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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


FORM 10-Q



| |         |                                                                                        
| | ------- | ---------------------------------------------------------------------------------------
| | (X BOX) | Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934

For the Quarterly Period Ended
March 31, 2002

OR



| |       |                                                                                         
| | ----- | ----------------------------------------------------------------------------------------
| | (BOX) | 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                  No

Indicate the number of shares outstanding of each of the issuers classes of
common stock, as at April 30, 2002

1,460,978,634 common shares without nominal or par value



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TABLE OF CONTENTS



|                                         |                                                                     |  |  |  |  |  |  | 
|---------------------------------------- | ------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                  
|                                         | ITEM 1. Consolidated Financial Statements (unaudited)              
|                                         | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
|                                         | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 
|PART II                                 
|                                         | ITEM 1. Legal Proceedings                                          
|                                         | ITEM 6. Exhibits and Reports on Form 8-K                           
|                                         | SIGNATURES                                                         
|NNL Deferred Share Compensation plan    
|First Half 2002 Success Bonus Plan      
|Form of NNL Foreign Subsiduary Guarantee
|Foreign Pledge Agreement                
|Foreign Pledge Agreement                
|Foreign Pledge Agreement                
|Pledge Agreement                        
|Foreign Pledge Agreement                
|Foreign Pledge Agreement                



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##### Table of Contents



TABLE OF CONTENTS

PART I
FINANCIAL INFORMATION

|                         |  |                                                   |  |      |    | 
|------------------------ |  | ------------------------------------------------- |  | ---- | -- | 
|                         |  |                                                   |  | PAGE
|                         |  |                                                   |  |     
|ITEM 1.                  |  | Consolidated Financial Statements (unaudited)     |  |      | 3  | 
|ITEM 2.                  |  | Management's Discussion and Analysis of Financial |  |      |    | 
|                         |  | Condition and Results of Operations               |  |      | 25 | 
|ITEM 3.                  |  | Quantitative and Qualitative Disclosures About    |  |      |    | 
|                         |  | Market Risk                                       |  |      | 51 | 
|                        
|                        
|PART IIOTHER INFORMATION
|                        
|                        
|ITEM 1.                  |  | Legal Proceedings                                 |  |      | 52 | 
|ITEM 6.                  |  | Exhibits and Reports on Form 8-K                  |  |      | 52 | 
|Signatures               |  |                                                   |  |      | 55 | 



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



Bay Networks and Nortel Networks are trademarks of Nortel Networks.

Clarify is a trademark of Amdocs Software Systems Limited.



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PART I
FINANCIAL INFORMATION




|        |  |                                               |  |  |  |  |  | 
|------- |  | --------------------------------------------- |  |  |  |  |  | 
|ITEM 1. |  | Consolidated Financial Statements (unaudited) |  |  |  | 
|        |  |                                               |  |  |  | 
|        |  | Contents of Consolidated Financial Statements |  |  |  | 

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

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NORTEL NETWORKS LIMITED
Consolidated Statements of Operations (unaudited)
(millions of U.S. dollars)

|                                                          |                     |      |                    |      |   |   |        |     |  
|--------------------------------------------------------- | ------------------- | ---- | ------------------ | ---- | - | - | ------ | --- | -
|                                                         
|                                                          |                     |      | Three months ended
|                                                          |                     |      | March 31,         
|                                                          |                     | 2002 |                    | 2001 |  
|                                                         
|Revenues                                                  |                     | $    | 2,910              |      |   | $ | 5,689  |    
|Cost of revenues                                          |                     |      | 2,229              |      |   |   | 3,875  |    
|                                                         
|Gross profit                                              |                     |      | 681                |      |   |   | 1,814  |    
|                                                         
|Selling, general and administrative expense               |                     |      | 740                |      |   |   | 1,308  |    
|Research and development expense                          |                     |      | 577                |      |   |   | 906    |    
|Amortization of intangibles                               |                     |      |                    |      |   |   |        |    
|                                                          | Acquired technology |      |                    | 5    |   |   |        | 203 |  
|                                                          | Goodwill            |      |                    |     |   |   |        | 682 |  
|Special charges                                           |                     |      | 443                |      |   |   | 355    |    
|Gain on sale of businesses                                |                     |      | (3                 | )    |   |   |       |    
|                                                         
|Operating loss                                            |                     |      | (1,081             | )    |   |   | (1,640 | )  
|                                                         
|Equity in net loss of associated companies                |                     |      | (4                 | )    |   |   | (16    | )  
|Other income (expense)  net                              |                     |      | (14                | )    |   |   | 105    |    
|Interest expense                                          |                     |      |                    |      |   |   |        |    
|                                                          | Long-term debt      |      |                    | (36  | ) |   |        | (39 | )
|                                                          | Other               |      |                    | (12  | ) |   |        | (18 | )
|                                                         
|Loss from continuing operations before income taxes       |                     |      | (1,147             | )    |   |   | (1,608 | )  
|Income tax benefit                                        |                     |      | 362                |      |   |   | 257    |    
|                                                         
|Net loss from continuing operations                       |                     |      | (785               | )    |   |   | (1,351 | )  
|Net loss from discontinued operations  net of tax        |                     |      |                   |      |   |   | (187   | )  
|                                                         
|Net loss before cumulative effect of accounting change    |                     |      | (785               | )    |   |   | (1,538 | )  
|Cumulative effect of accounting change  net of tax of $9 |                     |      |                   |      |   |   | 15     |    
|                                                         
|Net loss                                                  |                     |      | (785               | )    |   |   | (1,523 | )  
|Dividends on preferred shares                             |                     |      | (5                 | )    |   |   | (8     | )  
|                                                         
|Net loss applicable to common shares                      |                     | $    | (790               | )    |   | $ | (1,531 | )  
|                                                         

See notes to unaudited consolidated financial statements.

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NORTEL NETWORKS LIMITED
Consolidated Balance Sheets (unaudited)
(millions of U.S. dollars)



|                                                                                                                                                                    |                                                                                            |           |         |              |  |   |         |       | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------ | --------- | ------- | ------------ |  | - | ------- | ----- | 
|                                                                                                                                                                   
|                                                                                                                                                                    |                                                                                            | March 31, |         | December 31, | 
|                                                                                                                                                                    |                                                                                            | 2002      |         | 2001         | 
|                                                                                                                                                                   
|ASSETS                                                                                                                                                              |                                                                                            |           |         |              |  |   |         |      
|Current assets                                                                                                                                                      |                                                                                            |           |         |              |  |   |         |      
|                                                                                                                                                                    | Cash and cash equivalents                                                                  |           | $       | 3,024        |  |   | $       | 3,457 | 
|                                                                                                                                                                    | Accounts receivable (less provisions of $499 at March 31, 2002; $655 at December 31, 2001) |           |         | 2,735        |  |   |         | 2,923 | 
|                                                                                                                                                                    | Inventories  net                                                                          |           |         | 1,489        |  |   |         | 1,563 | 
|                                                                                                                                                                    | Income taxes recoverable                                                                   |           |         | 912          |  |   |         | 790   | 
|                                                                                                                                                                    | Deferred income taxes  net                                                                |           |         | 1,516        |  |   |         | 1,401 | 
|                                                                                                                                                                    | Other current assets                                                                       |           |         | 875          |  |   |         | 847   | 
|                                                                                                                                                                    | Current assets of discontinued operations                                                  |           |         | 540          |  |   |         | 698   | 
|                                                                                                                                                                   
|Total current assets                                                                                                                                                |                                                                                            |           | 11,091  |              |  |   | 11,679  |      
|                                                                                                                                                                   
|Long-term receivables (less provisions of $824 at March 31, 2002; $828 at December 31, 2001)                                                                        |                                                                                            |           | 158     |              |  |   | 203     |      
|Investments at cost and associated companies at equity                                                                                                              |                                                                                            |           | 273     |              |  |   | 263     |      
|Plant and equipment  net                                                                                                                                           |                                                                                            |           | 2,228   |              |  |   | 2,459   |      
|Goodwill  net                                                                                                                                                      |                                                                                            |           | 2,277   |              |  |   | 2,283   |      
|Intangible assets  net                                                                                                                                             |                                                                                            |           | 14      |              |  |   | 20      |      
|Deferred income taxes  net                                                                                                                                         |                                                                                            |           | 1,852   |              |  |   | 2,106   |      
|Other assets                                                                                                                                                        |                                                                                            |           | 698     |              |  |   | 697     |      
|Long-term assets of discontinued operations                                                                                                                         |                                                                                            |           | 283     |              |  |   | 283     |      
|                                                                                                                                                                   
|Total assets                                                                                                                                                        |                                                                                            | $         | 18,874  |              |  | $ | 19,993  |      
|                                                                                                                                                                   
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                |                                                                                            |           |         |              |  |   |         |      
|Current liabilities                                                                                                                                                 |                                                                                            |           |         |              |  |   |         |      
|                                                                                                                                                                    | Notes payable                                                                              |           | $       | 406          |  |   | $       | 426   | 
|                                                                                                                                                                    | Trade and other accounts payable                                                           |           |         | 2,152        |  |   |         | 2,248 | 
|                                                                                                                                                                    | Payroll and benefit-related liabilities                                                    |           |         | 675          |  |   |         | 613   | 
|                                                                                                                                                                    | Other accrued liabilities                                                                  |           |         | 5,176        |  |   |         | 5,347 | 
|                                                                                                                                                                    | Income taxes payable                                                                       |           |         | 268          |  |   |         | 143   | 
|                                                                                                                                                                    | Long-term debt due within one year                                                         |           |         | 318          |  |   |         | 384   | 
|                                                                                                                                                                    | Current liabilities of discontinued operations                                             |           |         | 286          |  |   |         | 384   | 
|                                                                                                                                                                   
|Total current liabilities                                                                                                                                           |                                                                                            |           | 9,281   |              |  |   | 9,545   |      
|                                                                                                                                                                   
|Deferred income                                                                                                                                                     |                                                                                            |           | 132     |              |  |   | 153     |      
|Long-term debt                                                                                                                                                      |                                                                                            |           | 2,282   |              |  |   | 2,293   |      
|Deferred income taxes  net                                                                                                                                         |                                                                                            |           | 466     |              |  |   | 477     |      
|Other liabilities                                                                                                                                                   |                                                                                            |           | 1,435   |              |  |   | 1,452   |      
|Minority interest in subsidiary companies                                                                                                                           |                                                                                            |           | 95      |              |  |   | 100     |      
|                                                                                                                                                                   
|                                                                                                                                                                    |                                                                                            |           | 13,691  |              |  |   | 14,020  |      
|                                                                                                                                                                   
|Contingencies (note 11)                                                                                                                                             |                                                                                            |           |         |              |  |   |         |      
|SHAREHOLDERS EQUITY                                                                                                                                                |                                                                                            |           |         |              |  |   |         |      
|Preferred shares, without par value  Authorized shares: unlimited;
Issued and outstanding shares: 30,000,000 at March 31, 2002 and December 31, 2001, respectively |                                                                                            |           | 536     |              |  |   | 536     |      
|Common shares, without par value  Authorized shares: unlimited; Issued and
outstanding shares: 1,460,978,634 at March 31, 2002 and December 31, 2001, respectively |                                                                                            |           | 2,111   |              |  |   | 2,111   |      
|Additional paid-in capital                                                                                                                                          |                                                                                            |           | 18,829  |              |  |   | 18,797  |      
|Deficit                                                                                                                                                             |                                                                                            |           | (15,297 | )            |  |   | (14,507 | )    
|Accumulated other comprehensive loss                                                                                                                                |                                                                                            |           | (996    | )            |  |   | (964    | )    
|                                                                                                                                                                   
|Total shareholders equity                                                                                                                                          |                                                                                            |           | 5,183   |              |  |   | 5,973   |      
|                                                                                                                                                                   
|Total liabilities and shareholders equity                                                                                                                          |                                                                                            | $         | 18,874  |              |  | $ | 19,993  |      
|                                                                                                                                                                   

See notes to unaudited consolidated financial statements.

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NORTEL NETWORKS LIMITED
Consolidated Statements of Cash Flows (unaudited)
(millions of U.S. dollars)

|                                                       |                                                                                                                                                                         |                                                                   |                                          |      |                    |      |       |        |       |        |  
|------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------- | ---------------------------------------- | ---- | ------------------ | ---- | ----- | ------ | ----- | ------ | -
|                                                      
|                                                       |                                                                                                                                                                         |                                                                   |                                          |      | Three months ended
|                                                       |                                                                                                                                                                         |                                                                   |                                          |      | March 31,         
|                                                       |                                                                                                                                                                         |                                                                   |                                          | 2002 |                    | 2001 |      
|                                                      
|Cash flows from (used in) operating activities         |                                                                                                                                                                         |                                                                   |                                          |      |                    |      |       |       
|                                                       | Net loss from continuing operations                                                                                                                                     |                                                                   | $                                        | (785 | )                  |      | $     | (1,351 | )    
|                                                       | Adjustments to reconcile net loss from continuing operations to net cash used in
operating activities, net of effects from acquisitions and divestitures of businesses: |                                                                   |                                          |      |                    |      |       |        |      
|                                                       |                                                                                                                                                                         | Amortization and depreciation                                     |                                          |      | 157                |      |       |        | 1,077 |       
|                                                       |                                                                                                                                                                         | Non-cash portion of special charges and related asset write downs |                                          |      | 75                 |      |       |        | 64    |       
|                                                       |                                                                                                                                                                         | Equity in net earnings of associated companies                    |                                          |      | 4                  |      |       |        | 16    |       
|                                                       |                                                                                                                                                                         | Tax benefit from stock options                                    |                                          |      |                   |      |       |        | 33    |       
|                                                       |                                                                                                                                                                         | Deferred income taxes                                             |                                          |      | 117                |      |       |        | (83   | )     
|                                                       |                                                                                                                                                                         | Other liabilities                                                 |                                          |      | (37                | )    |       |        | (29   | )     
|                                                       |                                                                                                                                                                         | Gain on sale of investments and businesses                        |                                          |      | (11                | )    |       |        | (24   | )     
|                                                       |                                                                                                                                                                         | Other  net                                                       |                                          |      | 127                |      |       |        | (19   | )     
|                                                       |                                                                                                                                                                         | Change in operating assets and liabilities:                       |                                          |      |                    |      |       |        |       |       
|                                                       |                                                                                                                                                                         |                                                                   | Accounts receivable                      |      |                    | 165  |       |        |       | 924    |  
|                                                       |                                                                                                                                                                         |                                                                   | Inventories                              |      |                    | 74   |       |        |       | 264    |  
|                                                       |                                                                                                                                                                         |                                                                   | Income taxes                             |      |                    | 3    |       |        |       | (461   | )
|                                                       |                                                                                                                                                                         |                                                                   | Accounts payable and accrued liabilities |      |                    | (207 | )     |        |       | (1,211 | )
|                                                       |                                                                                                                                                                         |                                                                   | Other operating assets and liabilities   |      |                    | (76  | )     |        |       | 8      |  
|                                                      
|                                                       | Net cash used in operating activities of continuing operations                                                                                                          |                                                                   |                                          | (394 | )                  |      |       | (792   | )    
|                                                      
|Cash flows from (used in) investing activities         |                                                                                                                                                                         |                                                                   |                                          |      |                    |      |       |       
|                                                       | Expenditures for plant and equipment                                                                                                                                    |                                                                   |                                          | (103 | )                  |      |       | (544   | )    
|                                                       | Proceeds on disposals of plant and equipment                                                                                                                            |                                                                   |                                          | 44   |                    |      |       |       |      
|                                                       | Increase in long-term receivables                                                                                                                                       |                                                                   |                                          | (107 | )                  |      |       | (389   | )    
|                                                       | Decrease in long-term receivables                                                                                                                                       |                                                                   |                                          | 89   |                    |      |       | 49     |      
|                                                       | Acquisitions of investments and businesses  net of cash acquired                                                                                                       |                                                                   |                                          | (19  | )                  |      |       | (24    | )    
|                                                       | Proceeds on sale of investments and businesses                                                                                                                          |                                                                   |                                          | 24   |                    |      |       | 44     |      
|                                                      
|                                                       | Net cash used in investing activities of continuing operations                                                                                                          |                                                                   |                                          | (72  | )                  |      |       | (864   | )    
|                                                      
|Cash flows from (used in) financing activities         |                                                                                                                                                                         |                                                                   |                                          |      |                    |      |       |       
|                                                       | Dividends on preferred shares                                                                                                                                           |                                                                   |                                          | (5   | )                  |      |       | (8     | )    
|                                                       | Increase (decrease) in notes payable  net                                                                                                                              |                                                                   |                                          | (11  | )                  |      |       | 375    |      
|                                                       | Proceeds from long-term debt                                                                                                                                            |                                                                   |                                          | 11   |                    |      |       | 1,505  |      
|                                                       | Repayments of long-term debt                                                                                                                                            |                                                                   |                                          | (2   | )                  |      |       | (37    | )    
|                                                       | Decrease in capital leases payable                                                                                                                                      |                                                                   |                                          | (4   | )                  |      |       | (9     | )    
|                                                      
|                                                       | Net cash from (used in) financing activities of continuing operations                                                                                                   |                                                                   |                                          | (11  | )                  |      |       | 1,826  |      
|                                                      
|                                                       | Effect of foreign exchange rate changes on cash and cash equivalents                                                                                                    |                                                                   |                                          | (6   | )                  |      |       | (15    | )    
|                                                      
|                                                       | Net cash from (used in) continuing operations                                                                                                                           |                                                                   |                                          | (483 | )                  |      |       | 155    |      
|                                                       | Net cash from (used in) discontinued operations                                                                                                                         |                                                                   |                                          | 50   |                    |      |       | (29    | )    
|                                                      
|Net increase (decrease) in cash and cash equivalents   |                                                                                                                                                                         |                                                                   | (433                                     | )    |                    |      | 126   |       
|                                                      
|Cash and cash equivalents at beginning of period  net |                                                                                                                                                                         |                                                                   | 3,457                                    |      |                    |      | 1,567 |       
|                                                      
|Cash and cash equivalents at end of period  net       |                                                                                                                                                                         | $                                                                 | 3,024                                    |      |                    | $    | 1,693 |       
|                                                      

See notes to unaudited consolidated financial statements.

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NORTEL NETWORKS LIMITED
Notes to Consolidated Financial Statements (unaudited)
(millions of U.S. dollars, unless otherwise stated)



|1. |  | Nortel Networks Limited                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Effective May 1, 2000, Nortel Networks Limited (Old Nortel) and a newly
formed Canadian corporation (New Nortel) participated in a Canadian
court-approved plan of arrangement (the Arrangement) with BCE Inc. As a
result of the Arrangement: Old Nortel and its subsidiaries became direct
and indirect subsidiaries, respectively, of New Nortel; New Nortel assumed
the name Nortel Networks Corporation; New Nortels common shares began to
trade publicly on the New York and Toronto stock exchanges under the symbol
NT; Old Nortel was renamed Nortel Networks Limited; and 100 percent of
Old Nortels common shares were acquired by New Nortel and ceased to be
publicly traded. The preferred shares and debt securities of Old Nortel
outstanding immediately prior to the Arrangement remained outstanding and
continued to be obligations of Old Nortel immediately after the
Arrangement. All of the business and operations conducted by Old Nortel
and its subsidiaries immediately prior to the effective date of the
Arrangement continued to be conducted by Old Nortel and its subsidiaries as
subsidiaries of New Nortel immediately after the Arrangement. All
acquisitions completed prior to May 1, 2000 were consummated by Old Nortel
or its subsidiaries. Since May 1, 2000, acquisitions involving any share
consideration have been consummated by New Nortel, while acquisitions not
involving share consideration have continued to be consummated by Old
Nortel or its subsidiaries.
|  
|2. |  | Basis of presentation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|   |  | The accompanying unaudited Consolidated Financial Statements of Nortel
Networks Limited (Nortel Networks) include all majority owned
subsidiaries over which Nortel Networks exercises control, and have been
prepared in accordance with the rules and regulations of the United States
Securities and Exchange Commission (the SEC) for the preparation of
interim financial information. Accordingly, they do not include all
information and notes as required by United States generally accepted
accounting principles (GAAP) in the preparation of annual consolidated
financial statements. The accounting policies used in the preparation of
the accompanying unaudited Consolidated Financial Statements are the same
as those described in Nortel Networks audited Consolidated Financial
Statements prepared in accordance with GAAP for the three years ended
December 31, 2001, 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.                                                                                                                                                                                                                                                                                                                      
|  
|   |  | In the opinion of management, all adjustments necessary to effect a fair
statement of the results for the periods presented have been made and all
such adjustments are of a normal recurring nature. The financial results
for the three months ended March 31, 2002, 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, 2001
(the 2001 10-K) and Current Report on Form 8-K dated May 13, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|   |  | The preparation of Nortel Networks Consolidated Financial Statements
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Estimates are used when
accounting for items and matters such as long-term contracts, allowance for
uncollectible accounts receivable and customer financings, inventory
obsolescence, product warranty, amortization, asset valuations, employee
benefits, taxes, restructuring and other provisions, in-process research
and development (IPR&D), and contingencies.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|   |  | Certain 2001 figures in the accompanying unaudited Consolidated Financial
Statements have been reclassified to conform to the 2002 presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

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



| | (a) |  | Accounting for goodwill and other intangible assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | In July 2001, the Financial Accounting Standards Board (the FASB)
issued Statement of Financial Accounting Standard (SFAS) No. 142,
Goodwill and Other Intangible Assets (SFAS 142), effective for
fiscal years beginning after December 15, 2001. SFAS 142 changed the
accounting for goodwill from an amortization method to an
impairment-only approach. Thus, amortization of goodwill, including
goodwill recorded in past business combinations, and amortization of
intangibles with an indefinite life, ceased upon adoption of this
Statement. For any acquisitions completed after June 30, 2001, goodwill
and intangible assets with an indefinite life are not amortized.
|
| |     |  | Nortel Networks adopted the provisions of SFAS 142 effective January 1,
2002. Nortel Networks will be performing the first of the required SFAS
142 impairment tests during the second quarter of 2002 and, therefore,
has not yet determined the effect that the adoption of SFAS 142 will
have on the business, results of operations, and financial condition of
Nortel Networks. There can be no assurance that future goodwill
impairment tests will not result in a charge to net earnings (loss).                                                                                                                                                                                     
|
| |     |  | Acquired technology will continue to be amortized and carried at cost
less accumulated amortization. Amortization is computed over the
estimated useful lives of the respective assets, generally two to three
years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |     |  | The following table presents the impact on net loss from both continuing
and discontinued operations for the three months ended March 31 of the
SFAS 142 requirement to cease the amortization of goodwill as if the
standard had been in effect beginning January 1, 2001:                                                                                                                                                                                                                                                                                                                                                                                                                  

|                                                                      |                                                                            |      |      |      |   |   |      |        |  
|--------------------------------------------------------------------- | -------------------------------------------------------------------------- | ---- | ---- | ---- | - | - | ---- | ------ | -
|                                                                     
|                                                                      |                                                                            | 2002 |      | 2001 |  
|                                                                     
|Reported results:                                                     |                                                                            |      |      |      |   |   |      |       
|                                                                      | Net loss from continuing operations                                        |      | $    | (785 | ) |   | $    | (1,351 | )
|                                                                      | Net loss from discontinued operations  net of tax                         |      |      |     |   |   |      | (187   | )
|                                                                      | Cumulative effect of accounting change  net of tax of $9                  |      |      |     |   |   |      | 15     |  
|                                                                     
|                                                                      | Net loss  reported                                                        |      | $    | (785 | ) |   | $    | (1,523 | )
|                                                                     
|Adjustments:                                                          |                                                                            |      |      |      |   |   |      |       
|                                                                      | Amortization
of goodwill from continuing operations  net of tax of $3
(a) |      | $    |     |   |   | $    | 686    |  
|                                                                      | Amortization of goodwill from discontinued operations                      |      |      |     |   |   |      | 62     |  
|                                                                     
|Total net adjustments                                                 |                                                                            | $    |     |      |   | $ | 748  |       
|                                                                     
|Adjusted results:                                                     |                                                                            |      |      |      |   |   |      |       
|                                                                      | Net loss from continuing operations                                        |      | $    | (785 | ) |   | $    | (665   | )
|                                                                      | Net loss from discontinued operations  net of tax                         |      |      |     |   |   |      | (125   | )
|                                                                      | Cumulative effect of accounting change  net of tax of $9                  |      |      |     |   |   |      | 15     |  
|                                                                     
|Net loss  adjusted                                                   |                                                                            | $    | (785 | )    |   | $ | (775 | )     
|                                                                     
|(a)   Includes goodwill amortization of equity accounted investments. |                                                                            |      |      |      |   |   |      |       



| | (b) |  | Impairment or disposal of long-lived assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS 144), which
addresses financial accounting and reporting for the impairment or
disposal of long-lived assets. SFAS 144 applies to certain long-lived
assets, including discontinued operations, and develops one accounting
model for long-lived assets to be disposed of by sale. This Statement
supersedes SFAS No. 121, Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to be Disposed Of, and the accounting
and reporting provisions of Accounting Principles Board Opinion (APB)
No. 30, Reporting the Results of Operations  Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions (APB 30), for the
disposal of a segment of a business.

8



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##### Table of Contents





| |  |  | SFAS 144 requires that long-lived assets to be disposed of by sale be
measured at the lower of carrying amount or fair value less cost to
sell, whether reported in continuing operations or in discontinued
operations. Discontinued operations will no longer be measured at net
realizable value or include amounts for operating losses that have not
yet been incurred. SFAS 144 also broadens the reporting of discontinued
operations to include the disposal of a component of an entity provided
that the operations and cash flows of the component will be eliminated
from the ongoing operations of the entity and the entity will not have
any significant continuing involvement in the operations of the
component.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Nortel Networks adopted the provisions of SFAS 144 effective January 1,
2002. The adoption of SFAS 144 has not had a material effect on the
business, results of operations, and financial condition of Nortel
Networks.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          



|4. |  | Discontinued operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | On June 14, 2001, Nortel Networks Board of Directors approved a plan to
discontinue Nortel Networks access solutions operations consisting of all
of Nortel Networks narrowband and broadband solutions, including copper,
cable, and fixed wireless solutions, as well as Nortel Networks then
current consolidated membership interest in Arris Interactive LLC (Arris)
and equity investment in Elastic Networks Inc. (Elastic Networks). Also
affected by the decision were Nortel Networks prior acquisitions of
Promatory Communications, Inc. (Promatory), Aptis Communications, Inc.
(Aptis), and Broadband Networks Inc.
|  
|   |  | Pursuant to APB 30, the revenues, costs and expenses, assets and
liabilities, and cash flows of Nortel Networks access solutions operations
have been segregated in the accompanying unaudited Consolidated Statements
of Operations, unaudited Consolidated Balance Sheets, and unaudited
Consolidated Statements of Cash Flows, and are reported as discontinued
operations.                                                                                                                                                                                                                                                         
|  
|   |  | The results of discontinued operations for the three months ended March 31,
presented in the accompanying unaudited Consolidated Statements of
Operations, were as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                              

|                                                       |      |   |      |  |  |   |      |  
|------------------------------------------------------ | ---- | - | ---- |  |  | - | ---- | -
|                                                      
|                                                       | 2002 |   | 2001 | 
|                                                      
|                                                      
|Revenues                                               |      | $ | 68   |  |  | $ | 424  |  
|                                                      
|Net loss from discontinued operations  net of tax (a) |      | $ |     |  |  | $ | (187 | )
|                                                      

| | (a) | Net loss from discontinued operations was net of applicable income
tax benefits of nil and $62 for the three months ended March 31, 2002
and 2001, respectively.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On March 5, 2002, Nortel Networks divested its approximately 46 percent
ownership interest in Elastic Networks to Paradyne Networks, Inc.
(Paradyne) in exchange for an approximately 8 percent ownership interest
in Paradyne. Nortel Networks recorded a gain of approximately $7 on the
transaction, which is included in the estimated remaining provisions
required for discontinued operations.                                                                                                                                                                                                                                                                                                                                                
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | During the three months ended March 31, 2002, Nortel Networks recorded a
gain of approximately $13 due to the reduction of Nortel Networks ownership
interest in Arris Group, Inc. (Arris Group), received for Nortel Networks
original interest in Arris, from approximately 49 percent to approximately
46 percent as a result of Arris Groups issuance of common shares in
connection with its acquisition of another company, which is included in
the estimated remaining provisions required for discontinued operations.                                                                                                                                                                                                                     
|
| |  | In connection with the decision to discontinue the access solutions
operations on June 14, 2001, Nortel Networks recorded a pre-tax loss on
disposal of the access solutions operations of $2,780 in the second quarter
of 2001, which reflected the estimated costs directly associated with
Nortel Networks plan of disposition. The loss reflected: the write-off of
goodwill associated with the acquisition of Promatory in the amount of
$417; provisions for both short-term and long-term receivables of $600; a
provision for inventories of $381; other asset write-offs totalling $151;
future contractual obligations and estimated liabilities of $1,059; and
estimated operating losses during the planned period of disposition of
$172.

9



---



##### Table of Contents





| |  | At March 31, 2002, the remaining accruals of $258 related to the above
noted future contractual obligations and estimated liabilities, and
estimated operating losses during the planned period of disposition were
included in current liabilities of discontinued operations. The remaining
accruals are expected to be substantially drawn down by cash payments over
the planned period of disposition, the impact of which is expected to be
offset by proceeds from the sale of certain remaining assets to be disposed of.
Nortel Networks continues to work towards disposing of or transitioning the
ownership of certain operations. Any operations not disposed of or so
transitioned are expected to be closed. Nortel Networks expects to
complete this plan by June 2002, subject to the closing of specific
transactions, the timing of which may be impacted by regulatory approval
processes and business issues.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The assets and liabilities of discontinued operations presented in the
accompanying unaudited Consolidated Balance Sheets were as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

|                                                      |           |   |              |  |  |   |     | 
|----------------------------------------------------- | --------- | - | ------------ |  |  | - | --- | 
|                                                     
|                                                      | March 31, |   | December 31, | 
|                                                      | 2002      |   | 2001         | 
|                                                     
|                                                     
|Accounts receivable  net                             |           | $ | 19           |  |  | $ | 109 | 
|Inventories  net                                     |           |   | 51           |  |  |   | 66  | 
|Deferred income taxes                                 |           |   | 303          |  |  |   | 348 | 
|Other current assets                                  |           |   | 167          |  |  |   | 175 | 
|                                                     
|Total current assets of discontinued operations       |           |   | 540          |  |  |   | 698 | 
|                                                     
|Intangible assets  net                               |           |   | 17           |  |  |   | 17  | 
|Other long-term assets                                |           |   | 266          |  |  |   | 266 | 
|                                                     
|Total assets of discontinued operations               |           | $ | 823          |  |  | $ | 981 | 
|
|                                                     
|                                                     
|Current liabilities                                   |           | $ | 286          |  |  | $ | 384 | 
|Long-term liabilities (included in Other liabilities) |           |   | 1            |  |  |   | 11  | 
|                                                     
|Total liabilities of discontinued operations          |           | $ | 287          |  |  | $ | 395 | 
|                                                     



| |  |                                                                                                                                                                                        
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The net cash from (used in) discontinued operations for the three months
ended March 31, presented in the accompanying unaudited Consolidated
Statements of Cash Flows, was as follows:

|                                                  |                      |      |    |      |   |   |     |     |  
|------------------------------------------------- | -------------------- | ---- | -- | ---- | - | - | --- | --- | -
|                                                 
|                                                  |                      | 2002 |    | 2001 |  
|                                                 
|Cash flows from (used in) discontinued operations |                      |      |    |      |   |   |     |    
|                                                  | Operating activities |      | $  | 72   |   |   | $   | (41 | )
|                                                  | Investing activities |      |    | (22  | ) |   |     | 12  |  
|                                                 
|Net cash from (used in) discontinued operations   |                      | $    | 50 |      |   | $ | (29 | )  
|                                                 

10



---



##### Table of Contents





|5. |  | Consolidated financial statement details   
|-- |  | -------------------------------------------
|  
|   |  | Consolidated balance sheets                
|  
|   |  | The following tables provide details as at:
|  
|   |  | Inventories  net:                         

|                      |           |   |              |  |  |   |       | 
|--------------------- | --------- | - | ------------ |  |  | - | ----- | 
|                     
|                      | March 31, |   | December 31, | 
|                      | 2002      |   | 2001         | 
|                     
|                     
|Raw materials         |           | $ | 816          |  |  | $ | 744   | 
|Work in process       |           |   | 488          |  |  |   | 576   | 
|Finished goods        |           |   | 185          |  |  |   | 243   | 
|                     
|Inventories  net (a) |           | $ | 1,489        |  |  | $ | 1,563 | 
|                     



| | (a) | Net of inventory provisions of $993 and $911 as at March 31, 2002
and December 31, 2001, respectively. Nortel Networks has also accrued
in other accrued liabilities $404 and $565 at March 31, 2002 and
December 31, 2001, respectively, for cancellation charges, for
inventory in excess of future demand, and for the settlement of
certain other claims related to its contract manufacturers or
suppliers.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Intangible assets  net:
| |  | ------------------------

|                               |           |   |              |   |  |   |        |  
|------------------------------ | --------- | - | ------------ | - |  | - | ------ | -
|                              
|                               | March 31, |   | December 31, |  
|                               | 2002      |   | 2001         |  
|                              
|                              
|Acquired technology            |           | $ | 5,201        |   |  | $ | 5,201  |  
|Less: accumulated amortization |           |   | (5,187       | ) |  |   | (5,181 | )
|                              
|Intangible assets  net        |           | $ | 14           |   |  | $ | 20     |  
|                              



| |  | The remaining intangible assets  net will be fully amortized by the end of
2002.
| |  | ---------------------------------------------------------------------------------
|
| |  | Consolidated statements of cash flows                                            
|
| |  | The following table provides details for the three months ended March 31:        
|
| |  | Interest and income taxes paid (received):                                       

|                             |      |   |      |   |  |   |     | 
|---------------------------- | ---- | - | ---- | - |  | - | --- | 
|                            
|                             | 2002 |   | 2001 |  
|                            
|                            
|Interest paid                |      | $ | 70   |   |  | $ | 32  | 
|Income taxes paid (received) |      | $ | (506 | ) |  | $ | 191 | 
|                            

11



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##### Table of Contents



|6. |  | Special charges                                                           
|-- |  | --------------------------------------------------------------------------
|  
|   |  | Special charges for the three months ended March 31, 2002 were as follows:



|      |                                     |  |  |   |     |                |       |           |     |       |     |      |                      |          |               |      |     |   |     |   |    |           |    |   |     |   |       | 
|----- | ----------------------------------- |  |  | - | --- | -------------- | ----- | --------- | --- | ----- | --- | ---- | -------------------- | -------- | ------------- | ---- | --- | - | --- | - | -- | --------- | -- | - | --- | - | ----- | 
|     
|      |                                     |  |  |   |     | Provision      |       | March 31, |     |       |     |      |                      |          |               |      |     |   |     |   |    | Provision
|      |                                     |  |  |   |     | balances as at |       | 2002      |     |       |     |      | Cumulative drawdowns |          | balance as at
|      |                                     |  |  |   |     | December 31,   |       | special   |     |       |     |      |                      |          | March 31,    
|      |                                     |  |  |   |     | 2001           |       | charges   |     | Total |     | Cash |                      | Non-cash |               | 2002
|     
|      | Workforce reduction                 |  |  | $ | 393 |                |       | $         | 312 |       |     | $    | 705                  |          |               | $    | 237 |   |     | $ |   |           |    | $ | 468 |  
|      | Contract settlement and lease costs |  |  |   | 773 |                |       |           | 56  |       |     |      | 829                  |          |               |      | 141 |   |     |   |   |           |    |   | 688 |  
|      | Plant and equipment write downs     |  |  |   |    |                |       |           | 75  |       |     |      | 75                   |          |               |      |    |   |     |   | 75 |           |    |   |    |  
|      | Other                               |  |  |   | 31  |                |       |           |    |       |     |      | 31                   |          |               |      | 9   |   |     |   |   |           |    |   | 22  |  
|     
|Total |                                     |  |  |   |     | $              | 1,197 |           |     | $     | 443 |      |                      | $        | 1,640         |      |     | $ | 387 |   |    | $         | 75 |   |     | $ | 1,178 | 
|     



| |  | Three months ended March 31, 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | For the three months ended March 31, 2002, Nortel Networks recorded special
charges of $443 related to restructuring costs associated with its work
plan, which was implemented in 2001 and continued into the first quarter of
2002, to streamline its operations and activities around its core markets
and leadership strategies.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Workforce reduction charges of $312 were related to the cost of severance
and benefits associated with the approximately 4,000 employees notified of
termination.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Contract settlement costs included negotiated settlements of approximately
$56 to either cancel contracts or renegotiate existing contracts across all
of Nortel Networks segments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | As a result of the significant negative industry and economic trends
impacting Nortel Networks operations and expected future growth rates,
Nortel Networks has performed assessments of certain plant and equipment
assets as part of its review of financial results during the three months
ended March 31, 2002. The conclusion of these assessments resulted in a
write down of certain plant and equipment within global operations, a
function that supports all of Nortel Networks segments, and within the
Optical Long-Haul Networks segment, of approximately $75.                                                                                                                                                                                                                                                                             
|
| |  | Year ended December 31, 2001                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | For the year ended December 31, 2001, Nortel Networks recorded
restructuring charges of $3,310, related to workforce reduction costs of
$1,343, contract settlement and lease costs of $883, plant and equipment
write downs of $939, and other costs of $145. During the year ended
December 31, 2001, there were cumulative cash and non-cash drawdowns
against the provision of $1,082 and $1,031, respectively, resulting in an
ending provision balance at December 31, 2001 of $1,197. The cash
drawdowns related primarily to workforce reduction payments, and the
non-cash drawdowns related primarily to the plant and equipment write
downs.                                                                                                                                                                                                   
|
| |  | Period from January 1, 2001 to March 31, 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Of the approximately 39,500 employees notified during the period from
January 1, 2001 to March 31, 2002, approximately 14,600 were direct
employees performing manufacturing, assembly, test and inspection
activities associated with the production of Nortel Networks products, and
approximately 24,900 were indirect sales, marketing, and administrative
employees, and manufacturing managers. The workforce reduction was
primarily in North America and the United Kingdom and extended across all
of Nortel Networks segments. During the three months ended March 31, 2002,
the workforce reduction provision balance has been drawn down by cash
payments of $237, resulting in an ending provision balance for workforce
reduction of $468. The remaining provision is expected to be substantially
drawn down by the second quarter of 2003.

12



---



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|   |  | In conjunction with the above noted workforce reduction, Nortel Networks
identified a number of leased and owned facilities comprised of office,
warehouse and manufacturing space, as well as leased manufacturing
equipment, that were no longer required. As a result, Nortel Networks
recorded net lease costs of approximately $757. The costs primarily related
to Nortel Networks future contractual obligations under operating leases.
Offsetting the total lease charge is approximately $506 in expected
sublease revenue on leases that Nortel Networks cannot terminate. Nortel
Networks expects to have subleased substantially all of these properties by
the end of 2004. Nortel Networks wrote down the net carrying value of
specific owned facilities across all segments within North America and the
United Kingdom. The write down of approximately $95 reflects the net
realizable value based on market assessments for general purpose
facilities. Contract settlement costs included negotiated settlements of
approximately $182 to either cancel contracts or renegotiate existing
contracts across all of Nortel Networks segments. During the three months
ended March 31, 2002, the provision balance for contract settlement and
lease costs has been drawn down by cash payments of $141, resulting in an
ending provision balance of $688. The remaining provision is expected to
be substantially drawn down by the end of 2004.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Plant and equipment write downs of approximately $459 consisted of the
write down of leasehold improvements and certain information technology
equipment associated with the exiting of the above noted leased and owned
facilities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|  
|   |  | In addition, as a result of the significant negative industry and economic
trends impacting Nortel Networks operations and expected future growth
rates, Nortel Networks has performed assessments of certain plant and
equipment assets as part of its review of financial results during 2001 and
the first quarter of 2002. The conclusion of these assessments resulted in
a write down of certain plant and equipment within global operations, a
function that supports all of Nortel Networks segments, and within the
Optical Long-Haul Networks segment, of approximately $460.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|   |  | Within global operations, it was determined that there was excess test
equipment at a number of system houses that would no longer be required as
a result of the industry and economic environment. As a result, Nortel
Networks recorded a charge of approximately $88 to write down the value of
this equipment to its net realizable value based on the current fair value
for this type of specialized equipment. Nortel Networks expects to dispose
of this equipment by the end of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|   |  | Within the Optical Long-Haul Networks segment, it was determined that there
was excess manufacturing equipment at a number of facilities that would no
longer be required as a result of the industry and economic environment.
As a result, Nortel Networks recorded a charge of approximately $281 to
write down the value of this equipment to its net realizable value based on
the current fair market value for this type of specialized equipment.
Nortel Networks expects to dispose of this equipment by the end of the
second quarter of 2002. Nortel Networks also wrote down the net carrying
value of a specialized manufacturing facility within the Optical Long-Haul
Networks segment for the production of optical components within North
America. The write down of approximately $91 reflects the net realizable
value based on market assessments for a general purpose facility.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|7. |  | Income taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|   |  | Nortel Networks effective tax benefit rate fluctuates from period to period
primarily as a result of the impact of non-tax deductible goodwill
amortization and IPR&D expense, stock option compensation, goodwill write
downs, and certain non-tax deductible restructuring charges. Excluding
these impacts as applicable, Nortel Networks effective tax benefit rate was
31.5 percent and 32.0 percent for the three months ended March 31, 2002 and
2001, respectively, and reflected changes in the geographic earnings (loss)
mix.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|   |  | Recently approved tax legislation in the United States extended the net
operating loss carry-back period from two years to five years. As a
result, Nortel Networks had the ability to carry back available United
States losses from 2001 and utilize approximately $700 of deferred income
tax assets previously recognized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|  
|   |  | Global investment tax credits of $25 and $36 for the three months ended
March 31, 2002 and 2001, respectively, have been incorporated into the
income tax benefit.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

13



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|8. |  | Related party transactions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Nortel Networks engages in certain transactions with Nortel Networks
Corporation and directly owned subsidiaries of Nortel Networks Corporation.
These transactions include cash borrowings between the parties in addition
to funding activities pursuant to reciprocal credit agreements. As at
March 31, 2002 and December 31, 2001, the balance included in trade and
other accounts payable owing to Nortel Networks Corporation was $93 and
$134, respectively, and to directly owned subsidiaries of Nortel Networks
Corporation was $157 and $116, respectively.
|  
|9. |  | Comprehensive loss                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  
|   |  | The components of comprehensive loss, net of tax, were as follows for the
three months ended March 31:                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

|                                   |                                                                    |      |      |      |   |   |        |      |  
|---------------------------------- | ------------------------------------------------------------------ | ---- | ---- | ---- | - | - | ------ | ---- | -
|                                  
|                                   |                                                                    | 2002 |      | 2001 |  
|                                  
|                                  
|Net loss                           |                                                                    | $    | (785 | )    |   | $ | (1,523 | )   
|Other comprehensive income (loss): |                                                                    |      |      |      |   |   |        |     
|                                   | Change in foreign currency translation adjustment (a)              |      |      | (49  | ) |   |        | (259 | )
|                                   | Unrealized gain (loss) on investments  net (b)                    |      |      | 16   |   |   |        | (87  | )
|                                   | Unrealized derivative gains (losses) on cash flow hedges  net (c) |      |      | 1    |   |   |        | (23  | )
|                                  
|Comprehensive loss                 |                                                                    | $    | (817 | )    |   | $ | (1,892 | )   
|                                  



| | (a) | The change in the foreign currency translation adjustment is not
adjusted for income taxes as it relates to indefinite investments in
non-United States subsidiaries.                                                                                                                                                                                   
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) | Certain securities deemed available-for-sale by Nortel Networks
are measured at fair value. Unrealized holding gains and losses
related to these securities are excluded from net loss and are
included in comprehensive loss until they are realized.                                                                                                  
|
| | (c) | During the three months ended March 31, 2002 and 2001, $6 and $5,
respectively, of net derivative losses were reclassified to selling,
general and administrative expense. Nortel Networks estimates that
$16 of net derivative losses included in other comprehensive loss will
be reclassified into net earnings (loss) within the next twelve
months.



|10. |  | Segmented information                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | General description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|    |  | Nortel Networks operations are organized around three reportable segments;
Metro and Enterprise Networks (Metro and Enterprise), Wireless Networks
(Wireless), and Optical Long-Haul Networks (Optical Long-Haul).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|    |  | Nortel Networks reportable segments are focused on providing seamless
networking products and service capabilities across Metro and Enterprise,
Wireless, and Optical Long-Haul. These product and service solutions are
used by service provider and enterprise customers, including incumbent and
competitive local exchange carriers, interexchange carriers, service
providers with global businesses, wireless service providers, Internet
service providers, application service providers, hosting service
providers, resellers, cable television companies, other communication
service providers, large businesses and their branch offices, small
businesses, and home offices, as well as government, education, and utility
organizations. Metro and Enterprise includes metro optical transmission,
data switching systems, routers, and aggregation products to deliver
services via Internet Protocol (IP) and other protocol standards across
local and wide area networks, voice over IP solutions for both greenfield
and circuit to packet network transitions, and traditional voice circuit
switching. Wireless includes wireless mobility switching and access
products for voice and data communications that span most major global
mobility standards. Optical Long-Haul includes long-haul optical
transmission products designed to provide long-distance, high capacity
dense wavelength division multiplexing transport, traditional optical
transmission systems that support most global transmission standards,
optical switch platforms, and optical components for long distance optical
networks.
|   
|    |  | Other represents miscellaneous business activities and corporate
functions. None of these activities meet the quantitative criteria to be
disclosed as reportable segments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

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| |  | As described in note 4, Nortel Networks access solutions operations were
discontinued during the year ended December 31, 2001. These operations
were previously included as a separate segment within Other. The data
included below excludes amounts related to the operations of the access
solutions segment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | 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 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 by headcount. Costs not allocated 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. The accounting policies of the
reportable segments are the same as those described in Nortel Networks
audited Consolidated Financial Statements for the year ended December 31,
2001 to the extent that the related items are included within contribution
margin.
|
| |  | Segments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | The following tables set forth information by segments for the three months
ended March 31:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

|                                    |      |   |        |   |  |   |        |  
|----------------------------------- | ---- | - | ------ | - |  | - | ------ | -
|                                   
|                                    | 2002 |   | 2001   |  
|                                   
|Revenues                            |      |   |        |   |  |   |        |  
|Metro and Enterprise                |      | $ | 1,489  |   |  | $ | 2,757  |  
|Wireless                            |      |   | 1,136  |   |  |   | 1,545  |  
|Optical Long-Haul                   |      |   | 270    |   |  |   | 1,187  |  
|Other                               |      |   | 15     |   |  |   | 200    |  
|                                   
|Total                               |      | $ | 2,910  |   |  | $ | 5,689  |  
|                                   
|Contribution margin                 |      |   |        |   |  |   |        |  
|Metro and Enterprise                |      | $ | (13    | ) |  | $ | 500    |  
|Wireless                            |      |   | 244    |   |  |   | 179    |  
|Optical Long-Haul                   |      |   | (167   | ) |  |   | (11    | )
|Other                               |      |   | (123   | ) |  |   | (162   | )
|                                   
|Total                               |      |   | (59    | ) |  |   | 506    |  
|                                   
|Research and development expense    |      |   | (577   | ) |  |   | (906   | )
|Amortization of acquired technology |      |   | (5     | ) |  |   | (203   | )
|Amortization of goodwill            |      |   |       |   |  |   | (682   | )
|Special charges                     |      |   | (443   | ) |  |   | (355   | )
|Gain on sale of businesses          |      |   | 3      |   |  |   |       |  
|                                   
|Consolidated operating loss         |      | $ | (1,081 | ) |  | $ | (1,640 | )
|                                   



|11. |  | Contingencies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Subsequent to the February 15, 2001 announcement in which Nortel Networks
Corporation provided revised guidance for financial performance for the
2001 fiscal year and the first quarter of 2001, Nortel Networks Corporation
and certain of its then current officers and directors 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 in the provinces of Ontario, Quebec, and British Columbia in
Canada, on behalf of shareholders who acquired Nortel Networks
Corporations securities as early as October 24, 2000 and as late as
February 15, 2001, allege, among other things, violations of United States
federal and
Canadian provincial securities laws. Securities regulatory authorities in
Canada and the United States are also reviewing these matters. On May 11,
2001, Nortel Networks Corporation filed motions to dismiss and/or stay in
connection with the three proceedings in Quebec primarily based on the
factual allegations lacking substantial

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| |  | 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, Nortel Networks Corporation 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.                                                                                                                                      
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | A class action lawsuit 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, Nortel Networks Corporation 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, Nortel
Networks Corporation also moved to dismiss on the separate basis that JDS
shareholders lacked standing to sue Nortel Networks Corporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | 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
Nortel Networks Corporation 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 Nortel Networks
Corporation common shares in the Plan. A motion to dismiss or, in the
alternative, to transfer was filed on March 15, 2002. A second purported
class action lawsuit, on behalf of the Plan and Plan participants for whose
individual accounts the Plan purchased Nortel Networks Corporation 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.
|
| |  | On February 12, 2001, Nortel Networks Inc. (NNI), a direct subsidiary of
Nortel Networks, was served with a consolidated amended class action
complaint (the First Complaint) that purported to add Nortel Networks
Corporation as a defendant to a lawsuit commenced in July 2000 against
Entrust, Inc. (formerly Entrust Technologies, Inc.) (Entrust) and two of
its then current officers in the United States District Court for the
Eastern District of Texas (Marshall Division) (the District Court). The
First Complaint alleges that Entrust, two officers of Entrust, and Nortel
Networks Corporation violated the Securities Exchange Act of 1934 with
respect to certain statements made by Entrust. Nortel Networks Corporation
is alleged to be a controlling person of Entrust. On April 6, 2001,
Nortel Networks Corporation filed a motion to dismiss the First Complaint.
On July 31, 2001, the First Complaint was dismissed without prejudice. On
August 31, 2001, the plaintiffs filed a second amended class action
complaint (the Second Complaint) against the same defendants asserting
claims substantively similar to those in the First Complaint. On September
21, 2001, Nortel Networks Corporation filed a motion to dismiss the Second
Complaint. The motion is currently under consideration by the District
Court.                     
|
| |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

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|    |  | On April 18, 1997, a
second lawsuit was filed in the California Court, purportedly on behalf of
a class of shareholders who acquired Bay Networks common shares pursuant
to the registration statement and prospectus that became effective on
November 15, 1995. The two actions in the California Court were
consolidated in April 1998; however, the California Court denied the
plaintiffs motion for class certification. In January 2000, the
California Court of Appeal rejected the plaintiffs appeal of the decision.
A petition for review was filed with the California Supreme Court by the
plaintiffs and was denied. In February 2000, new plaintiffs who allege to
have been shareholders of Bay Networks during the relevant periods, filed a
motion for intervention in the California Court seeking to become the
representatives of a class of shareholders. The motion was granted on June
8, 2001 and the new plaintiffs filed their complaint-in-intervention on an
individual and purported class representative basis alleging
misrepresentations made in connection with the purchase and sale of
securities of Bay Networks in violation of California statutory and common
law. On 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.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | In each of the matters described above, plaintiffs are seeking an
unspecified amount of money 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 of the above matters which seek
damages of material or indeterminate amounts, and therefore cannot
determine whether these actions, suits, claims, proceedings and
investigations will, individually or collectively, have a material adverse
effect on the business, results of operations, and financial condition of
Nortel Networks. Nortel Networks and any named directors and officers of
Nortel Networks intend to vigorously defend these actions, suits, claims,
proceedings and investigations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|12. |  | Recent pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|    |  | In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations (SFAS 143), which is effective for financial
statements issued for fiscal years beginning after June 15, 2002. SFAS 143
addresses the recognition and remeasurement of obligations associated with
the retirement of a tangible long-lived asset. Nortel Networks has not yet
determined the effect that the adoption of SFAS 143 will have on the
business, results of operations, and financial condition of Nortel
Networks.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|13. |  | Subsequent events                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|    |  | On April 21, 2002, Nortel Networks entered into an agreement with Aastra
Technologies Limited to sell certain assets, which are included in
discontinued operations, associated with Nortel Networks prior acquisition
of Aptis. The consideration primarily consists of approximately $18 in
cash, as well as contingent cash consideration of up to $60 over four years
based on the achievement of certain revenue targets by the business. The
deal is expected to close in the second quarter of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|    |  | Effective April 8, 2002, Nortel Networks and NNI amended and extended the
364-day syndicated credit agreements originally entered into on April 12,
2000 and subsequently amended on April 11, 2001. The April 8, 2002
amendments reduced the size of the 364-day committed revolving facilities
to $1,175 from $1,750, extended the term to April 7, 2003 with no
additional term-out period thereafter, maintained the financial covenant in
the April 2001 facilities requiring Nortel Networks minimum consolidated
tangible net worth to be not less than $1,888, and included higher pricing
reflecting the current credit and bank environment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|    |  | On April 4, 2002, Moodys Investors Services, Inc. lowered Nortel Networks
United States senior long-term debt rating below investment grade to Ba3.
On April 9, 2002, Standard & Poors Ratings Service also lowered their
credit ratings for Nortel Networks below investment grade to BB-. As a
result, various liens, pledges, and guarantees became effective under
certain credit and security agreements entered into by Nortel Networks and
various of its subsidiaries. In accordance with the covenants in the trust
indentures for all of Nortel Networks current consolidated
public debt securities, which represent primarily all of Nortel Networks
consolidated long-term debt at March 31, 2002, all such public debt
securities are also secured equally and ratably with the obligations under
all of Nortel Networks and NNIs credit agreements by liens on
substantially all of the assets of Nortel Networks and those of most                                                                                                                                                                                                                                                                                                                                                                                                                                     

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| |  | of its
United States and Canadian subsidiaries, and by pledges of shares in
certain of Nortel Networks other subsidiaries. In addition, certain of
Nortel Networks wholly owned subsidiaries have guaranteed Nortel Networks
obligations under the credit agreements and outstanding public debt
securities (the Guarantor Subsidiaries). Non-guarantor subsidiaries (the
Non-Guarantor Subsidiaries) represent either wholly owned subsidiaries of
Nortel Networks whose shares have been pledged, or are the remaining
subsidiaries of Nortel Networks which are not providing liens, pledges, or
guarantees.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The liens, pledges, and guarantees described above also apply equally and
ratably to the obligations under Nortel Networks Corporations $1,800 4.25
percent convertible senior notes due September 1, 2008.                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | 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 March 31, 2002 and December 31, 2001, and for the
three months ended March 31, 2002 and 2001.                                                                                                                                                                                                                                                                     
|
| |  | 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 accounts
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.                                                                                   

18



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

|                                                     |                |   |          |     |              |   |              |     |              |   |              |    |   |   |      |   |  |   |        |     |  
|---------------------------------------------------- | -------------- | - | -------- | --- | ------------ | - | ------------ | --- | ------------ | - | ------------ | -- | - | - | ---- | - |  | - | ------ | --- | -
|                                                    
|                                                     |                |   | Nortel   |     |              |   |              |     | Non-         |   |              |    |   |   |      |   | 
|                                                     |                |   | Networks |     | Guarantor    |   | Guarantor    |     |              |   |              |    |   |   |     
|                                                     |                |   | Limited  |     | Subsidiaries |   | Subsidiaries |     | Eliminations |   | Consolidated
|                                                    
|                                                    
|Revenues                                             |                | $ | 756      |     |              | $ | 2,038        |     |              | $ | 798          |    |   | $ | (682 | ) |  | $ | 2,910  |    
|Cost of revenues                                     |                |   | 693      |     |              |   | 1,539        |     |              |   | 679          |    |   |   | (682 | ) |  |   | 2,229  |    
|                                                    
|Gross profit                                         |                |   | 63       |     |              |   | 499          |     |              |   | 119          |    |   |   |     |   |  |   | 681    |    
|                                                    
|Selling, general and administrative expense          |                |   | 134      |     |              |   | 543          |     |              |   | 63           |    |   |   |     |   |  |   | 740    |    
|Research and development expense                     |                |   | 197      |     |              |   | 303          |     |              |   | 77           |    |   |   |     |   |  |   | 577    |    
|Amortization of acquired technology                  |                |   |         |     |              |   | 5            |     |              |   |             |    |   |   |     |   |  |   | 5      |    
|Special charges                                      |                |   | 78       |     |              |   | 226          |     |              |   | 139          |    |   |   |     |   |  |   | 443    |    
|Loss (gain) on sale of businesses                    |                |   | (1       | )   |              |   | (3           | )   |              |   | 1            |    |   |   |     |   |  |   | (3     | )  
|                                                    
|Operating loss                                       |                |   | (345     | )   |              |   | (575         | )   |              |   | (161         | )  |   |   |     |   |  |   | (1,081 | )  
|                                                    
|Equity in net earnings (loss) ofassociated companies |                |   | (532     | )   |              |   | (114         | )   |              |   | 1            |    |   |   | 641  |   |  |   | (4     | )  
|Other income (expense)  net                         |                |   |         |     |              |   | (22          | )   |              |   | 8            |    |   |   |     |   |  |   | (14    | )  
|Interest expense                                     |                |   |          |     |              |   |              |     |              |   |              |    |   |   |      |   |  |   |        |    
|                                                     | Long-term debt |   |          | (29 | )            |   |              |    |              |   |              | (7 | ) |   |      |  |  |   |        | (36 | )
|                                                     | Other          |   |          |    |              |   |              | (12 | )            |   |              |   |   |   |      |  |  |   |        | (12 | )
|                                                    
|Loss from continuing operationsbefore income taxes   |                |   | (906     | )   |              |   | (723         | )   |              |   | (159         | )  |   |   | 641  |   |  |   | (1,147 | )  
|Income tax benefit                                   |                |   | 121      |     |              |   | 151          |     |              |   | 90           |    |   |   |     |   |  |   | 362    |    
|                                                    
|Net loss from continuing operations                  |                |   | (785     | )   |              |   | (572         | )   |              |   | (69          | )  |   |   | 641  |   |  |   | (785   | )  
|Net loss from discontinued operations net of tax    |                |   |         |     |              |   |             |     |              |   |             |    |   |   |     |   |  |   |       |    
|                                                    
|Net loss                                             |                |   | (785     | )   |              |   | (572         | )   |              |   | (69          | )  |   |   | 641  |   |  |   | (785   | )  
|Dividends on preferred shares                        |                |   | (5       | )   |              |   |             |     |              |   |             |    |   |   |     |   |  |   | (5     | )  
|                                                    
|Net loss applicable to common shares                 |                | $ | (790     | )   |              | $ | (572         | )   |              | $ | (69          | )  |   | $ | 641  |   |  | $ | (790   | )  
|                                                    

19



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Supplemental Consolidating Statements of Operations for the three months ended
March 31, 2001:

|                                                         |                     |   |          |     |   |              |        |     |              |   |       |              |   |   |              |   |  |   |        |     |  
|-------------------------------------------------------- | ------------------- | - | -------- | --- | - | ------------ | ------ | --- | ------------ | - | ----- | ------------ | - | - | ------------ | - |  | - | ------ | --- | -
|                                                        
|                                                         |                     |   | Nortel   |     |   |              |        |     | Non-         |   |       |              |   |   |              |   | 
|                                                         |                     |   | Networks |     |   | Guarantor    |        |     | Guarantor    |   |       |              |   |   |              |   |  |  
|                                                         |                     |   | Limited  |     |   | Subsidiaries |        |     | Subsidiaries |   |       | Eliminations |   |   | Consolidated |  
|                                                        
|                                                        
|Revenues                                                 |                     | $ | 1,577    |     |   | $            | 4,510  |     |              | $ | 1,323 |              |   | $ | (1,721       | ) |  | $ | 5,689  |    
|Cost of revenues                                         |                     |   | 1,299    |     |   |              | 3,109  |     |              |   | 1,188 |              |   |   | (1,721       | ) |  |   | 3,875  |    
|                                                        
|Gross profit                                             |                     |   | 278      |     |   |              | 1,401  |     |              |   | 135   |              |   |   |             |   |  |   | 1,814  |    
|                                                        
|Selling, general and administrative expense              |                     |   | 332      |     |   |              | 820    |     |              |   | 156   |              |   |   |             |   |  |   | 1,308  |    
|Research and development expense                         |                     |   | (432     | )   |   |              | 1,263  |     |              |   | 75    |              |   |   |             |   |  |   | 906    |    
|Amortization of intangibles                              |                     |   |          |     |   |              |        |     |              |   |       |              |   |   |              |   |  |   |        |    
|                                                         | Acquired technology |   |          |    |   |              |        | 203 |              |   |       |             |   |   |              |  |  |   |        | 203 |  
|                                                         | Goodwill            |   |          | 5   |   |              |        | 459 |              |   |       | 218          |   |   |              |  |  |   |        | 682 |  
|Special charges                                          |                     |   | 86       |     |   |              | 250    |     |              |   | 19    |              |   |   |             |   |  |   | 355    |    
|                                                        
|Operating income (loss)                                  |                     |   | 287      |     |   |              | (1,594 | )   |              |   | (333  | )            |   |   |             |   |  |   | (1,640 | )  
|                                                        
|Equity in net loss ofassociated companies                |                     |   | (1,535   | )   |   |              | (222   | )   |              |   | (1    | )            |   |   | 1,742        |   |  |   | (16    | )  
|Other income  net                                       |                     |   | 26       |     |   |              | 75     |     |              |   | 4     |              |   |   |             |   |  |   | 105    |    
|Interest expense                                         |                     |   |          |     |   |              |        |     |              |   |       |              |   |   |              |   |  |   |        |    
|                                                         | Long-term debt      |   |          | (31 | ) |              |        |    |              |   |       | (8           | ) |   |              |  |  |   |        | (39 | )
|                                                         | Other               |   |          | (10 | ) |              |        | (4  | )            |   |       | (4           | ) |   |              |  |  |   |        | (18 | )
|                                                        
|Loss from continuing operationsbefore income taxes       |                     |   | (1,263   | )   |   |              | (1,745 | )   |              |   | (342  | )            |   |   | 1,742        |   |  |   | (1,608 | )  
|Income tax benefit (provision)                           |                     |   | (88      | )   |   |              | 296    |     |              |   | 49    |              |   |   |             |   |  |   | 257    |    
|                                                        
|Net loss from continuing operations                      |                     |   | (1,351   | )   |   |              | (1,449 | )   |              |   | (293  | )            |   |   | 1,742        |   |  |   | (1,351 | )  
|Net loss from discontinued operations net of tax        |                     |   | (187     | )   |   |              | (122   | )   |              |   |      |              |   |   | 122          |   |  |   | (187   | )  
|                                                        
|Net loss before cumulative effect ofaccounting change    |                     |   | (1,538   | )   |   |              | (1,571 | )   |              |   | (293  | )            |   |   | 1,864        |   |  |   | (1,538 | )  
|Cumulative effect of accounting change net of tax of $9 |                     |   | 15       |     |   |              |       |     |              |   |      |              |   |   |             |   |  |   | 15     |    
|                                                        
|Net loss                                                 |                     |   | (1,523   | )   |   |              | (1,571 | )   |              |   | (293  | )            |   |   | 1,864        |   |  |   | (1,523 | )  
|Dividends on preferred shares                            |                     |   | (8       | )   |   |              |       |     |              |   |      |              |   |   |             |   |  |   | (8     | )  
|                                                        
|Net loss applicable to common shares                     |                     | $ | (1,531   | )   |   | $            | (1,571 | )   |              | $ | (293  | )            |   | $ | 1,864        |   |  | $ | (1,531 | )  
|                                                        

20



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##### Table of Contents



Supplemental Consolidating Balance Sheets as at March 31, 2002:

|                                              |                                                |   |          |       |   |              |         |        |              |      |        |              |   |   |              |        |   |   |         |       | 
|--------------------------------------------- | ---------------------------------------------- | - | -------- | ----- | - | ------------ | ------- | ------ | ------------ | ---- | ------ | ------------ | - | - | ------------ | ------ | - | - | ------- | ----- | 
|                                             
|                                              |                                                |   | Nortel   |       |   |              |         |        |              | Non- |        |              |   |   |              |        |   |  
|                                              |                                                |   | Networks |       |   | Guarantor    |         |        | Guarantor    |      |        |              |   |   |              |        |   |  
|                                              |                                                |   | Limited  |       |   | Subsidiaries |         |        | Subsidiaries |      |        | Eliminations |   |   | Consolidated |       
|                                             
|ASSETS                                        |                                                |   |          |       |   |              |         |        |              |      |        |              |   |   |              |        |   |   |         |      
|Current assets                                |                                                |   |          |       |   |              |         |        |              |      |        |              |   |   |              |        |   |   |         |      
|                                              | Cash and cash equivalents                      |   | $        | (24   | ) |              | $       | 2,162  |              |      | $      | 886          |   |   | $            |       |   |   | $       | 3,024 | 
|                                              | Accounts receivable  net                      |   |          | 473   |   |              |         | 1,711  |              |      |        | 549          |   |   |              |       |   |   |         | 2,733 | 
|                                              | Intercompany accounts receivable               |   |          | 4,410 |   |              |         | 842    |              |      |        | 431          |   |   |              | (5,681 | ) |   |         | 2     | 
|                                              | Inventories  net                              |   |          | 794   |   |              |         | 477    |              |      |        | 218          |   |   |              |       |   |   |         | 1,489 | 
|                                              | Income taxes recoverable                       |   |          | 111   |   |              |         | 788    |              |      |        | 13           |   |   |              |       |   |   |         | 912   | 
|                                              | Deferred income taxes  net                    |   |          | 312   |   |              |         | 1,058  |              |      |        | 146          |   |   |              |       |   |   |         | 1,516 | 
|                                              | Other current assets                           |   |          | 122   |   |              |         | 604    |              |      |        | 149          |   |   |              |       |   |   |         | 875   | 
|                                              | Current assets of discontinued operations      |   |          | 189   |   |              |         | 351    |              |      |        |             |   |   |              |       |   |   |         | 540   | 
|                                             
|Total current assets                          |                                                |   | 6,387    |       |   |              | 7,993   |        |              |      | 2,392  |              |   |   | (5,681       | )      |   |   | 11,091  |      
|                                             
|Long-term receivables  net                   |                                                |   | 314      |       |   |              | 1,321   |        |              |      | 527    |              |   |   | (2,004       | )      |   |   | 158     |      
|Investments at cost and associated            |                                                |   |          |       |   |              |         |        |              |      |        |              |   |   |              |        |   |   |         |      
|                                              | companies at equity                            |   |          | 2,192 |   |              |         | (8,208 | )            |      |        | (100         | ) |   |              | 6,389  |   |   |         | 273   | 
|Plant and equipment  net                     |                                                |   | 680      |       |   |              | 1,178   |        |              |      | 370    |              |   |   |             |        |   |   | 2,228   |      
|Goodwill -net                                 |                                                |   | 31       |       |   |              | 2,116   |        |              |      | 130    |              |   |   |             |        |   |   | 2,277   |      
|Intangible assets  net                       |                                                |   |         |       |   |              | 14      |        |              |      |       |              |   |   |             |        |   |   | 14      |      
|Deferred income taxes  net                   |                                                |   | 481      |       |   |              | 1,269   |        |              |      | 102    |              |   |   |             |        |   |   | 1,852   |      
|Other assets                                  |                                                |   | 145      |       |   |              | 302     |        |              |      | 251    |              |   |   |             |        |   |   | 698     |      
|Long-term assets of discontinued operations   |                                                |   | 99       |       |   |              | 184     |        |              |      |       |              |   |   |             |        |   |   | 283     |      
|                                             
|Total assets                                  |                                                | $ | 10,329   |       |   | $            | 6,169   |        |              | $    | 3,672  |              |   | $ | (1,296       | )      |   | $ | 18,874  |      
|                                             
|LIABILITIES ANDSHAREHOLDERS EQUITY           |                                                |   |          |       |   |              |         |        |              |      |        |              |   |   |              |        |   |   |         |      
|Current liabilities                           |                                                |   |          |       |   |              |         |        |              |      |        |              |   |   |              |        |   |   |         |      
|                                              | Notes payable                                  |   | $        | 2     |   |              | $       | 180    |              |      | $      | 224          |   |   | $            |       |   |   | $       | 406   | 
|                                              | Trade and other accounts payable               |   |          | 527   |   |              |         | 1,212  |              |      |        | 162          |   |   |              |       |   |   |         | 1,901 | 
|                                              | Intercompany accounts payable                  |   |          | 107   |   |              |         | 3,340  |              |      |        | 2,485        |   |   |              | (5,681 | ) |   |         | 251   | 
|                                              | Payroll and benefit-related liabilities        |   |          | 69    |   |              |         | 506    |              |      |        | 100          |   |   |              |       |   |   |         | 675   | 
|                                              | Other accrued liabilities                      |   |          | 1,136 |   |              |         | 3,077  |              |      |        | 963          |   |   |              |       |   |   |         | 5,176 | 
|                                              | Income taxes payable                           |   |          |      |   |              |         | 181    |              |      |        | 87           |   |   |              |       |   |   |         | 268   | 
|                                              | Long-term debt due within one year             |   |          | 313   |   |              |         | 13     |              |      |        | (8           | ) |   |              |       |   |   |         | 318   | 
|                                              | Current liabilities of discontinued operations |   |          | 100   |   |              |         | 186    |              |      |        |             |   |   |              |       |   |   |         | 286   | 
|                                             
|Total current liabilities                     |                                                |   | 2,254    |       |   |              | 8,695   |        |              |      | 4,013  |              |   |   | (5,681       | )      |   |   | 9,281   |      
|                                             
|Deferred income                               |                                                |   | 3        |       |   |              | 126     |        |              |      | 3      |              |   |   |             |        |   |   | 132     |      
|Long-term debt                                |                                                |   | 1,914    |       |   |              | 5       |        |              |      | 363    |              |   |   |             |        |   |   | 2,282   |      
|Deferred income taxes  net                   |                                                |   | 351      |       |   |              | 99      |        |              |      | 16     |              |   |   |             |        |   |   | 466     |      
|Other liabilities                             |                                                |   | 624      |       |   |              | 1,082   |        |              |      | 1,733  |              |   |   | (2,004       | )      |   |   | 1,435   |      
|Minority interest in subsidiary companies     |                                                |   |         |       |   |              |        |        |              |      | 95     |              |   |   |             |        |   |   | 95      |      
|                                             
|                                              |                                                |   | 5,146    |       |   |              | 10,007  |        |              |      | 6,223  |              |   |   | (7,685       | )      |   |   | 13,691  |      
|                                             
|SHAREHOLDERS EQUITY                          |                                                |   |          |       |   |              |         |        |              |      |        |              |   |   |              |        |   |   |         |      
|Preferred shares                              |                                                |   | 536      |       |   |              | 365     |        |              |      |       |              |   |   | (365         | )      |   |   | 536     |      
|Common shares                                 |                                                |   | 2,111    |       |   |              | 5,415   |        |              |      | 423    |              |   |   | (5,838       | )      |   |   | 2,111   |      
|Additional paid-in capital                    |                                                |   | 18,829   |       |   |              | 1,619   |        |              |      | 3,796  |              |   |   | (5,415       | )      |   |   | 18,829  |      
|Deficit                                       |                                                |   | (15,297  | )     |   |              | (12,130 | )      |              |      | (6,648 | )            |   |   | 18,778       |        |   |   | (15,297 | )    
|Accumulated other comprehensive income (loss) |                                                |   | (996     | )     |   |              | 893     |        |              |      | (122   | )            |   |   | (771         | )      |   |   | (996    | )    
|                                             
|Total shareholders equity                    |                                                |   | 5,183    |       |   |              | (3,838  | )      |              |      | (2,551 | )            |   |   | 6,389        |        |   |   | 5,183   |      
|                                             
|Total liabilities and shareholders equity    |                                                | $ | 10,329   |       |   | $            | 6,169   |        |              | $    | 3,672  |              |   | $ | (1,296       | )      |   | $ | 18,874  |      
|                                             

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##### Table of Contents



Supplemental Consolidating Balance Sheets as at December 31, 2001:

|                                              |                                                |   |          |       |   |              |         |        |              |      |        |              |  |   |              |        |   |   |         |       | 
|--------------------------------------------- | ---------------------------------------------- | - | -------- | ----- | - | ------------ | ------- | ------ | ------------ | ---- | ------ | ------------ |  | - | ------------ | ------ | - | - | ------- | ----- | 
|                                             
|                                              |                                                |   | Nortel   |       |   |              |         |        |              | Non- |        |              |  |   |              |        |   |   |        
|                                              |                                                |   | Networks |       |   | Guarantor    |         |        | Guarantor    |      |        |              |  |   |              |        |   |  
|                                              |                                                |   | Limited  |       |   | Subsidiaries |         |        | Subsidiaries |      |        | Eliminations |  |   | Consolidated |       
|                                             
|ASSETS                                        |                                                |   |          |       |   |              |         |        |              |      |        |              |  |   |              |        |   |   |         |      
|Current assets                                |                                                |   |          |       |   |              |         |        |              |      |        |              |  |   |              |        |   |   |         |      
|                                              | Cash and cash equivalents                      |   | $        | (41   | ) |              | $       | 2,340  |              |      | $      | 1,158        |  |   | $            |       |   |   | $       | 3,457 | 
|                                              | Accounts receivable  net                      |   |          | 409   |   |              |         | 2,032  |              |      |        | 480          |  |   |              |       |   |   |         | 2,921 | 
|                                              | Intercompany accounts receivable               |   |          | 4,952 |   |              |         | 1,054  |              |      |        | 588          |  |   |              | (6,592 | ) |   |         | 2     | 
|                                              | Inventories  net                              |   |          | 810   |   |              |         | 511    |              |      |        | 242          |  |   |              |       |   |   |         | 1,563 | 
|                                              | Income taxes recoverable                       |   |          | 343   |   |              |         | 442    |              |      |        | 5            |  |   |              |       |   |   |         | 790   | 
|                                              | Deferred income taxes  net                    |   |          | 287   |   |              |         | 1,080  |              |      |        | 34           |  |   |              |       |   |   |         | 1,401 | 
|                                              | Other current assets                           |   |          | 107   |   |              |         | 563    |              |      |        | 177          |  |   |              |       |   |   |         | 847   | 
|                                              | Current assets of discontinued operations      |   |          | 244   |   |              |         | 454    |              |      |        |             |  |   |              |       |   |   |         | 698   | 
|                                             
|Total current assets                          |                                                |   | 7,111    |       |   |              | 8,476   |        |              |      | 2,684  |              |  |   | (6,592       | )      |   |   | 11,679  |      
|                                             
|Long-term receivables  net                   |                                                |   | 225      |       |   |              | 1,078   |        |              |      | 547    |              |  |   | (1,647       | )      |   |   | 203     |      
|Investments at cost and associated            |                                                |   |          |       |   |              |         |        |              |      |        |              |  |   |              |        |   |   |         |      
|                                              | companies at equity                            |   |          | 2,543 |   |              |         | (8,097 | )            |      |        | 516          |  |   |              | 5,301  |   |   |         | 263   | 
|Plant and equipment  net                     |                                                |   | 705      |       |   |              | 1,353   |        |              |      | 401    |              |  |   |             |        |   |   | 2,459   |      
|Goodwill  net                                |                                                |   | 31       |       |   |              | 2,117   |        |              |      | 135    |              |  |   |             |        |   |   | 2,283   |      
|Intangible assets  net                       |                                                |   |         |       |   |              | 20      |        |              |      |       |              |  |   |             |        |   |   | 20      |      
|Deferred income taxes  net                   |                                                |   | 436      |       |   |              | 1,578   |        |              |      | 92     |              |  |   |             |        |   |   | 2,106   |      
|Other assets                                  |                                                |   | 132      |       |   |              | 313     |        |              |      | 252    |              |  |   |             |        |   |   | 697     |      
|Long-term assets of discontinued operations   |                                                |   | 99       |       |   |              | 184     |        |              |      |       |              |  |   |             |        |   |   | 283     |      
|                                             
|Total assets                                  |                                                | $ | 11,282   |       |   | $            | 7,022   |        |              | $    | 4,627  |              |  | $ | (2,938       | )      |   | $ | 19,993  |      
|                                             
|LIABILITIES AND
SHAREHOLDERS EQUITY          |                                                |   |          |       |   |              |         |        |              |      |        |              |  |   |              |        |   |   |         |      
|Current liabilities                          
|                                              | Notes payable                                  | $ | 2        |       |   | $            | 168     |        |              | $    | 256    |              |  | $ |             |        |   | $ | 426     |      
|                                              | Trade and other accounts payable               |   |          | 372   |   |              |         | 1,288  |              |      |        | 338          |  |   |              |       |   |   |         | 1,998 | 
|                                              | Intercompany accounts payable                  |   |          | 163   |   |              |         | 3,471  |              |      |        | 3,208        |  |   |              | (6,592 | ) |   |         | 250   | 
|                                              | Payroll and benefit-related liabilities        |   |          | 63    |   |              |         | 449    |              |      |        | 101          |  |   |              |       |   |   |         | 613   | 
|                                              | Other accrued liabilities                      |   |          | 1,355 |   |              |         | 3,240  |              |      |        | 752          |  |   |              |       |   |   |         | 5,347 | 
|                                              | Income taxes payable                           |   |          |      |   |              |         | 45     |              |      |        | 98           |  |   |              |       |   |   |         | 143   | 
|                                              | Long-term debt due within one year             |   |          | 313   |   |              |         | 63     |              |      |        | 8            |  |   |              |       |   |   |         | 384   | 
|                                              | Current liabilities of discontinued operations |   |          | 134   |   |              |         | 250    |              |      |        |             |  |   |              |       |   |   |         | 384   | 
|                                             
|Total current liabilities                     |                                                |   | 2,402    |       |   |              | 8,974   |        |              |      | 4,761  |              |  |   | (6,592       | )      |   |   | 9,545   |      
|                                             
|Deferred income                               |                                                |   | 3        |       |   |              | 143     |        |              |      | 7      |              |  |   |             |        |   |   | 153     |      
|Long-term debt                                |                                                |   | 1,928    |       |   |              | 8       |        |              |      | 357    |              |  |   |             |        |   |   | 2,293   |      
|Deferred income taxes  net                   |                                                |   | 360      |       |   |              | 100     |        |              |      | 17     |              |  |   |             |        |   |   | 477     |      
|Other liabilities                             |                                                |   | 616      |       |   |              | 1,092   |        |              |      | 1,391  |              |  |   | (1,647       | )      |   |   | 1,452   |      
|Minority interest in subsidiary companies     |                                                |   |         |       |   |              |        |        |              |      | 100    |              |  |   |             |        |   |   | 100     |      
|                                             
|                                              |                                                |   | 5,309    |       |   |              | 10,317  |        |              |      | 6,633  |              |  |   | (8,239       | )      |   |   | 14,020  |      
|                                             
|SHAREHOLDERS EQUITY                          |                                                |   |          |       |   |              |         |        |              |      |        |              |  |   |              |        |   |   |         |      
|Preferred shares                              |                                                |   | 536      |       |   |              | 365     |        |              |      |       |              |  |   | (365         | )      |   |   | 536     |      
|Common shares                                 |                                                |   | 2,111    |       |   |              | 950     |        |              |      | 386    |              |  |   | (1,336       | )      |   |   | 2,111   |      
|Additional paid-in capital                    |                                                |   | 18,797   |       |   |              | 6,043   |        |              |      | 4,204  |              |  |   | (10,247      | )      |   |   | 18,797  |      
|Deficit                                       |                                                |   | (14,507  | )     |   |              | (11,605 | )      |              |      | (6,509 | )            |  |   | 18,114       |        |   |   | (14,507 | )    
|Accumulated other comprehensive income (loss) |                                                |   | (964     | )     |   |              | 952     |        |              |      | (87    | )            |  |   | (865         | )      |   |   | (964    | )    
|                                             
|Total shareholders equity                    |                                                |   | 5,973    |       |   |              | (3,295  | )      |              |      | (2,006 | )            |  |   | 5,301        |        |   |   | 5,973   |      
|                                             
|Total liabilities and shareholders equity    |                                                | $ | 11,282   |       |   | $            | 7,022   |        |              | $    | 4,627  |              |  | $ | (2,938       | )      |   | $ | 19,993  |      
|                                             

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##### Table of Contents



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

|                                                     |                                                                                                                                                                       |                                                                  |     |      |          |   |       |              |      |   |              |      |      |              |   |     |              |   |       |      |      |   | 
|---------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------- | --- | ---- | -------- | - | ----- | ------------ | ---- | - | ------------ | ---- | ---- | ------------ | - | --- | ------------ | - | ----- | ---- | ---- | - | 
|                                                    
|                                                     |                                                                                                                                                                       |                                                                  |     |      | Nortel   |   |       |              |      |   |              | Non- |      |              |   |     |              |   |       |      |     
|                                                     |                                                                                                                                                                       |                                                                  |     |      | Networks |   |       | Guarantor    |      |   | Guarantor    |      |      |              |   |     |              |   |       |     
|                                                     |                                                                                                                                                                       |                                                                  |     |      | Limited  |   |       | Subsidiaries |      |   | Subsidiaries |      |      | Eliminations |   |     | Consolidated |  
|                                                    
|Cash flows from (used in) operating activities       |                                                                                                                                                                       |                                                                  |     |      |          |   |       |              |      |   |              |      |      |              |   |     |              |   |       |     
|                                                     | Net loss from continuing operations                                                                                                                                   |                                                                  | $   | (785 | )        |   | $     | (572         | )    |   | $            | (69  | )    |              | $ | 641 |              |   | $     | (785 | )   
|                                                     | Adjustments
to reconcile net loss from continuing operations tonet cash used
in operating activities, net of effects fromacquisitions and divestitures of businesses: |                                                                  |     |      |          |   |       |              |      |   |              |      |      |              |   |     |              |   |       |      |     
|                                                     |                                                                                                                                                                       | Amortization and depreciation                                    |     |      | 31       |   |       |              | 110  |   |              |      | 16   |              |   |     |             |   |       |      | 157  |  
|                                                     |                                                                                                                                                                       | Non-cash portion of special charges and relatedasset write downs |     |      | 25       |   |       |              | 40   |   |              |      | 10   |              |   |     |             |   |       |      | 75   |  
|                                                     |                                                                                                                                                                       | Equity in net earnings (loss) of associated companies            |     |      | 532      |   |       |              | 114  |   |              |      | (1   | )            |   |     | (641         | ) |       |      | 4    |  
|                                                     |                                                                                                                                                                       | Deferred income taxes                                            |     |      | (77      | ) |       |              | 317  |   |              |      | (123 | )            |   |     |             |   |       |      | 117  |  
|                                                     |                                                                                                                                                                       | Other liabilities                                                |     |      | 8        |   |       |              | (31  | ) |              |      | (14  | )            |   |     |             |   |       |      | (37  | )
|                                                     |                                                                                                                                                                       | Gain on sale of investments and businesses                       |     |      | (6       | ) |       |              | (5   | ) |              |      |     |              |   |     |             |   |       |      | (11  | )
|                                                     |                                                                                                                                                                       | Other  net                                                      |     |      |         |   |       |              | 55   |   |              |      | 72   |              |   |     |             |   |       |      | 127  |  
|                                                     |                                                                                                                                                                       | Change in operating assets and liabilities:                      |     |      |          |   |       |              |      |   |              |      |      |              |   |     |              |   |       |      |      |  
|                                                     |                                                                                                                                                                       | Accounts receivable                                              |     |      | (90      | ) |       |              | 263  |   |              |      | (8   | )            |   |     |             |   |       |      | 165  |  
|                                                     |                                                                                                                                                                       | Inventories                                                      |     |      | 16       |   |       |              | 34   |   |              |      | 24   |              |   |     |             |   |       |      | 74   |  
|                                                     |                                                                                                                                                                       | Income taxes                                                     |     |      | 232      |   |       |              | (210 | ) |              |      | (19  | )            |   |     |             |   |       |      | 3    |  
|                                                     |                                                                                                                                                                       | Accounts payable and accrued liabilities                         |     |      | (54      | ) |       |              | (187 | ) |              |      | 34   |              |   |     |             |   |       |      | (207 | )
|                                                     |                                                                                                                                                                       | Other operating assets and liabilities                           |     |      | (42      | ) |       |              | (34  | ) |              |      |     |              |   |     |             |   |       |      | (76  | )
|                                                     |                                                                                                                                                                       | Intercompany activities                                          |     |      | 132      |   |       |              | (89  | ) |              |      | (43  | )            |   |     |             |   |       |      |     |  
|                                                    
|                                                     | Net cash used in operating activities                                                                                                                                 |                                                                  | (78 | )    |          |   | (195  | )            |      |   | (121         | )    |      |              |  |     |              |   | (394  | )   
|                                                    
|Cash flows from (used in) investing activities       |                                                                                                                                                                       |                                                                  |     |      |          |   |       |              |      |   |              |      |      |              |   |     |              |   |       |     
|                                                     | Expenditures for plant and equipment                                                                                                                                  |                                                                  |     | (15  | )        |   |       | (69          | )    |   |              | (19  | )    |              |   |    |              |   |       | (103 | )   
|                                                     | Proceeds on disposals of plant and equipment                                                                                                                          |                                                                  |     |     |          |   |       | 44           |      |   |              |     |      |              |   |    |              |   |       | 44   |     
|                                                     | Increase in long-term receivables                                                                                                                                     |                                                                  |     | 64   |          |   |       | (49          | )    |   |              | (122 | )    |              |   |    |              |   |       | (107 | )   
|                                                     | Decrease in long-term receivables                                                                                                                                     |                                                                  |     | 17   |          |   |       | 59           |      |   |              | 13   |      |              |   |    |              |   |       | 89   |     
|                                                     | Acquisitions of investments and businesses  net of cash acquired                                                                                                     |                                                                  |     |     |          |   |       | (19          | )    |   |              |     |      |              |   |    |              |   |       | (19  | )   
|                                                     | Proceeds on sale of investments and businesses                                                                                                                        |                                                                  |     | 16   |          |   |       | 8            |      |   |              |     |      |              |   |    |              |   |       | 24   |     
|                                                    
|                                                     | Net cash from (used in) investing activities                                                                                                                          |                                                                  |     | 82   |          |   |       | (26          | )    |   |              | (128 | )    |              |   |    |              |   |       | (72  | )   
|                                                    
|Cash flows from (used in) financing activities       |                                                                                                                                                                       |                                                                  |     |      |          |   |       |              |      |   |              |      |      |              |   |     |              |   |       |     
|                                                     | Dividends on preferred shares                                                                                                                                         |                                                                  |     | (5   | )        |   |       |             |      |   |              |     |      |              |   |    |              |   |       | (5   | )   
|                                                     | Increase (decrease) in notes payable  net                                                                                                                            |                                                                  |     |     |          |   |       | 19           |      |   |              | (30  | )    |              |   |    |              |   |       | (11  | )   
|                                                     | Proceeds from long-term debt                                                                                                                                          |                                                                  |     |     |          |   |       |             |      |   |              | 11   |      |              |   |    |              |   |       | 11   |     
|                                                     | Repayments of long-term debt                                                                                                                                          |                                                                  |     |     |          |   |       |             |      |   |              | (2   | )    |              |   |    |              |   |       | (2   | )   
|                                                     | Decrease in capital leases payable                                                                                                                                    |                                                                  |     |     |          |   |       | (4           | )    |   |              |     |      |              |   |    |              |   |       | (4   | )   
|                                                    
|                                                     | Net cash from (used in) financing activities                                                                                                                          |                                                                  |     | (5   | )        |   |       | 15           |      |   |              | (21  | )    |              |   |    |              |   |       | (11  | )   
|                                                    
|                                                     | Effect of foreign exchange rate changes on cashand cash equivalents                                                                                                   |                                                                  |     | 1    |          |   |       | (5           | )    |   |              | (2   | )    |              |   |    |              |   |       | (6   | )   
|                                                    
|                                                     | Net cash used in continuing operations                                                                                                                                |                                                                  |     |     |          |   |       | (211         | )    |   |              | (272 | )    |              |   |    |              |   |       | (483 | )   
|                                                     | Net cash from discontinued operations                                                                                                                                 |                                                                  |     | 17   |          |   |       | 33           |      |   |              |     |      |              |   |    |              |   |       | 50   |     
|                                                    
|Net increase (decrease) in cash and cash equivalents |                                                                                                                                                                       |                                                                  | 17  |      |          |   | (178  | )            |      |   | (272         | )    |      |              |  |     |              |   | (433  | )   
|                                                    
|                                                    
|Cash and cash equivalents at end of period  net     |                                                                                                                                                                       | $                                                                | (24 | )    |          | $ | 2,162 |              |      | $ | 886          |      |      | $            |  |     |              | $ | 3,024 |     
|                                                    

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##### Table of Contents



Supplemental Consolidating Statements of Cash Flows for the three months ended
March 31, 2001:

|                                                       |                                                                                                                                  |   |                                                                  |                                          |   |          |       |        |              |     |              |      |   |              |     |       |              |        |       |        |   |       |        |  
|------------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------- | - | ---------------------------------------------------------------- | ---------------------------------------- | - | -------- | ----- | ------ | ------------ | --- | ------------ | ---- | - | ------------ | --- | ----- | ------------ | ------ | ----- | ------ | - | ----- | ------ | -
|                                                      
|                                                       |                                                                                                                                  |   |                                                                  |                                          |   | Nortel   |       |        |              |     |              | Non- |   |              |     |       |              |        |       |       
|                                                       |                                                                                                                                  |   |                                                                  |                                          |   | Networks |       |        | Guarantor    |     | Guarantor    |      |   |              |     |       |              |        |      
|                                                       |                                                                                                                                  |   |                                                                  |                                          |   | Limited  |       |        | Subsidiaries |     | Subsidiaries |      |   | Eliminations |     |       | Consolidated
|                                                      
|Cash flows from (used in) operating activities         |                                                                                                                                  |   |                                                                  |                                          |   |          |       |        |              |     |              |      |   |              |     |       |              |        |       |       
|                                                       | Net loss from continuing operations                                                                                              |   | $                                                                | (1,351                                   | ) |          | $     | (1,449 | )            |     | $            | (293 | ) |              | $   | 1,742 |              |        | $     | (1,351 | )
|                                                       | Adjustments to reconcile net loss from continuing operations tonet cash from (used in) operating activities, net of effects from |   |                                                                  |                                          |   |          |       |        |              |     |              |      |   |              |     |       |              |        |       |        |  
|                                                       | acquisitions and divestitures of businesses:                                                                                     |   |                                                                  |                                          |   |          |       |        |              |     |              |      |   |              |     |       |              |        |       |        |  
|                                                       |                                                                                                                                  |   | Amortization and depreciation                                    |                                          |   | 66       |       |        |              | 774 |              |      |   | 237          |     |       |              |       |       |        |   | 1,077 |       
|                                                       |                                                                                                                                  |   | Non-cash portion of special charges and relatedasset write downs |                                          |   |         |       |        |              | 64  |              |      |   |             |     |       |              |       |       |        |   | 64    |       
|                                                       |                                                                                                                                  |   | Equity in net loss of associated companies                       |                                          |   | 1,535    |       |        |              | 222 |              |      |   | 1            |     |       |              | (1,742 | )     |        |   | 16    |       
|                                                       |                                                                                                                                  |   | Tax benefit from stock options                                   |                                          |   | 33       |       |        |              |    |              |      |   |             |     |       |              |       |       |        |   | 33    |       
|                                                       |                                                                                                                                  |   | Deferred income taxes                                            |                                          |   | (122     | )     |        |              | 81  |              |      |   | (42          | )   |       |              |       |       |        |   | (83   | )     
|                                                       |                                                                                                                                  |   | Other liabilities                                                |                                          |   | (16      | )     |        |              | 3   |              |      |   | (16          | )   |       |              |       |       |        |   | (29   | )     
|                                                       |                                                                                                                                  |   | Gain on sale of investments and businesses                       |                                          |   |         |       |        |              | (24 | )            |      |   |             |     |       |              |       |       |        |   | (24   | )     
|                                                       |                                                                                                                                  |   | Other  net                                                      |                                          |   | 90       |       |        |              | 41  |              |      |   | (150         | )   |       |              |       |       |        |   | (19   | )     
|                                                       |                                                                                                                                  |   | Change in operating assets and liabilities:                      |                                          |   |          |       |        |              |     |              |      |   |              |     |       |              |        |       |        |   |       |       
|                                                       |                                                                                                                                  |   |                                                                  | Accounts receivable                      |   |          | 93    |        |              |     | 633          |      |   |              | 198 |       |              |        |      |        |   |       | 924    |  
|                                                       |                                                                                                                                  |   |                                                                  | Inventories                              |   |          | 138   |        |              |     | 151          |      |   |              | (25 | )     |              |        |      |        |   |       | 264    |  
|                                                       |                                                                                                                                  |   |                                                                  | Income taxes                             |   |          | 31    |        |              |     | (476         | )    |   |              | (16 | )     |              |        |      |        |   |       | (461   | )
|                                                       |                                                                                                                                  |   |                                                                  | Accounts payable and accrued liabilities |   |          | (581  | )      |              |     | (546         | )    |   |              | (84 | )     |              |        |      |        |   |       | (1,211 | )
|                                                       |                                                                                                                                  |   |                                                                  | Other operating assets and liabilities   |   |          | 104   |        |              |     | (51          | )    |   |              | (45 | )     |              |        |      |        |   |       | 8      |  
|                                                       |                                                                                                                                  |   | Intercompany activities                                          |                                          |   | (1,243   | )     |        |              | 687 |              |      |   | 556          |     |       |              |       |       |        |   |      |       
|                                                      
|                                                       | Net cash from (used in) operating activities                                                                                     |   |                                                                  | (1,223                                   | ) |          |       | 110    |              |     |              | 321  |   |              |     |      |              |        |       | (792   | )
|                                                      
|Cash flows from (used in) investing activities         |                                                                                                                                  |   |                                                                  |                                          |   |          |       |        |              |     |              |      |   |              |     |       |              |        |       |       
|                                                       | Expenditures for plant and equipment                                                                                             |   |                                                                  | (191                                     | ) |          |       | (297   | )            |     |              | (56  | ) |              |     |      |              |        |       | (544   | )
|                                                       | Increase in long-term receivables                                                                                                |   |                                                                  | (92                                      | ) |          |       | (291   | )            |     |              | (6   | ) |              |     |      |              |        |       | (389   | )
|                                                       | Decrease in long-term receivables                                                                                                |   |                                                                  | 36                                       |   |          |       | 17     |              |     |              | (4   | ) |              |     |      |              |        |       | 49     |  
|                                                       | Acquisitions of investments and businesses  net of cash acquired                                                                |   |                                                                  | (10                                      | ) |          |       | (14    | )            |     |              |     |   |              |     |      |              |        |       | (24    | )
|                                                       | Proceeds on sale of investments and businesses                                                                                   |   |                                                                  |                                         |   |          |       | 31     |              |     |              | 13   |   |              |     |      |              |        |       | 44     |  
|                                                      
|                                                       | Net cash used in investing activities                                                                                            |   |                                                                  | (257                                     | ) |          |       | (554   | )            |     |              | (53  | ) |              |     |      |              |        |       | (864   | )
|                                                      
|Cash flows from (used in) financing activities         |                                                                                                                                  |   |                                                                  |                                          |   |          |       |        |              |     |              |      |   |              |     |       |              |        |       |       
|                                                       | Dividends on preferred shares                                                                                                    |   |                                                                  | (8                                       | ) |          |       |       |              |     |              |     |   |              |     |      |              |        |       | (8     | )
|                                                       | Increase (decrease) in notes payable  net                                                                                       |   |                                                                  |                                         |   |          |       | 395    |              |     |              | (20  | ) |              |     |      |              |        |       | 375    |  
|                                                       | Proceeds from long-term debt                                                                                                     |   |                                                                  | 1,500                                    |   |          |       | 5      |              |     |              |     |   |              |     |      |              |        |       | 1,505  |  
|                                                       | Repayments of long-term debt                                                                                                     |   |                                                                  |                                         |   |          |       | (4     | )            |     |              | (33  | ) |              |     |      |              |        |       | (37    | )
|                                                       | Decrease in capital leases payable                                                                                               |   |                                                                  |                                         |   |          |       | (8     | )            |     |              | (1   | ) |              |     |      |              |        |       | (9     | )
|                                                      
|                                                       | Net cash from (used in) financing activities                                                                                     |   |                                                                  | 1,492                                    |   |          |       | 388    |              |     |              | (54  | ) |              |     |      |              |        |       | 1,826  |  
|                                                      
|                                                       | Effect of foreign exchange rate changes on cashand cash equivalents                                                              |   |                                                                  | 1                                        |   |          |       | (8     | )            |     |              | (8   | ) |              |     |      |              |        |       | (15    | )
|                                                      
|                                                       | Net cash from (used in) continuing operations                                                                                    |   |                                                                  | 13                                       |   |          |       | (64    | )            |     |              | 206  |   |              |     |      |              |        |       | 155    |  
|                                                       | Net cash used in discontinued operations                                                                                         |   |                                                                  | (6                                       | ) |          |       | (23    | )            |     |              |     |   |              |     |      |              |        |       | (29    | )
|                                                      
|Net increase (decrease) in cash and cash equivalents   |                                                                                                                                  |   | 7                                                                |                                          |   |          | (87   | )      |              |     | 206          |      |   |              |    |       |              |        | 126   |       
|                                                      
|Cash and cash equivalents at beginning of period  net |                                                                                                                                  |   | (73                                                              | )                                        |   |          | 1,020 |        |              |     | 620          |      |   |              |    |       |              |        | 1,567 |       
|                                                      
|Cash and cash equivalents at end of period  net       |                                                                                                                                  | $ | (66                                                              | )                                        |   | $        | 933   |        |              | $   | 826          |      |   | $            |    |       |              | $      | 1,693 |       
|                                                      

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|        |  |                                                                                                                                
|------- |  | -------------------------------------------------------------------------------------------------------------------------------
|ITEM 2. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS FOR THE THREE
MONTHS ENDED MARCH 31, 2002

You should read this section in conjunction with the accompanying
unaudited consolidated financial statements and notes prepared in accordance
with United States generally accepted accounting principles. This section adds
additional analysis of our operations and current financial condition and also
contains forward-looking statements and should be read in conjunction with the
factors set forth below under Forward-looking statements. All dollar amounts
in this Managements Discussion and Analysis of Financial Condition and Results
of Operations are in millions of United States dollars unless otherwise stated.

Where we say we, us, our, or Nortel Networks, we mean Nortel
Networks Limited and its subsidiaries.

Business overview

We are a leading global supplier of products and services that support the
Internet and other public and private data, voice, and multimedia
communications networks, using terrestrial and wireless technologies, which we
refer to as networking solutions. With our networking solutions, we are
focused on providing the infrastructure and applications for high performance
networks, as technology transforms the way we communicate and conduct business.
We have a technology focus, with a substantial portion of Nortel Networks
dedicated to research and development, forming a core strength and a factor
differentiating us from our competitors. Our research and development efforts
are focused on delivering carrier-grade infrastructure, enabling valuable
services for our customers, reducing network costs, and transforming
traditional voice-communications networks into cost-effective networks
supporting data, voice, and multimedia communications.

Our operations are focused on providing seamless networking products and
service capabilities across three core business areas and three segments: Metro
and Enterprise Networks; Wireless Networks; and Optical Long-Haul Networks.
These products and service solutions are used by service provider and
enterprise customers, including incumbent and competitive local exchange
carriers, interexchange carriers, service providers with global businesses,
wireless service providers, Internet service providers, application service
providers, hosting service providers, resellers, cable television companies,
other communications service providers, large businesses and their branch
offices, small businesses, and home offices, as well as government, education,
and utility organizations.

Our Metro and Enterprise Networks segment includes a range of Optical
Ethernet solutions, packet switching and routing solutions, such as data
switching systems, aggregation products, virtual private network gateways, and
routers, and circuit to packet network solutions, such as enterprise telephone
systems, digital switching systems, business solutions and applications, and
network management software, together with related professional services. Our
Wireless Networks segment solutions support the Time Division Multiple Access,
or TDMA, Code Division Multiple Access, or CDMA, Global System for Mobile
communications, or GSM, General Packet Radio Standard, or GPRS, and Universal
Mobile Telecommunications Systems, or UMTS, standards, to enable end users to
be mobile while they send and receive voice and data communications using a
wireless device, and include radio access network equipment, key network
elements of which are base station transceivers and base station controllers,
core network equipment, key network elements of which are mobile switching
centers and home location registers, and related professional services. Our
Optical Long-Haul Networks segment includes optical long-haul networking
solutions designed to provide long-distance, high-capacity transport and
switching of data, voice, and multimedia communications signals for operators
of land-based and submarine communications networks, including Dense Wave
Division Multiplexing, or DWDM, transmission solutions, synchronous optical
transmission solutions, optical switching solutions, and network management
software, optical components for long-distance optical networks, including
optical transmitters, optical receivers, lasers, tunable lasers, amplifiers,
pump modules, integrated circuits, and other modules and devices for long-haul
optical networking, and related engineering, installation, and support
services.

Nortel Networks Corporations common shares are publicly-traded on the New
York and Toronto stock exchanges under the symbol NT. Nortel Networks
Corporation holds all of Nortel Networks Limiteds outstanding common shares
but none of its outstanding preferred shares. Acquisitions involving any share
consideration are completed by Nortel Networks Corporation, while acquisitions
involving only cash consideration are generally completed by Nortel Networks
Limited or one of its direct subsidiaries.

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Developments in 2002

Filing of shelf registration statement and preliminary base shelf
prospectus

On May 13, 2002, Nortel Networks Corporation and Nortel Networks Limited
announced their intention to file a shelf registration statement with the
United States Securities and Exchange Commission and a preliminary base shelf
prospectus with the applicable securities regulatory authorities in Canada,
for the purpose of qualifying the potential sale by Nortel Networks Corporation or Nortel Networks Limited from time to time in the United States and/or Canada of up to an aggregate of $2,500 of
various types of securities.

See Liquidity and capital resources for additional information.

Amendment and extension of April 2001 revolving bank credit facilities

On April 10, 2002, Nortel Networks Corporation announced that, effective
April 8, 2002, Nortel Networks Limited and Nortel Networks Inc. amended and
extended their April 2001 364-day revolving syndicated credit facilities to
April 7, 2003 with no additional term-out period thereafter. The amendment
reduced the size of the 364-day committed revolving facilities to $1,175 from
$1,750. The amended facilities maintained the financial covenant in the April
2001 facilities requiring Nortel Networks Limiteds minimum consolidated
tangible net worth to be not less than $1,888 and included higher pricing
reflecting the current credit and bank environment. As a result, total
borrowings permitted under the syndicated April 2002 364-day credit agreements
and the existing April 2000 five-year credit agreements are $1,925.

See Liquidity and capital resources for additional details on our credit
agreements.

Debt rating downgrades

On April 4, 2002, Moodys Investors Services, Inc. lowered Nortel Networks
Limiteds United States senior long-term debt rating below investment grade to
Ba3. On April 9, 2002, Standard & Poors Ratings Service also lowered their
credit rating for Nortel Networks Limited below investment grade to BB-. As a
result, various liens, pledges, and guarantees became effective under certain
credit and security agreements entered into by Nortel Networks Limited and
various of its subsidiaries. In accordance with the covenants in the trust
indentures for all of our current consolidated public debt securities, which
represent primarily all of our consolidated long-term debt at March 31, 2002,
all such public debt securities are also secured equally and ratably with the
obligations under all of Nortel Networks Limited and Nortel Networks Inc.s
credit agreements by liens on substantially all of the assets of Nortel
Networks Limited and those of most of its United States and Canadian
subsidiaries, and by pledges of shares in certain of Nortel Networks Limiteds
other subsidiaries. In addition, certain of Nortel Networks Limiteds wholly
owned subsidiaries have guaranteed Nortel Networks Limiteds obligations under
the credit agreements and outstanding public debt securities.

The liens, pledges, and guarantees described above also apply equally and
ratably to the obligations under Nortel Networks Corporations $1,800 4.25
percent convertible senior notes due on September 1, 2008.

For additional financial information related to those subsidiaries
providing guarantees, see Subsequent events in note 13 of the accompanying
unaudited consolidated financial statements. For additional financial
information related to the three years ended December 31, 2001, see our Current
Report on Form 8-K dated May 13, 2002.

In addition, see Liquidity and capital resources for additional details
on our credit ratings and the granting of security under our credit agreements.

26



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##### Table of Contents



Restructuring

In the first quarter of 2002, Nortel Networks recorded special charges of
$443, primarily related to the cost of severance and benefits associated with
the approximately 4,000 employees notified of termination during the three
months ended March 31, 2002.

As of March 31, 2002, our workforce numbered approximately 47,000.
Following the completion of remaining reductions, primarily related to
previously announced European work council and joint venture activities, and
anticipated non-core business divestitures, we expect to have a workforce of
approximately 44,000. We will record a charge in the second quarter of 2002
associated with these remaining reductions.

See Special charges for additional information.

Results of operations  continuing operations

Revenues

Segment revenues

The following table sets forth revenues by segment for the three months
ended March 31:

|                              |  |      |       |      |  |          |       |          |  |              |        |   |  |  |       |  
|----------------------------- |  | ---- | ----- | ---- |  | -------- | ----- | -------- |  | ------------ | ------ | - |  |  | ----- | -
|                             
|                              |  |      |       |      |  |          |       |          |  | 2002 vs 2001
|                              |  | 2001 |       | 2002 |  | $ Change |       | % Change
|                             
|Metro and Enterprise Networks |  | $    | 2,757 |      |  | $        | 1,489 |          |  | $            | (1,268 | ) |  |  | (46.0 | )
|Wireless Networks             |  |      | 1,545 |      |  |          | 1,136 |          |  |              | (409   | ) |  |  | (26.5 | )
|Optical Long-Haul Networks    |  |      | 1,187 |      |  |          | 270   |          |  |              | (917   | ) |  |  | (77.3 | )
|Other (a)                     |  |      | 200   |      |  |          | 15    |          |  |              | (185   | ) |  |  | (92.5 | )
|                             
|Consolidated                  |  | $    | 5,689 |      |  | $        | 2,910 |          |  | $            | (2,779 | ) |  |  | (48.8 | )
|                             

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

Geographic revenues

The following table sets forth revenues by geographic region for the three
months ended March 31:

|                      |  |      |       |      |  |          |       |          |  |              |        |   |  |  |       |  
|--------------------- |  | ---- | ----- | ---- |  | -------- | ----- | -------- |  | ------------ | ------ | - |  |  | ----- | -
|                     
|                      |  |      |       |      |  |          |       |          |  | 2002 vs 2001
|                      |  | 2001 |       | 2002 |  | $ Change |       | % Change
|                     
|External revenues (a) |  |      |       |      |  |          |       |          |  |              |        |   |  |  |       |  
|United States         |  | $    | 2,806 |      |  | $        | 1,432 |          |  | $            | (1,374 | ) |  |  | (49.0 | )
|Canada                |  |      | 311   |      |  |          | 191   |          |  |              | (120   | ) |  |  | (38.6 | )
|Other countries       |  |      | 2,572 |      |  |          | 1,287 |          |  |              | (1,285 | ) |  |  | (50.0 | )
|                     
|Consolidated          |  | $    | 5,689 |      |  | $        | 2,910 |          |  | $            | (2,779 | ) |  |  | (48.8 | )
|                     

|(a) |  | Revenues are attributable to geographic areas based on the location of the
customer.
|--- |  | ------------------------------------------------------------------------------------

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Consolidated

In 2001, the telecommunications industry underwent a significant
adjustment, particularly in the United States. Following a period of rapid
infrastructure build-out and strong economic growth in 1999 and 2000, we saw a
continued tightening in the capital markets and slowdown in the
telecommunications industry throughout 2001. This resulted in lower capital
spending by industry participants and substantially less demand for our
products and services as service providers focused on maximizing their return
on invested capital and, as a result, our revenues declined sequentially during
2001. In the first quarter of 2002, we continued to see limited capital
expenditures by industry participants. As a result, for the first quarter of
2002, our consolidated revenues declined substantially compared to the same
period in 2001, and significantly compared to the fourth quarter of 2001, due
to a continuation of the change in our customers focus from building new
networks to conserving capital and/or increasing the capacity utilization rates
and efficiency of existing networks, and reducing costs. We expect that the
severe lack of available funding from the capital markets, high debt levels of
many service providers, bankruptcies and financial difficulties of certain
service providers, excess network assets, excess and shared bandwidth capacity,
and the compounding impact of economic concerns will continue to constrain
capital spending by service providers. It is difficult to predict the duration
or severity of this industry adjustment, as growth in industry spending is not
expected to occur until economic concerns have subsided and the anticipated
rationalization of the telecom industry is well underway. Market visibility
remains limited given the uncertainty of the economic downturn and its impact
on our customers business and spending plans. We do not expect that results
of operations for any quarter will necessarily be consistent with our quarterly
historical profile or indicative of results to be expected for future quarters.

The substantial decline in revenues in the first quarter of 2002 compared
to the same period in 2001 was the result of considerable declines across all
segments. The significant decline in revenues in the first quarter of 2002
compared to the fourth quarter of 2001 was primarily due to considerable
declines in Metro and Enterprise Networks and Other revenues and a decline in
Wireless Networks segment revenues, partially offset by a moderate increase in
Optical Long-Haul Networks revenues.

The substantial decline in revenues in the first quarter of 2002 compared
to the same period in 2001 was due to considerable declines across all
geographic regions. Compared to the fourth quarter of 2001, revenues declined
significantly in the United States and Europe and substantially in the Asia
Pacific region, offset slightly by a strong increase in the Caribbean and Latin
America region. We expect that revenues from the Peoples Republic of China
will continue to be affected by the expected reorganization of a major Chinese
service provider.

Metro and Enterprise Networks

The following chart sets forth quarterly revenues for the Metro and Enterprise
Networks segment:

(BAR CHART)

The substantial decline in revenues in the first quarter of 2002 compared
to the same period in 2001 was due to substantial declines in all portions of
this segment. The substantial decrease in sales of the circuit to packet voice
networks portion of this segment was primarily the result of continued reduced
demand in the interexchange carrier market due to the significant adjustment in
the telecom industry, continued industry consolidation, continued tightened
capital markets, and the decline in traditional circuit switching. The
considerable decline in sales of the packet switching and routing portion of
this segment and the substantial decrease in sales of the metro optical portion
of this segment were primarily due to a decline in demand for mature products
in these portions of the segment, compounded by the ongoing industry adjustment
as customers continue to delay the purchase of next generation products. The
circuit to packet voice networks for the service providers and

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enterprises portion of this segment continues to form a substantial portion of the overall
sales for this segment. As data, voice, and multimedia communications
technologies continue to converge, and service providers, as well as
enterprises, look for ways to maximize the effectiveness of their existing
networks while reducing ongoing capital expenditures and operating costs, we
anticipate that communications networks will use packet-based technologies.
However, the timing of this progression in the short term is unclear as a
result of the continuing industry adjustment. The substantial decline in
overall segment revenues in the first quarter of 2002 compared to the same
period in 2001 was due to considerable declines across all geographic regions.

Compared to the fourth quarter of 2001, overall segment revenues declined
considerably, primarily due to a decrease in demand for traditional circuit
switching and for the packet switching and routing portions of this segment.
Substantial declines in the United States and the Asia Pacific region and a
significant decline in Europe were partially offset by a substantial increase
in the Caribbean and Latin America region.

Wireless Networks

The following chart sets forth quarterly revenues for the Wireless
Networks segment:

(BAR CHART)

The substantial decline in revenues in the first quarter of 2002 compared
to the same period in 2001 was primarily due to strong revenues in the first
quarter of 2001 driven by growth in the United States and the Asia Pacific
region, as major customers continued their network expansion programs which
they began in 2000. Wireless Networks segment revenues began to decline in the
second half of 2001 and continued into 2002, as a result of deterioration in
customers financial condition, slowing subscriber growth, and the decision of
many wireless service providers to delay certain capital expenditures. In
addition, as a result of market conditions, starting in the second half of 2001
we have been and are currently providing only limited, incremental customer
financing compared to 2000 and the first half of 2001. The substantial
decrease in overall segment revenues compared to the same period in 2001 was
primarily due to substantial decreases in the United States, Europe, and the
Asia Pacific region. Overall Wireless Networks segment revenues for the first
quarter of 2002 continue to be primarily generated by sales of Code Division
Multiple Access, or CDMA, and Global System for Mobile communications, or GSM,
technologies. Compared to the first quarter of 2001, CDMA and Universal Mobile
Telecommunications System, or UMTS, revenues have increased substantially as a
percentage of total revenues, partially offset by a substantial decrease in
Time Division Multiple Access, or TDMA, revenues and a significant decrease in
GSM revenues as a percentage of total revenues. UMTS and CDMA technology sales
are expected to continue to represent a larger proportion of our total Wireless
Networks segment revenues as third generation, or 3G, technologies gain a
greater foothold in the market and as GSM and TDMA sales slow, comparatively,
due to increased wireless data traffic and requirements for greater wireless
spectrum efficiency. However, the timing of changes in revenues in the short
term from the different wireless technologies has become increasingly difficult
to predict as a result of the continuing industry and capital markets
adjustments and the complexities and potential for delays in implementation of
3G network deployments.

The sequential decline in revenues in the first quarter of 2002 follows
significant sequential declines in the third and fourth quarter of 2001. The
sequential decline in overall revenues for the first quarter of 2002 compared
to the fourth quarter of 2001 was primarily due to a decline in the United
States, a substantial decline in the Caribbean and Latin America region, and a
significant decline in the Asia Pacific region.

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Optical Long-Haul Networks

The following chart sets forth quarterly revenues for the Optical
Long-Haul Networks segment:

(BAR CHART)

The substantial decline in revenues in the first quarter of 2002 compared
to the same period in 2001 was primarily the result of substantial reductions
in capital spending, mainly by our major United States customers. Our Optical
Long-Haul Networks segment revenues in the first quarter of 2001 reflected the
then in-process network build-outs that had begun in 2000. However, when the
telecom industry began experiencing the significant adjustment and the capital
markets tightened, our customers reduced their purchases sharply as they
focused on reducing existing inventory levels to complete existing network
build-outs and on improving the efficiency of existing networks. Our major
customers in this segment focused on maximizing return on invested capital by
increasing the capacity utilization rates and efficiency of existing networks,
and we expect that any additional capital spending by those customers will be
increasingly directed to opportunities that enhance customer performance,
revenue generation, and cost reduction in the near term. We expect that
customers in this segment will continue to focus on route by route activities,
adding channels to existing networks, and interconnect and bandwidth issues in
the short term, while building out networks for increased bandwidth will remain
longer term projects. Sales for the Optical Long-Haul Networks segment are
primarily based on network build-outs and, as such, generally include a number
of long-haul products packaged together in an end-to-end solution. As a
result, volatility in this segment typically results in a corresponding
increase or decline in overall segment sales as almost all products within the
segment are generally affected in the same manner. Telecommunications industry
consolidation also contributed to the reduction in service provider capital
spending during 2001 and the first quarter of 2002. Overall, a large
redeployment of assets occurred in this segment of the
industry in 2001 primarily due to significant excess inventories, and is
expected to continue to a certain extent into 2002. This redeployment, in
conjunction with the continuing telecommunications industry consolidation,
resulted in significant pricing pressures in 2001 and into the first quarter of
2002. Due to the severe reduction, in number and size, of new network
build-outs during 2001 and the first quarter of 2002 and due to the nature of
this segment, we expect that the Optical Long-Haul Networks segment will be one
of the last to recover from the significant adjustment in the telecom industry.
The substantial decline in Optical Long-Haul Networks segment revenues was due
to substantial declines in all regions during the first quarter of 2002
compared to the same period in 2001.

Overall segment revenues increased slightly for the first quarter of 2002
compared to the fourth quarter of 2001.

Gross profit and gross margin

The following table sets forth gross profit and gross margin for the three
months ended March 31:

|             |  |      |       |      |  |        |      |          |  |              |        |   |  |  |       |  
|------------ |  | ---- | ----- | ---- |  | ------ | ---- | -------- |  | ------------ | ------ | - |  |  | ----- | -
|            
|             |  |      |       |      |  |        |      |          |  | 2002 vs 2001
|             |  | 2001 |       | 2002 |  | Change |      | % Change
|            
|            
|Gross profit |  | $    | 1,814 |      |  | $      | 681  |          |  | $            | (1,133 | ) |  |  | (62.5 | )
|Gross margin |  |      | 31.9  | %    |  |        | 23.4 | %        |  |              | (8.5   | ) |  |  | (26.6 | )
|            

Gross profit decreased substantially in the first quarter of 2002 compared
to the same period in 2001 due to a substantial decline in revenues and a
considerable decline in gross margin. The overall decrease in gross margin was
primarily due to: approximately $200 of increased provisions, primarily related
to recently completed negotiations with all of our major suppliers; a change in
the mix of products being sold from mature products with generally higher
margins to new

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technologies with lower margins; and pricing pressures across
certain products and services, primarily in the Optical Long-Haul Networks and
Metro and Enterprise Networks segments, resulting from increased competition in
the current economic environment. These impacts were partially offset by our
lower cost structure in relation to our sales volume.

While we cannot predict to what extent changes in product mix and pricing
pressures will continue, or whether the geographic mix of sales will shift, we
expect that our work plan, when completed, will result in a cost structure that
is more reflective of the current industry and economic environment. In
addition, we believe that our current provision levels related to the entire
supply chain reflect both current and anticipated future market demand. As a
result, we expect that overall gross margin for the full year 2002 will be
substantially higher compared to full year 2001 and we currently expect that
margins will be higher than present levels for the remainder of 2002. See
Forward-looking statements for factors that may affect our gross margins.

Operating expenses

Selling, general and administrative expense

The following table sets forth selling, general and administrative, or
SG&A, expense and SG&A expense as a percentage of revenues for the three months
ended March 31:

|             |                             |   |       |      |      |   |         |      |          |   |              |     |  |  |       |     | 
|------------ | --------------------------- | - | ----- | ---- | ---- | - | ------- | ---- | -------- | - | ------------ | --- |  |  | ----- | --- | 
|            
|             |                             |   |       |      |      |   |         |      |          |   | 2002 vs 2001
|             |                             |   | 2001  |      | 2002 |   | $Change |      | % Change
|            
|            
|SG&A expense |                             | $ | 1,308 |      |      | $ | 740     |      |          | $ | (568         | )   |  |  | (43.4 | )  
|             | As a percentage of revenues |   |       | 23.0 | %    |   |         | 25.4 | %        |   |              | N/A |  |  |       | N/A | 
|            

SG&A expense declined substantially in the first quarter of 2002 compared
to the same period in 2001, reflecting the impact of our work plan which began
in 2001. SG&A expense declined substantially compared to the fourth quarter of
2001 and is expected to continue to decline sequentially on a quarterly basis
during 2002 as the full impact of our work plan is realized. We expect that
SG&A expense will continue to decline as we move towards a cost structure that
produces less than $700 of SG&A expense per quarter by the end of the year.

Research and development expense

The following table sets forth research and development, or R&D, expense
and R&D expense as a percentage of revenues for the three months ended March
31:

|            |                             |   |      |      |      |   |          |      |          |   |              |     |  |  |       |     | 
|----------- | --------------------------- | - | ---- | ---- | ---- | - | -------- | ---- | -------- | - | ------------ | --- |  |  | ----- | --- | 
|           
|            |                             |   |      |      |      |   |          |      |          |   | 2002 vs 2001
|            |                             |   | 2001 |      | 2002 |   | $ Change |      | % Change
|           
|           
|R&D expense |                             | $ | 906  |      |      | $ | 577      |      |          | $ | (329         | )   |  |  | (36.3 | )  
|            | As a percentage of revenues |   |      | 15.9 | %    |   |          | 19.8 | %        |   |              | N/A |  |  |       | N/A | 
|           

R&D expense decreased substantially in the first quarter of 2002 compared
to the same period in 2001, reflecting the impact of initiatives undertaken by
us to focus our spending on key potential growth areas. R&D expense
represented our planned investment in our next generation core products across
all segments. R&D expense, in absolute dollars, is expected to decline for
full year 2002, compared to full year 2001, as we improve process efficiencies.
In the fourth quarter of 2001, we incurred a charge from Nortel Networks
Corporation related to R&D services provided to us. We did not incur a similar
charge in the first quarter of 2002. As a result, R&D expense decreased
significantly compared to the fourth quarter of 2001. We expect that R&D
expense will be approximately $625 in the second quarter of 2002. We will
continue our strategic investments in R&D, while looking for synergies in our
R&D investments.

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Amortization of intangibles

The following table sets forth the amortization of intangibles for the
three months ended March 31:

|                            |                     |  |      |     |      |  |          |   |          |  |              |      |   |  |  |        |  
|--------------------------- | ------------------- |  | ---- | --- | ---- |  | -------- | - | -------- |  | ------------ | ---- | - |  |  | ------ | -
|                           
|                            |                     |  |      |     |      |  |          |   |          |  | 2002 vs 2001
|                            |                     |  | 2001 |     | 2002 |  | $ Change |   | % Change
|                           
|                           
|Amortization of intangibles |                    
|                            | Acquired technology |  |      | 203 |      |  |          | 5 |          |  |              | (198 | ) |  |  | (97.5  | )
|                            | Goodwill            |  |      | 682 |      |  |          |  |          |  |              | (682 | ) |  |  | (100.0 | )
|                           

Amortization of intangibles

Acquired technology

The amortization of acquired technology for the first quarter of 2001
primarily reflected the charge related to the acquisition of Bay Networks, Inc.
The decline in the first quarter of 2002 compared to the same period in 2001
is primarily due to the completion of amortization associated with Bay
Networks. As at March 31, 2002 and December 31, 2001, the remaining
capitalized amount of acquired technology  net was $14 and $20, respectively.

Goodwill

In the first quarter of 2002, we adopted the provisions of Statement of
Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets.
Thus, amortization of goodwill, including goodwill recorded in past business
combinations, and amortization of intangibles with an indefinite life ceased
upon adoption of this Statement.

The amortization of goodwill for the first quarter of 2001 primarily
reflected the charges related to the acquisitions of Bay Networks, Qtera
Corporation, and Clarify Inc.

As at March 31, 2002 and December 31, 2001, the remaining capitalized
amount of goodwill  net was $2,277 and $2,283, respectively.

Special charges

Three months ended March 31, 2002

For the three months ended March 31, 2002, we recorded special charges of
$443 related to restructuring costs associated with our work plan to streamline
our operations and activities around our core markets and leadership
strategies.

Workforce reduction charges of $312 were related to the cost of severance
and benefits associated with the approximately 4,000 employees notified of
termination.

Contract settlement costs included negotiated settlements of approximately
$56 to either cancel contracts or renegotiate existing contracts across all of
Nortel Networks segments.

As a result of the significant negative industry and economic trends
impacting our operations and expected future growth rates, we have performed
assessments of certain plant and equipment assets as part of our review of
financial results during the three months ended March 31, 2002. The conclusion
of these assessments resulted in a write down of certain plant and equipment
within global operations, a function that supports all of our segments, and
within the Optical Long-Haul Networks segment, of approximately $75.

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Year ended December 31, 2001

For the year ended December 31, 2001, we recorded restructuring charges of
$3,310, consisting of workforce reduction costs of $1,343, contract settlement
and lease costs of $883, plant and equipment write downs of $939, and other
costs of $145. During the year ended December 31, 2001, there were cumulative
cash and non-cash drawdowns against the provision of $1,082 and $1,031,
respectively, resulting in an ending provision balance at December 31, 2001 of
$1,197. The cash drawdowns related primarily to workforce reduction payments,
and the non-cash drawdowns related primarily to the plant and equipment write
downs.

Period from January 1, 2001 to March 31, 2002

Of the approximately 39,500 employees notified during the period from
January 1, 2001 to March 31, 2002, approximately 14,600 were direct employees
performing manufacturing, assembly, test and inspection activities associated
with the production of our products, and approximately 24,900 were indirect
sales, marketing, and administrative employees, and manufacturing managers.
The workforce reduction was primarily in North America and the United Kingdom
and extended across all of our segments. During the three months ended March
31, 2002, the workforce reduction provision balance has been drawn down by cash
payments of $237, resulting in an ending provision balance for workforce
reduction of $468. The remaining provision is expected to be substantially
drawn down by the second quarter of 2003.

In conjunction with the above noted workforce reduction, we identified a
number of leased and owned facilities comprised of office, warehouse and
manufacturing space, as well as leased manufacturing equipment, that were no
longer required. As a result, we recorded net lease costs of approximately
$757. The costs primarily related to our future contractual obligations under
operating leases. Offsetting the total lease charge is approximately $506 in
expected sublease revenue on leases that we cannot terminate. We expect to
have subleased substantially all of these properties by the end of 2004. We
wrote down the net carrying value of specific owned facilities across all
segments within North America and the United Kingdom. The write down of
approximately $95 reflects the net realizable value based on market assessments
for general purpose facilities. Contract settlement costs included negotiated
settlements of approximately $182 to either cancel contracts or renegotiate
existing contracts across all of our segments. During the three months ended
March 31, 2002, the provision balance for contract settlement and lease costs
has been drawn down by cash payments of $141, resulting in an ending provision
balance of $688. The remaining provision is expected to be substantially drawn
down by the end of 2004.

Plant and equipment write downs of approximately $459 consisted of the
write down of leasehold improvements and certain information technology
equipment associated with the exiting of the above noted leased and owned
facilities.

In addition, as a result of the significant negative industry and economic
trends impacting our operations and expected future growth rates, we have
performed assessments of certain plant and equipment assets as part of our
review of financial results during 2001 and the first quarter of 2002. The
conclusion of these assessments resulted in a write down of certain plant and
equipment within global operations, a function that supports all of our
segments, and within the Optical Long-Haul Networks segment, of approximately
$460.

Within global operations, we determined that there was excess test
equipment at a number of system houses that would no longer be required as a
result of the industry and economic environment. As a result, we recorded a
charge of approximately $88 to write down the value of this equipment to its
net realizable value based on the current fair value for this type of
specialized equipment. We expect to dispose of this equipment by the end of
2002.

Within the Optical Long-Haul Networks segment, we determined that there
was excess manufacturing equipment at a number of facilities that would no
longer be required as a result of the industry and economic environment. As a
result, we recorded a charge of approximately $281 to write down the value of
this equipment to its net realizable value based on the current fair market
value for this type of specialized equipment. We expect to dispose of this
equipment by the end of the second quarter of 2002. We also wrote down the net
carrying value of a specialized manufacturing facility within the Optical
Long-Haul Networks segment for the production of optical components within
North America. The write down of approximately $91 reflects the net realizable
value based on market assessments for a general purpose facility.

For additional information related to these restructuring activities, see
Special charges in note 6 to the accompanying unaudited consolidated
financial statements.

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Interest expense

The decrease in interest expense of $9 in the first quarter of 2002
compared to the same period in 2001, was primarily related to lower interest
expense due to a decrease in long-term debt offerings and a lower level of
short-term notes payable.

Income tax benefit

Our effective tax benefit rate fluctuates from period to period primarily
as a result of the impact of non-tax deductible goodwill amortization and
in-process research and development expense, stock option compensation,
goodwill write downs and certain non-tax deductible restructuring charges.
Excluding these impacts, as applicable, our effective tax benefit rate was 31.5
percent and 32.0 percent for the three months ended March 31, 2002 and 2001,
respectively, and reflected changes in the geographic earnings (loss) mix.

Recently approved tax legislation in the United States extended the net
operating loss carry-back period from two years to five years. As a result, we
had the ability to carry back available United States losses from 2001 and
utilize certain deferred income tax assets previously recognized. We received
approximately $700 of additional tax refunds during the second quarter of 2002.

See Liquidity and capital resources for additional information.

Net loss from continuing operations

As a result principally of the foregoing factors, our net loss from
continuing operations improved by $566 in the first quarter of 2002 compared to
the same period in 2001. We reported a net loss from continuing operations in
the first quarter of 2002 of $785, compared to a net loss from continuing
operations of $1,351 for the same period in 2001. If we had implemented
Statement of Financial Accounting Standards No. 142 Goodwill and Other
Intangible Assets, effective January 1, 2001, then we would have recorded a
net loss from continuing operations of $662 for the three months ended March
31, 2001.

Results of operations  discontinued operations

Revenues for our access solutions operations were $68 for the first
quarter of 2002 compared to $424 for the same period in 2001. Access solutions
operations also generated net cash of $50 during the first quarter of 2002.

On April 21, 2002, we entered into an agreement with Aastra Technologies
Limited to sell certain assets, which are included in discontinued operations,
associated with our prior acquisition of Aptis Communications, Inc. The
consideration primarily consists of approximately $18 in cash, as well as
contingent cash consideration of up to $60 over four years based on the
achievement of certain revenue targets by the business. The deal is expected
to close in the second quarter of 2002.

On March 5, 2002, we divested our approximately 46 percent ownership
interest in Elastic Networks Inc. to Paradyne Networks, Inc., in exchange for
an approximately 8 percent ownership interest in Paradyne. We recorded a gain
of approximately $7 on the transaction, which is included in the estimated
remaining provision required for discontinued operations.

During the three months ended March 31, 2002, we recorded a gain of
approximately $13 due to the reduction of our ownership interest in Arris
Group, Inc., received for our original interest in Arris Interactive LLC, from
approximately 49 percent to approximately 46 percent as a result of Arris
Groups issuance of common shares in connection with its acquisition of another
company, which is included in the estimated remaining provision required for
discontinued operations.

We continue to work towards disposing of or transitioning the ownership of
certain operations. Any operations not disposed of or so transitioned are
expected to be closed. We expect to complete this plan by June 2002, subject
to the closing of specific transactions, the timing of which may be impacted by
regulatory approval processes and business issues.

For additional information, see Discontinued operations in note 4 to the
accompanying unaudited consolidated financial statements.

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Critical accounting policies

There have been no changes to our critical accounting policies since
December 31, 2001. For a description of our critical accounting policies, see
our Annual Report on Form 10-K for the year ended December 31, 2001.

Liquidity and capital resources

Cash flows

Cash and cash equivalents, or cash, were $3,024 at March 31, 2002, a
decrease of $433 (including net cash from the access solutions operations of
$50) from December 31, 2001.

Cash flows used in operating activities were $394 for the three months
ended March 31, 2002. Cash flows used in operating activities were due
primarily to a net loss of $353, adjusted for non-cash items. The net change
in operating assets and liabilities was due to a reduction in accounts payable
and accrued liabilities, and other changes in operating assets and liabilities,
almost offset by reductions in both accounts receivable and inventory balances.
The change in operating assets and liabilities was due primarily to the
decline in revenues for the three months ended March 31, 2002, and the
utilization of provisions set up for cancellation charges, for inventory in
excess of future demand, and for the settlement of certain other claims related
to our contract manufacturers and suppliers.

During the three months ended March 31, 2002, we received approximately
$500 in tax refunds. In addition, we received additional tax refunds in April
2002 of approximately $700, related to a recent change in tax legislation in
the United States that has allowed us to carry back our 2001 losses to
additional periods.

Cash flows used in investing activities were $72 for the three months
ended March 31, 2002, and were primarily due to expenditures for plant and
equipment of $103, partially offset by the proceeds on disposal of certain
plant and equipment of $44.

Cash flows used in financing activities were $11 for the three months
ended March 31, 2002, primarily due to the repayment of certain notes payable.

Uses of liquidity

Our cash requirements for the next 12 months are primarily to fund
operations, research and development, capital expenditures, workforce reduction
and restructuring activities, debt service, and customer financings. The
following provides additional information related to our uses of liquidity.

Special charges

The remaining cash outlays of $468 related to workforce reduction
initiatives are expected to be substantially completed by the second quarter of
2003, and the remaining cash payments of $688 related to contract settlement
and lease costs are expected to be substantially completed by the end of 2004.
An additional charge will be incurred in the second quarter of 2002 related to
remaining announced workforce reductions and related charges.

See Special charges for additional information.

Cash obligations

Our contractual cash obligations for long-term debt, outsourcing contracts
and operating leases as at March 31, 2002 remain substantially unchanged from
the amounts disclosed as at December 31, 2001 in our Annual Report on Form 10-K
for the year ended December 31, 2001.

Commitments and guarantees

We enter into bid and performance bonds related to various contracts,
which generally have terms of less than two years. Potential payments due
under these bonds are related to performance under the applicable contract.
Historically, we have not had to make material payments under these types of
bonds and we currently do not anticipate that we will be required to make
material payments under the current bonds. The total commercial commitments
representing amounts

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available and undrawn was $1,165 and $1,177 at March 31, 2002 and December 31, 2001,
respectively. Due to the current general economic and industry environment,
and our current credit ratings, the basis under which we have historically
obtained performance bonds has changed, resulting in increased collateral
requirements and/or increased fees in connection with obtaining new performance
bonds. However, we currently do not expect that the requirements and/or fees
to obtain performance bonds will have a material adverse effect on our ability
to win contracts from potential customers.

We have also entered into supply contracts with customers for products and
services, which in some cases involve new technologies currently being
developed, or which we have not yet commercially deployed, or which require us
to build and operate networks on a turnkey basis. We have also entered into
network outsourcing contracts with customers to operate their networks. Some
of these supply and network outsourcing contracts contain delivery and
installation timetables, performance criteria and other contractual obligations
which, if not met, could result in our having to pay substantial penalties or
liquidated damages, the termination of the related supply or network
outsourcing contract, and/or the reduction of shared revenues under a turnkey
arrangement, in certain circumstances. As is customary for the
telecommunications industry, these supply and networking outsourcing contracts
are highly customized to address each customers particular needs and concerns
and, therefore, the nature of the events triggering, as well as the actual
amounts of the penalties, vary greatly and are based on a variety of complex,
interrelated factors, and may vary significantly in amount over the life of the
contract. We have not experienced material penalty payments in any recent
reporting period.

Further, certain of our supply arrangements with our contract
manufacturers were negotiated prior to the current industry and economic
downturn and, depending upon the extent and duration of this downturn, the
terms of these arrangements may not be achievable. To the extent that we fail
to meet any of these arrangements, and if we are unable to successfully
renegotiate the applicable arrangement, we may be obligated to indemnify the
contract manufacturer for certain direct costs attributable to our failure to
so perform. The actual amount of any such indemnification, which could be
substantial, would be based on a variety of complex, interrelated factors. The
failure to reach a satisfactory resolution of any such matter could have a
material adverse effect on our business, results of operations, financial
condition, and supply relationships.

Customer financing

The following table provides information related to customer financing
commitments as at:

|                          |  |           |       |  |              |   |       | 
|------------------------- |  | --------- | ----- |  | ------------ | - | ----- | 
|                         
|                          |  | March 31, |       |  | December 31,
|                          |  | 2002      |       |  | 2001        
|                         
|                         
|Drawn and outstanding (a) |  | $         | 418   |  |              | $ | 464   | 
|Undrawn commitments       |  |           | 1,551 |  |              |   | 1,611 | 
|                         
|Total customer financing  |  | $         | 1,969 |  |              | $ | 2,075 | 
|                         

|(a) |  | Net of provisions of $857 and $887 as at March 31, 2002, and December 31,
2001, respectively.
|--- |  | ---------------------------------------------------------------------------------------------

We currently have customer financing commitments and balances outstanding
in connection with the turnkey construction of new networks, particularly third
generation, or 3G, wireless networks, and we may commit to provide additional
funding in the future if such financings are strategic to our core business
activities. Generally, customer financing arrangements may include financing
in connection with the sale of our products and services, as well as funding
for certain non-product and service costs associated with network installation
and integration of our products and services, and financing for working capital
purposes and equity financing.

We continue to regularly assess the levels of our customer financing
provisions based on a loan-by-loan review to evaluate whether they reflect
current market conditions, as well as the ability of our customers to meet
their repayment obligations and determine our provisions accordingly. Any
misinterpretation or misunderstanding of these factors could result in losses
in excess of our provisions. We also continue to restructure financings to
minimize losses and reduce undrawn commitments where possible. In addition to
being highly selective in providing customer financing, we have various
programs in place to monitor and mitigate customer credit risk, including
performance milestones and other conditions of funding. Management is focused
on the strategic use of our customer financing capacity, on revolving that
capacity as quickly and efficiently as possible, and on managing the absolute
dollar amount of our customer financing exposure.

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We have traditionally been able to place a large amount of our customer
financing obligations with third-party lenders. However, our ability to place
customer financing with third-party lenders has been significantly reduced due
to, among other factors, recent economic downturns in various countries,
adverse changes in the credit ratings of our customers, reduced demand for
telecommunications financings in capital and bank markets, and our recent
credit ratings downgrade. As a result, we are currently directly supporting,
and expect to be required to support in the future, more of such commitments
and outstanding balances of such customer financings. We will continue to seek
to arrange for third-party lenders to assume our customer financing obligations
and to fund customer financings from working capital and conventional sources
of external financing in the normal course. However, our customer financing
commitments and balances outstanding may increase substantially as a result of
us continuing to hold such customer financings.

See Forward-looking statements for additional factors that may impact
our customer financing arrangements.

Discontinued operations

At March 31, 2002, the remaining accruals totalled $258 and were related
to certain future contractual obligations and estimated liabilities of the
discontinued access solutions operations, and estimated operating losses during
the planned period of disposition. Such accruals are expected to be
substantially drawn down by cash payments, the impact of which is expected to
be partially offset by cash inflows generated from the sale of certain assets
over the planned period of disposition.

For additional information related to discontinued operations, see
Discontinued operations in note 4 to the accompanying unaudited consolidated
financial statements.

Sources of liquidity

On April 12, 2000, Nortel Networks Limited and Nortel Networks Inc.
entered into five-year syndicated credit agreements, which permit borrowings in
an aggregate amount of up to $750. Effective April 8, 2002, Nortel Networks
Limited and Nortel Networks Inc. amended and extended the 364-day syndicated
credit agreements originally entered into on April 12, 2000 and subsequently
amended on April 11, 2001. The April 8, 2002 amendments reduced the size of
the 364-day committed facilities to $1,175 from $1,750 and extended the
revolving term to April 7, 2003 with no additional term-out period thereafter.
As a result, total borrowings currently permitted under these syndicated
five-year and 364-day credit agreements are $1,925. The amended facilities
maintain the financial covenant in the April 2001 facilities requiring Nortel
Networks Limiteds minimum consolidated tangible net worth at any time to be
not less than $1,888 and include higher pricing reflecting the current credit
and bank environment. These agreements can be used for borrowings for general
corporate purposes.

Nortel Networks Limited and Nortel Networks Inc. also have 364-day credit
agreements with certain banks which permit borrowings in an aggregate amount of
up to $1,575 to December 13, 2002, with a one-year term out option to convert
outstanding amounts under the credit agreements into term loans on the
termination date of the credit agreements.

The credit agreements for the $1,575 committed facilities noted above
contain financial covenants that require (i) the maintenance of a minimum
consolidated tangible net worth at the consolidated Nortel Networks Limited
level, and (ii) the achievement of certain minimum consolidated earnings before
interest, taxes, depreciation and amortization, or EBITDA, thresholds at the
Nortel Networks Corporation level, which began in the first quarter of 2002.
The minimum consolidated tangible net worth of Nortel Networks Limited required
is $1,880. The consolidated EBITDA covenant requires that Nortel Networks
Corporation achieve a cumulative EBITDA of negative $650 or better for the six
months ended June 30, 2002. In addition, there are minimum EBITDA covenants in
place for the remainder of fiscal year 2002 and the first three quarters of
2003, tested in quarterly increments during the period. Compliance with this
covenant will require EBITDA improvements during the fiscal year 2002, and
further improvements in the year thereafter. Certain business restructuring
charges and other incremental charges and gains as publicly disclosed are
excluded from the calculation of EBITDA. In addition, these credit
agreements contain covenants restricting additional debt, the payment of
dividends, corporate events, liens, sale and leasebacks, and investments, among
others. Payments of dividends on the outstanding preferred shares of Nortel
Networks Limited is permitted provided that compliance with certain covenants
of the credit agreements is maintained.

Any amounts subsequently drawn under all of Nortel Networks Limited and
Nortel Networks Inc.s existing credit agreements will be secured equally and
ratably with all of our current outstanding public debt securities pursuant to
the security documents which became effective following Moodys Investors
Services, Inc.s downgrade of Nortel Networks Limiteds United States senior
long-term debt rating below investment grade on April 4, 2002. The security is
comprised of

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liens on substantially all of the assets of Nortel Networks
Limited and those of most of its United States and Canadian subsidiaries, and
pledges of shares in certain of Nortel Networks Limiteds other subsidiaries.
In addition, certain of Nortel Networks Limiteds wholly owned subsidiaries
have provided guarantees of Nortel Networks Limiteds obligations under these
credit agreements. The security would be released when Nortel Networks
Limiteds United States senior long-term debt ratings return to Baa2 (with a
stable outlook) and BBB (with a stable outlook), as determined by Moodys
Investors Services, Inc. and Standard & Poors Ratings Service, respectively.

The liens, pledges, and guarantees described above also apply equally and
ratably to the obligations under Nortel Networks Corporations $1,800 4.25
percent convertible senior notes due on September 1, 2008.

For additional financial information related to those subsidiaries
providing guarantees, see Subsequent events in note 13 of the accompanying
unaudited consolidated financial statements.

As at March 31, 2002, we were in compliance with the covenants of our
credit agreements and had not drawn on any of the above-noted credit
agreements. Refer to the discussion below regarding our debt ratings and see
Forward-looking statements for factors that may affect our ability to comply
with covenants and conditions in our credit agreements in the future.

On May 13, 2002, Nortel Networks Corporation and Nortel Networks Limited
announced their intention to file a shelf registration statement with the
United States Securities and Exchange Commission and a preliminary base shelf
prospectus with the applicable securities regulatory authorities in Canada.
The May 13, 2002 shelf registration statement and the
base shelf prospectus are intended to ultimately qualify for sale by Nortel Networks Corporation or Nortel
Networks Limited, in the United States and/or Canada,
up to an aggregate of $2,500 of various types of securities, under which
Nortel Networks Limited may be able to offer for sale guaranteed debt
securities. As a result, Nortel Networks Limited and its financing subsidiary
also intend to withdraw an existing shelf registration statement filed with the
United States Securities and Exchange Commission under which they were
previously eligible to issue up to an aggregate of $1,000 of debt securities
and warrants to purchase debt securities.

The total debt to total capitalization ratio of Nortel Networks was 36
percent at March 31, 2002, compared to 34 percent at December 31, 2001. The
increase in the total debt to total capitalization ratio at March 31, 2002,
compared to December 31, 2001, was due to the increase in our deficit as a
result of the net losses for the three months ended March 31, 2002.

Credit ratings

|                                  |  |                                       |  |                         |  |               |  |             |  |  |  | 
|--------------------------------- |  | ------------------------------------- |  | ----------------------- |  | ------------- |  | ----------- |  |  |  | 
|                                 
|                                 
|                                  |  |                                       |  | Rating on preferred     |  |               |  |            
|                                  |  | Rating on long-term debt issued or    |  | shares issued by Nortel |  |               |  |            
|Rating agency                     |  | guaranteed by Nortel Networks Limited |  | Networks Limited        |  |               |  | Last update
|                                 
|Standard & Poors Ratings Service |  | BB-                                   |  | Global scale  B         |  | April 9, 2002
|                                 
|Moodys Investor Services, Inc.   |  | Ba3                                   |  | B3                      |  | April 4, 2002
|                                 

The ratings remain on negative outlook by Moodys and Standard & Poors.
There can be no assurance that our credit ratings will not be lowered further
or that such ratings agencies will not issue adverse commentaries, resulting in
higher financing costs under our credit facilities and for other financings
generally, and reduced access to the capital markets or our credit agreements.
Our credit ratings also affect our ability, and the cost, to securitize
receivables.

See Forward-looking statements for effects of changes in respect of our
debt ratings.

During 2001, we took actions to strengthen our cash and liquidity
positions and as of March 31, 2002, our primary source of liquidity is our
current cash and cash equivalents. We believe this cash, together with cash
flows from operations, will be sufficient to meet our working capital, capital
expenditure, and investment requirements through the next 12 months, with
potential funding under our credit facilities to address cash flow fluctuations
within quarters. If our revenues and cash flows are materially lower than we
expect, we may be required to further reduce capital expenditures and
investments in

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order to meet our cash requirements. We may seek additional
funds from liquidity-generating transactions and other conventional sources of
external financing (which may include a variety of debt, convertible debt,
and/or equity financings). We cannot
provide any assurance that our net cash requirements will be as we currently
expect, that we will continue to have access to our credit facilities when and
as needed, or that liquidity-generating transactions or financings will be
available to us on acceptable terms or at all.

See Forward-looking statements for factors that may affect our revenues,
cash flows and debt levels.

Legal proceedings

Subsequent to the February 15, 2001 announcement in which Nortel Networks
Corporation provided revised guidance for financial performance for the 2001
fiscal year and the first quarter of 2001, Nortel Networks Corporation and
certain of its then current officers and directors 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 in the
provinces of Ontario, Quebec, and British Columbia in Canada, on behalf of
shareholders who acquired Nortel Networks Corporations securities as early as
October 24, 2000 and as late as February 15, 2001, allege, among other things,
violations of United States federal and Canadian provincial securities laws.
Securities regulatory authorities in Canada and the United States are also
reviewing these matters. On May 11, 2001, Nortel Networks Corporation 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, Nortel
Networks Corporation 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.

A class action lawsuit 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 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, Nortel Networks Corporation filed a motion to dismiss
both the above consolidated United States shareholder class action and the
above JDS Uniphase 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 Uniphase shareholder class action complaint, Nortel
Networks Corporation also moved to dismiss on the separate basis that JDS
Uniphase shareholders lacked standing to sue Nortel Networks Corporation.

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, or the Plan, at any time during the period of March 7, 2000 through the
filing date and who made or maintained Plan investments in
Nortel Networks Corporations 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 Nortel Networks Corporations
common shares in the Plan. A motion to dismiss or, in the alternative, to
transfer was filed on March 15, 2002. A second purported class action lawsuit,
on behalf of the Plan and Plan participants for whose individual accounts the
Plan purchased Nortel Networks Corporations 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.

On February 12, 2001, Nortel Networks Inc., a subsidiary of Nortel
Networks Limited, was served with a consolidated amended class action complaint
that purported to add Nortel Networks Corporation as a defendant to a lawsuit
commenced in July 2000 against Entrust, Inc. (formerly Entrust Technologies,
Inc.) and two of its then current officers in the

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United States District Court for the Eastern District of Texas (Marshall Division), or the District Court.
This complaint alleges that Entrust, two officers of Entrust, and Nortel
Networks Corporation violated the Securities Exchange Act of 1934 with respect
to certain statements made by Entrust. Nortel Networks Corporation is alleged
to be a controlling person of Entrust. On April 6, 2001, Nortel Networks
Corporation filed a motion to dismiss the first complaint. On July 31, 2001,
the first complaint was dismissed without prejudice. On August 31, 2001, the
plaintiffs filed a second amended class action complaint against the same
defendants asserting claims substantively similar to those in the first
complaint. On September 21, 2001, Nortel Networks Corporation filed a motion
to dismiss this second complaint. The motion is currently under consideration
by the District Court.

On March 4, 1997, Bay Networks, Inc., 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, or the Federal
Court, and the California Superior Court, County of Santa Clara, or 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 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.

In each of the matters described above, plaintiffs are seeking an
unspecified amount of money damages.

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

We are unable to ascertain the ultimate aggregate amount of monetary
liability or financial impact of the above matters which seek damages of
material or indeterminate amounts, and therefore cannot determine whether these
actions, suits, claims, proceedings and investigations will, individually or
collectively, have a material adverse effect on our business, results of
operations, and financial condition. We and any of our named directors and
officers intend to vigorously defend these actions, suits, claims, proceedings
and investigations.

Environmental matters

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

Nortel Networks has remedial activities under way at five of its
facilities and seven previously occupied sites. An estimate of Nortel Networks
anticipated remediation costs associated with all such facilities and sites, to
the extent probable and reasonably estimable, is included in Nortel Networks
environmental accruals in an approximate amount of $24.

For a discussion of Environmental matters, see Environmental matters in
note 17 to Nortel Networks Limiteds audited consolidated financial statements
and notes thereto for the year ended December 31, 2001.

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Forward-looking statements

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

We have restructured our business and recorded a write down of intangible
assets in the past to respond to industry and market conditions. The
assumptions underlying our restructuring efforts and intangible assets write
down may prove to be inaccurate and we may have to restructure our business or
incur additional intangible asset write downs again in the future.

In response to changes in industry and market conditions, we have
restructured our business in the past, are currently restructuring our
business, and may again restructure our business in the future to achieve
certain cost savings and to strategically realign our resources. We have based
our work plan pertaining to the restructuring on certain assumptions regarding
the cost structure of our business and the nature and severity of the current
industry adjustment which may not prove to be accurate.

While restructuring, we have assessed, and will continue to assess,
whether we should dispose of or otherwise exit businesses or further reduce our
workforce, as well as review the recoverability of our tangible and intangible
assets associated with those businesses. Any decision to further limit
investment or to dispose of or otherwise exit businesses may result in the
recording of additional charges, such as workforce reduction costs, facilities
reduction costs, asset write downs, and contractual settlements. Additionally,
estimates and assumptions used in asset valuations are subject to
uncertainties, as are accounting estimates with respect to the useful life and
ultimate recoverability of our carrying basis of assets, including goodwill and
other intangible assets. As a result, future market conditions may result in
further charges for the write down of tangible and intangible assets.

We may not be able to successfully implement the initiatives we have undertaken
in restructuring our business and, even if successfully implemented, these
initiatives may not be sufficient to meet the changes in industry and market
conditions and to achieve future profitability.

We must successfully implement our work plan if we are to adjust our cost
structure to reflect current and expected future economic conditions, market
demands and revenues, and to achieve future profitability. We must also manage
the potentially higher growth areas of our business, as well as the non-core
areas of our business, effectively in light of current and expected future
market demands and trends.

Under our work plan, we have also implemented a number of initiatives,
including exiting businesses and writing down our tangible and intangible
assets, to streamline our business, and to focus our investments on delivering
what we believe to be the key next-generation networking solutions. However,
our work plan, including workforce reductions, may not be sufficient to meet
the changes in industry and market conditions, and such conditions may continue
to deteriorate or last longer than we expect. In addition, we may not be able
to successfully implement our work plan and may be required to refine, expand
or extend our work plan. Furthermore, our workforce reductions may impair our
ability to realize our current or future business objectives. Lastly, costs
actually incurred in connection with restructuring actions may be higher than
the estimated costs of such actions and/or may not lead to the anticipated cost
savings. As a result, our restructuring efforts may not result in our return
to profitability.

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

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



| |  |  | our ability to successfully complete programs on a timely basis to
reduce our cost structure, including fixed costs, and to streamline our
operations;                                                                                                                                                                                 
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | our ability to focus our business on what we believe to be
potentially higher growth, higher margin businesses, and to dispose of
or exit non-core businesses;                                                                                                                                                                         
|
| |  |  | the inherent uncertainties of using estimates and assumptions for
asset valuations and in determining the amounts of liabilities and other
items in our financial statements, and the impact of changes in
accounting principles used to value assets;                                                                                 
|
| |  |  | our ability to implement our work plan without negatively impacting
our relationships with our customers, the delivery of products based on
new and developing technologies, the delivery of high quality robust
products at competitive prices, the maintenance of technological
leadership, and the retention of qualified personnel;
|
| |  |  | fluctuations in our gross margins;                                                                                                                                                                                                                                                                                                     
|
| |  |  | the impact of acquired businesses and technologies;                                                                                                                                                                                                                                                                                    
|
| |  |  | increased price and product competition in the networking industry;                                                                                                                                                                                                                                                                    
|
| |  |  | the development, introduction and market acceptance of new
technologies, and integrated networking solutions, as well as the
adoption of new networking standards;                                                                                                                                                                     
|
| |  |  | variations in sales channels, product costs, and the mix of products sold;                                                                                                                                                                                                                                                             
|
| |  |  | the size and timing of customer orders and shipments;                                                                                                                                                                                                                                                                                  
|
| |  |  | our ability to maintain appropriate inventory levels; and                                                                                                                                                                                                                                                                              
|
| |  |  | the impact of our product development schedules, manufacturing
capacity, and lead times required to produce our products.                                                                                                                                                                                                              

Additionally, we are required to perform goodwill impairment tests on an
annual basis and between annual tests in certain circumstances, which may
result in a charge to net earnings (loss).

Significant fluctuations in our operating results could contribute to
volatility in the market price of Nortel Networks Corporations common shares.

Our gross margins may be negatively affected, which in turn would negatively
affect our operating results and could contribute to volatility in the market
price of Nortel Networks Corporations common shares.

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



| |  |  | increased price competition;    
| | - |  | --------------------------------
|
| |  |  | excess capacity;                
|
| |  |  | higher material or labour costs;

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| |  |  | warranty costs;                                                                         
| | - |  | ----------------------------------------------------------------------------------------
|
| |  |  | obsolescence charges;                                                                   
|
| |  |  | loss of cost savings on future inventory purchases as a result of high inventory levels;
|
| |  |  | introductions of new products and costs of entering new markets;                        
|
| |  |  | increased levels of customer services;                                                  
|
| |  |  | changes in distribution channels; and                                                   
|
| |  |  | changes in product and geographic mix.                                                  

Lower than expected gross margins would negatively affect our operating
results and could contribute to volatility in the market price of Nortel
Networks Corporations common shares.

Economic conditions in the United States, Canada, and globally, affecting the telecommunications industry, as well other trends and factors affecting the
telecommunications industry, are beyond our control and may result in reduced
demand and pricing pressure on our products.

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



| |  |  | adverse changes in the public and private equity and debt markets and
our ability, as well as the ability of our customers and suppliers, to
obtain financing or to fund working capital and capital expenditures;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | adverse changes in our credit rating, or the credit ratings of our customers and suppliers;                                                                                                                       
|
| |  |  | adverse changes in the market conditions in our industry and the specific markets for our products;                                                                                                               
|
| |  |  | the trend towards the sale of integrated networking solutions;                                                                                                                                                    
|
| |  |  | visibility to, and the actual size and timing of, capital expenditures by our customers;                                                                                                                          
|
| |  |  | inventory practices, including the timing of product and service deployment, of our customers;                                                                                                                    
|
| |  |  | the amount of network capacity and the network capacity utilization
rates of our customers, and the amount of sharing and/or acquisition of
new and/or existing network capacity by our customers;                
|
| |  |  | policies of our customers regarding utilization of single or multiple
vendors for the products they purchase;                                                                                                     
|
| |  |  | the overall trend toward industry consolidation and rationalization
among our customers, competitors, and suppliers;                                                                                              
|
| |  |  | conditions in the broader market for communications products,
including data networking products and computerized information access
equipment and services;                                                      
|
| |  |  | governmental regulation or intervention affecting communications or
data networking; and                                                                                                                          
|
| |  |  | the effects of war and acts of terrorism, such as disruptions in
general global economic activity, changes in logistics and security
arrangements, and reduced customer demand for our products and services.     

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Economic conditions affecting the telecommunications industry, which
affect market conditions in the telecommunications and networking industry, in
the United States, Canada and globally, affect our business. Reduced capital
spending and/or negative economic conditions in the United States, Canada,
Europe, Asia, Latin America and/or other areas of the world could result in
reduced demand for or pricing pressure on our products.

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

Competition for certain key positions and specialized technical personnel
in the high-technology industry is intense, despite current economic
conditions. We believe that our future success depends in part on our
continued ability to hire, assimilate, and retain qualified personnel in a
timely manner, particularly key members of senior management and in our key
areas of potential growth. A key factor in attracting and retaining qualified
employees is our ability to provide employees with the opportunity to
participate in the potential growth of our business through programs such as
stock option plans and employee investment plans. The value of these
opportunities may be adversely affected by the volatility or negative
performance of the market price for Nortel Networks Corporations common
shares. We may also find it more difficult to attract or retain qualified
employees because of our recent significant workforce reductions and business
performance. In addition, if we have not properly sized our workforce and
retained those employees with the appropriate skills, our ability to compete
effectively may be adversely affected. If we are not successful in attracting,
retaining or recruiting qualified employees, including members of senior
management, in the future, we may not have the necessary personnel to
effectively compete in the highly dynamic, specialized and volatile industry in
which we operate or to achieve our business objectives.

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

Our working capital requirements and cash flows historically have been,
and are expected to continue to be, subject to quarterly and yearly
fluctuations, depending on such factors as timing and size of capital
expenditures, levels of sales, timing of deliveries and collection of
receivables, inventory levels, customer payment terms, customer financing
obligations, and supplier terms and conditions. Our inability to manage cash
flow fluctuations resulting from such factors could have a material adverse
effect on our ability to fund our working capital requirements from operating
cash flows and other sources of liquidity or to achieve our business objectives
in a timely manner.

Our business may be materially and adversely affected by our increased levels
of debt.

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

In particular, certain of such credit agreements have been recently
amended and now contain financial covenants that require the maintenance of a
minimum consolidated tangible net worth and the achievement of certain minimum
consolidated earnings before interest, taxes, depreciation and amortization
(EBITDA) thresholds. The minimum required consolidated tangible net worth of
Nortel Networks Limited is not less than $1,888 at any time. The consolidated
EBITDA covenant requires that Nortel Networks Corporation achieve a cumulative
EBITDA of negative $650 or better for the six months ended June 30, 2002. In
addition, there are minimum EBITDA covenants in place for the remainder of
fiscal year 2002 and the first three quarters of 2003, tested in quarterly
increments during the period. Compliance with this covenant will require
EBITDA improvements during the fiscal year 2002, and further improvements in
the year thereafter. Certain business restructuring charges and other
incremental charges and gains as publicly disclosed are excluded from the
calculation of EBITDA. In addition, these credit agreements contain covenants
restricting additional debt, the payment of dividends, corporate events, liens,
sale and leasebacks, and investments, among others. Payments of dividends on
the outstanding preferred shares of Nortel Networks Limited is permitted
provided that compliance with certain covenants of the credit agreements is
maintained. If we continue to incur net losses, we may be unable to comply
with certain of our covenants under the credit agreements.

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



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

Changes in respect of our public debt ratings may materially and adversely
affect the availability, the cost, and the terms and conditions of our debt and
asset-based financings.

Certain of our outstanding debt instruments are publicly rated by
independent rating agencies, which ratings are now below investment grade.
These public debt ratings affect our ability to raise debt, our access to the
commercial paper market (which is currently closed to us), and our ability to
engage in asset-based financing. These public debt ratings also may negatively
affect the cost to us and terms and conditions of debt and asset-based
financings. Additionally, any negative developments regarding our cash flow,
public debt ratings and/or our incurring significant levels of debt, or our
failure to meet certain covenants under our credit agreements, could cause us
to lose access to, and/or cause a default under certain of our credit
facilities and adversely affect further the cost and terms and conditions of
our debt and asset-based financings.

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

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

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We cannot be sure what the rate of such convergence of voice and data
networks will be, due to the dynamic and rapidly evolving nature of the
communications business, the technology involved and the availability of
capital. Consequently, market discontinuities and the resulting demand for
IP-optimized networking solutions or 3G wireless networks may not materialize.
Alternatively, the pace of that development may slow. It may also be the case
that the market may develop in an unforeseen direction. Certain events,
including the availability of new technologies or the evolution of other
technologies, may occur which would affect the extent or timing of anticipated
market demand, or increase demand for products based on other technologies, or
reduce the demand for IP-optimized networking solutions or 3G wireless
networks, which in turn may reduce purchases of our networking solutions by our
customers, require increased expenditures to develop and market different
technologies, or provide market opportunities for our competitors. Our
performance may also be materially and adversely affected by a lack of growth
in the rate of data traffic, a reduction in the use of the Internet or a
reduction in the demand for IP-optimized networking solutions or 3G wireless
networks in the future.

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

A continued slowdown in capital spending by service providers may affect
our revenues more than we currently expect. Moreover, the significant slowdown
in capital spending by service providers has created uncertainty as to market
demand. As a result, revenues and operating results for a particular period
can be difficult to predict. In addition, there can be no certainty as to the
severity or duration of the current industry adjustment. Many of our
traditional customers have already begun to invest in data networking and/or
are in the process of transitioning from voice-only networks to networks which
include data traffic. However, as a result of the recent changes in industry
and market conditions, many of our customers have reduced their capital
spending on telecommunications infrastructure. Our revenues and operating
results have been and are expected to continue to be materially and adversely
affected by the continued reductions in capital spending on telecommunications
infrastructure by our customers. If the reduction of capital spending
continues for a prolonged period and we continue to incur net losses as a
result, we may be unable to comply with certain covenants under our credit
agreements.

We have made, and may continue to make, strategic acquisitions in order to
enhance our business. If we are not successful in operating or integrating
these acquisitions, our business, results of operation, and financial condition
may be materially and adversely affected.

In the past, we acquired companies to enhance the expansion of our
business and products. We may consider selective opportunistic acquisitions of
companies or businesses with resources and product or service offerings capable
of providing us with additional strengths to help fulfill our vision of
building the new, high-performance Internet. Acquisitions involve significant
risks and uncertainties. These risks and uncertainties include:



| |  |  | the risk that the industry may develop in a different direction than
anticipated and that the technologies we acquire do not prove to be
those we need to be successful in the industry;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the risk that future valuations of acquired businesses may decrease
from the market price we paid for these acquisitions;                                                               
|
| |  |  | the generation of insufficient revenues by acquired businesses to
offset increased operating expenses associated with these acquisitions;                                               
|
| |  |  | the potential difficulties in completing in-process research and
development projects and delivering high quality robust products to our
customers;                                     
|
| |  |  | the potential difficulties in integrating new products, businesses
and operations in an efficient and effective manner;                                                                 
|
| |  |  | the risk that our customers or customers of the acquired businesses
may defer purchase decisions as they evaluate the impact of the
acquisitions on our future product strategy;        
|
| |  |  | the potential loss of key employees of the acquired businesses;                                                                                                                         

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| |  |  | the risk that acquired businesses will divert the attention of our
senior management from the operation of our business; and    
| | - |  | --------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the risks of entering new markets in which we have limited experience
and where competitors may have a stronger market presence.

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

We operate in highly dynamic and volatile industries characterized by rapidly
changing technologies, evolving industry standards, frequent new product
introductions, and short product life cycles.

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

The success of new or enhanced products, including IP-optimized networking
solutions and 3G wireless networks, depends on a number of other factors,
including the timely introduction of such products, market acceptance of new
technologies and industry standards, the quality and robustness of new or
enhanced products, competing product offerings, the pricing and marketing of
such products, and the availability of funding for such networks. Products and
technologies developed by our competitors may render our products obsolete.
Hackers may attempt to disrupt or exploit our customers use of our
technologies. If we fail to respond in a timely and effective manner to
unanticipated changes in one or more of the technologies affecting
telecommunications and data networking or our new products or product
enhancements fail to achieve market acceptance, our ability to compete
effectively in our industry, and our sales, market share, and customer
relationships could be materially and adversely affected.

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

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

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

Our principal competitors in the sale of our Metro and Enterprise Networks
products to service providers are large communications companies such as
Alcatel S.A., Fujitsu Limited, Telefonaktiebolagat LM Ericsson, Lucent
Technologies Inc., and Siemens Aktiengesellschaft. In addition, we compete
with smaller companies that address specific niches within this market, such as
Ciena Corporation and ONI Systems Corp (who recently announced their intention
to combine their companies), Sonus Systems Limited, and Redback Networks Inc.
Our principal competitors in the sale of our Metro and Enterprise Networks
solutions to enterprises are Alcatel, Avaya Inc., Cisco Systems, Inc.,
Ericsson, and Siemens. We also

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compete with smaller companies that address specific niches, such as
Foundry Networks, Inc., Extreme Networks, Inc., Enterasys Networks, Inc., 3Com
Corporation, and Genesys Telecommunications Laboratories, Inc. Our major
competitors in the global wireless infrastructure business have traditionally
included Ericsson, Lucent, Motorola, Inc., and Nokia Corporation. More
recently, Siemens and Samsung Electronics Co., Ltd. have emerged as
competitors. Our major competitors in the sale of long-distance optical
networking equipment include Alcatel, Ciena, Fujitsu, Lucent, and Marconi plc.
Our major competitors in the sale of optical components includes Agere Systems
Inc. and JDS Uniphase Corporation. Since some of the markets in which we
compete are characterized by the potential for rapid growth and, in certain
cases, low barriers to entry and rapid technological changes, smaller,
specialized companies and start-up ventures are now or may become principal
competitors in the future. We may also face competition from the resale of
used telecommunications equipment, including our own on occasion, by failed,
downsized or consolidated high technology enterprises and telecommunications
service providers. In addition, one way to maximize market growth, enhance
existing products and introduce new products is through acquisitions of
companies, where advisable. Our acquisitions of other companies may cause
certain of our competitors to enter into additional business combinations, to
accelerate product development, or to engage in aggressive price reductions or
other competitive practices, creating even more powerful or aggressive
competitors.

We expect that we will face additional competition from existing
competitors and from a number of companies that have entered or may enter our
existing and future markets. Some of our current and potential competitors
have greater marketing, technical and financial resources, including the
ability to provide customer financing in connection with the sale of products.
Many of our current and potential competitors have also established, or may in
the future establish, relationships with our current and potential customers.
Increased competition could result in price reductions, negatively affecting
our operating results, reducing profit margins and potentially leading to a
loss of market share.

We face certain barriers in our efforts to expand internationally.

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



| |  |  | reversals or delays in the opening of foreign markets to new competitors;
| | - |  | -------------------------------------------------------------------------
|
| |  |  | trade protection measures;                                               
|
| |  |  | exchange controls;                                                       
|
| |  |  | currency fluctuations;                                                   
|
| |  |  | investment policies;                                                     
|
| |  |  | restrictions on repatriation of cash;                                    
|
| |  |  | nationalization of local industry;                                       
|
| |  |  | economic, social and political risks;                                    
|
| |  |  | taxation;                                                                
|
| |  |  | interest rates; and                                                      
|
| |  |  | other factors, depending on the country involved.                        

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

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

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

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

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

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

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

Changes in regulation of the Internet may affect the manner in which we conduct
our business and may materially and adversely affect our business, results of
operations, and financial condition.

There are currently few domestic or international laws or regulations that
apply directly to access to or commerce on the Internet. We could be
materially and adversely affected by regulation of the Internet in any country
where we operate in respect of such technologies as voice over the Internet,
encryption technology and access charges for Internet service providers. We
could also be materially and adversely affected by increased competition as a
result of the continuing

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deregulation of the telecommunications industry. If a jurisdiction in
which we operate adopts measures which affect the regulation of the Internet or
the deregulation of the telecommunications industry, we could experience both
decreased demand for our products and increased costs of selling such products.
Changes in laws or regulations governing the Internet and Internet commerce
could have a material adverse effect on our business, results of operations,
and financial condition.

We have provided and may continue to provide significant financing to our
customers. The current downturn in the economy increases our exposure to our
customers credit risk and the risk that our customers will not be able to
fulfill their payment obligations.

The competitive environment in which we operate has required us in the
past, and we expect may continue to require us in the future, to provide
significant amounts of medium-term and long-term customer financing. Customer
financing arrangements may include financing in connection with the sale of our
products and services, funding for certain non-product and service costs
associated with network installation and integration of our products and
services, financing for working capital and equity financing. We may provide
customer financing in the future for such customer requirements as turnkey
construction of new networks, particularly for 3G wireless operators. If we
do, we may be required to directly hold a significantly greater amount of such
financings than in the past, when we were able to place a large amount of our
customer financing obligations with third party lenders.

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

Recently, certain of our customers, including a number of competitive
local exchange carriers, have been experiencing financial difficulties, and
during the third and fourth quarters of 2001, we noted the amount of customer
financing with respect to which customers that have failed to meet their
financing obligations had increased. If there is further increase in the
failure of our customers to meet their customer financing obligations to us, we
could incur losses in excess of our provisions, which could have a material
adverse effect on our cash flow and operating results.

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

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

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

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excessive inventory levels could materially and negatively affect our
gross margins and our operating results and could materially damage customer
relationships.

Further, certain of our supply arrangements with our contract
manufacturers were negotiated prior to the current industry and economic
downturn and, depending upon the extent and duration of this downturn, the
terms of these arrangements may not be achievable. To the extent that we fail
to meet any of these arrangements, and if we are unable to successfully
renegotiate the applicable arrangement, we may be obligated to indemnify the
contract manufacturer for certain direct costs attributable to our failure to
so perform. The actual amount of any such indemnification, which could be
substantial, would be based on a variety of complex, inter-related factors. The
failure to reach a satisfactory resolution of any such matter could have a
material adverse effect on our business, results of operations, financial
condition, and supply relationships.

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

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

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

We are currently a defendant in numerous class actions and other lawsuits
which seek damages of material and indeterminate amounts, as well as lawsuits
in the normal course of business. We are and may in the future be subject to
other litigation arising in the normal course of our business. Litigation may
be time consuming, expensive, and distracting from the conduct of our business,
and the outcome of litigation is difficult to predict. The adverse resolution
of any specific lawsuit could have a material adverse effect on our business,
results of operations, and financial condition.

Recent pronouncements

In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 143, Accounting for Asset Retirement
Obligations, or SFAS 143, which is effective for financial statements issued
for fiscal years beginning after June 15, 2002. SFAS 143 addresses the
recognition and remeasurement of obligations associated with the retirement of
a tangible long-lived asset. We have not yet determined the effect that the
adoption of SFAS 143 will have on our business, results of operations, and
financial condition.

For a discussion of recent pronouncements, see Recent pronouncements in
note 12 to the accompanying unaudited consolidated financial statements.




ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk represents the risk of loss that may impact the consolidated
financial statements of Nortel Networks due to adverse changes in financial
market prices and rates. Nortel Networks market risk exposure is primarily a
result of fluctuations in interest rates and foreign exchange rates.
Disclosure of market risk is contained in our Annual Report on Form 10-K for
the year ended December 31, 2001.

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PART II
OTHER INFORMATION




ITEM 1.    Legal Proceedings

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




ITEM 6.    Exhibits and Reports on Form 8-K



|   |          
|-- | ---------
|a) | Exhibits:
|  



| |       |                                                                                                                                                                                                                                                                                                                                                                                                      
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.1  | Nortel Networks Limited Directors Deferred Share Compensation
Plan effective June 30, 1998 and amended and restated as of May 1,
2000, as further amended effective January 1, 2002.                                                                                                                                                                                                                
|
| | 10.2  | First Half 2002 SUCCESS Bonus Plan Summary.                                                                                                                                                                                                                                                                                                                                                          
|
| | *10.3 | U.S. Guarantee and Security Agreement dated as of the first
day of the Collateral Period (as defined therein) among Nortel
Networks Limited, Nortel Networks Inc. and certain of their
subsidiaries and JPMorgan Chase Bank, as Collateral Agent (filed as
Exhibit 99.1 to Nortel Networks Limiteds Current Report on Form 8-K
dated January 18, 2002).                                           
|
| | *10.4 | Canadian Guarantee and Security Agreement dated as of the
first day of the Collateral Period (as defined therein) among
Nortel Networks Limited and certain of its subsidiaries and JPMorgan
Chase Bank, as Collateral Agent (filed as Exhibit 99.1 to Nortel
Networks Limiteds Current Report on Form 8-K dated February 4,
2002).                                                               
|
| | 10.5  | Form of Nortel Networks Limited Foreign Subsidiary Guarantee
dated as of April 4, 2002 and schedule thereto listing the specific
foreign subsidiary guarantees which are not attached as exhibits.                                                                                                                                                                                                   
|
| | 10.6  | Foreign Pledge Agreement dated as of April 4, 2002 among Nortel
Networks Limited, the Subsidiary Guarantors party thereto and
JPMorgan Chase Bank, as Collateral Agent.                                                                                                                                                                                                                              
|
| | 10.7  | Foreign Pledge Agreement dated as of April 4, 2002 among Nortel
Networks Limited, Nortel Networks International Corporation and
JPMorgan Chase Bank, as Collateral Agent.                                                                                                                                                                                                                            
|
| | 10.8  | Foreign Pledge Agreement dated as of April 4, 2002 among Nortel
Networks Inc. and JPMorgan Chase Bank, as Collateral Agent.                                                                                                                                                                                                                                                                          
|
| | 10.9  | Pledge Agreement dated as of April 4, 2002 among Nortel
Networks Limited, Nortel Networks International
Finance & Holding B.V., Nortel Networks S.A., and JPMorgan Chase
Bank, as Collateral Agent.                                                                                                                                                                                                  
|
| | 10.10 | Foreign Pledge Agreement dated as of April 4, 2002 among
Nortel Networks International Finance & Holding B.V., Nortel
Communications Holdings (1997) Limited, Nortel Networks AB and
JPMorgan Chase Bank, as Collateral Agent, together with (a) the
Supplementing Pledge Agreement dated as of April 4, 2002 among Nortel
Networks International Finance & Holding, B.V. and JPMorgan Chase
Bank, as



---

|* |  | Incorporated by reference.
|- |  | --------------------------

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| |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |       | Collateral Agent, (b) the Pledge Agreement Supplement dated as of
April 4, 2002 between Nortel Networks Limited and JPMorgan Chase
Bank, as Collateral Agent, and (c) the Pledge Agreement Supplement
dated as of April 4, 2002 between Nortel Networks U.K. Limited and
JPMorgan Chase Bank, as Collateral Agent.                                                                                                                                                                                                                                                  
|
| | 10.11 | Foreign Pledge Agreement dated as of April 4, 2002 between
Nortel Networks International Finance & Holding B.V. and JPMorgan
Chase Bank, as Collateral Agent, together with (a) the Pledge
Agreement Supplement, dated as of April 4, 2002 between Nortel
Networks Optical Components Limited and JPMorgan Chase Bank, as
Collateral Agent, and (b) the Pledge Agreement Supplement dated as of
April 4, 2002 between Nortel Networks International Finance & Holding B.V., Nortel Networks
Optical Components Limited and JPMorgan Chase Bank, as Collateral
Agent.



|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|b) | Reports on Form 8-K:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  
|   | Nortel Networks Limited filed a Current Report on Form 8-K dated January
18, 2002 related to: (i) a certain security agreement among Nortel
Networks Limited, Nortel Networks Inc., certain other subsidiaries of
Nortel Networks Limited, and JPMorgan Chase Bank, as Collateral Agent,
related to the amended and restated credit agreements filed on the Current
Report on Form 8-K dated December 26, 2001; and (ii) Nortel Networks
Corporations financial results for the fourth quarter of 2001 and the
year 2001.                                                                                                                                
|  
|   | Nortel Networks Limited filed a Current Report on Form 8-K dated February
4, 2002 related to a certain security agreement related to the amended and
restated credit agreements filed on the Current Report on Form 8-K dated
December 26, 2001.                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|   | Nortel Networks Limited filed a Current Report on Form 8-K dated February
12, 2002 related to: (i) the resignation of Nortel Networks Corporations
and Nortel Networks Limiteds Chief Financial Officer; and (ii) a
purported class action lawsuit filed on behalf of certain participants and
beneficiaries of the Nortel Networks Long-Term Investment Plan.                                                                                                                                                                                                                                                                                          
|  
|   | Nortel Networks Limited filed a Current Report on Form 8-K dated February
12, 2002 related to Part I  Item 1  Business of Nortel Networks
Limiteds Annual Report on Form 10-K for the fiscal year ended December
31, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|   | Nortel Networks Limited filed a Current Report on Form 8-K/A dated
February 12, 2002 related to amended managements discussion and analysis
of financial condition and results of operations for the year ended
December 31, 2000, restated for discontinued operations, which it
previously filed on the Current Report on Form 8-K dated November 6, 2001.                                                                                                                                                                                                                                                                                             
|  
|   | Nortel Networks Limited filed a Current Report on Form 8-K dated February
12, 2002 related to: (i) a pre-effective amendment to a registration
statement of Nortel Networks Corporation and Nortel Networks Limited with
respect to the potential resale by selling securityholders of Nortel
Networks Corporations 4.25% convertible senior notes guaranteed by Nortel
Networks Limited and/or the underlying common shares of Nortel Networks
Corporation; and (ii) Nortel Networks Corporations investor conference
held in New York City, including Nortel Networks Corporations financial
outlook for the year 2002 and the first quarter of 2002.
|  
|   | Nortel Networks Limited filed a Current Report on Form 8-K dated March 1,
2002 related to the announcement of a number of changes in the make-up of
Nortel Networks Corporations and Nortel Networks Limiteds boards of
directors, including the dissolution of the Office of the Chief Executive.                                                                                                                                                                                                                                                                                                                                                      
|  
|   | Nortel Networks Limited filed a Current Report on Form 8-K dated April 4,
2002 related to a press release Nortel Networks Corporation issued in
response to an announcement that Moodys Investors Service, Inc. lowered
ratings on securities issued or guaranteed by it and its principal
operating subsidiaries to below investment grade.                                                                                                                                                                                                                                                                                                             

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Nortel Networks Limited filed a Current Report on Form 8-K dated April 9,
2002 related to: (i) the announcement by Nortel Networks Corporation of
the amendment and extension of the $1.75 billion April 2001 credit
facilities, and the reduction of the facilities to $1.175, of its
principal operating subsidiaries, Nortel Networks Limited and Nortel
Networks Inc.; and (ii) an update by Nortel Networks Corporation on its
first quarter of 2002 performance.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | Nortel Networks Limited filed a Current Report on Form 8-K dated April 22,
2002 related to Nortel Networks Corporations financial results for the
first quarter of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | Nortel Networks Limited filed a Current Report on Form 8-K dated May
13, 2002 related to: (i) the filing of audited consolidated financial
statements for the three years ended December 31, 2001 of Nortel Networks
Limited and audited financial statements for the three years ended
December 31, 2001 of Nortel Networks S.A. in accordance with Rule 3-10 and 3-16, respectively, of Regulation
S-X under the Securities Act of 1933;
(ii) the
intended filing of a shelf registration statement on Form S-3 with the
United States Securities and Exchange Commission and a preliminary base
shelf prospectus with the Canadian securities regulatory authorities for the purposes of qualifying the potential sale by Nortel Networks
Corporation or Nortel Networks Limited from time to time in the
United States and/or Canada of up to an aggregate of $2.5 billion of various
types of securities; (iii) the
intended withdrawal by Nortel Networks Limited and Nortel
Networks Capital Corporation, a wholly owned indirect finance subsidiary of Nortel Networks Limited, of their existing U.S. shelf registration statement currently pertaining to an aggregate of up to US$1.0 billion of debt securities and warrants to purchase debt securities; and
(iv) the filing of certain information incorporated by reference into the Canadian preliminary base shelf prospectus, including historical consolidated
financial statements of Nortel Networks Limited prepared in accordance with Canadian generally accepted accounting principles.

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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
|                                                                             
|                                                                             
|FRANK A. DUNN                                                               |  | D.C. BEATTY           
|FRANK A. DUNN
President, Chief Executive Officer,
and Chief Financial Officer |  | D.C. BEATTY
Controller  



Date: May 13, 2002

55