
    
    
    
    14
    
    
    
    
    
    
    $
    
    
    
    $
    33As restated
    
    $
    (2
    )
    
    $
    164
    
    
    $
    21
    
    
    $
    (2,524
    )
    
    $
    (414
    )Net
earnings (loss) applicable
to common sharesAs previously reported
    
    $
    50
    
    
    $
    92
    
    
    $
    (3,061
    )
    
    $
    (14,105
    )
    
    $
    (1,316
    )Adjustments
    
    
    50
    
    
    
    (44
    )
    
    
    315
    
    
    
    139
    
    
    
    28
    
    
    $
    4
    
    
    $
    492As restated
    
    $
    100
    
    
    $
    48
    
    
    $
    (2,746
    )
    
    $
    (13,966
    )
    
    $
    (1,288
    )
 (a)
    
    The amount in prior years relates to net adjustments in the years
1997 through 1999 which have been reflected as an adjustment to
accumulated deficit as of January 1, 2000.




| |  | The following presents details by category, aggregating to the net decrease
in accumulated deficit of $492 as at June 30, 2003, resulting from the
restatement adjustments:
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Net decrease in accumulated deficit by category
| |  | -----------------------------------------------



Contract and customer-related accruals
    
    $
    424Special charges related to restructuring actions
    
    
    328Other accruals and provisions
    
    
    196Total accruals and provisions adjustments
    
    $
    948Income tax adjustments
    
    
    (168
    )Revenue adjustments
    
    
    (122
    )Foreign currency translation adjustments related to Brazilian operations
    
    
    (107
    )Foreign currency translation adjustments  other
    
    
    (59
    )Decrease in accumulated deficit as at June 30, 2003
    
    $
    492




| |  | Descriptions of the categories of the restatement adjustments to Nortel
Networks accumulated deficit as at June 30, 2003 that were determined as a
result of its comprehensive review are set forth below.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Contract and customer-related accruals
| |  | --------------------------------------



| |  | Approximately $424 of adjustments related to certain contract and
customer-related accruals. These accruals were identified as having been
accrued in error and were reversed in the appropriate periods. Nortel
Networks identified situations in which additional accruals related to
certain contracts were recognized when circumstances did not justify such
accruals. Certain of these accruals were not supported by adequate
documentation.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10



---



##### 





| |  | In addition, Nortel Networks identified situations where accruals were not
released in the appropriate period. While these errors did not impact the
cumulative reduction of the contract and customer-related accruals in the
$424 of adjustments noted above, certain periods reflect adjustments to these
accruals to recognize them in the appropriate periods.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Special charges related to restructuring actions
| |  | ------------------------------------------------



| |  | During the period January 1, 2000 to June 30, 2003, Nortel Networks recorded
prior to the restatement adjustments $5,029 of special charges related to workforce reductions, contract
settlement and lease costs, plant and equipment write-downs, and other
ancillary special charges in connection with the implementation of specific
restructuring actions to streamline its operations and activities around core
markets and operations. As part of the restatements, Nortel Networks has
reduced, on a cumulative basis, $328 of special charges. The following table
provides details of the total adjustments related to these special charges:
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Severance and fringe benefits calculations
    
    $
    222Plant and equipment and real estate related adjustments
    
    
    62Contract settlements
    
    
    44Total special charges related to restructuring actions
    
    $
    328




| |  | Approximately $222 of adjustments were made relating to special charges for
costs associated with severance and fringe benefits offered to terminated
employees due to calculation errors that resulted in excess charges being
recorded at the time of initial recognition, or the failure to properly
release or adjust accruals for subsequent changes in estimates and
assumptions.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Approximately $62 of net adjustments related to special charges for plant and
equipment and certain real estate facilities. These adjustments related to
$53 of excess depreciation and amortization charges taken on previously
written-down assets, $14 of computational errors related to foreign currency
adjustments, $14 of incorrect recognition of proceeds received on the sale of
previously written-down assets, and $4 of other provisions determined to be
in excess of appropriate amounts, partially offset by the need to recognize
additional exit costs of $23 net for properties which had not previously been
accrued to special charges.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Nortel Networks also had appropriately accrued $44 of certain costs
associated with contract settlements with customers and suppliers related to
exit activities. However, the timely reassessment of the estimates and
assumptions used to establish these accruals was not carried out and
accordingly the restatement adjustments reflected the release of such
accruals in the appropriate periods.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Further, the timely reassessment of estimates and assumptions used in the
establishment of certain workforce reduction provisions was not carried out
and significant provisions for costs associated with fringe benefits offered
to terminated employees were not released in the appropriate periods. While
these errors did not impact the cumulative reduction of the special charges
in the $328 of adjustments noted above, certain periods reflect adjustments
to these provisions to recognize them in the appropriate periods.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Other accruals and provisions
| |  | -----------------------------



| |  | Nortel Networks determined that approximately $196 of accruals and provisions
related to certain items should not have been recorded as the appropriate
conditions and documentation supporting the establishment of these accruals
and provisions did not exist at the time of such recognition. The restatement
adjustments included the reversal of these accruals and provisions in the
periods in which they were originally recorded.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | These restatement adjustments included $51 release of provisions previously
established to bring into balance certain inter-company payables and
receivables, $35 reversal of accruals for costs associated with programs to
upgrade certain financial information systems and $25 reversal of accruals
for discretionary bonuses in excess of amounts reasonably expected to be
paid. Other adjustments made in connection with the restatements totaled $85
which related to the need to make modifications to accruals in a number of
specific areas of risk in Nortel Networks businesses, including adjustments
to accounts payable balances, warranty provisions, and other provisions and
accruals. In addition, Nortel Networks determined that a $33 adjustment
which had previously been recorded as a reduction of the provisions related
to discontinued operations should have been recorded as an expense to
continuing operations. This restatement adjustment has increased expense in
prior periods relating to continuing operations, but has reduced discontinued
operations expense by a similar amount.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11



---



##### 





| |  | Income tax adjustments
| |  | ----------------------



| |  | Nortel Networks has determined that certain tax liabilities, principally in
Canada and the United States of approximately $142, were netted against
deferred tax assets as at September 30, 2002 and subsequent period ends. As
a result, the valuation allowance recorded in those affected tax
jurisdictions at September 30, 2002 should have included an additional amount
of approximately $142. The correction to the valuation allowance resulted in
an increase to tax expense for the affected period.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Nortel Networks reduced the net
deferred tax asset as at June 30, 2003 by
approximately $26 for the tax impacts of the restatement adjustments. In tax
jurisdictions where Nortel Networks had a valuation allowance, the deferred
tax asset and corresponding valuation allowance were reduced to account for
the impact of the related restatement adjustments.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Revenue adjustments
| |  | -------------------



| |  | Nortel Networks recognized approximately $122 of net revenue in circumstances
in which such revenue should have been deferred to later periods.
Adjustments of $99 primarily related to the accounting treatment of certain
contract related obligations with a limited number of customers. In these
cases, such obligations should not have been recorded; rather, recognition of
revenue should have been deferred. Also, in the Caribbean and Latin America
region, Nortel Networks determined that there were $23 in revenue calculation
errors. In the restatements, Nortel Networks deferred the recognition of
such revenues to the appropriate periods and released associated accrued
costs in the appropriate periods.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Foreign currency translation adjustments
| |  | ----------------------------------------



| |  | From January 1, 1999 to June 30, 2003, Nortel Networks had recorded $107 of
net losses on the translation of foreign currency denominated balances of its
Brazilian entities in the currency translation adjustment account included in
accumulated other comprehensive loss on its consolidated balance sheet. In connection
with the comprehensive review, Nortel Networks determined that the
appropriate accounting treatment would have been to record the foreign
exchange losses in its consolidated statement of operations in the appropriate periods.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The restatements also reflected $59 of foreign currency translation
adjustments as a result of the other restatement adjustment amounts.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  | Impacts of the restatements on the accompanying unaudited consolidated
financial statements
| |  | -------------------------------------------------------------------------------------------



| |  | The following presents a summary of the impact of the restatements for the
periods presented in the accompanying unaudited consolidated financial
statements.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Consolidated statement of operations for the three months ended September 30,
2002 as restated
| |  | ----------------------------------------------------------------------------------------------



| |  | Net loss applicable to common shares for the three months ended September 30,
2002 was reduced by $62 from $1,437 to $1,375. The major components of the
reduction included a $62 net decrease in income tax expense resulting from
the effect on the valuation allowance recorded at September 30, 2002 of the
prior period restatement adjustments offset by the current period income tax
adjustment of $142 as noted above. Additionally, there was a $22 decrease
resulting from the release of special charges primarily related to costs
associated with severance and fringe benefits for terminated employees.
These reductions in net loss were partially offset by a $17 increase in
selling, general and administrative expense which resulted primarily from the
reversal of a previously recorded release of accruals for inter-company out
of balance amounts and a $22 increase in other expense primarily due to $36
in losses from foreign exchange translation adjustments related to Nortel
Networks Brazilian operations offset by $14 for other items.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Consolidated statement of operations for the nine months ended September 30,
2002 as restated
| |  | ---------------------------------------------------------------------------------------------



| |  | Net loss for the nine months ended September 30, 2002 was reduced by $233
from $2,801 to $2,568. The major components of the reduction included a $122
improvement in gross profit primarily from adjustments to contract and
customer-related accruals, $84 from the release of special charges primarily
related to costs associated with severance and fringe benefits for terminated
employees, a $32 decrease in selling, general and administrative expense and
a $30 decrease in research and development expense each due to a net decrease
in other accruals and provisions. These reductions in net loss were
offset by a $19 increase in other expenses which included $36 in
losses from foreign exchange
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12



---



##### 





| |  | translation adjustments related to Nortel
Networks Brazilian operations and reduced by $17 of net adjustments for other
items. Income tax adjustments of $17 represented the net effect of the tax
expense related to the restatement adjustments, the resulting valuation
allowance adjustment and the income tax adjustment of $142 as noted above.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Consolidated balance sheet as at December 31, 2002 as restated
| |  | --------------------------------------------------------------



| |  | Restatement adjustments
| |  | -----------------------



| |  | The above discussion regarding the restatements identified and classified the
various adjustments by category and provided their measurement with respect
to the net decrease in accumulated deficit as at June 30, 2003. The
consolidated balance sheet which follows below presents the cumulative impact
of the restatement adjustments classified by balance sheet line item as at
December 31, 2002. The adjustments as at December 31, 2002 are of the same
nature as those as at June 30, 2003. The changes to the consolidated balance
sheet as a result of the cumulative impact of the restatement adjustments as
at December 31, 2002 included a reduction in contractual liabilities largely
due to the adjustments for contract and customer-related accruals, a
reduction in restructuring liabilities as a result of the adjustments to
special charges related to restructuring actions, a reduction in other
accrued liabilities principally from adjustments related to other accruals
and provisions; and a reduction to the deferred tax asset principally related
to the incorrect netting of certain tax liabilities against the deferred tax
asset.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Reclassification adjustments
| |  | ----------------------------



| |  | Reclassification adjustments were made between line items which also impacted
the unaudited consolidated balance sheet as at December 31, 2002. The
principal reclassifications resulted in, among other things, a net reduction
to cash and notes payables of $70 to reflect, upon consolidation, that a bank
note payable by one subsidiary was fully collateralized by, and could be
offset against, a deposit in the same bank by another subsidiary, an
approximate $370 increase in accounts receivable and in other accrued
liabilities to recognize advance billings in excess of revenues as a
liability, and a $90 increase in net inventory with offsets in other current
and other long-term assets.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Filing of restated financial statements
| |  | ---------------------------------------



| |  | At the earliest possible time in the fourth quarter of 2003, Nortel Networks
expects to file with the SEC the Nortel Networks Form 10-K/A and amended
Quarterly Reports on Form 10-Q/A for the quarterly periods ended March 31,
2003 and June 30, 2003 containing restated financial statements for the
relevant periods.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

13



---



##### 





| |  | Consolidated Statements of Operations (unaudited)
| |  | -------------------------------------------------



Three months ended September 30, 2002
    
    
    Nine months ended September 30, 2002As
    
    
    
    
    
    
    
    
    Aspreviously
    
    
    
    
    
    As
    
    
    previously
    
    
    
    
    
    Asreported
    
    
    Adjustments
    
    
    restated
    
    
    reported
    
    
    Adjustments
    
    
    restatedRevenues
    
    $
    2,353
    
    
    $
    (4
    )
    
    $
    2,349
    
    
    $
    8,033
    
    
    $
    1
    
    
    $
    8,034Cost of revenues
    
    
    1,513
    
    
    
    (13
    )
    
    
    1,500
    
    
    
    5,612
    
    
    
    (121
    )
    
    
    5,491Gross profit
    
    
    840
    
    
    
    9
    
    
    
    849
    
    
    
    2,421
    
    
    
    122
    
    
    
    2,543Selling, general and administrative expense
    
    
    678
    
    
    
    17
    
    
    
    695
    
    
    
    2,182
    
    
    
    (32
    )
    
    
    2,150Research and development expense
    
    
    553
    
    
    
    (9
    )
    
    
    544
    
    
    
    1,697
    
    
    
    (30
    )
    
    
    1,667Amortization of acquired technology
    
    
    6
    
    
    
    
    
    
    
    6
    
    
    
    17
    
    
    
    
    
    
    
    17Special chargesGoodwill impairment
    
    
    264
    
    
    
    
    
    
    
    264
    
    
    
    264
    
    
    
    
    
    
    
    264Other special charges
    
    
    585
    
    
    
    (22
    )
    
    
    563
    
    
    
    1,335
    
    
    
    (84
    )
    
    
    1,251Gain on sale of businesses
    
    
    
    
    
    
    (3
    )
    
    
    (3
    )
    
    
    (3
    )
    
    
    (8
    )
    
    
    (11
    )Operating earnings (loss)
    
    
    (1,246
    )
    
    
    26
    
    
    
    (1,220
    )
    
    
    (3,071
    )
    
    
    276
    
    
    
    (2,795
    )Other income (expense)  net
    
    
    4
    
    
    
    (22
    )
    
    
    (18
    )
    
    
    (24
    )
    
    
    (19
    )
    
    
    (43
    )Interest expenseLong-term debt
    
    
    (34
    )
    
    
    (3
    )
    
    
    (37
    )
    
    
    (104
    )
    
    
    (6
    )
    
    
    (110
    )Other
    
    
    (12
    )
    
    
    (1
    )
    
    
    (13
    )
    
    
    (33
    )
    
    
    (2
    )
    
    
    (35
    )Earnings (loss) from continuing operations
before income taxes, minority interests and
equity in net loss of associated companies
    
    
    (1,288
    )
    
    
    
    
    
    
    (1,288
    )
    
    
    (3,232
    )
    
    
    249
    
    
    
    (2,983
    )Income tax benefit (expense)
    
    
    (137
    )
    
    
    62
    
    
    
    (75
    )
    
    
    447
    
    
    
    (17
    )
    
    
    430(1,425
    )
    
    
    62
    
    
    
    (1,363
    )
    
    
    (2,785
    )
    
    
    232
    
    
    
    (2,553
    )Minority interests  net of tax
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )
    
    
    19
    
    
    
    (13
    )
    
    
    6Equity in net loss of associated companies  net of tax
    
    
    (5
    )
    
    
    (2
    )
    
    
    (7
    )
    
    
    (19
    )
    
    
    (7
    )
    
    
    (26
    )Net earnings (loss) from continuing operations
    
    
    (1,431
    )
    
    
    60
    
    
    
    (1,371
    )
    
    
    (2,785
    )
    
    
    212
    
    
    
    (2,573
    )Net earnings from discontinued operations  net of tax
    
    
    
    
    
    
    2
    
    
    
    2
    
    
    
    
    
    
    
    21
    
    
    
    21Net earnings (loss)
    
    
    (1,431
    )
    
    
    62
    
    
    
    (1,369
    )
    
    
    (2,785
    )
    
    
    233
    
    
    
    (2,552
    )Dividends on preferred shares
    
    
    (6
    )
    
    
    
    
    
    
    (6
    )
    
    
    (16
    )
    
    
    
    
    
    
    (16
    )Net earnings (loss) applicable to common shares
    
    $
    (1,437
    )
    
    $
    62
    
    
    $
    (1,375
    )
    
    $
    (2,801
    )
    
    $
    233
    
    
    $
    (2,568
    )


14



---



##### 





| |  | Consolidated Balance Sheet (unaudited)
| |  | --------------------------------------



December 31, 2002Aspreviously
    
    
    
    
    
    
    
    
    
    
    Asreported
    
    
    Adjustments
    
    
    Reclassification
    
    
    restatedASSETSCurrent assetsCash and cash equivalents
    
    $
    3,813
    
    
    $
    
    
    
    $
    (70
    )
    
    $
    3,743Restricted cash and cash equivalents
    
    
    249
    
    
    
    
    
    
    
    
    
    
    
    249Accounts receivable  net
    
    
    1,993
    
    
    
    (11
    )
    
    
    265
    
    
    
    2,247Inventories  net
    
    
    889
    
    
    
    7
    
    
    
    90
    
    
    
    986Income taxes recoverable
    
    
    58
    
    
    
    
    
    
    
    
    
    
    
    58Deferred income taxes  net
    
    
    793
    
    
    
    
    
    
    
    
    
    
    
    793Other current assets
    
    
    706
    
    
    
    14
    
    
    
    (52
    )
    
    
    668Total current assets
    
    
    8,501
    
    
    
    10
    
    
    
    233
    
    
    
    8,744Investments
    
    
    246
    
    
    
    2
    
    
    
    
    
    
    
    248Plant and equipment  net
    
    
    1,441
    
    
    
    23
    
    
    
    
    
    
    
    1,464Goodwill
    
    
    2,021
    
    
    
    
    
    
    
    
    
    
    
    2,021Deferred income taxes  net
    
    
    2,797
    
    
    
    (144
    )
    
    
    
    
    
    
    2,653Other assets
    
    
    747
    
    
    
    9
    
    
    
    10
    
    
    
    766Total assets
    
    $
    15,753
    
    
    $
    (100
    )
    
    $
    243
    
    
    $
    15,896LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesNotes payable
    
    $
    100
    
    
    $
    
    
    
    $
    (70
    )
    
    $
    30Trade and other accounts payable
    
    
    931
    
    
    
    (32
    )
    
    
    
    
    
    
    899Payroll and benefit-related liabilities
    
    
    513
    
    
    
    (14
    )
    
    
    
    
    
    
    499Contractual liabilities
    
    
    1,546
    
    
    
    (333
    )
    
    
    
    
    
    
    1,213Restructuring
    
    
    761
    
    
    
    (224
    )
    
    
    
    
    
    
    537Other accrued liabilities
    
    
    2,803
    
    
    
    (215
    )
    
    
    306
    
    
    
    2,894Long-term debt due within one year
    
    
    233
    
    
    
    
    
    
    
    
    
    
    
    233Total current liabilities
    
    
    6,887
    
    
    
    (818
    )
    
    
    236
    
    
    
    6,305Long-term debt
    
    
    1,919
    
    
    
    (1
    )
    
    
    31
    
    
    
    1,949Deferred income taxes  net
    
    
    366
    
    
    
    
    
    
    
    
    
    
    
    366Other liabilities
    
    
    2,351
    
    
    
    (6
    )
    
    
    (24
    )
    
    
    2,321Total liabilities
    
    
    11,523
    
    
    
    (825
    )
    
    
    243
    
    
    
    10,941Minority interests in subsidiary companies
    
    
    78
    
    
    
    51
    
    
    
    
    
    
    
    129SHAREHOLDERS EQUITYPreferred shares, without par value Authorized shares: unlimited; issued and outstanding shares:30,000,000 at September 30, 2003 and December 31, 2002
    
    
    536
    
    
    
    
    
    
    
    
    
    
    
    536Common shares, without par value Authorized shares: unlimited; issued and outstanding shares:1,460,978,638 at September 30, 2003 and December 31, 2002
    
    
    1,211
    
    
    
    
    
    
    
    
    
    
    
    1,211Additional paid-in capital
    
    
    21,991
    
    
    
    13
    
    
    
    
    
    
    
    22,004Accumulated deficit
    
    
    (18,093
    )
    
    
    486
    
    
    
    
    
    
    
    (17,607
    )Accumulated other comprehensive loss
    
    
    (1,493
    )
    
    
    175
    
    
    
    
    
    
    
    (1,318
    )Total shareholders equity
    
    
    4,152
    
    
    
    674
    
    
    
    
    
    
    
    4,826Total liabilities and shareholders equity
    
    $
    15,753
    
    
    $
    (100
    )
    
    $
    243
    
    
    $
    15,896


15



---



##### 





|3. |  | Accounting changes
|-- |  | ------------------



| | (a) | Stock-based compensation
| | --- | ------------------------



| |  | In December 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 148, Accounting
for Stock-Based Compensation  Transition and Disclosure  an Amendment
of FASB Statement No. 123 (SFAS 148), which amended the transitional
provisions of SFAS No. 123, Accounting for Stock-based Compensation
(SFAS 123) to allow the recognition of stock-based compensation under
the fair value based method.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Prior to January 1, 2003, Nortel Networks, as permitted under SFAS 123,
applied Accounting Principles Board Opinion (APB) No. 25, Accounting
for Stock Issued to Employees (APB 25) and related interpretations in
accounting and providing disclosures for its stock-based compensation
plans. Under SFAS 123 and APB 25, Nortel Networks did not expense
employee stock-based compensation using the fair value based method.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Effective January 1, 2003, Nortel Networks elected to expense employee
stock-based compensation using the fair value based method prospectively
for all awards granted or modified after January 1, 2003. The fair value
at grant date of stock options is estimated using the Black-Scholes
option-pricing model. Compensation expense is recognized over the stock
option vesting period. Nortel Networks has also adopted the amended
disclosure provisions of SFAS 148. Stock option expense (pre-tax)
recorded during the three months and nine months ended September 30, 2003
was $7 and $18, respectively.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Under various stock option programs of Nortel Networks parent, Nortel
Networks Corporation (NNC), options may be granted to various eligible
employees of Nortel Networks to purchase common shares of NNC. Had Nortel
Networks applied the fair value based method to all stock-based awards,
reported net earnings (loss) applicable to common shares would have
decreased (increased) to the pro forma amounts indicated below for the
following periods:
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Three months ended September 30,
    
    
    Nine months ended September 30,2003
    
    
    2002
    
    
    2003
    
    
    2002Net earnings (loss) applicable to common shares  as reported
    
    $
    224
    
    
    $
    (1,375
    )
    
    $
    372
    
    
    $
    (2,568
    )Stock-based compensation  reported (a)
    
    
    46
    
    
    
    4
    
    
    
    92
    
    
    
    10Stock-based compensation  pro forma (b)
    
    
    (105
    )
    
    
    (309
    )
    
    
    (268
    )
    
    
    (781
    )Net earnings (loss) applicable to common shares  pro forma
    
    $
    165
    
    
    $
    (1,680
    )
    
    $
    196
    
    
    $
    (3,339
    )
 (a)
    
    Stock-based compensation  reported included stock option
expense, the employer portion of stock purchase plan contributions
and restricted stock units expense. For the three months and nine
months ended September 30, 2003, the amounts were net of tax of nil.
For the three months and nine months ended September 30, 2002, the
amounts were net of tax of nil and $3, respectively.(b)
    
    Stock-based compensation  pro forma included stock option
expense, pro forma stock option expense, employer portion of stock
purchase plan contributions and restricted stock units expense. For
the three months and nine months ended September 30, 2003, the
amounts were net of tax of nil. For the three months and nine months
ended September 30, 2002, the amounts were net of tax of nil and
$147, respectively.




| |  | The following weighted average assumptions were used in computing the fair
value of stock options used to compute pro forma net earnings (loss)
applicable to common shares for the following periods:
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Three months ended September 30,
    
    
    Nine months ended September 30,2003
    
    
    2002
    
    
    2003
    
    
    2002Black-Scholes weighted-average assumptionsExpected dividend yield
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    0.00
    %Expected volatility
    
    
    93.29
    %
    
    
    79.14
    %
    
    
    92.49
    %
    
    
    71.33
    %Risk-free interest rate
    
    
    3.17
    %
    
    
    3.37
    %
    
    
    2.81
    %
    
    
    4.49
    %Expected option life in years
    
    
    4
    
    
    
    4
    
    
    
    4
    
    
    
    4Weighted average stock option fair value
per option granted
    
    $
    1.94
    
    
    $
    0.60
    
    
    $
    1.57
    
    
    $
    3.50


16



---



##### 





| | (b) | Guarantees
| | --- | ----------



| |  | In November 2002, the FASB issued FASB Interpretation No. (FIN) 45
Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others  an
interpretation of FASB Statements No. 5, 57, and 107 and rescission of
FASB interpretation No. 34 (FIN 45). FIN 45 defines a guarantee as a
contract that contingently requires a guarantor to pay a guaranteed party
as a result of changes in an underlying asset, liability or equity
security of the guaranteed party or a third partys failure to perform
under a specified agreement. FIN 45 requires that a liability be
recognized for the estimated fair value of the guarantee at its inception.
Guarantees issued prior to January 1, 2003 are not subject to the
recognition and measurement provisions, but are subject to expanded
disclosure requirements. Nortel Networks has entered into agreements that
contain features which meet the definition of a guarantee under FIN 45.
Effective December 31, 2002 Nortel Networks adopted the disclosure
requirements of FIN 45. In addition, effective January 1, 2003, Nortel
Networks adopted the initial recognition and measurement provisions of FIN
45 which apply on a prospective basis to certain guarantees issued or
modified after December 31, 2002. The adoption of FIN 45 did not have a
material impact on the results of operations and financial condition of
Nortel Networks (see note 11).
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) | Asset retirement obligations
| | --- | ----------------------------



| |  | In June 2001, the FASB issued SFAS No. 143 Accounting for Asset
Retirement Obligations (SFAS 143), which applies to certain obligations
associated with the retirement of tangible long-lived assets. SFAS 143
requires that a liability is initially recognized for the estimated fair
value of the obligation when it is incurred. The associated asset
retirement cost is capitalized as part of the carrying amount of the
long-lived asset and depreciated over the remaining life of the underlying
asset and the associated liability is accreted to the estimated fair value
of the obligation at the settlement date through periodic accretion
charges to net earnings (loss). When the obligation is settled, any
difference between the final cost and the recorded liability is recognized
as income or loss on settlement. Effective January 1, 2003, Nortel
Networks adopted the initial recognition and measurement provisions of
SFAS No. 143. The adoption of SFAS 143 resulted in a decrease to net
earnings of $8 (net of tax of nil) which has been reported as a cumulative
effect of an accounting change, the recording of a long-lived asset of $5
and an asset retirement obligation liability of $13.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (d) | Accounting for costs associated with exit or disposal activities
| | --- | ----------------------------------------------------------------



| |  | In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities (SFAS 146), which is
effective for exit or disposal activities initiated after December 31,
2002. SFAS 146 supercedes the FASB Emerging Issues Task Force (EITF)
Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs
Incurred in Restructuring) (EITF 94-3). SFAS 146 requires recognition
of costs associated with an exit or disposal activity when the liability
is incurred, whereas under EITF 94-3 a liability for an exit cost was
recognized when an entity committed to an exit plan. In addition, SFAS
146 establishes that fair value is the objective for initial measurement
of the liability. The effect of SFAS 146 is to change the timing of
recognition and the basis for measuring certain liabilities creating
valuation differences between SFAS 146 and EITF 94-3. Exit and disposal
activities initiated before December 31, 2002 continue to be accounted for
under EITF 94-3. Nortel Networks adopted the requirements of SFAS 146
effective January 1, 2003. The adoption of SFAS 146 did not have a
material impact on Nortel Networks results of operations and financial
condition.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (e) | Consolidation of variable interest entities
| | --- | -------------------------------------------



| |  | In January 2003, the FASB issued FIN 46, Consolidation of Variable
Interest Entities (FIN 46). FIN 46 clarifies the application of
Accounting Research Bulletin No. 51, Consolidated Financial Statements
to those entities defined as Variable Interest Entities (more commonly
referred to as special purpose entities) in which equity investors do not
have the characteristics of a controlling financial interest or there is
not sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. FIN
46 applies immediately to all Variable Interest Entities created after
January 31, 2003 and by the beginning of the first interim or annual
reporting period commencing after June 15, 2003 for Variable Interest
Entities created prior to February 1, 2003. In October 2003, the FASB
issued FASB Staff Position (FSP) No. FIN 46-6 deferring the effective
date for applying the provisions of FIN 46 for Variable Interest Entities
created prior to February 1, 2003 to the end of the first interim or
annual period ending after December 15, 2003. While the criteria for
deferral were met, Nortel Networks elected early application of FIN 46.
Effective July 1, 2003, Nortel Networks prospectively began
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

17



---



##### 





| |  | consolidating certain special purpose entities in which Nortel Networks was considered
the primary beneficiary following the guidance of FIN 46.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  | As at September 30, 2003, certain lease financing transactions that were
structured through single transaction special purpose entities did not
have sufficient equity at risk as defined in FIN 46. In addition, Nortel
Networks retained certain risks associated with guaranteeing recovery of
the unamortized principal balance of the special purpose entities debt
which represented the majority of the risks associated with the special
purpose entities activities. The amount of the above guarantee will be
adjusted over time as the underlying debt matures. As at September 30,
2003, the Nortel Networks consolidated balance sheet included $179 in
long-term debt and $179 of plant and equipment  net related to these
special purpose entities. These amounts represented both the collateral
and maximum exposure to loss as a result of Nortel Networks involvement
with these entities.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Nortel Networks has conducted certain receivable sales and lease financing
transactions through special purpose entities. Receivable sales
transactions are generally conducted either directly with financial
institutions or with multi-seller conduits. As at September 30, 2003,
Nortel Networks was not required to, and did not, consolidate or provide
any of the additional disclosures set out in FIN 46, with respect to the
special purpose entities involving receivable sales.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (f) | Accounting for certain financial instruments with characteristics of
both liabilities and equity
| | --- | ------------------------------------------------------------------------------------------------



| |  | In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity
(SFAS 150). SFAS 150 clarifies the accounting for certain financial
instruments with characteristics of both liabilities and equity and
requires that those instruments be classified as liabilities in the
balance sheets. Previously, many of those financial instruments were
classified as equity. SFAS 150 is effective for financial instruments
entered into or modified after May 31, 2003 and otherwise is effective at
the beginning of the first interim period beginning after June 15, 2003.
As at September 30, 2003, Nortel Networks continued to consolidate two
enterprises with limited lives. Upon liquidation, the net assets of these
entities will be distributed to the owners based on their relative
interests at that time. The minority interest included in the balance
sheet related to these entities as at September 30, 2003 was $37. Nortel
Networks has not yet determined the fair value of this minority interest
as at September 30, 2003. In November 2003, the FASB issued FSP No. FAS
150-3 deferring indefinitely the effective date for applying the specific
provisions within SFAS 150 related to the classification and measurement
of mandatorily redeemable noncontrolling interests. The adoption of SFAS
150 did not have a material impact on Nortel Networks results of
operations and financial condition.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (g) | Accounting for revenue arrangements with multiple deliverables
| | --- | --------------------------------------------------------------



| |  | In November 2002, the EITF reached a consensus on Issue No. 00-21,
Accounting for Revenue Arrangements with Multiple Deliverables (EITF
00-21). In the absence of higher level accounting literature, EITF 00-21
governs how to separate and allocate revenue to goods or services or both
that are to be delivered in a bundled sales arrangement. EITF 00-21
applies to revenue arrangements entered into after June 30, 2003 and
allows for either prospective application or cumulative adjustment upon
adoption. Nortel Networks adopted the requirements of EITF 00-21 on a
prospective basis effective July 1, 2003. The adoption of EITF 00-21 did
not have a material impact on Nortel Networks results of operations and
financial condition.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (h) | Amendment of statement 133 on derivative instruments and hedging
activities
| | --- | ---------------------------------------------------------------------------



| |  | In April 2003, the FASB issued SFAS No. 149, Amendment of SFAS No. 133 on
Derivative Instruments and Hedging Activities (SFAS 149). SFAS 149
amends and clarifies accounting for derivative instruments, including
certain derivative instruments embedded in other contracts and hedging
activities under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities (SFAS 133). In particular, it (1) clarifies under
what circumstances a contract with an initial net investment meets the
characteristic of a derivative as discussed in SFAS 133, (2) clarifies
when a derivative contains a financing component, (3) amends the
definition of an underlying to conform it to the language used in FIN
45, and (4) amends certain other existing pronouncements. SFAS 149 is
effective for contracts entered into or modified after June 30, 2003,
except as stated below, and for hedging relationships designated after
June 30, 2003.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The provisions of SFAS 149 that relate to guidance in SFAS 133
Implementation Issues that have been effective for fiscal quarters which
began prior to June 15, 2003 will continue to be applied in accordance
with their respective effective dates. In addition, certain provisions
relating to forward purchases or sales of when-issued securities or
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

18



---



##### 





| |  | other securities that do not yet exist will be applied to both existing
contracts as well as new contracts entered into after June 30, 2003.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  | Effective July 1, 2003 Nortel Networks applied the requirements of SFAS
149 on a prospective basis to contracts entered into or modified after
June 30, 2003. The adoption of SFAS 149 did not have a material impact
on Nortel Networks results of operations and financial condition.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (i) | Determining whether an arrangement contains a lease
| | --- | ---------------------------------------------------



| |  | In May 2003, the EITF reached a consensus on Issue No. 01-8, Determining
Whether an Arrangement Contains a Lease (EITF 01-8). EITF 01-8
provides guidance on how to determine whether an arrangement contains a
lease that is within the scope of FASB Statement No. 13, Accounting for
Leases. The guidance in EITF 01-8 is based on whether the arrangement
conveys to the purchaser (lessee) the right to use a specific asset, and
is effective for Nortel Networks for arrangements entered into or modified
after June 30, 2003. As at September 30, 2003, the adoption of EITF 01-8
did not have a material impact on Nortel Networks results of operations
and financial condition. However, the impact of EITF 01-8 on Nortel
Networks future results of operations and financial position will depend
on the terms contained in contracts signed or contracts amended
prospectively.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

19



---



##### 





|4. |  | Consolidated financial statement details
|-- |  | ----------------------------------------



| |  | The following unaudited consolidated financial statement details are
presented as at September 30, 2003 and December 31, 2002 for the consolidated
balance sheets and for the nine months ended September 30, 2003 and 2002 for
the consolidated statements of cash flows:
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  | Accounts receivable  net:
| |  | --------------------------



September 30,
    
    
    December 31,2003
    
    
    2002Trade receivables
    
    $
    1,788
    
    
    $
    1,915Related party receivables
    
    
    186
    
    
    
    83Contracts
in process(a)
    
    
    553
    
    
    
    7652,527
    
    
    
    2,763Less: provision for doubtful accounts
    
    
    (277
    )
    
    
    (516
    )Accounts receivable  net
    
    $
    2,250
    
    
    $
    2,247
 (a)
    
    Amounts represented the recognized sales value of performance that
was not billed or billable to customers as at September 30, 2003 and
December 31, 2002, respectively.




| |  | Inventories  net:
| |  | ------------------



September 30,
    
    
    December 31,2003
    
    
    2002Raw materials
    
    $
    299
    
    
    $
    343Work in process
    
    
    262
    
    
    
    308Finished goods
    
    
    367
    
    
    
    335Inventories
 net(a)
    
    $
    928
    
    
    $
    986
 (a)
    
    Net of inventory provisions of $988 and $1,070 as at September 30,
2003 and December 31, 2002, respectively. Other reserves for claims
related to contract manufacturers and suppliers of $129 and $167 at
September 30, 2003 and December 31, 2002, respectively, were included in
other accrued liabilities. These accruals were related to cancellation
charges, contracted for inventory in excess of future demand and the
settlement of certain other claims.




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



September 30,
    
    
    December 31,2003
    
    
    2002Cost:Land
    
    $
    59
    
    
    $
    53Buildings
    
    
    1,328
    
    
    
    1,161Machinery and equipment
    
    
    2,956
    
    
    
    3,3894,343
    
    
    
    4,603Less: accumulated depreciation:Buildings
    
    
    (568
    )
    
    
    (479
    )Machinery and equipment
    
    
    (2,307
    )
    
    
    (2,660
    )(2,875
    )
    
    
    (3,139
    )Plant
and equipment  net(a)
    
    $
    1,468
    
    
    $
    1,464
 (a)
    
    Included assets held for sale with a carrying value of $48 and $78 as
at September 30, 2003 and December 31, 2002, respectively, related to
owned facilities that were being actively marketed. These assets were
written down in previous periods to their estimated fair values less
costs to sell. The write down was included in special charges. We
expect to dispose of all of these facilities by mid-2005.


20



---



##### 





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



September 30,
    
    
    December 31,2003
    
    
    2002Outsourcing and selling, general and administrative related
    
    $
    417
    
    
    $
    616Customer deposits
    
    
    52
    
    
    
    58Product related
    
    
    166
    
    
    
    237Warranty and known product defects
    
    
    329
    
    
    
    359Deferred income
    
    
    512
    
    
    
    586Miscellaneous taxes
    
    
    120
    
    
    
    126Income taxes payable
    
    
    86
    
    
    
    98Current liabilities of discontinued operations
    
    
    81
    
    
    
    44Interest payable
    
    
    33
    
    
    
    52Advance billings in excess of earnings (a)
    
    
    329
    
    
    
    365Other
    
    
    168
    
    
    
    353Other accrued liabilities
    
    $
    2,293
    
    
    $
    2,894
 (a)
    
    Amounts represented billings in excess of revenues recognized to date
on long-term contracts.




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



| |  | Change in operating assets and liabilities:
| |  | -------------------------------------------



September 30,
    
    
    September 30,2003
    
    
    2002Accounts receivable
    
    $
    22
    
    
    $
    924Inventories
    
    
    98
    
    
    
    394Income taxes
    
    
    23
    
    
    
    1,278Restructuring
    
    
    (448
    )
    
    
    (844
    )Accounts payable and accrued liabilities
    
    
    (675
    )
    
    
    (1,009
    )Other operating assets and liabilities
    
    
    (335
    )
    
    
    (120
    )Total change in operating assets and liabilities
    
    
    (1,315
    )
    
    
    623


Interest and income taxes paid (recovered):




September 30,
    
    
    September 30,2003
    
    
    2002Interest paid
    
    $
    93
    
    
    $
    168Income taxes paid (recovered)
    
    $
    9
    
    
    $
    (1,223
    )




| |  | Goodwill
| |  | --------



| |  | Goodwill represents the excess of the purchase price of an acquired
enterprise over the fair values of the identifiable assets acquired and
liabilities assumed. Nortel Networks tests for impairment of goodwill on an
annual basis on October 1 and at any other time if events occur or
circumstances change that would more likely than not reduce the fair value of
the reporting unit below its carrying amount.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Circumstances that could trigger an impairment test include a significant
adverse change in the business climate or legal factors, an adverse action or
assessment by a regulator, unanticipated competition, loss of key personnel,
the likelihood that a reporting unit or significant portion of a reporting
unit will be sold or otherwise disposed, results of testing for
recoverability of a significant asset group within a reporting unit and
recognition of a goodwill impairment loss in the financial statements of a
subsidiary that is a component of a reporting unit.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The impairment test for goodwill is a two-step process. Step one consists of
a comparison of the fair value of a reporting unit with its carrying amount,
including the goodwill allocated to the reporting unit. Measurement of the
fair value of a reporting unit is based on one or more fair value measures
including: estimated amounts at which the unit as a whole could be bought or
sold in a current transaction between willing parties; present value
techniques of estimated future cash
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

21



---



##### 





| |  | flows; and valuation techniques based on multiples of earnings or revenue or a similar performance measure. Nortel
Networks also considers its market capitalization as of the date of the
impairment test. If the carrying amount of the reporting unit exceeds the
fair value, step two requires the fair value of the reporting unit to be
allocated to the underlying assets and liabilities of that reporting unit,
resulting in an implied fair value of goodwill. If the carrying amount of
the reporting unit goodwill exceeds the implied fair value of that goodwill,
an impairment loss equal to the excess is recorded in net earnings (loss).
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | During the nine months ended September 30, 2003, Nortel Networks determined
that there was no triggering event requiring a test for impairment of
goodwill.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | During the three months ended September 30, 2002, an impairment test was
performed on goodwill in accordance with SFAS 142 for all reporting units due
to a significant adverse change in the business climate and taking into
consideration Nortel Networks market capitalization at the end of the third
quarter of 2002. All of Nortel Networks reporting units had fair values in
excess of their carrying values with the exception of Optical Networks. As a
result of Nortel Networks impairment test, Nortel Networks wrote off $264 of
goodwill within the Optical Networks segment during the three months ended
September 30, 2002.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Goodwill by reportable segment as at September 30, 2003 was as follows:
| |  | -----------------------------------------------------------------------



Wireless
    
    
    Enterprise
    
    
    Wireline
    
    
    OpticalNetworks
    
    
    Networks
    
    
    Networks
    
    
    Networks
    
    
    Other
    
    
    TotalBalance  net as at December 31, 2002
    
    $
    21
    
    
    $
    1,520
    
    
    $
    480
    
    
    $
    
    
    
    $
    
    
    
    $
    2,021Change:Additions(a)
    
    
    2
    
    
    
    11
    
    
    
    13
    
    
    
    3
    
    
    
    
    
    
    
    29Foreign exchange
    
    
    
    
    
    
    2
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    3Balance  net as at September 30, 2003
    
    $
    23
    
    
    $
    1,533
    
    
    $
    494
    
    
    $
    3
    
    
    $
    
    
    
    $
    2,053
 (a)
    
    See note 8 for details.




| |  | Investments
| |  | -----------



September 30,
    
    
    December 31,2003
    
    
    2002Investments at cost
    
    $
    169
    
    
    $
    180Investments in associated companies at equity
    
    
    14
    
    
    
    68Investments
    
    $
    183
    
    
    $
    248




| |  | The following table provides summarized statements of operations of a certain
significant associated company for the nine months ended September 30, 2003
and 2002, respectively, which Nortel Networks accounted for under the equity
method. The unaudited financial statements of this associated company are
denominated in a foreign currency and the summarized information below has
been translated into United States dollars at the average rates for the
period for revenues and expenses.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Equity in net loss of associated companies  net of tax for the nine months
ended September 30, 2003 included Nortel Networks interest in this associated
company until the disposal of that interest during the three months ended
September 30, 2003.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Nine months ended September 30,2003
    
    
    2002Revenues
    
    $
    426
    
    
    $
    390Operating loss
    
    $
    62
    
    
    $
    34Net loss
    
    $
    86
    
    
    $
    45


22



---



##### 





|5. |  | Segment information
|-- |  | -------------------



| |  | General description
| |  | -------------------



| |  | Nortel Networks operations are organized around four reportable segments:
Wireless Networks, Enterprise Networks, Wireline Networks and Optical
Networks. Wireless Networks includes network access and core networking
products for voice and data communications that span second and third
generation wireless technologies and most major global standards for mobile
networks. Enterprise Networks includes circuit and packet voice solutions,
data networking and security solutions and the related professional services
used by our enterprise customers. Wireline Networks includes circuit and
packet voice solutions, data networking and security solutions and the
related professional services used by our service provider customers.
Optical Networks includes metropolitan, regional and long-haul photonic dense
wavelength division multiplexing transmission systems, synchronous optical
transmission systems, optical switching solutions, network management
software and intelligence solutions and Optical Ethernet solutions for both
service provider and enterprise customers.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Other represents miscellaneous business activities and corporate functions.
None of these activities meet the quantitative criteria to be disclosed as reportable segments.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Nortel Networks 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. Each
reportable segment is managed separately with each segment manager reporting
directly to the CEO. The CEO relies on the information derived directly from
the Nortel Networks management reporting system. Contribution margin
represents the primary financial measure used by the CEO in assessing
performance and allocating resources and includes the cost of revenues and
selling, general and administrative expense for which the segment managers
are held accountable. Costs associated with shared services and other
corporate costs are allocated to the segments based on usage determined
generally by headcount. Costs not allocated to the segments are primarily
related to Nortel Networks corporate compliance and other non-operational
activities and are included in Other. In addition, the CEO does not review
asset information on a segmented basis in order to assess performance and
allocate resources. Research and development expense represents planned
investment in next generation core products across all segments. The
accounting policies of the reportable segments are the same as those applied
to the consolidated financial statements.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

23



---



##### 





| |  | Segments
| |  | --------



| |  | The following table sets forth information by segment for the following
periods:
| |  | --------------------------------------------------------------------------------



Three months ended September 30,
    
    
    Nine months ended September 30,2003
    
    
    2002
    
    
    2003
    
    
    2002RevenuesWireless Networks
    
    $
    1,005
    
    
    $
    936
    
    
    $
    2,939
    
    
    $
    3,196Enterprise Networks
    
    
    579
    
    
    
    616
    
    
    
    1,738
    
    
    
    1,923Wireline Networks
    
    
    439
    
    
    
    484
    
    
    
    1,494
    
    
    
    1,758Optical Networks
    
    
    243
    
    
    
    309
    
    
    
    810
    
    
    
    1,120Other
    
    
    
    
    
    
    4
    
    
    
    1
    
    
    
    37Total
    
    $
    2,266
    
    
    $
    2,349
    
    
    $
    6,982
    
    
    $
    8,034Contribution marginWireless Networks
    
    
    410
    
    
    
    278
    
    
    
    1,073
    
    
    
    861Enterprise Networks
    
    
    141
    
    
    
    108
    
    
    
    379
    
    
    
    289Wireline Networks
    
    
    138
    
    
    
    98
    
    
    
    469
    
    
    
    330Optical Networks
    
    
    92
    
    
    
    (125
    )
    
    
    131
    
    
    
    (756
    )Other
    
    
    (86
    )
    
    
    (205
    )
    
    
    (208
    )
    
    
    (331
    )Total
    
    $
    695
    
    
    $
    154
    
    
    $
    1,844
    
    
    $
    393Research and development expense
    
    
    (480
    )
    
    
    (544
    )
    
    
    (1,454
    )
    
    
    (1,667
    )Amortization of acquired technology
    
    
    
    
    
    
    (6
    )
    
    
    
    
    
    
    (17
    )Special charges
    
    
    (70
    )
    
    
    (827
    )
    
    
    (180
    )
    
    
    (1,515
    )Gain on sale of businesses
    
    
    20
    
    
    
    3
    
    
    
    28
    
    
    
    11Other income  net
    
    
    100
    
    
    
    (18
    )
    
    
    130
    
    
    
    (43
    )Interest expense
    
    
    (25
    )
    
    
    (50
    )
    
    
    (80
    )
    
    
    (145
    )Earnings (loss) from continuing operations before
income taxes, minority interests and equity in net loss of
associated companies
    
    $
    240
    
    
    $
    (1,288
    )
    
    $
    288
    
    
    $
    (2,983
    )


24



---



##### 





|6. |  | Special charges
|-- |  | ---------------



| |  | During the three months and nine months ended September 30, 2003, Nortel
Networks continued to implement its restructuring work plan. Changes in the
provision for special charges are shown below:
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Contractsettlement
    
    
    Plant andWorkforce
    
    
    and lease
    
    
    equipmentreduction
    
    
    costs
    
    
    write downs
    
    
    Other
    
    
    TotalProvision balance as at December 31, 2002(a)
    
    $
    233
    
    
    $
    629
    
    
    $
    
    
    
    $
    9
    
    
    $
    871Special charges:For the three months ended March 31, 2003
    
    
    67
    
    
    
    31
    
    
    
    21
    
    
    
    
    
    
    
    119For the three months ended June 30, 2003
    
    
    23
    
    
    
    15
    
    
    
    23
    
    
    
    
    
    
    
    61For the three months ended September 30, 2003
    
    
    73
    
    
    
    5
    
    
    
    1
    
    
    
    
    
    
    
    79Revisions to prior accruals:For the three months ended March 31, 2003
    
    
    (22
    )
    
    
    46
    
    
    
    (32
    )
    
    
    
    
    
    
    (8
    )For the three months ended June 30, 2003
    
    
    (13
    )
    
    
    (44
    )
    
    
    (5
    )
    
    
    
    
    
    
    (62
    )For the three months ended September 30, 2003
    
    
    1
    
    
    
    (10
    )
    
    
    
    
    
    
    
    
    
    
    (9
    )Cumulative provision (drawdowns) adjustments in 2003:Cash drawdowns
    
    
    (243
    )
    
    
    (197
    )
    
    
    
    
    
    
    (9
    )
    
    
    (449
    )Non-cash drawdowns
    
    
    (47
    )
    
    
    
    
    
    
    (8
    )
    
    
    
    
    
    
    (55
    )Foreign exchange and other adjustments
    
    
    21
    
    
    
    15
    
    
    
    
    
    
    
    
    
    
    
    36Provision balance as at September 30, 2003(a)
    
    $
    93
    
    
    $
    490
    
    
    $
    
    
    
    $
    
    
    
    $
    583
 (a)
    
    At September 30, 2003 and December 31, 2002, the short-term provision
balances were $269 and $537, respectively, and the long-term provision
balances were $314 and $334, respectively (included in other
liabilities).




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



Employees (approximate)Direct(a)
    
    
    Indirect(b)
    
    
    TotalRFT employee notifications for the three months ended:March 31, 2003
    
    
    300
    
    
    
    500
    
    
    
    800June 30, 2003
    
    
    
    
    
    
    300
    
    
    
    300September 30, 2003
    
    
    100
    
    
    
    100
    
    
    
    200
 (a)
    
    Direct employees included employees performing manufacturing,
assembly, test and inspection activities associated with the production
of Nortel Networks products.(b)
    
    Indirect employees included employees performing manufacturing
management, sales, marketing, research and development and
administrative activities.




| |  | Three months and nine months ended September 30, 2003
| |  | -----------------------------------------------------



| |  | During the three months and nine months ended September 30, 2003, Nortel
Networks recorded total special charges of $70 and $180, respectively, which
were net of revisions of $9 and $79, respectively, related to prior accruals.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Workforce reduction charges of $163 for the nine months ended September 30,
2003 were related to severance and benefit costs, including a pension
settlement loss of $47, associated with approximately 1,300 employees
notified of termination during the nine months ended September 30, 2003 which
extended across all segments. Offsetting these charges were net revisions of
$34 which were primarily related to termination benefits where actual costs
were lower than the estimated amounts across all segments. During the nine
months ended September 30, 2003, the workforce reduction provision balance
was drawn down by cash payments of $243 and the reclassification of the
pension settlement amount to the pension liability account. The remaining
provision is expected to be substantially drawn down by mid-2004.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Contract settlement and lease costs of $51 for the nine months ended
September 30, 2003 consisted of net lease charges related to leased
facilities (comprised of office, warehouse and manufacturing space) and
leased furniture that were newly
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

25



---



##### 





| |  | identified as no longer being used and which
were valued using the estimated fair value method prescribed under SFAS 146.
These costs extended across all segments. In addition to these charges were
revisions of $8 resulting from changes in sublease revenue and cost to vacate
estimates associated with certain properties which extended across all
segments. During the nine months ended September 30, 2003, the provision
balance for contract settlement and lease costs was drawn down by cash
payments of $197. The remaining provision, net of approximately $353 in
estimated sublease revenue, is expected to be substantially drawn down by the
end of 2010.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Plant and equipment write downs of $45 for the nine months ended September
30, 2003 were related to current period write downs to fair value less costs
to sell for various leasehold improvements and excess Optical Networks
equipment. Revisions of $37 to prior write downs of assets held for sale
resulted primarily from adjustments to original plans or estimated amounts
for certain facility closures.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|7. |  | Income taxes
|-- |  | ------------



| |  | At September 30, 2003, Nortel Networks net deferred tax assets, excluding
discontinued operations, were $3,359, reflecting temporary differences
between financial reporting and the tax treatment of certain assets and
liabilities, in addition to the tax benefit of net operating loss and tax
credit carryforwards. These carryforwards expire at various dates beginning
in 2003.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | For the nine months ended September 30, 2003, Nortel Networks recorded a tax
expense on pre-tax income of $288 from continuing operations before minority
interests and equity in net loss of associated companies. This tax expense
was a result of various non-income related taxes, and the draw down of our
deferred tax assets and current income tax provisions in certain taxable
jurisdictions, partially offset by the recognition of tax refunds received in
the period.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Nortel Networks reviews the valuation allowance on a quarterly basis. As a
result of the latest review, Nortel Networks determined that the valuation
allowance as at September 30, 2003 was appropriate. The valuation allowance
was recorded in accordance with SFAS No. 109, Accounting for Income Taxes,
which requires that tax valuation allowances be established when it is more
likely than not that some portion or all of a companys deferred tax assets
will not be realized. Our valuation allowance is primarily attributed to
continued uncertainty in the industry. If market conditions deteriorate
further or future results of operations are less than expected, an additional
tax valuation allowance may be required for all or a portion of our deferred
tax assets.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|8. |  | Divestitures, closures and acquisitions
|-- |  | ---------------------------------------



| |  | Acquisitions and Divestitures
| |  | -----------------------------



| |  | High speed module operations
| |  | ----------------------------



| |  | On August 10, 2003, Nortel Networks sold certain assets related to its high
speed module operations to BreconRidge Manufacturing Solutions Corporation
(BreconRidge). Nortel Networks received proceeds of $6 in the form of cash
and a note receivable. As a result of this transaction, Nortel Networks
recorded a loss of $1 during the three months ended September 30, 2003. The
transaction included a minimum purchase commitment with BreconRidge requiring
Nortel Networks to purchase approximately $11 and $33 of products during 2003
and 2004, respectively.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Nortel Networks Germany and Nortel Networks France
| |  | --------------------------------------------------



| |  | On October 19, 2002, Nortel Networks, through various subsidiaries, entered
into a number of put option and call option agreements as well as a share
exchange agreement with European Aeronautic Defence and Space Company EADS
N.V. (EADS), its partner at that time in three European joint ventures. On
July 1, 2003, EADS exercised its put option to sell its minority interest of
45 percent in Nortel Networks France S.A.S. (NNF) to Nortel Networks. On
July 18, 2003, Nortel Networks exercised its call option and share exchange
rights to acquire the minority interest held by EADS of 42 percent in Nortel
Networks Germany GmbH & Co. KG (NNG) and to sell Nortel Networks equity
interest of 41 percent in EADS Telecom S.A.S., formerly EADS Defence and
Security Networks S.A.S (EADS Telecom) to EADS. The transactions were
completed on September 18, 2003.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The purchase price of $236 for the minority interests of NNF and NNG included
$58 of cash, an in-kind component of approximately $82, representing the
return of a loan note that was owed to Nortel Networks by EADS Telecom, and
the remaining shares of EADS Telecom held by Nortel Networks. The allocation
of the purchase price resulted in the
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

26



---



##### 





| |  | elimination of $65 of minority
interest, settlement of a net liability of $96 related to the put and call
options, and an increase of $46 in other assets and $29 in Goodwill (see note
4 for goodwill by reportable segment). The other assets of $46 related
primarily to customer contracts and customer relationships and will be
amortized over their estimated lives averaging 9 years, and were included in
the consolidated balance sheet as at September 30, 2003. The sale of Nortel
Networks 41 percent interest in EADS Telecom has resulted in the receipt of
cash of $11 and a reduction in equity investments of $23. As a result of
this transaction, Nortel Networks recognized a gain of $76 which is included
in other income (expense)  net for the three months ended September 30,
2003. Except as noted below, there was no additional impact on the results
of operations and financial condition, as NNF and NNG were already included
in the consolidated results. The allocation referred to above for goodwill,
other intangibles and gain are preliminary estimates and are subject to
change pending completion of the valuation report.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | As a result of the sale of Nortel Networks 41 percent interest in EADS
Telecom, the remaining unamortized deferred gain of $21, related to the sale
of substantially all of the assets in the Cogent Defence Systems business
during the year ended December 31, 2001, was recognized and included in gain
on sale of business. The gain had been deferred because Nortel Networks had
an interest in EADS Telecom which had purchased the assets of the Cogent Defence
Systems business from Nortel Networks.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|9. |  | Long-term debt, credit and support facilities
|-- |  | ---------------------------------------------



| |  | Long-term debt
| |  | --------------



| |  | During the three months ended March 31, 2003, Nortel Networks purchased a
portion of its 6.125 percent notes due February 15, 2006 with a face value of
$39. The transaction resulted in a gain of $4 which was included in the
consolidated statement of operations within other income (expense)  net for
the nine months ended September 30, 2003.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Credit facilities
| |  | -----------------



| |  | At September 30, 2003 and December 31, 2002, Nortel Networks had total unused
committed credit facilities of $750. These credit facilities terminate on
April 15, 2005.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Support facilities
| |  | ------------------



| |  | On February 14, 2003, Nortel Networks entered into an agreement with Export
Development Canada (EDC) regarding arrangements to provide for support, on
a secured basis, of certain performance related obligations arising out of
normal course business activities (the EDC Support Facility). On July 10,
2003, Nortel Networks and EDC amended the terms of the EDC Support Facility
by extending the termination date of the facility to December 31, 2005 from
June 30, 2004. All other material terms of the EDC Support Facility remained
unchanged.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The EDC Support Facility provides for up to $750 in support including $300 of
committed revolving support for performance bonds or similar instruments, of
which $131 was utilized as at September 30, 2003. The remainder is
uncommitted support, subject to certain limitations, for performance bonds,
receivables sales and/or securitizations, of which $167 was utilized as at
September 30, 2003. For additional information, see note 20 in the Nortel
Networks Annual Report.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On February 14, 2003, Nortel Networks obligations under the EDC Support
Facility became secured on an equal and ratable basis under the existing
security agreements entered into by Nortel Networks and various of its
subsidiaries that pledge substantially all of the assets of Nortel Networks
in favor of the banks under the Nortel Networks and Nortel Networks Inc.
(NNI) $750 April 2000 five year credit facilities and the holders of Nortel
Networks and NNCs public debt securities. This security became effective in
favor of the banks and the public debt holders on April 4, 2002 (see note
19).
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10. |  | Financial instruments and hedging activities
|--- |  | --------------------------------------------



| |  | On January 27, 2003, various cross currency coupon swaps (notional amount of
Canadian $350) were terminated. There was no impact to net earnings (loss)
on termination as these instruments were not designated as hedges and changes
in fair value were previously accounted for in the statements of operations.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|11. |  | Guarantees
|--- |  | ----------

27



---



##### 





| |  | Nortel Networks has entered into agreements that contain features which meet
the definition of a guarantee under FIN 45. FIN 45 defines a guarantee as a
contract that contingently requires Nortel Networks to pay a guaranteed party
as a result of changes in an underlying asset, liability or equity security
of the guaranteed party or a third partys failure to perform under a
specified agreement. As at September 30, 2003, the fair value of Nortel
Networks outstanding guarantees subject to the recognition and measurement
provisions of FIN 45 was insignificant. A description of the major types of
Nortel Networks outstanding guarantees as at September 30, 2003 is provided
below.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (a) | Business sale and business combination agreements
| | --- | -------------------------------------------------



| |  | In connection with agreements for the sale of portions of its business,
including certain discontinued operations, Nortel Networks has typically
retained the liabilities of a business which relate to events occurring
prior to its sale, such as tax, environmental, litigation and employment
matters. Nortel Networks generally indemnifies the purchaser of a Nortel
Networks business in the event that a third party asserts a claim against
the purchaser that relates to a liability retained by Nortel Networks.
Some of these types of guarantees have indefinite terms while others have
specific terms extending as far as June 2008.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Nortel Networks also entered into guarantees related to the escrow of
shares in business combinations in prior periods. These types of
agreements generally include indemnities that require Nortel Networks to
indemnify counterparties for loss incurred from litigation that may be
suffered by counterparties arising under such agreements. These types of
indemnities apply over a specified period of time from the date of the
business combination and do not provide for any limit on the maximum
potential amount.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Nortel Networks is unable to estimate the maximum potential liability for
these types of indemnification guarantees as the business sale agreements
generally do not specify a maximum amount and the amounts are dependent
upon the outcome of future contingent events, the nature and likelihood of
which cannot be determined.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Historically, Nortel Networks has not made any significant indemnification
payments under such agreements and no significant amount has been accrued
in the accompanying consolidated financial statements with respect to the
contingency associated with these guarantees.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | Intellectual property indemnification obligations
| | --- | -------------------------------------------------



| |  | Nortel Networks has periodically entered into agreements with customers
and suppliers that include limited intellectual property indemnification
obligations that are customary in the industry. These types of guarantees
typically have indefinite terms and generally require Nortel Networks to
compensate the other party for certain damages and costs incurred as a
result of third party intellectual property claims arising from these
transactions.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The nature of the intellectual property indemnification obligations
generally prevents Nortel Networks from making a reasonable estimate of
the maximum potential amount it could be required to pay to its customers
and suppliers. Historically, Nortel Networks has not made any significant
indemnification payments under such agreements and as at September 30,
2003, the amount which has been accrued in the accompanying consolidated
financial statements with respect to the contingency associated with these
indemnities was $6.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) | Lease agreements
| | --- | ----------------



| |  | Nortel Networks has entered into agreements with its lessors that
guarantee the lease payments of certain sub-lessees of its facilities to
lessors. Generally, these lease agreements relate to facilities Nortel
Networks vacated prior to the end of the term of its lease. These lease
agreements require Nortel Networks to make lease payments throughout the
lease term if the sub-lessee fails to make scheduled payments. Most of
these lease agreements also require Nortel Networks to pay for facility
restoration costs at the end of the lease term if the sub-lessee fails to
do so. These lease agreements have expiration dates through June 2015.
The maximum amount that Nortel Networks may be required to pay under these
types of agreements is $59 as at September 30, 2003. Nortel Networks
generally has the ability to attempt to recover such lease payments from
the defaulting party through rights of subrogation.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Historically, Nortel Networks has not made any significant payments under
these types of guarantees and no amount has been accrued in the
accompanying consolidated financial statements with respect to the
contingent aspect of these guarantees.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

28



---



##### 





| | (d) | Third party debt agreements
| | --- | ---------------------------



| |  | Nortel Networks has guaranteed the debt of certain customers. These third
party debt agreements require Nortel Networks to make debt payments
throughout the term of the related debt instrument if the customer fails
to make scheduled debt payments. These third party debt agreements have
expiration dates extending to May 2012. The maximum amount that Nortel
Networks may be required to pay under these types of debt agreements is
$8. Under most such arrangements, the Nortel Networks guarantee is
secured, usually by the assets being purchased or financed. The liability
for such guarantees accrued in the accompanying consolidated financial
statements was $8 as at September 30, 2003.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Nortel Networks is the full and unconditional guarantor of NNCs $1,800
4.25 percent convertible senior notes due September 1, 2008, in the event
that NNC does not make payments for the principal, premium, if any,
interest and other amounts, if any, as they are due. The maximum amount
that Nortel Networks may be required to pay under this guarantee is $1,800
plus premium, if any, and interest.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (e) | Indemnification of banks and agents under credit facilities, EDC
Support Facility and security agreements
| | --- | ---------------------------------------------------------------------------------------------------------



| |  | Nortel Networks has agreed to indemnify the banks and agents under its
credit facilities against costs or losses resulting from changes in laws
and regulations which would increase the banks costs or reduce their
return and from any legal action brought against the banks or agents
related to the use of loan proceeds. Nortel Networks has also agreed to
indemnify EDC under the EDC Support Facility against any legal action
brought against EDC that relates to the provision of support under the EDC
Support Facility. Nortel Networks has also agreed to indemnify the
collateral agent under the security agreements against any legal action
brought against the collateral agent in connection with the collateral
pledged under the security agreements. These indemnifications generally
apply to issues that arise during the term of the credit and support
facilities, or for as long as the security agreements remain in effect
(see notes 9 and 19).
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Nortel Networks is unable to estimate the maximum potential liability for
these types of indemnification guarantees as the agreements do not specify
a maximum amount and the amounts are dependent upon the outcome of future
contingent events, the nature and likelihood of which cannot be determined
at this time.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Historically, Nortel Networks has not made any significant indemnification
payments under such agreements and no amount has been accrued in the
accompanying consolidated financial statements with respect to the
contingent aspect of these indemnification guarantees.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Nortel Networks has agreed to indemnify its counterparties in receivables
securitization transactions. The indemnifications provided to
counterparties in these types of transactions may require Nortel Networks
to compensate counterparties for costs incurred as a result of changes in
laws and regulations (including tax legislation) or in the interpretations
of such laws and regulations, or as a result of regulatory penalties that
may be suffered by the counterparty as a consequence of the transaction.
Certain receivables securitization transactions include indemnifications
requiring the repurchase of the receivables if the particular transaction
becomes invalid. As at September 30, 2003, Nortel Networks had
approximately $330 of quantifiable securitized receivables which were
subject to repurchase under this provision, in which case Nortel Networks
would assume all rights to collect such receivables. The indemnification
provisions generally expire upon expiration of the securitization
agreements, which extend through December of 2004, or collection of the
receivable amount by the counterparty.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Nortel Networks is generally unable to estimate the maximum potential
liability for all of these types of indemnification guarantees as certain
agreements do not specify a maximum amount and the amounts are dependent
upon the outcome of future contingent events, the nature and likelihood of
which cannot be determined at this time.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Historically, Nortel Networks has not made any significant indemnification
payments or receivable repurchases under such agreements and no amount has
been accrued in the accompanying consolidated financial statements with
respect to the contingent aspect of these indemnification guarantees.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

29



---



##### 





| | (f) | Other indemnification agreements
| | --- | --------------------------------



| |  | Nortel Networks has also entered into other agreements that provide
indemnifications to counterparties in certain transactions including
investment banking agreements, guarantees related to the administration of
capital trust accounts, guarantees related to the administration of
employee benefit plans, indentures for its outstanding public debt and
sales of assets (other than the business sale agreements noted above).
These indemnification agreements generally require Nortel Networks to
indemnify the counterparties for costs incurred as a result of changes in
laws and regulations (including tax legislation) or in the interpretations
of such laws and regulations and/or as a result of losses from litigation
that may be suffered by the counterparties arising from the transactions.
These types of indemnification agreements normally extend over an
unspecified period of time from the date of the transaction and do not
provide for any limit on the maximum potential payment amount.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The nature of such agreements prevents Nortel Networks from making a
reasonable estimate of the maximum potential amount it could be required
to pay to its counterparties. The difficulties in assessing the amount of
liability result primarily from the unpredictability of future changes in
laws, the inability to determine how laws apply to counterparties and the
lack of limitations on the potential liability.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Historically, Nortel Networks has not made any significant indemnification
payments under such agreements and no amount has been accrued in the
accompanying consolidated financial statements with respect to the
contingent aspect of these guarantees.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Product warranties
| |  | ------------------



| |  | As part of the normal sale of product, Nortel Networks has provided its
customers with product warranties that extend for periods generally ranging
from one to five years from the date of sale. A liability for the expected
cost of warranty-related claims is established when products are sold and the
related revenue is recognized. In estimating the warranty liability,
historical material replacement costs and associated labor to correct the
product defect are considered. Revisions are made when actual experience
differs materially from historical experience. Known product defects were
included in the warranty reconciliation below and were specifically accrued
for as Nortel Networks became aware of such defects. The following
summarizes the accrual of product warranties that was recorded as part of
other accrued liabilities in the accompanying consolidated balance sheets as
at September 30, 2003:
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Balance as at December 31, 2002
    
    $
    359Payments
    
    
    (127
    )Warranties issued
    
    
    167Revisions
    
    
    (70
    )Balance as at September 30, 2003
    
    $
    329




|12. |  | Commitments
|--- |  | -----------



| |  | Bid, performance related and other bonds
| |  | ----------------------------------------



| |  | Nortel Networks has entered into bid, performance related and other bonds
associated with various contracts. Bid bonds generally have a term less than
twelve months. Performance related bonds generally have a term of twelve
months. Other bonds generally have a term of twenty-four months. The
various contracts to which these bonds apply generally have terms ranging
from two to five years. Potential payments due under these bonds are related
to Nortel Networks non-performance under the applicable contract. The
following table sets forth the maximum potential amount of future payments
under bid, performance related and other bonds, net of the corresponding
restricted cash and cash equivalents, as at:
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



September 30,
    
    
    December 31,2003
    
    
    2002Bid and performance related bonds(a)
    
    $
    422
    
    
    $
    400Other bonds(b)
    
    
    48
    
    
    
    35Total bid, performance related and other bonds
    
    $
    470
    
    
    $
    435
 (a)
    
    Net of restricted cash and cash equivalent amounts of $53 and $195 as
at September 30, 2003 and December 31, 2002, respectively.


30



---



##### 





(b)
    
    Net of restricted cash and cash equivalent amounts of $37 and $19 as
at September 30, 2003 and December 31, 2002, respectively.




| |  | Customer financing
| |  | ------------------



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



September 30,
    
    
    December 31,2003
    
    
    2002Drawn and outstanding  gross
    
    $
    449
    
    
    $
    1,091Provisions for doubtful accounts
    
    
    (322
    )
    
    
    (799
    )Drawn and outstanding  net(a)
    
    
    127
    
    
    
    292Undrawn commitments
    
    
    116
    
    
    
    801Total customer financing
    
    $
    243
    
    
    $
    1,093
 (a)
    
    Included short-term and long-term amounts. Short-term and long-term
amounts were included in accounts receivable  net and other assets,
respectively, in the consolidated balance sheets.




| |  | During the three months and nine months ended September 30, 2003, Nortel
Networks recorded net customer financing bad debt recoveries of $6 and $53,
respectively, primarily as a result of favorable settlements and adjustments
to other existing provisions. The recoveries of $6 and $53, respectively,
were included in the consolidated statements of operations within selling,
general and administrative expense.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | During the nine months ended September 30, 2003, Nortel Networks entered into
certain agreements to restructure and/or settle various customer financing
and related receivables. As a result of these transactions, Nortel Networks
received cash consideration of approximately $220 to settle outstanding
receivables of approximately $600 (with a net carrying value of $120).
Additional non-cash consideration received under one such restructuring
agreement included a five year equipment and services supply agreement and
the mutual release of all other claims between the parties.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | During the nine months ended September 30, 2003, Nortel Networks reduced
undrawn customer financing commitments by $685 as a result of the expiration
or cancellation of commitments and changing customer business plans.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Joint ventures/minority interests
| |  | ---------------------------------



| |  | On October 19, 2002, Nortel Networks entered into a number of put option and
call option agreements (the Options) as well as a share exchange agreement
(the Share Exchange) with EADS, its partner at that time in three European
joint ventures. The Options and the Share Exchange were exercised and the
transaction closed during the three months ended September 30, 2003 (see note
8).
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|13. |  | Restricted cash and cash equivalents
|--- |  | ------------------------------------



| |  | As at September 30, 2003 and December 31, 2002, approximately $113 and $249,
respectively, of cash and cash equivalents was restricted as collateral for
certain bid, performance related and other bonds. In addition to the payment
of fees, cash and cash equivalent collateral was also required in connection
with obtaining new bid, performance related and other bonds as a result of
the general economic and industry environment, and Nortel Networks current
credit ratings.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

31



---



##### 





|14. |  | Comprehensive income (loss)
|--- |  | ---------------------------



| |  | The following are the components of comprehensive income (loss), net of tax,
for the following periods:
| |  | -------------------------------------------------------------------------------------------------------



Three months ended September 30,
    
    
    Nine months ended September 30,2003
    
    
    2002
    
    
    2003
    
    
    2002Net earnings (loss)
    
    $
    230
    
    
    $
    (1,369
    )
    
    $
    390
    
    
    $
    (2,552
    )Other comprehensive income (loss) adjustments:Change in foreign currency translation adjustment(a)
    
    
    31
    
    
    
    (63
    )
    
    
    311
    
    
    
    77Unrealized gain (loss) on investments  net(b)
    
    
    43
    
    
    
    (4
    )
    
    
    89
    
    
    
    (7
    )Unrealized derivative gain (loss) on cash flow hedges  net(c)
    
    
    (8
    )
    
    
    (8
    )
    
    
    12
    
    
    
    7Comprehensive income (loss)
    
    $
    296
    
    
    $
    (1,444
    )
    
    $
    802
    
    
    $
    (2,475
    )
 (a)
    
    The changes in the foreign currency translation adjustments were not
adjusted for income taxes since they related to indefinite term
investments in non-United States subsidiaries.(b)
    
    Certain securities deemed available-for-sale by Nortel Networks were
measured at fair value. Unrealized holding gains (losses) related to
these securities were excluded from net earnings (loss) and were
included in comprehensive income (loss) until realized. Unrealized gain
(loss) on investments was net of tax of nil and $1 for the three months
and nine months ended September 30, 2003, respectively, and net of tax
of $3 and $5 for the three months and nine months ended September 30,
2002, respectively.(c)
    
    During the three months and nine months ended September 30, 2003, $7
and $19 of net derivative gains were reclassified to net earnings
(loss), respectively. During the three months and nine months ended
September 30, 2002, nil and $15, respectively, of net derivative losses
were reclassified to net earnings (loss). Nortel Networks estimates
that $10 of net derivative gains (losses) included in accumulated other
comprehensive income (loss) will be reclassified into net earnings
(loss) within the next 12 months.




|15. |  | Discontinued operations
|--- |  | -----------------------



| |  | During the nine months ended September 30, 2003, Nortel Networks
substantially completed the wind-down of its access solutions operations.
The initial disposal strategy or intent to exit the business was approved by
the Nortel Networks Board of Directors on June 14, 2001. The continued
deterioration in industry and market conditions delayed certain disposal
activities beyond the original planned timeframe of one year. In particular,
actions involving negotiations with customers, who were also affected by
industry conditions, took longer than expected. Although disposal activities
continued beyond a one-year period, Nortel Networks has continued to present
the access solutions operations as discontinued operations in the
accompanying unaudited consolidated financial statements.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The following unaudited consolidated financial results for discontinued
operations are presented for the three months and nine months ended September
30, 2003 and 2002 for the consolidated statements of operations, as at
September 30, 2003 and December 31, 2002 for the consolidated balance sheets
and for the three and nine months ended September 30, 2003 and 2002 for the
consolidated statements of cash flows:
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Consolidated statements of operations:
| |  | --------------------------------------



Three months ended September 30,
    
    
    Nine months ended September 30,2003
    
    
    2002
    
    
    2003
    
    
    2002Revenues
    
    $
    2
    
    
    $
    
    
    
    $
    8
    
    
    $
    138Net earnings from discontinued operations  net of tax(a)
    
    $
    44
    
    
    $
    2
    
    
    $
    206
    
    
    $
    21
 (a)
    
    Net earnings from discontinued operations were net of an income tax
benefit of $8 and nil for the three months and nine months ended
September 30, 2003, respectively, and net of applicable income tax of
nil for the three months and nine months ended September 30, 2002.


32



---



##### 





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



September 30,
    
    
    December 31,2003
    
    
    2002Accounts receivable  net(a)
    
    $
    
    
    
    $
    20Inventories  net
    
    
    
    
    
    
    Deferred income taxes
    
    
    58
    
    
    
    146Other current assets
    
    
    
    
    
    
    45Total current assets of discontinued operations(b)
    
    $
    58
    
    
    $
    211Other long-term assets(a)(b)
    
    
    89
    
    
    
    48Total assets of discontinued operations
    
    $
    147
    
    
    $
    259Current liabilities(b)(c)
    
    $
    81
    
    
    $
    44Long-term liabilities(b)
    
    
    1
    
    
    
    2Total liabilities of discontinued operations
    
    $
    82
    
    
    $
    46
 (a)
    
    Included customer financing receivables of nil (net of provisions of
$61) and $66 (net of provisions of $486) as at September 30, 2003 and
December 31, 2002, respectively.(b)
    
    Current assets, other long-term assets, current liabilities and
long-term liabilities of discontinued operations were included in other
current assets, other assets, other accrued liabilities and other
liabilities, respectively, of the consolidated balance sheets.(c)
    
    Included accruals of $64 and $81 as at September 30, 2003 and
December 31, 2002, respectively, related to the future contractual
obligations and estimated liabilities during the planned period of
disposition.




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



Nine months ended September 30,2003
    
    
    2002Cash flows from discontinued operationsOperating activities
    
    $
    77
    
    
    $
    240Investing activities
    
    
    241
    
    
    
    97Net cash from discontinued operations
    
    $
    318
    
    
    $
    337




| |  | Nine months ended September 30, 2003
| |  | ------------------------------------



| |  | On August 6, 2003, Nortel Networks received cash of $20 relating to the
repayment of a subordinated, unsecured, convertible, promissory note
receivable from Netgear, Inc. (Netgear). The note was part of the
consideration received by Nortel Networks upon its sale of its 68.5 percent
interest in Netgear in February 2002. As the note had a carrying value of
nil, a gain of $20 was recognized during the three months ended September 30,
2003.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On March 24, 2003, Nortel Networks sold 8 million common shares of Arris
Group Inc. (Arris) to Arris for cash consideration of $28 pursuant to a
March 11, 2003 agreement. This resulted in a gain of $12. Upon completion
of this transaction, Nortel Networks owned 14 million Arris common shares or
18.8 percent of the Arris outstanding common shares. Nortel Networks has
classified its remaining ownership interest in Arris as an available-for-sale
investment. In addition, on March 18, 2003, Nortel Networks assigned its
membership interest in Arris Interactive LLC to ANTEC Corporation, an Arris
company, for cash consideration of $89. This resulted in a gain for the full
amount.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On March 20, 2003, Nortel Networks entered into an agreement with a customer
to restructure approximately $465 of trade and customer financing receivables
owed to Nortel Networks, the majority of which was previously provisioned.
As a result of the restructuring agreement, Nortel Networks received
consideration including cash of $125, notes receivable and an ownership
interest which have been fully provided for and the mutual release of all
other claims between the parties. A gain of $95 was recorded as a result of
the transaction. In addition to the restructuring agreement, a five year
equipment and services supply agreement was entered into requiring customer
payment terms of either cash in advance or guarantee by letters of credit in
favor of Nortel Networks.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

33



---



##### 





|16. |  | Related party transactions
|--- |  | --------------------------



| |  | In the ordinary course of business, Nortel Networks engages in transactions
with certain of its equity-owned investees that are under or are subject to
Nortel Networks significant influence and with NNC, joint ventures of NNC and
subsidiaries of NNC. These transactions include sales and purchases of goods
and services (under usual trade terms measured at their exchange amounts),
cash borrowings between the parties and funding activities pursuant to
reciprocal credit agreements.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | As at September 30, 2003 and December 31, 2002, Nortel Networks had the
following related party amounts on its balance sheet related to NNC and owned
subsidiaries of NNC:
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



September 30,
    
    
    December 31,2003
    
    
    2002Owing from (to) NNC
    
    $
    76
    
    
    $
    (17
    )Owing from NNC subsidiaries
    
    $
    110
    
    
    $
    100Related party receivables
    
    $
    186
    
    
    $
    83Stock option fair value increment (addition to shareholders equity)
    
    $
    
    
    
    $
    525




| |  | On August 29, 2002, a payment was made by a subsidiary of Nortel Networks to
NNC equal to $525 representing the difference between the market value of NNC
common shares issued on stock option exercises and the exercise price of NNC
stock options exercised by employees of the subsidiary. This payment was
referred to as stock option fair value increment.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|17. |  | Contingencies
|--- |  | -------------



| |  | Subsequent to the February 15, 2001 announcement in which NNC provided
revised guidance for financial performance for the 2001 fiscal year and the
first quarter of 2001, NNC and certain of its then current officers and
directors were named as defendants in more than twenty-five purported class
action lawsuits. These lawsuits in the United States District Courts for the
Eastern District of New York, for the Southern District of New York and for
the District of New Jersey and the provinces of Ontario, Quebec and British
Columbia in Canada, on behalf of shareholders who acquired NNC securities as
early as October 24, 2000 and as late as February 15, 2001, allege, among
other things, violations of United States federal and Canadian provincial
securities laws. These matters also have been the subject of review by
Canadian and U.S. securities regulatory authorities. On May 11,
2001, the defendants
filed motions to dismiss and/or stay in connection with the three proceedings
in Quebec primarily based on the factual allegations lacking substantial
connection to Quebec and the inclusion of shareholders resident in Quebec in
the class claimed in the Ontario lawsuit. The plaintiffs in two of these
proceedings in Quebec obtained court approval for discontinuances of their
proceedings on January 17, 2002. The motion to dismiss and/or stay the third
proceeding was heard on November 6, 2001 and the court deferred any
determination on the motion to the judge who will hear the application for
authorization to commence a class proceeding. On December 6, 2001, the defendants filed
a motion seeking leave to appeal that decision. The motion for leave to
appeal was dismissed on March 11, 2002. On October 16, 2001, an order in the
Southern District of New York was filed consolidating twenty-five of the
related United States class action lawsuits into a single case, appointing
class plaintiffs and counsel for such plaintiffs. The plaintiffs served a
consolidated amended complaint on January 18, 2002. On December 17, 2001,
the defendants in the British Columbia action served notice of a motion
requesting the court to decline jurisdiction and to stay all proceedings on
the ground that British Columbia is an inappropriate forum. The motion has
been adjourned at the plaintiffs request to a future date to be set by the
parties.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | A class action lawsuit against NNC was also filed in the United States
District Court for the Southern District of New York on behalf of
shareholders who acquired the securities of JDS Uniphase Corporation, (JDS)
between January 18, 2001 and February 15, 2001, alleging violations of the
same United States federal securities laws as the above-noted lawsuits.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On April 1, 2002, NNC filed a motion to dismiss both the above consolidated
United States shareholder class action and the above JDS shareholder class
action complaints on the grounds that they failed to state a cause of action
under United States federal securities laws. With respect to the JDS
shareholder class action complaint, NNC also moved to dismiss on the separate
basis that JDS shareholders lacked standing to sue NNC. On January 3, 2003,
the District Court granted the motion to dismiss the JDS shareholder class
action complaint and denied the motion to dismiss the consolidated United
States class action complaint. Plaintiffs are appealing the dismissal of the
JDS shareholder class action complaint. With respect to the consolidated
United States shareholder class action, the plaintiffs served a motion for
class certification on
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

34



---



##### 





| |  | March 21, 2003. On May 30, 2003, the defendants
served an opposition to the motion for class certification. Plaintiffs reply
was served on August 1, 2003. The District Court held oral arguments on
September 3, 2003 and issued an order granting class certification on
September 5, 2003. On September 23, 2003, the defendants filed a motion in
the Second Circuit for permission to appeal the class certification decision.
The plaintiffs opposition to the motion was filed on October 2, 2003.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On July 17, 2002, a new purported class action lawsuit (the Ontario Claim)
was filed in the Ontario Superior Court of Justice, Commercial List, naming
NNC, certain of its current and former officers and directors and its auditor
as defendants. The factual allegations in the Ontario Claim are
substantially similar to the allegations in the consolidated amended
complaint filed in the United States District Court described above. The
Ontario Claim is on behalf of all Canadian residents who purchased NNC
securities (including options on NNC securities) between October 24, 2000 and
February 15, 2001. The plaintiffs claim damages of Canadian $5,000, plus
punitive damages in the amount of Canadian $1,000, prejudgment and
postjudgment interest and costs of the action. On September 23, 2003, the
Court issued an order allowing the plaintiffs to proceed to amend the Ontario
Claim and requiring that the plaintiffs serve class certification materials
by December 15, 2003. On September 24, 2003, the plaintiffs filed a notice
of discontinuance of the original action filed in Ontario.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | A purported class action lawsuit was filed in the United States District
Court for the Middle District of Tennessee on December 21, 2001, on behalf of
participants and beneficiaries of the Nortel Networks Long-Term Investment
Plan (the Plan) at any time during the period of March 7, 2000 through the
filing date and who made or maintained Plan investments in NNC common shares,
under the Employee Retirement Income Security Act for Plan-wide relief and
alleging, among other things, material misrepresentations and omissions to
induce Plan participants to continue to invest in and maintain investments in
NNC common shares in the Plan. A second purported class action lawsuit, on
behalf of the Plan and Plan participants for whose individual accounts the
Plan purchased NNC common shares during the period from October 27, 2000 to
February 15, 2001 and making similar allegations was filed in the same court
on March 12, 2002. A third purported class action lawsuit, on behalf of
persons who are or were Plan participants or beneficiaries at
any time since March 1, 1999 to the filing date and making similar
allegations, was filed in the same court on March 21, 2002. The first and
second purported class action lawsuits were consolidated by a new purported
class action complaint, filed on May 15, 2002 in the same court and making
similar allegations, on behalf of Plan participants and beneficiaries who
directed the Plan to purchase or hold shares of certain funds, which held
primarily NNC common shares, during the period of March 7, 2000 through
December 21, 2000. On September 24, 2002, plaintiffs in the consolidated
action filed a motion to consolidate all the actions and to transfer them to
the United States District Court for the Southern District of New York. The
plaintiffs then filed a motion to withdraw the pending motion to consolidate
and transfer. The withdrawal was granted by the District Court on December
30, 2002. A fourth purported class action lawsuit, on behalf of the Plan and
Plan participants for whose individual accounts the Plan held NNC common
shares during the period from March 7, 2000 through March 31, 2001 and making
similar allegations, was filed in the United States District Court for the
Southern District of New York on March 12, 2003. On March 18, 2003,
plaintiffs in the fourth purported class action filed a motion with the
Judicial Panel on Multidistrict Litigation to transfer all the actions to the
Southern District of New York for coordinated or consolidated proceedings
pursuant to 28 U.S.C. section 1407. On June 24, 2003, the Judicial Panel on
Multidistrict Litigation issued a transfer order transferring the Southern
District of New York action to the Middle District of Tennessee. On
September 12, 2003, the plaintiffs in all the actions filed a consolidated
class action complaint. On October 28, 2003, the defendants filed a motion
to dismiss the complaint and a motion to stay discovery pending disposition
of the motion to dismiss.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On March 4, 1997, Bay Networks, Inc. (Bay Networks), a company acquired on
August 31, 1998, announced that shareholders had filed two separate lawsuits
in the United States District Court for the Northern District of California
(the Federal Court) and the California Superior Court, County of Santa
Clara (the California Court), against Bay Networks and ten of Bay Networks
then current and former officers and directors purportedly on behalf of a
class of shareholders who purchased Bay Networks common shares during the
period of May 1, 1995 through October 14, 1996. On August 17, 2000, the
Federal Court granted the defendants motion to dismiss the federal
complaint. On August 1, 2001, the United States Court of Appeals for the
Ninth Circuit denied the plaintiffs appeal of that decision. On April 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
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

35



---



##### 





| |  | individual and
purported class representative basis alleging misrepresentations made in
connection with the purchase and sale of securities of Bay Networks in
violation of California statutory and common law. On March 11, 2002, the
California Court granted the defendants motion to strike the class
allegations. The plaintiffs were permitted to proceed on their individual
claims. The intervenor-plaintiffs appealed the dismissal of their class
allegations. On July 25, 2003, the California Court of Appeal reversed the
trial courts dismissal of the intervenor-plaintiffs class allegations. On
September 3, 2003, the defendants filed a petition for review with the
California Supreme Court seeking permission to appeal the Court of Appeal
decision. On October 22, 2003, the California Supreme Court denied, without
opinion, the defendants petition for review.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Except as otherwise described herein, in each of the matters described above,
plaintiffs are seeking an unspecified amount of monetary damages.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  | Nortel Networks is also a defendant in various other suits, claims, proceedings and
investigations which arise in the normal course of business.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Nortel Networks is unable to ascertain the ultimate aggregate amount of
monetary liability or financial impact to Nortel Networks of the above matters which,
unless otherwise specified, seek damages from the defendants of material or
indeterminate amounts. Nortel Networks cannot determine whether these actions, suits,
claims and proceedings will, individually or collectively, have a material
adverse effect on the business, results of operations and financial condition
of Nortel Networks. Nortel Networks or NNC, as applicable, and any
named directors and officers of Nortel Networks or NNC, as applicable, intend to vigorously
defend these actions, suits, claims and proceedings.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|18. |  | Subsequent events
|--- |  | -----------------



| |  | There were no events subsequent to September 30, 2003 required to be
reported.
| |  | ------------------------------------------------------------------------------



|19. |  | Supplemental consolidating financial information
|--- |  | ------------------------------------------------



| |  | As a result of Nortel Networks current credit ratings, various liens, pledges
and guarantees are effective under certain credit, support and security
agreements entered into by Nortel Networks and various of its subsidiaries.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The security agreements were originally entered into in connection with the
$1,510 December 2001 364-day credit facilities (which expired on December 13,
2002). The security became effective April 4, 2002, following Moodys
Investors Services Inc. (Moodys) downgrade of Nortel Networks senior
long-term debt rating to below investment grade, in respect of the then
existing credit facilities including the available $750 April 2000 five year
credit facilities. Consequently on April 4, 2002, and in accordance with the
negative pledge covenants in the indentures for all Nortel Networks and NNCs
outstanding public debt securities, all such public debt securities became,
under the terms of the security agreements, secured equally and ratably with
the obligations under Nortel Networks and NNIs then existing credit
facilities.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Nortel Networks obligations under the EDC Support Facility became secured on
an equal and ratable basis under the security agreements on February 14,
2003. As at September 30, 2003, the security agreements pledge substantially
all of the assets of Nortel Networks in favor of the banks under the $750
April 2000 five year credit facilities, EDC and the holders of Nortel
Networks and NNCs outstanding public debt securities, which debt securities
represent substantially all of NNCs consolidated long term debt.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The security provided under the security agreements is comprised of pledges
of substantially all of the assets of Nortel Networks and those of most of
its United States and Canadian subsidiaries and pledges of shares in certain
of Nortel Networks other subsidiaries. In addition, certain of Nortel
Networks wholly owned subsidiaries have guaranteed Nortel Networks
obligations under the credit and support facilities and Nortel Networks and
NNCs outstanding public debt securities (the Guarantor Subsidiaries).
Non-guarantor subsidiaries (the Non-Guarantor Subsidiaries) represent
either wholly owned subsidiaries of Nortel Networks whose shares have been
pledged, or are the remaining subsidiaries of Nortel Networks which are not
providing liens, pledges or guarantees.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The liens, pledges and guarantees described above also apply equally and
ratably to NNCs $1,800 4.25 percent senior notes due September 1, 2008, as
well as Nortel Networks guarantee of the senior notes.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | If Nortel Networks senior long-term debt rating by Moodys returns to Baa2
(with a stable outlook) and its rating by Standard & Poors returns to BBB
(with a stable outlook), the security and guarantees will be released in full
in respect of the banks, EDC, the public debt holders and any other parties
secured under the security agreements at that time. If both
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

36



---



##### 





| |  | the $750 April
2000 five year credit facilities and the EDC Support Facility are terminated,
or expire, the security and guarantees will also be released in full in
respect of the banks, EDC, the public debt holders and any other parties
secured under the security agreements at that time. Nortel Networks may
provide EDC with cash collateral in an amount equal to the total amount of
its outstanding obligations and undrawn commitments and expenses under the
EDC Support Facility (or any other alternative collateral acceptable to EDC)
in lieu of the security provided under the security agreements (see note 9).
Accordingly, if the EDC Support Facility is secured by cash or other
alternate collateral acceptable to EDC and if the $750 April 2000 five year
credit facilities are terminated or expire, the security and guarantees will
also be released in full in respect of the banks, EDC, the public debt
holders and any other parties secured under the security agreements at that
time.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The following supplemental consolidating financial data illustrates, in
separate columns, the composition of Nortel Networks Limited, the Guarantor
Subsidiaries, the Non-Guarantor Subsidiaries, eliminations and the
consolidated total as at September 30, 2003 and December 31, 2002 and for the
three months and nine months ended September 30, 2003 and 2002.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

37



---



##### 



Supplemental Consolidating Statements of Operations for the three months ended September 30, 2003:

Nortel
    
    
    
    
    
    
    Non-Networks
    
    
    Guarantor
    
    
    Guarantor(millions of U.S. dollars)
    
    Limited
    
    
    subsidiaries
    
    
    subsidiaries
    
    
    Elimination
    
    
    TotalRevenues
    
    $
    559
    
    
    $
    1,712
    
    
    $
    662
    
    
    $
    (667
    )
    
    $
    2,266Cost of revenues
    
    
    385
    
    
    
    798
    
    
    
    573
    
    
    
    (667
    )
    
    
    1,089Gross profit
    
    
    174
    
    
    
    914
    
    
    
    89
    
    
    
    
    
    
    
    1,177Selling, general and administrative expense
    
    
    106
    
    
    
    324
    
    
    
    52
    
    
    
    
    
    
    
    482Research and development expense
    
    
    206
    
    
    
    213
    
    
    
    61
    
    
    
    
    
    
    
    480Amortization of acquired technology
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Special charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Goodwill impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other special charges
    
    
    24
    
    
    
    36
    
    
    
    10
    
    
    
    
    
    
    
    70Gain on sale of businesses
    
    
    
    
    
    
    (20
    )
    
    
    
    
    
    
    
    
    
    
    (20
    )Operating earnings (loss)
    
    
    (162
    )
    
    
    361
    
    
    
    (34
    )
    
    
    
    
    
    
    165Other income (expense)  net
    
    
    23
    
    
    
    26
    
    
    
    51
    
    
    
    
    
    
    
    100Interest expenseLong-term debt
    
    
    (16
    )
    
    
    (2
    )
    
    
    (7
    )
    
    
    
    
    
    
    (25
    )Other
    
    
    
    
    
    
    (12
    )
    
    
    12
    
    
    
    
    
    
    
    Earnings (loss) from continuing operations before
income taxes, minority interests and equity in net
earnings (loss) from continuing operations
    
    
    (155
    )
    
    
    373
    
    
    
    22
    
    
    
    
    
    
    
    240Income tax benefit (provision)
    
    
    (3
    )
    
    
    164
    
    
    
    (196
    )
    
    
    
    
    
    
    (35
    )(158
    )
    
    
    537
    
    
    
    (174
    )
    
    
    
    
    
    
    205Minority interests  net of tax
    
    
    
    
    
    
    
    
    
    
    (14
    )
    
    
    
    
    
    
    (14
    )Equity in net earnings (loss) of associated companies net of tax
    
    
    344
    
    
    
    (486
    )
    
    
    2
    
    
    
    135
    
    
    
    (5
    )Net earnings (loss) from continuing operations
    
    
    186
    
    
    
    51
    
    
    
    (186
    )
    
    
    135
    
    
    
    186Net earnings from discontinued operations net of tax
    
    
    44
    
    
    
    29
    
    
    
    
    
    
    
    (29
    )
    
    
    44Net earnings (loss)
    
    
    230
    
    
    
    80
    
    
    
    (186
    )
    
    
    106
    
    
    
    230Dividends on preferred shares
    
    
    (6
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6
    )Net earnings (loss) applicable to common shares
    
    $
    224
    
    
    $
    80
    
    
    $
    (186
    )
    
    $
    106
    
    
    $
    224


38



---



##### 



Supplemental Consolidating Statements of Operations for the three months ended September 30, 2002:

Nortel
    
    
    
    
    
    
    Non-Networks
    
    
    Guarantor
    
    
    Guarantor(millions of U.S. dollars)
    
    Limited
    
    
    subsidiaries
    
    
    subsidiaries
    
    
    Elimination
    
    
    TotalRevenues
    
    $
    600
    
    
    $
    1,783
    
    
    $
    652
    
    
    $
    (686
    )
    
    $
    2,349Cost of revenues
    
    
    517
    
    
    
    1,136
    
    
    
    533
    
    
    
    (686
    )
    
    
    1,500Gross profit
    
    
    83
    
    
    
    647
    
    
    
    119
    
    
    
    
    
    
    
    849Selling, general and administrative expense
    
    
    251
    
    
    
    385
    
    
    
    59
    
    
    
    
    
    
    
    695Research and development expense
    
    
    235
    
    
    
    249
    
    
    
    60
    
    
    
    
    
    
    
    544Amortization of acquired technology
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    6Special chargesGoodwill impairment
    
    
    
    
    
    
    203
    
    
    
    61
    
    
    
    
    
    
    
    264Other special charges
    
    186
    
    
    
    380
    
    
    
    (3
    )
    
    
    
    
    
    
    563Gain on sale of businesses
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    (3
    )Operating earnings (loss)
    
    
    (589
    )
    
    
    (576
    )
    
    
    (55
    )
    
    
    
    
    
    
    (1,220
    )Other income (expense)  net
    
    
    (31
    )
    
    
    33
    
    
    
    (20
    )
    
    
    
    
    
    
    (18
    )Interest expenseLong-term debt
    
    (31
    )
    
    
    
    
    
    
    (6
    )
    
    
    
    
    
    
    (37
    )Other
    
    
    
    
    
    (7
    )
    
    
    (6
    )
    
    
    
    
    
    
    (13
    )Earnings (loss) from continuing operations before
income taxes, minority interests and equity in
net earnings (loss) of associated companies
    
    
    (651
    )
    
    
    (550
    )
    
    
    (87
    )
    
    
    
    
    
    
    (1,288
    )Income tax benefit (provision)
    
    
    (111
    )
    
    
    4
    
    
    
    32
    
    
    
    
    
    
    
    (75
    )(762
    )
    
    
    (546
    )
    
    
    (55
    )
    
    
    
    
    
    
    (1,363
    )Minority interests  net of tax
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )Equity in net earnings (loss) of associated companies net of tax
    
    
    (609
    )
    
    
    (226
    )
    
    
    (2
    )
    
    
    830
    
    
    
    (7
    )Net earnings (loss) from continuing operations
    
    
    (1,371
    )
    
    
    (772
    )
    
    
    (58
    )
    
    
    830
    
    
    
    (1,371
    )Net earnings from discontinued operations net of tax
    
    
    2
    
    
    
    1
    
    
    
    
    
    
    
    (1
    )
    
    
    2Net loss
    
    
    (1,369
    )
    
    
    (771
    )
    
    
    (58
    )
    
    
    829
    
    
    
    (1,369
    )Dividends on preferred shares
    
    
    (6
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6
    )Net loss applicable to common shares
    
    $
    (1,375
    )
    
    $
    (771
    )
    
    $
    (58
    )
    
    $
    829
    
    
    $
    (1,375
    )


39



---



##### 



Supplemental Consolidating Statements of Operations for the nine months ended September 30, 2003:

Nortel
    
    
    
    
    
    
    Non-Networks
    
    
    Guarantor
    
    
    Guarantor(millions of U.S. dollars)
    
    Limited
    
    
    subsidiaries
    
    
    subsidiaries
    
    
    Elimination
    
    
    TotalRevenues
    
    $
    2,197
    
    
    $
    4,996
    
    
    $
    2,043
    
    
    $
    (2,254
    )
    
    $
    6,982Cost of revenues
    
    
    1,295
    
    
    
    3,207
    
    
    
    1,482
    
    
    
    (2,254
    )
    
    
    3,730Gross profit
    
    
    902
    
    
    
    1,789
    
    
    
    561
    
    
    
    
    
    
    
    3,252Selling, general and administrative expense
    
    
    338
    
    
    
    923
    
    
    
    147
    
    
    
    
    
    
    
    1,408Research and development expense
    
    
    605
    
    
    
    654
    
    
    
    195
    
    
    
    
    
    
    
    1,454Amortization of acquired technology
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Special chargesGoodwill impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other special charges
    
    
    85
    
    
    
    108
    
    
    
    (13
    )
    
    
    
    
    
    
    180Gain on sale of businesses
    
    
    (2
    )
    
    
    (18
    )
    
    
    (8
    )
    
    
    
    
    
    
    (28
    )Operating earnings (loss)
    
    
    (124
    )
    
    
    122
    
    
    
    240
    
    
    
    
    
    
    
    238Other income (expense)  net
    
    
    73
    
    
    
    104
    
    
    
    (47
    )
    
    
    
    
    
    
    130Interest expenseLong-term debt
    
    
    (50
    )
    
    
    (1
    )
    
    
    (20
    )
    
    
    
    
    
    
    (71
    )Other
    
    
    (2
    )
    
    
    (39
    )
    
    
    32
    
    
    
    
    
    
    
    (9
    )Earnings (loss) from continuing operations before
income taxes, minority interests and equity in
net earnings (loss) of associated companies
    
    
    (103
    )
    
    
    186
    
    
    
    205
    
    
    
    
    
    
    
    288Income tax benefit (provision)
    
    
    152
    
    
    
    (116
    )
    
    
    (79
    )
    
    
    
    
    
    
    (43
    )49
    
    
    
    70
    
    
    
    126
    
    
    
    
    
    
    
    245Minority interests  net
    
    
    
    
    
    
    
    
    
    
    (18
    )
    
    
    
    
    
    
    (18
    )Equity in net earnings (loss) of associated companies net of tax
    
    
    135
    
    
    
    865
    
    
    
    11
    
    
    
    (1,046
    )
    
    
    (35
    )Net earnings (loss) from continuing operations
    
    
    184
    
    
    
    935
    
    
    
    119
    
    
    
    (1,046
    )
    
    
    192Net earnings from discontinued operations net of tax
    
    
    206
    
    
    
    134
    
    
    
    
    
    
    
    (134
    )
    
    
    206Net earnings (loss) before cumulative effect of accounting
change  net of tax
    
    
    390
    
    
    
    1,069
    
    
    
    119
    
    
    
    (1,180
    )
    
    
    398Cumulative effect of accounting changes  net of tax
    
    
    
    
    
    
    (8
    )
    
    
    
    
    
    
    
    
    
    
    (8
    )Net earnings (loss)
    
    
    390
    
    
    
    1,061
    
    
    
    119
    
    
    
    (1,180
    )
    
    
    390Dividends on preferred shares
    
    
    (18
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18
    )Net earnings (loss) applicable to common shareholders
    
    $
    372
    
    
    $
    1,061
    
    
    $
    119
    
    
    $
    (1,180
    )
    
    $
    372


40



---



##### 



Supplemental Consolidating Statements of Operations for the nine months ended September 30, 2002:

Nortel
    
    
    
    
    
    
    Non-Networks
    
    
    Guarantor
    
    
    Guarantor(millions of U.S. dollars)
    
    Limited
    
    
    subsidiaries
    
    
    subsidiaries
    
    
    Elimination
    
    
    TotalRevenues
    
    $
    2,198
    
    
    $
    5,990
    
    
    $
    2,108
    
    
    $
    (2,262
    )
    
    $
    8,034Cost of revenues
    
    
    1,987
    
    
    
    4,010
    
    
    
    1,756
    
    
    
    (2,262
    )
    
    
    5,491Gross profit
    
    
    211
    
    
    
    1,980
    
    
    
    352
    
    
    
    
    
    
    
    2,543Selling, general and administrative expense
    
    
    479
    
    
    
    1,387
    
    
    
    284
    
    
    
    
    
    
    
    2,150Research and development expense
    
    
    673
    
    
    
    782
    
    
    
    212
    
    
    
    
    
    
    
    1,667Amortization of acquired technology
    
    
    
    
    
    
    17
    
    
    
    
    
    
    
    
    
    
    
    17Special chargesGoodwill impairment
    
    
    
    
    
    
    203
    
    
    
    61
    
    
    
    
    
    
    
    264Other special charges
    
    
    438
    
    
    
    677
    
    
    
    136
    
    
    
    
    
    
    
    1,251Gain on sale of businesses
    
    
    (1
    )
    
    
    (4
    )
    
    
    (6
    )
    
    
    
    
    
    
    (11
    )Operating earnings (loss)
    
    
    (1,378
    )
    
    
    (1,082
    )
    
    
    (335
    )
    
    
    
    
    
    
    (2,795
    )Other income (expense)  net
    
    
    3
    
    
    
    (17
    )
    
    
    (29
    )
    
    
    
    
    
    
    (43
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Long-term debt
    
    
    (90
    )
    
    
    
    
    
    
    (20
    )
    
    
    
    
    
    
    (110
    )Other
    
    
    (3
    )
    
    
    (24
    )
    
    
    (8
    )
    
    
    
    
    
    
    (35
    )Earnings (loss) from continuing operations before
income taxes, minority interests and equity in
net earnings (loss) of associated companies
    
    
    (1,468
    )
    
    
    (1,123
    )
    
    
    (392
    )
    
    
    
    
    
    
    (2,983
    )Income tax benefit (provision)
    
    
    216
    
    
    
    84
    
    
    
    130
    
    
    
    
    
    
    
    430(1,252
    )
    
    
    (1,039
    )
    
    
    (262
    )
    
    
    
    
    
    
    (2,553
    )Minority interests  net of tax
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    6Equity in net earnings (loss) of associated companies net of tax
    
    
    (1,321
    )
    
    
    (562
    )
    
    
    (8
    )
    
    
    1,865
    
    
    
    (26
    )Net earnings (loss) from continuing operations
    
    
    (2,573
    )
    
    
    (1,601
    )
    
    
    (264
    )
    
    
    1,865
    
    
    
    (2,573
    )Net earnings from discontinued operations net of tax
    
    
    21
    
    
    
    14
    
    
    
    
    
    
    
    (14
    )
    
    
    21Net loss
    
    
    (2,552
    )
    
    
    (1,587
    )
    
    
    (264
    )
    
    
    1,851
    
    
    
    (2,552
    )Dividends on preferred shares
    
    
    (16
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16
    )Net loss applicable to common shares
    
    $
    (2,568
    )
    
    $
    (1,587
    )
    
    $
    (264
    )
    
    $
    1,851
    
    
    $
    (2,568
    )


41



---



##### 



Supplemental Consolidating Balance Sheets as at September 30, 2003:

Nortel
    
    
    
    
    
    
    Non-Networks
    
    
    Guarantor
    
    
    Guarantor(millions of U.S. dollars)
    
    Limited
    
    
    subsidiaries
    
    
    subsidiaries
    
    
    Elimination
    
    
    TotalASSETSCurrent assetsCash and cash equivalents
    
    $
    (41
    )
    
    $
    2,633
    
    
    $
    901
    
    
    $
    
    
    
    $
    3,493Restricted cash and cash equivalents
    
    
    19
    
    
    
    56
    
    
    
    38
    
    
    
    
    
    
    
    113Accounts receivable  net
    
    
    292
    
    
    
    1,346
    
    
    
    426
    
    
    
    
    
    
    
    2,064Intercompany/related party accounts receivable
    
    
    242
    
    
    
    884
    
    
    
    1,916
    
    
    
    (2,856
    )
    
    
    186Inventories  net
    
    
    428
    
    
    
    304
    
    
    
    196
    
    
    
    
    
    
    
    928Income taxes recoverable
    
    
    7
    
    
    
    38
    
    
    
    14
    
    
    
    
    
    
    
    59Deferred income taxes  net
    
    
    108
    
    
    
    307
    
    
    
    
    
    
    
    
    
    
    
    415Other current assets
    
    
    95
    
    
    
    210
    
    
    
    113
    
    
    
    
    
    
    
    418Total current assets
    
    
    1,150
    
    
    
    5,778
    
    
    
    3,604
    
    
    
    (2,856
    )
    
    
    7,676Investments
    
    
    1,834
    
    
    
    (7,502
    )
    
    
    205
    
    
    
    5,646
    
    
    
    183Plant and equipment  net
    
    
    389
    
    
    
    731
    
    
    
    348
    
    
    
    
    
    
    
    1,468Goodwill
    
    
    
    
    
    
    1,956
    
    
    
    97
    
    
    
    
    
    
    
    2,053Deferred income taxes  net
    
    
    1,532
    
    
    
    1,586
    
    
    
    106
    
    
    
    
    
    
    
    3,224Other assets
    
    
    435
    
    
    
    1,165
    
    
    
    899
    
    
    
    (1,934
    )
    
    
    565Total assets
    
    $
    5,340
    
    
    $
    3,714
    
    
    $
    5,259
    
    
    $
    856
    
    
    $
    15,169LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesNotes payable
    
    $
    6
    
    
    $
    3
    
    
    $
    14
    
    
    $
    
    
    
    $
    23Trade and other accounts payable
    
    
    239
    
    
    
    478
    
    
    
    49
    
    
    
    
    
    
    
    766Intercompany/related party accounts payable
    
    
    (3,635
    )
    
    
    2,823
    
    
    
    3,668
    
    
    
    (2,856
    )
    
    
    Payroll and benefit-related liabilities
    
    
    90
    
    
    
    486
    
    
    
    129
    
    
    
    
    
    
    
    705Contractual liabilities
    
    
    45
    
    
    
    458
    
    
    
    265
    
    
    
    
    
    
    
    768Restructuring
    
    
    74
    
    
    
    129
    
    
    
    66
    
    
    
    
    
    
    
    269Other accrued liabilities
    
    
    435
    
    
    
    1,573
    
    
    
    285
    
    
    
    
    
    
    
    2,293Long-term debt due within one year
    
    
    11
    
    
    
    95
    
    
    
    6
    
    
    
    
    
    
    
    112Total current liabilities
    
    
    (2,735
    )
    
    
    6,045
    
    
    
    4,482
    
    
    
    (2,856
    )
    
    
    4,936Long-term debt
    
    
    1,547
    
    
    
    9
    
    
    
    402
    
    
    
    
    
    
    
    1,958Deferred income taxes  net
    
    
    
    
    
    
    249
    
    
    
    31
    
    
    
    
    
    
    
    280Other liabilities
    
    
    898
    
    
    
    1,639
    
    
    
    1,685
    
    
    
    (1,934
    )
    
    
    2,288(290
    )
    
    
    7,942
    
    
    
    6,600
    
    
    
    (4,790
    )
    
    
    9,462Minority interests in subsidiary companies
    
    
    
    
    
    
    
    
    
    
    77
    
    
    
    
    
    
    
    77SHAREHOLDERS EQUITYPreferred shares
    
    
    536
    
    
    
    342
    
    
    
    
    
    
    
    (342
    )
    
    
    536Common shares
    
    
    1,211
    
    
    
    5,975
    
    
    
    647
    
    
    
    (6,622
    )
    
    
    1,211Additional paid-in capital
    
    
    22,024
    
    
    
    1,528
    
    
    
    3,988
    
    
    
    (5,516
    )
    
    
    22,024Accumulated deficit
    
    
    (17,235
    )
    
    
    (13,038
    )
    
    
    (6,027
    )
    
    
    19,065
    
    
    
    (17,235
    )Accumulated other comprehensive income (loss)
    
    
    (906
    )
    
    
    965
    
    
    
    (26
    )
    
    
    (939
    )
    
    
    (906
    )Total shareholders equity
    
    
    5,630
    
    
    
    (4,228
    )
    
    
    (1,418
    )
    
    
    5,646
    
    
    
    5,630Total liabilities and shareholders equity
    
    $
    5,340
    
    
    $
    3,714
    
    
    $
    5,259
    
    
    $
    856
    
    
    $
    15,169


42



---



##### 



Supplemental Consolidating Balance Sheets as at December 31, 2002:

Nortel
    
    
    
    
    
    
    Non-Networks
    
    
    Guarantor
    
    
    Guarantor(millions of U.S. dollars)
    
    Limited
    
    
    subsidiaries
    
    
    subsidiaries
    
    
    Elimination
    
    
    TotalASSETSCurrent assetsCash and cash equivalents
    
    $
    251
    
    
    $
    2,382
    
    
    $
    1,110
    
    
    $
    
    
    
    $
    3,743Restricted cash and cash equivalents
    
    
    6
    
    
    
    176
    
    
    
    67
    
    
    
    
    
    
    
    249Accounts receivable  net
    
    
    270
    
    
    
    1,488
    
    
    
    406
    
    
    
    
    
    
    
    2,164Intercompany/related party accounts receivable
    
    
    4,200
    
    
    
    976
    
    
    
    459
    
    
    
    (5,552
    )
    
    
    83Inventories  net
    
    
    524
    
    
    
    246
    
    
    
    216
    
    
    
    
    
    
    
    986Income taxes recoverable
    
    
    3
    
    
    
    46
    
    
    
    9
    
    
    
    
    
    
    
    58Deferred income taxes  net
    
    
    178
    
    
    
    615
    
    
    
    
    
    
    
    
    
    
    
    793Other current assets
    
    
    182
    
    
    
    427
    
    
    
    59
    
    
    
    
    
    
    
    668Total current assets
    
    
    5,614
    
    
    
    6,356
    
    
    
    2,326
    
    
    
    (5,552
    )
    
    
    8,744Investments at cost and associated companies at equity
    
    
    1,338
    
    
    
    (8,037
    )
    
    
    118
    
    
    
    6,829
    
    
    
    248Plant and equipment  net
    
    
    409
    
    
    
    752
    
    
    
    303
    
    
    
    
    
    
    
    1,464Goodwill
    
    
    
    
    
    
    1,956
    
    
    
    65
    
    
    
    
    
    
    
    2,021Deferred income taxes  net
    
    
    1,062
    
    
    
    1,537
    
    
    
    54
    
    
    
    
    
    
    
    2,653Other assets
    
    
    627
    
    
    
    1,279
    
    
    
    754
    
    
    
    (1,894
    )
    
    
    766Total assets
    
    $
    9,050
    
    
    $
    3,843
    
    
    $
    3,620
    
    
    $
    (617
    )
    
    $
    15,896LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesNotes payable
    
    $
    2
    
    
    $
    3
    
    
    $
    25
    
    
    $
    
    
    
    $
    30Trade and other accounts payable
    
    
    356
    
    
    
    429
    
    
    
    85
    
    
    
    
    
    
    
    870Intercompany/related party accounts payable
    
    
    153
    
    
    
    3,288
    
    
    
    2,140
    
    
    
    (5,552
    )
    
    
    29Payroll and benefit-related liabilities
    
    
    32
    
    
    
    383
    
    
    
    84
    
    
    
    
    
    
    
    499Contractual liabilities
    
    
    78
    
    
    
    751
    
    
    
    384
    
    
    
    
    
    
    
    1,213Restructuring
    
    
    113
    
    
    
    308
    
    
    
    116
    
    
    
    
    
    
    
    537Other accrued liabilities
    
    
    637
    
    
    
    1,969
    
    
    
    288
    
    
    
    
    
    
    
    2,894Long-term debt due within one year
    
    
    174
    
    
    
    8
    
    
    
    51
    
    
    
    
    
    
    
    233Total current liabilities
    
    
    1,545
    
    
    
    7,139
    
    
    
    3,173
    
    
    
    (5,552
    )
    
    
    6,305Long-term debt
    
    
    1,603
    
    
    
    34
    
    
    
    312
    
    
    
    
    
    
    
    1,949Deferred income taxes  net
    
    
    263
    
    
    
    95
    
    
    
    8
    
    
    
    
    
    
    
    366Other liabilities
    
    
    813
    
    
    
    1,734
    
    
    
    1,668
    
    
    
    (1,894
    )
    
    
    2,3214,224
    
    
    
    9,002
    
    
    
    5,161
    
    
    
    (7,446
    )
    
    
    10,941Minority interests in subsidiary companies
    
    
    
    
    
    
    
    
    
    
    129
    
    
    
    
    
    
    
    129SHAREHOLDERS EQUITYPreferred shares
    
    
    536
    
    
    
    342
    
    
    
    
    
    
    
    (342
    )
    
    
    536Common shares
    
    
    1,211
    
    
    
    6,061
    
    
    
    982
    
    
    
    (7,043
    )
    
    
    1,211Additional paid-in capital
    
    
    22,004
    
    
    
    1,563
    
    
    
    4,065
    
    
    
    (5,628
    )
    
    
    22,004Accumulated deficit
    
    
    (17,607
    )
    
    
    (13,897
    )
    
    
    (6,606
    )
    
    
    20,503
    
    
    
    (17,607
    )Accumulated other comprehensive income (loss)
    
    
    (1,318
    )
    
    
    772
    
    
    
    (111
    )
    
    
    (661
    )
    
    
    (1,318
    )Total shareholders equity
    
    
    4,826
    
    
    
    (5,159
    )
    
    
    (1,670
    )
    
    
    6,829
    
    
    
    4,826Total liabilities and shareholders equity
    
    $
    9,050
    
    
    $
    3,843
    
    
    $
    3,620
    
    
    $
    (617
    )
    
    $
    15,896


43



---



##### 



Supplemental Consolidating Statements of Cash Flows for the nine months ended September 30, 2003:

Nortel
    
    
    
    
    
    
    Non-Networks
    
    
    Guarantor
    
    
    Guarantor(millions of U.S. dollars)
    
    Limited
    
    
    subsidiaries
    
    
    subsidiaries
    
    
    Elimination
    
    
    TotalCash flows from (used in) operating activitiesNet earnings (loss) from continuing operations
    
    $
    184
    
    
    $
    927
    
    
    $
    119
    
    
    $
    (1,038
    )
    
    $
    192Adjustments to reconcile net earnings (loss) from
continuing operations to net cash from (used in)
operating activities, net of effects from acquisitions
and divestitures of businesses:Amortization and depreciation
    
    
    77
    
    
    
    173
    
    
    
    76
    
    
    
    
    
    
    
    326Non-cash portion of special charges
and related asset write downs
    
    
    4
    
    
    
    8
    
    
    
    (4
    )
    
    
    
    
    
    
    8Equity in net loss of associated companies
    
    
    (135
    )
    
    
    (865
    )
    
    
    (11
    )
    
    
    1,046
    
    
    
    35Current and deferred stock option compensation
    
    
    3
    
    
    
    13
    
    
    
    3
    
    
    
    
    
    
    
    19Deferred income taxes
    
    
    
    
    
    
    12
    
    
    
    32
    
    
    
    
    
    
    
    44Other liabilities
    
    
    62
    
    
    
    56
    
    
    
    1
    
    
    
    
    
    
    
    119Gain on repurchases of outstanding debt securities
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4
    )Gain on sale of investments and businesses
    
    
    (10
    )
    
    
    (45
    )
    
    
    (12
    )
    
    
    
    
    
    
    (67
    )Other  net
    
    
    292
    
    
    
    (276
    )
    
    
    30
    
    
    
    (8
    )
    
    
    38Change in operating assets and liabilities
    
    
    (809
    )
    
    
    (167
    )
    
    
    (339
    )
    
    
    
    
    
    
    (1,315
    )Net cash from (used in) operating activities
    
    
    (336
    )
    
    
    (164
    )
    
    
    (105
    )
    
    
    
    
    
    
    (605
    )Cash flows from (used in) investing activitiesExpenditures for plant and equipment
    
    
    (23
    )
    
    
    (39
    )
    
    
    (32
    )
    
    
    
    
    
    
    (94
    )Proceeds on disposals of plant and equipment
    
    
    7
    
    
    
    12
    
    
    
    3
    
    
    
    
    
    
    
    22Decrease (increase) in restricted cash and
cash equivalents
    
    
    (11
    )
    
    
    132
    
    
    
    26
    
    
    
    
    
    
    
    147Increase in long-term receivables
    
    
    1
    
    
    
    (12
    )
    
    
    (1
    )
    
    
    
    
    
    
    (12
    )Decrease in long-term receivables
    
    
    195
    
    
    
    10
    
    
    
    2
    
    
    
    
    
    
    
    207Acquisitions of investments and businesses
 net of cash acquired
    
    
    (60
    )
    
    
    (5
    )
    
    
    11
    
    
    
    
    
    
    
    (54
    )Proceeds on sale of investments and businesses
    
    
    6
    
    
    
    45
    
    
    
    
    
    
    
    
    
    
    
    51Investments in subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net cash from (used in) investing activities
    
    
    115
    
    
    
    143
    
    
    
    9
    
    
    
    
    
    
    
    267Cash flows from (used in) financing activitiesDividends on preferred shares
    
    
    (18
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18
    )Increase (decrease) in notes payable  net
    
    
    4
    
    
    
    4
    
    
    
    (47
    )
    
    
    
    
    
    
    (39
    )Proceeds from long-term debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Repayments of long-term debt
    
    
    (199
    )
    
    
    
    
    
    
    (68
    )
    
    
    
    
    
    
    (267
    )Decrease in capital leases payable
    
    
    
    
    
    
    (2
    )
    
    
    (1
    )
    
    
    
    
    
    
    (3
    )Issuance of common shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of prepaid forward purchase contracts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock option fair value increment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net cash from (used in) financing activities
    
    
    (213
    )
    
    
    2
    
    
    
    (116
    )
    
    
    
    
    
    
    (327
    )Effect of foreign exchange rate changes
on cash and cash equivalents
    
    
    1
    
    
    
    74
    
    
    
    22
    
    
    
    
    
    
    
    97Net cash from (used in) continuing operations
    
    
    (433
    )
    
    
    55
    
    
    
    (190
    )
    
    
    
    
    
    
    (568
    )Net cash from (used in) discontinued operations
    
    
    141
    
    
    
    196
    
    
    
    (19
    )
    
    
    
    
    
    
    318Net increase (decrease) in cash and
cash equivalents
    
    
    (292
    )
    
    
    251
    
    
    
    (209
    )
    
    
    
    
    
    
    (250
    )Cash and cash equivalents at beginning of
period
    
    
    251
    
    
    
    2,382
    
    
    
    1,110
    
    
    
    
    
    
    
    3,743Cash and cash equivalents at end of period
    
    $
    (41
    )
    
    $
    2,633
    
    
    $
    901
    
    
    $
    
    
    
    $
    3,493


44



---



##### 



Supplemental Consolidating Statements of Cash Flows for the nine months ended September 30, 2002:

Nortel
    
    
    
    
    
    
    Non-Networks
    
    
    Guarantor
    
    
    Guarantor(millions of U.S. dollars)
    
    Limited
    
    
    subsidiaries
    
    
    subsidiaries
    
    
    Elimination
    
    
    TotalCash flows from (used in) operating activitiesNet earnings (loss) from continuing operations
    
    $
    (2,573
    )
    
    $
    (1,601
    )
    
    $
    (264
    )
    
    $
    1,865
    
    
    $
    (2,573
    )Adjustments to reconcile net earnings (loss) from
continuing operations to net cash from (used in)
operating activities, net of effects from acquisitions
and divestitures of businesses:Amortization and depreciation
    
    
    61
    
    
    
    325
    
    
    
    29
    
    
    
    
    
    
    
    415Non-cash portion of special charges
and related asset write downs
    
    
    223
    
    
    
    550
    
    
    
    67
    
    
    
    
    
    
    
    840Equity in net loss of associated companies
    
    
    1,321
    
    
    
    562
    
    
    
    7
    
    
    
    (1,865
    )
    
    
    25Current and deferred stock option compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deferred income taxes
    
    
    (71
    )
    
    
    (317
    )
    
    
    (50
    )
    
    
    
    
    
    
    (438
    )Other liabilities
    
    
    (16
    )
    
    
    1
    
    
    
    (14
    )
    
    
    
    
    
    
    (29
    )Gain on repurchases of outstanding debt securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gain on sale of investments and businesses
    
    
    (10
    )
    
    
    (7
    )
    
    
    
    
    
    
    
    
    
    
    (17
    )Other  net
    
    
    372
    
    
    
    109
    
    
    
    114
    
    
    
    
    
    
    
    595Change in operating assets and liabilities
    
    
    (961
    )
    
    
    1,476
    
    
    
    108
    
    
    
    
    
    
    
    623Net cash from (used in) operating activities
    
    
    (1,654
    )
    
    
    1,098
    
    
    
    (3
    )
    
    
    
    
    
    
    (559
    )Cash flows from (used in) investing activitiesExpenditures for plant and equipment
    
    
    (40
    )
    
    
    (214
    )
    
    
    (35
    )
    
    
    
    
    
    
    (289
    )Proceeds on disposals of plant and equipment
    
    
    5
    
    
    
    351
    
    
    
    
    
    
    
    
    
    
    
    356Decrease (increase) in restricted cash and
cash equivalents
    
    
    (47
    )
    
    
    (352
    )
    
    
    (21
    )
    
    
    
    
    
    
    (420
    )Increase in long-term receivables
    
    
    60
    
    
    
    (187
    )
    
    
    (122
    )
    
    
    
    
    
    
    (249
    )Decrease in long-term receivables
    
    
    19
    
    
    
    151
    
    
    
    83
    
    
    
    
    
    
    
    253Acquisitions of investments and businesses
 net of cash acquired
    
    
    (5
    )
    
    
    (24
    )
    
    
    
    
    
    
    
    
    
    
    (29
    )Proceeds on sale of investments and businesses
    
    
    20
    
    
    
    24
    
    
    
    
    
    
    
    
    
    
    
    44Investments in subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net cash from (used in) investing activities
    
    
    12
    
    
    
    (251
    )
    
    
    (95
    )
    
    
    
    
    
    
    (334
    )Cash flows from (used in) financing activitiesDividends on preferred shares
    
    
    (16
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16
    )Increase (decrease) in notes payable  net
    
    
    
    
    
    
    (184
    )
    
    
    (130
    )
    
    
    
    
    
    
    (314
    )Proceeds from long-term debt
    
    
    
    
    
    
    1
    
    
    
    31
    
    
    
    
    
    
    
    32Repayments of long-term debt
    
    
    (5
    )
    
    
    (4
    )
    
    
    (13
    )
    
    
    
    
    
    
    (22
    )Increase (decrease) in capital leases payable
    
    
    (3
    )
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    (7
    )Issuance of common shares
    
    
    1,997
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,997Issuance of prepaid forward purchase contracts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock option fair value increment
    
    
    
    
    
    
    (525
    )
    
    
    
    
    
    
    
    
    
    
    (525
    )Net cash from (used in) financing activities
    
    
    1,973
    
    
    
    (716
    )
    
    
    (112
    )
    
    
    
    
    
    
    1,145Effect of foreign exchange rate changes
on cash and cash equivalents
    
    
    3
    
    
    
    10
    
    
    
    3
    
    
    
    
    
    
    
    16Net cash from (used in) continuing operations
    
    
    334
    
    
    
    141
    
    
    
    (207
    )
    
    
    
    
    
    
    268Net cash from (used in) discontinued operations
    
    
    119
    
    
    
    218
    
    
    
    
    
    
    
    
    
    
    
    337Net increase (decrease) in cash and
cash equivalents
    
    
    453
    
    
    
    359
    
    
    
    (207
    )
    
    
    
    
    
    
    605Cash and cash equivalents at beginning of
period
    
    
    (41)
    
    
    
    2,285
    
    
    
    1,160
    
    
    
    
    
    
    
    3,404Cash and cash equivalents at end of period
    
    $
    412
    
    
    $
    2,644
    
    
    $
    953
    
    
    $
    
    
    
    $
    4,009


45



---



##### 



PART II
OTHER INFORMATION

ITEM 6.        Exhibits And Reports On Form 8-K



|(a) |  | Exhibits
|--- |  | --------



|10.1 |  | Nortel Networks Limited
SUCCESS Plan, as amended and
restated on July 28, 2003
with effect from January 1,
2003.*
|---- |  | -----------------------------------------------------------------------------------------------------------------



|31.1 |  | Certification of the
President and Chief Executive
Officer pursuant to 18 U.S.C.
Section 1350 as Adopted
Pursuant to Section 302 of
the Sarbanes-Oxley Act of
2002.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



|31.2 |  | Certification of the Chief
Financial Officer pursuant to
18 U.S.C. Section 1350 as
Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act
of 2002.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



|32 |  | Certification of the President and Chief Executive Officer
and Chief Financial Officer pursuant to 18 U.S.C. Section
1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) |  | Reports on Form 8-K
|--- |  | -------------------



| |  | Nortel Networks Limited filed a Current Report on Form 8-K dated July
10, 2003 related to Amending Agreement No. 1 dated as of July 10,
2003 to the Master Facility Agreement dated as of February 14, 2003
between Nortel Networks Limited and Export Development Canada.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Nortel Networks Limited filed a Current Report on Form 8-K dated July
25, 2003 related to its financial results for the second quarter of
2003.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  | Nortel Networks Limited filed a Current Report on Form 8-K dated
October 24, 2003 related to its financial results for the third
quarter of 2003.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Nortel Networks Limited filed a Current Report on Form 8-K dated
November 13, 2003 related to the expected timing for the filing of
its Third Quarter 2003 Form 10-Q.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------








|* |  | Previously filed as an exhibit to the Originally Filed 10-Q, which
was filed with the Securities and Exchange Commission on November 19,
2003.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------

46



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##### 



SIGNATURES

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

NORTEL NETWORKS LIMITED
(Registrant)

Chief Financial Officer
    
    Chief Accounting Officer/s/  D.C. BEATTY
    
    /s/  M.J. GOLLOGLYD.C. BEATTY
Chief Financial Officer
    
    M.J. GOLLOGLY
Controller


Date: November 28, 2003

47