<PAGE>   1
================================================================================

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


                                    FORM 10-Q

    [ X ]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934



                  For the Quarterly Period Ended March 31, 2001

                                       OR

    [   ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934



               For the Transition Period From __________ to __________


                        Commission file number 000-30758


                            NORTEL NETWORKS LIMITED
             (Exact name of registrant as specified in its charter)


CANADA                                                              62-12-62580
(State or other jurisdiction of            (I.R.S. Employer Identification No.)
incorporation or organization)


8200 DIXIE ROAD, SUITE 100, BRAMPTON, ONTARIO, CANADA                   L6T 5P6
(Address of principal executive offices)                             (Zip Code)


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

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

                           YES  [ X ]              No

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as at APRIL 30, 2001

            1,456,889,062 COMMON SHARES WITHOUT NOMINAL OR PAR VALUE


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<PAGE>   2

                                TABLE OF CONTENTS


                                     PART I
                              FINANCIAL INFORMATION

<TABLE>
<CAPTION>

                                                                           PAGE
                                                                           ----

<S>         <C>                                                            <C>
ITEM 1.     Consolidated Financial Statements (unaudited).................    4

ITEM 2.     Management's Discussion and Analysis of Financial
                   Condition and Results of Operations....................    18

ITEM 3.     Quantitative and Qualitative Disclosures About
                   Market Risk............................................    34
</TABLE>


                                     PART II
                                OTHER INFORMATION
<TABLE>
<S>         <C>                                                            <C>
ITEM 1.     Legal Proceedings.............................................    35

ITEM 6.     Exhibits and Reports on Form 8-K..............................    35

SIGNATURES  ..............................................................    36
</TABLE>




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

Nortel Networks is a trademark of Nortel Networks Limited




                                       2
<PAGE>   3
                                     PART I
                              FINANCIAL INFORMATION



ITEM 1.       CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



              Contents of Consolidated Financial Statements

<TABLE>
<CAPTION>
                                                                                    PAGE
                                                                                    ----
              <S>                                                                   <C>
              Consolidated Statements of Operations............................      4

              Consolidated Balance Sheets......................................      5

              Consolidated Statements of Cash Flows............................      6

              Notes to Consolidated Financial Statements.......................      7
</TABLE>




                                       3
<PAGE>   4


                             NORTEL NETWORKS LIMITED
                CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
                           (MILLIONS OF U.S. DOLLARS)

<TABLE>
<CAPTION>
                                                              THREE MONTHS ENDED
                                                                  MARCH 31,
                                                           -------------------------
                                                             2001              2000
                                                           -------           -------
<S>                                                        <C>               <C>
Revenues                                                   $ 6,113           $ 6,322
Cost of revenues                                             4,298             3,718
                                                           -------           -------
Gross profit                                                 1,815             2,604
Selling, general and administrative expense                  1,358             1,192
Research and development expense                               986               851
In-process research and development expense                      -               673
Amortization of intangibles
   Acquired technology                                         208               181
   Goodwill                                                    744               479
Special charges                                                388               195
                                                           -------           -------

                                                            (1,869)             (967)
Equity in net loss of associated companies                     (28)               (3)
Other income - net                                              97               543
Interest expense
   Long-term debt                                              (39)              (23)
   Other                                                       (18)              (16)
                                                          --------           -------
Loss before income taxes and accounting change              (1,857)             (466)

Income tax recovery (provision)                                319              (256)
                                                          --------           -------
Loss before accounting change                               (1,538)             (722)

Cumulative effect of accounting change
  (net of income taxes of $9)                                   15                 -
                                                           -------           -------
Net loss                                                    (1,523)             (722)

Dividends on preferred shares                                   (8)               (8)
                                                          --------           -------
Net loss applicable to common shares                      $ (1,531)           $ (730)
                                                         =========           =======
</TABLE>

            See notes to unaudited consolidated financial statements.




                                       4
<PAGE>   5
                             NORTEL NETWORKS LIMITED
                     CONSOLIDATED BALANCE SHEETS (UNAUDITED)
                           (MILLIONS OF U.S. DOLLARS)

<TABLE>
<CAPTION>

                                                                                                    MARCH 31,  DECEMBER 31,
                                                                                                      2001             2000
                                                                                                   -------          -------
<S>                                                                                                <C>              <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents                                                                          $ 1,693          $ 1,567
Accounts receivable (less provisions of - $384 at March 31, 2001;
  $400 at December 31, 2000)                                                                         7,468            8,156
Inventories                                                                                          4,079            4,310
Income taxes receivable                                                                                155                -
Deferred income taxes - net                                                                            785              739
Other current assets                                                                                 1,307            1,592
                                                                                                  --------         --------
TOTAL CURRENT ASSETS                                                                                15,487           16,364

Long-term receivables (less provisions of - $414 at March 31, 2001;
  $383 at December 31, 2000)                                                                         1,502            1,527
Investments at cost and associated companies at equity                                                 715              880
Plant and equipment - net                                                                            3,576            3,352
Intangible assets - net                                                                              6,889            7,947
Deferred income taxes - net                                                                            317              284
Other assets                                                                                           813              558
                                                                                                  --------         --------
TOTAL ASSETS                                                                                      $ 29,299         $ 30,912
                                                                                                  ========         ========

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
   Notes payable                                                                                     $ 684            $ 315
   Trade and other accounts payable                                                                  2,497            3,483
   Payroll and benefit-related liabilities                                                             702              912
   Other accrued liabilities                                                                         3,648            3,674
   Income taxes payable                                                                                  -              306
   Long-term debt due within one year                                                                  457              445
                                                                                                  --------         --------
TOTAL CURRENT LIABILITIES                                                                            7,988            9,135

Deferred income                                                                                        109              105
Long-term debt                                                                                       2,632            1,177
Deferred income taxes - net                                                                            648              708
Other liabilities                                                                                    1,029            1,024
Minority interest in subsidiary companies                                                              168              195
                                                                                                  --------         --------
                                                                                                    12,574           12,344
                                                                                                  --------         --------
CONTINGENCIES (note 13)

SHAREHOLDERS' EQUITY
Preferred shares, without par value - Authorized shares: unlimited; Issued
  and outstanding shares: 30,000,200 at March 31, 2001 and December 31, 2000                           609              609
Common shares, without par value - Authorized shares: unlimited; Issued and outstanding
  shares: 1,453,706,507 at March 31, 2001 and 1,453,437,535 at December 31, 2000                    17,049           17,024
Additional paid-in capital                                                                           1,910            1,878
Deficit                                                                                             (1,933)            (402)
Accumulated other comprehensive loss                                                                  (910)            (541)
                                                                                                  --------         --------
TOTAL SHAREHOLDERS' EQUITY                                                                          16,725           18,568
                                                                                                  ========         ========
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                                        $ 29,299         $ 30,912
                                                                                                  ========         ========

</TABLE>


            See notes to unaudited consolidated financial statements.



                                       5
<PAGE>   6


                             NORTEL NETWORKS LIMITED
                CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
                           (MILLIONS OF U.S. DOLLARS)

<TABLE>
<CAPTION>
                                                                                                    THREE MONTHS ENDED
                                                                                                         MARCH 31,
                                                                                                 -------------------------
                                                                                                     2001             2000
                                                                                                 --------           ------
<S>                                                                                              <C>                <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
 Net loss                                                                                        $ (1,523)          $ (722)
 Adjustments to reconcile net loss to net cash used in operating
  activities, net of effects from acquisitions of businesses:
   Amortization and depreciation                                                                    1,150              818
   In-process research and development expense                                                          -              673
   Equity in net loss of associated companies                                                          28                3
   Tax benefit from stock options                                                                      33              166
   Deferred income taxes                                                                              (78)              99
   Other liabilities                                                                                  (29)              32
   Gain on sale of investments                                                                        (24)            (513)
   Other - net                                                                                         11              368
   Change in operating assets and liabilities:
    Accounts receivable                                                                             1,036              (76)
    Inventories                                                                                        84             (622)
    Income taxes                                                                                     (461)            (330)
    Accounts payable and accrued liabilities                                                       (1,195)            (441)
    Other operating assets and liabilities                                                            135              (62)
                                                                                                 --------           ------
 Net cash used in operating activities                                                               (833)            (607)
                                                                                                 --------           ------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
 Expenditures for plant and equipment                                                                (544)            (308)
 Proceeds on disposals of plant and equipment                                                           -               13
 Increase in long-term receivables                                                                   (389)            (419)
 Decrease in long-term receivables                                                                     61              409
 Acquisitions of investments and businesses - net of cash acquired                                    (24)              21
 Proceeds on sale of investments                                                                       44              661
                                                                                                 --------           ------
 Net cash from (used in) investing activities                                                        (852)             377
                                                                                                 --------           ------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
 Dividends on common and preferred shares                                                              (8)             (61)
 Increase in notes payable                                                                            582               20
 Decrease in notes payable                                                                           (207)             (21)
 Proceeds from long-term debt                                                                       1,505               29
 Repayments of long-term debt                                                                         (37)             (25)
 Increase (decrease) in capital leases payable                                                         (9)              22
 Issuance of common shares                                                                              -              183
                                                                                                 --------           ------
 Net cash from financing activities                                                                 1,826              147
                                                                                                 --------           ------
 Effect of foreign exchange rate changes on cash and cash equivalents                                 (15)             (10)
                                                                                                 --------           ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                                  126              (93)
                                                                                                 --------           ------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD - NET                                              1,567            2,153
                                                                                                 --------           ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD - NET                                                  $ 1,693          $ 2,060
                                                                                                 ========          =======
</TABLE>


            See notes to unaudited consolidated financial statements.


                                       6
<PAGE>   7



                             NORTEL NETWORKS LIMITED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
               (millions of U.S. dollars, unless otherwise stated)

1.   NORTEL NETWORKS LIMITED

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

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

2.   BASIS OF PRESENTATION

     The accompanying unaudited Consolidated Financial Statements of the Company
     have been prepared in accordance with the rules and regulations of the
     United States Securities and Exchange Commission for the preparation of
     interim financial information. Accordingly, they do not include all
     information and footnotes 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
     these unaudited Consolidated Financial Statements are as those described in
     the Company's audited Consolidated Financial Statements and notes thereto
     prepared in accordance with GAAP and included in the Company's Annual
     Report on Form 10-K for the year ended December 31, 2000 (the "2000 Form
     10-K"). Although the Company is headquartered in Canada, the consolidated
     financial statements are expressed in United States dollars as the greater
     part of the Company's financial results and net assets are denominated in
     United States dollars.

     In the opinion of management, all adjustments necessary to effect a fair
     statement of the results for the periods presented have been made and all
     such adjustments are of a normal recurring nature. The financial results
     for the three months ended March 31, 2001 are not necessarily indicative of
     financial results for the full year. These unaudited Consolidated Financial
     Statements should be read in conjunction with the 2000 Form 10-K.


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

3.   ACCOUNTING CHANGE - DERIVATIVE FINANCIAL INSTRUMENTS

     Effective January 1, 2001, Nortel Networks adopted Statement of Financial
     Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
     Instruments and Hedging Activities" ("SFAS 133"), and the corresponding
     amendments under SFAS No. 138, "Accounting for Certain Derivative
     Instruments and Certain Hedging Activities - an amendment of SFAS No. 133"
     ("SFAS 138"). SFAS 133 requires that all derivative financial instruments
     be recognized in the financial statements and measured at fair value
     regardless of the purpose or intent for holding them. If the derivative is
     designated as a fair value hedge, changes in the fair value of the
     derivative and of the hedged item attributable to the


                                       7
<PAGE>   8

     hedged risk are recognized in net earnings/loss. If the derivative is
     designated as a cash flow hedge, the effective portions of changes in the
     fair value of the derivative are recorded in other comprehensive
     income/loss ("OCI") and are recognized in net earnings/loss when the hedged
     item affects net earnings/loss. Ineffective portions of changes in the fair
     value of cash flow hedges are recognized in net earnings/loss. If the
     derivative used in an economic hedging relationship is not designated in an
     accounting hedging relationship, changes in the fair value of the
     derivative are recognized in net earnings/loss.

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

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

     Foreign Currency Risk

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

     Interest Rate Risk

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

     Other Derivatives

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

     For option contracts designated either as fair value or cash flow hedges,
     changes in the time value are excluded from the assessment of hedge
     effectiveness. Hedge ineffectiveness, determined in accordance with SFAS
     133, had no material impact on net loss for the three months ended March
     31, 2001. No fair value hedges or cash flow hedges were derecognized or
     discontinued for the three months ended March 31, 2001.

     Selling, general and administrative expenses for the three months ended
     March 31, 2001, included a net gain of $38 pre-tax, primarily related to
     changes in the fair value of derivative instruments not designated as
     hedging instruments.


                                       8
<PAGE>   9

     Derivative gains and losses included in OCI are reclassified into net
     earnings/loss at the time the underlying transaction is recognized. During
     the three months ended March 31, 2001, $5 of net derivative losses were
     reclassified to selling, general and administrative expense. Nortel
     Networks estimates that $25 pre-tax of net derivative losses included in
     OCI will be reclassified into net earnings/loss within the next twelve
     months.

4.   SEGMENTED INFORMATION

     General description

     Nortel Networks customers, markets, and solutions continue to evolve. As a
     result, the specific customer groups identified within our previous Service
     Provider and Carrier segment and Enterprise segment have now merged or
     become uniform. In response to this change, Nortel Networks has changed the
     way it manages its business to reflect a focus on providing seamless
     networking solutions and service capabilities to its customers.
     Consequently, financial information by segment and customer solution has
     been restated and reported on a new basis commencing with the three months
     ended March 31, 2001. Financial information by segment and customer
     solution for the years ended December 31, 2000 and 1999 has also been
     restated and presented for comparative purposes. Geographical information
     did not change as a result of this new basis of reporting.

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

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

     The Company's President and Chief Executive Officer ("CEO") has been
     identified as the chief operating decision maker in assessing the
     performance of the segments and the allocation of resources to the
     segments. The CEO relies on the information derived directly from Nortel
     Networks management reporting system which provides revenue and gross
     profit information by segment. The CEO reviews selling, general and
     administrative expense, research and development expense, and the costs
     associated with acquisitions on a total basis. Therefore, Nortel Networks
     does not allocate these costs to the segments as the CEO does not use this
     information to either assess the performance of or allocate resources to
     the segments. In addition, the CEO does not review asset information on a
     segmented basis. Intersegment sales are based on fair market values. All
     intersegment profit, including any unrealized profit on ending inventories,
     is eliminated on consolidation. The accounting policies of the segments are
     the same as those described on page F-6 in note 2 of the 2000 Form 10-K.


                                       9
<PAGE>   10


     Segments

     The following tables set forth information by segments for the three months
     ended March 31:

<TABLE>
<CAPTION>
                                                                                                  2001              2000
                                                                                                -------           -------
     <S>                                                                                        <C>               <C>
     REVENUES
     Network Infrastructure                                                                     $ 4,512           $ 4,620
     Photonics Components                                                                           300               402
     Other                                                                                        1,511             1,611
     Intersegment sales elimination                                                                (210)             (311)
                                                                                                -------           -------
     Total                                                                                      $ 6,113           $ 6,322
                                                                                                =======           =======

     GROSS PROFIT
     Network Infrastructure                                                                     $ 1,502             2,052
     Photonics Components                                                                            56               128
     Other                                                                                          263               434
     Intersegment inventory unrealized profit elimination - net                                      (6)              (10)
                                                                                                -------           -------
     Total                                                                                      $ 1,815           $ 2,604
                                                                                                =======           =======
     Gross margin
     Network Infrastructure                                                                       33.3%             44.4%
     Photonics Components                                                                         18.7%             31.8%
     Other                                                                                        17.4%             26.9%
     Nortel Networks                                                                              29.7%             41.2%
                                                                                                =======           =======
</TABLE>

     The following tables set forth information by segments for the years ended
     December 31:

<TABLE>
<CAPTION>
                                                                                                   2000              1999
                                                                                               --------          --------
     <S>                                                                                       <C>               <C>
     Revenues
     Network Infrastructure                                                                    $ 22,427          $ 14,378
     Photonics Components                                                                         2,425             1,045
     Other                                                                                        7,278             6,669
     Intersegment sales elimination                                                              (1,952)             (805)
                                                                                               --------          --------
     Total                                                                                     $ 30,178          $ 21,287
                                                                                               ========          ========

     GROSS PROFIT
     Network Infrastructure                                                                    $ 10,363             6,635
     Photonics Components                                                                           902               389
     Other                                                                                        1,900             2,255
     Intersegment inventory unrealized profit elimination - net                                     (43)              (55)
                                                                                               --------          --------
     Total                                                                                     $ 13,122           $ 9,224
                                                                                               ========          ========

     Gross margin
     Network Infrastructure                                                                       46.2%             46.1%
     Photonics Components                                                                         37.2%             37.2%
     Other                                                                                        26.1%             33.8%
     Nortel Networks                                                                              43.5%             43.3%
                                                                                               ========          ========
</TABLE>



                                       10
<PAGE>   11
     Customer solutions revenues

     The following table sets forth external revenues by customer solutions for
     the three months ended March 31:

<TABLE>
<CAPTION>
                                                                               2001              2000
                                                                            -------            -------
     <S>                                                                    <C>                <C>
     Optical inter-city                                                     $   992            $ 1,424
     Local internet                                                           2,055              2,134
     Wireless internet                                                        1,465              1,062
     Other (a)                                                                1,601              1,702
                                                                            -------            -------
     Total                                                                  $ 6,113            $ 6,322
                                                                            =======            =======

     </TABLE>
     (a)  Other includes the external customer solutions revenue of $90 and $91
          of the Photonics Components segment for the three months ended March
          31, 2001 and 2000, respectively.

     The following table sets forth external revenues by customer solutions for
     the years ended December 31:

<TABLE>
<CAPTION>
                                                                               2000              1999
                                                                           --------          --------
     <S>                                                                   <C>               <C>
     Optical inter-city                                                    $  6,912          $  3,073
     Local internet                                                          10,423             7,428
     Wireless internet                                                        5,092             3,877
     Other (a)                                                                7,751             6,909
                                                                           --------          --------
     Total                                                                 $ 30,178          $ 21,287
                                                                           ========          ========

</TABLE>

     (a)  Other includes the external customer solutions revenue of $473 and
          $240 of the Photonics Components segment for the years ended December
          31, 2000 and 1999, respectively.

     Geographic information

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

<TABLE>
<CAPTION>
                                                                             2001              2000
                                                                          -------           -------
     <S>                                                                  <C>               <C>
     EXTERNAL REVENUES (a)
     United States                                                        $ 3,005           $ 3,960
     Canada                                                                   318               325
     Other countries                                                        2,790             2,037
                                                                          -------           -------
     Total                                                                $ 6,113           $ 6,322
                                                                          =======           =======
</TABLE>

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


                                       11
<PAGE>   12


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

<TABLE>
<CAPTION>
                                                          MARCH 31,      DECEMBER 31,
                                                            2001             2000
                                                          ---------      -----------
     <S>                                                  <C>             <C>
     LONG-LIVED ASSETS (a)
     United States                                        $  7,814        $  8,660
     Canada                                                  1,381           1,286
     Other countries                                         1,270           1,353
                                                          --------        --------
     Total                                                $ 10,465        $ 11,299
                                                          ========        ========
</TABLE>

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

5.   IN-PROCESS RESEARCH AND DEVELOPMENT

     A brief description of the in-process research and development ("IPR&D")
     project in process during the three months ended March 31, 2001, including
     an estimated percentage-of-completion of product within the project at its
     respective acquisition date, is set forth in the table below:


<TABLE>
<CAPTION>

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

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

       ----------------------------------------------------------------------------------------------
</TABLE>

       In order for Nortel Networks to succeed in the highly competitive and
       rapidly changing marketplace in which it operates, acquired assets must
       be integrated quickly into its customer solutions as enhancements of
       existing technology or as part of a larger platform. It is Nortel
       Networks normal practice to begin the integration of all acquired
       businesses (including management responsibilities, financial reporting,
       and human resources) immediately following the closing of the
       transaction. As such, Nortel Networks does not specifically track
       revenues generated from completed IPR&D projects of acquired businesses
       subsequent to the closing and integration of acquisitions. While Nortel
       Networks believes that all of the development projects will be
       successfully completed, failure of any of these projects to achieve
       technological feasibility, and/or any variance from forecasted results,
       may result in a material adverse effect on the business, results of
       operations and financial condition of Nortel Networks.


                                       12
<PAGE>   13


6.   SPECIAL CHARGES AND ONE-TIME COSTS

     Special charges for the three months ended March 31, 2001 were as follows:

<TABLE>

<S>                                                                                 <C>
     Workforce reduction                                                                 $      260
     Contract settlement and lease costs                                                         24
     Goodwill write-off                                                                          90
     Other                                                                                       14
                                                                                         ----------
     Total special charges                                                                      388
     Cumulative draw-downs                                                                     (183)
                                                                                         ----------
     Provision balance                                                                   $      205
                                                                                         ==========
</TABLE>

     2001

     For the three months ended March 31, 2001, Nortel Networks recorded special
     charges of $388 related to restructuring and other costs associated with
     its initiatives that began in 2000 to optimize profitability and drive
     efficiencies in its business by streamlining operations and activities that
     are not aligned with its core markets and leadership strategies. In
     addition, Nortel Networks continued with the outsourcing of the Information
     Services function that began in the fourth quarter of 2000.

     Workforce reduction charges of $254 related to the cost of severance and
     related benefits for the termination of approximately 8,200 employees in
     connection with the above noted restructuring activities. The termination
     of the 8,200 employees was primarily in North America and the United
     Kingdom and across all of Nortel Networks operating segments. As at March
     31, 2001, the provision balance has been drawn down by cash payments of $92
     resulting in an ending provision balance of $162. The remaining provision
     is expected to be substantially drawn down by the third quarter of 2001.

     Non-severance charges of $34 in connection with the above noted
     restructuring activities included a charge of $20 for obligations under
     contractual agreements within Network Infrastructure and Other and a charge
     of $14 related to various items within Network Infrastructure. The
     provision of $34 at March 31, 2001 is expected to be substantially drawn
     down by the third quarter of 2001.

     The goodwill write-off of $90 was the remaining net book value of goodwill
     recorded on the prior acquisitions of MICOM Communications Corp. and
     Broadband Networks Inc. As part of Nortel Networks current initiative to
     strategically realign resources, Nortel Networks has made the decision to
     exit the technologies associated with these prior acquisitions completely.

     When events and circumstances warrant a review, Nortel Networks evaluates
     the carrying value of goodwill and long-lived assets to be held and used in
     accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
     Assets and for Long-Lived Assets to Be Disposed Of." In light of the
     current business environment, uncertain performance outlook, and adjustment
     of technology market valuations, Nortel Networks is engaged in an
     evaluation of its long-lived assets.

     A charge of $10 was recorded in connection with the outsourcing of certain
     Information Services functions, of which $6 related to workforce reduction
     and $4 related to contract settlement and lease costs. As at March 31,
     2001, the provision balance has been drawn down by cash payments of $1
     resulting in an ending provision balance of $9. The remaining provision is
     expected to be substantially drawn down by the fourth quarter of 2001.

     2000

     In the year ended December 31, 2000, Nortel Networks recorded special
     charges aggregating to $271 related to restructuring and other charges, and
     one-time costs of $2.


                                       13
<PAGE>   14

     Restructuring activities involved the implementation of Nortel Networks
     initiative to strategically realign resources into high growth areas of the
     business in response to shifts in customers' needs and transitions from
     older to newer technologies across Nortel Networks product portfolio, and
     the outsourcing of certain Information Services functions.

     Workforce reduction charges of $130 primarily represented the cost of
     severance and related benefits for the termination of approximately 4,000
     employees in the above noted restructuring activities.

     Other charges primarily represented a reduction of the goodwill related to
     Matra Nortel Communications S.A.S. and the provision had been completely
     drawn down as at December 31, 2000.

     The opening provision balance of $48, related to the above workforce
     reductions, has been completely drawn down, resulting in a provision
     balance of nil as at March 31, 2001.

     1999

     In the year ended December 31, 1999, Nortel Networks recorded special
     charges aggregating to $160 related to restructuring costs and one-time
     costs of $49.

     Restructuring activities involved Nortel Networks exit of certain
     operations, realigning of resources into growth areas in response to
     industry shifts as well as to create efficiencies within the former Service
     Provider and Carrier segment ("SP&C") and the former Enterprise segment and
     the streamlining of SP&C manufacturing operations. Nortel Networks also
     restructured, for purposes of outsourcing, its corporate processes
     including a portion of its payroll, accounts payable, training, and
     resourcing functions.

     Workforce reduction charges of $87 primarily represented the cost of
     severance and related benefits for the termination of approximately 1,970
     employees in the above noted restructuring activities.

     Other charges primarily represented a write-down of equipment, contract
     settlement and lease costs, and facilities impairment charges of $73. The
     provision had been completely drawn down as at December 31, 2000.

     The opening provision balance of $28 related to the employees identified in
     the strategic resource realignment initiatives described above has been
     drawn down by $17, resulting in a provision balance of $11 as at March 31,
     2001. The remaining provision is expected to be drawn down by the second
     quarter of 2001.

7.   LONG-TERM DEBT

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

8.   INCOME TAXES

     Excluding the impact of after-tax charges of Acquisition Related Costs
     (IPR&D expense and the amortization of acquired technology and goodwill
     from all acquisitions subsequent to July 1998), stock option compensation
     and, where applicable, certain of the one-time gains and charges, Nortel
     Networks effective income tax rate was 32.0 percent for the three months
     ended March 31, 2001 compared with 33.0 percent for the same period in
     2000. The change in Nortel Networks effective tax rate was primarily due to
     the change in Nortel Networks geographic mix of earnings.

     Global investment tax credits of $40 and $43 for the three months ended
     March 31, 2001 and 2000, respectively, have been applied against the income
     tax provision.


                                       14
<PAGE>   15


9.   RELATED PARTY TRANSACTIONS

     The Company engages in certain transactions with both its parent company,
     Nortel Networks Corporation, and with a directly owned subsidiary of its
     parent. These transactions include cash borrowings between the parties in
     addition to funding activities pursuant to reciprocal credit agreements. As
     at March 31, 2001 and December 31, 2000, the balance included in trade and
     other accounts payable owing to the Company's parent was $139 and $101,
     respectively, and to a directly owned subsidiary of the Company's parent
     was $206 and $252, respectively.

10.  INVENTORIES

     The following table sets forth inventories as at:

<TABLE>
<CAPTION>
                                                                                    MARCH 31,      DECEMBER 31,
                                                                                      2001             2000
                                                                                   ----------      ------------
     <S>                                                                      <C>               <C>
     Raw materials                                                                  $ 1,020          $   789
     Work in process                                                                    897              964
     Finished goods                                                                   2,162            2,557
                                                                                    -------          -------
     Inventories                                                                    $ 4,079          $ 4,310
                                                                                    =======          =======
</TABLE>

11.  CONSOLIDATED STATEMENTS OF CASH FLOWS

     The following table sets forth interest and income taxes paid for the three
     months ended March 31:

<TABLE>
<CAPTION>
                                                                                   2001              2000
                                                                                   -----             -----
     <S>                                                                           <C>               <C>
     Interest paid                                                                 $  32             $  28
     Income taxes paid                                                             $ 191             $ 308
</TABLE>


12.  COMPREHENSIVE LOSS

     The components of comprehensive loss, net of tax, were as follows for the
     three months ended March 31:

<TABLE>
<CAPTION>
                                                                                    2001              2000
                                                                                --------            ------
     <S>                                                                        <C>                 <C>
     Net loss applicable to common shares                                       $ (1,531)           $ (730)
     Other comprehensive income (loss):
       Change in foreign currency translation adjustment (a)                        (259)              (21)
       Change in unrealized gain on investments - net (b)                            (87)              129
       Unrealized net derivative losses on cash flow hedges - net (c)                (23)                -
                                                                                --------            ------
     Comprehensive loss                                                         $ (1,900)           $ (622)
                                                                                --------            ------
</TABLE>

     (a)  The change in the foreign currency translation adjustment is not
          adjusted for income taxes as it relates to indefinite investments in
          non-United States subsidiaries.

     (b)  Certain securities deemed available-for-sale by Nortel Networks are
          measured at fair value. Unrealized holding gains and losses
          related to these securities are excluded from net loss and are
          included in comprehensive loss until they are realized.

     (c)  Includes $7 (pre-tax $11) of net derivative losses related to the
          adoption of SFAS 133. During the three months ended March 31, 2001, $5
          of net derivative losses were reclassed to selling, general and
          administrative expense.


                                       15
<PAGE>   16

13.  CONTINGENCIES

     Subsequent to the February 15, 2001 announcement in which Nortel Networks
     Corporation provided revised guidance for financial performance for the
     fiscal year and first quarter 2001, Nortel Networks Corporation and certain
     of its then current officers and directors have been named as defendants in
     a number of purported class action lawsuits. These lawsuits, which have
     been filed through April 13, 2001 in the United States, and in Ontario and
     Quebec, Canada, on behalf of shareholders who acquired Nortel Networks
     Corporation's securities as early as November 1, 2000 and as late as
     February 15, 2001, allege violations of United States federal and Canadian
     provincial securities laws.

     On February 12, 2001, Nortel Networks Inc., a subsidiary of the Company,
     was served with a consolidated amended class action complaint (the
     "Complaint") that purported to add Nortel Networks Corporation as a
     defendant to a lawsuit commenced in July 2000 against Entrust Technologies,
     Inc. ("Entrust Technologies") and three of its then current officers in the
     United States District Court of Texas, Marshall Division. The Complaint
     alleges that Entrust Technologies, certain then current officers of Entrust
     Technologies, and Nortel Networks Corporation violated the Securities
     Exchange Act of 1934 with respect to certain statements made by Entrust
     Technologies. Nortel Networks Corporation is alleged to be a controlling
     person of Entrust Technologies. On April 6, 2001, Nortel Networks
     Corporation filed a motion to dismiss the Complaint.

     On March 4, 1997, Bay Networks, Inc. ("Bay Networks"), a company acquired
     by the Company on August 31, 1998, announced that shareholders had filed
     two separate lawsuits in the United States District Court for the Northern
     District of California (the "Federal Court") and the California Superior
     Court, County of Santa Clara (the "California 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 case and on September 8, 2000, a notice of appeal was
     filed by the plaintiffs. In January 2001, the plaintiffs filed their
     opening brief in the United States Court of Appeal for the Ninth Circuit
     and the defendants filed their responsive brief in April 2001. 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. A new group of putative plaintiffs, who allege to have been
     shareholders of Bay Networks during the relevant periods, filed a motion
     for intervention in the California Court on February 22, 2000, seeking to
     become the representatives of a class of shareholders. The motion and all
     other proceedings have been stayed pending determination of a request for a
     reassignment of the matter to a new judge.

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


                                       16
<PAGE>   17


14.  RECENTLY ISSUED PRONOUNCEMENTS

     In September 2000, the Financial Accounting Standards Board issued SFAS No.
     140, "Accounting for Transfers and Servicing of Financial Assets and
     Extinguishments of Liabilities - a replacement of FASB Statement No. 125"
     ("SFAS 140"). SFAS 140 revises certain standards for accounting for
     securitization and other transfers of financial assets and collateral. In
     addition, SFAS No. 140 requires certain additional disclosures that were
     not previously required. The additional disclosure requirements were
     effective for financial statements for fiscal years ending after December
     15, 2000 and were adopted for the year ended December 31, 2000. The revised
     accounting standards of SFAS 140 are effective for transactions occurring
     after March 31, 2001. The application of the revised accounting standards
     of SFAS 140 are not expected to have a material adverse effect on the
     business, results of operations or financial condition of Nortel Networks.

15.  SUBSEQUENT EVENTS

     On April 9, 2001, Nortel Networks Corporation and ANTEC Corporation
     ("ANTEC"), announced an amendment to the agreement announced October 18,
     2000 to realign their cable businesses to create a new company. Under the
     terms of the amended agreement, immediately prior to closing, Nortel
     Networks and ANTEC will contribute to Arris Interactive LLC ("Arris
     Interactive") all outstanding loans previously provided to Arris
     Interactive, of approximately $114 and $10 at December 31, 2000,
     respectively, and accrued interest to the date of closing. At closing,
     Nortel Networks will transfer to the new company its then existing
     membership interest in Arris Interactive in exchange for 37 million common
     shares of the new company. Nortel Networks will own approximately 49.3
     percent of the new company and the ANTEC shareholders will own the
     remaining approximate 50.7 percent. Nortel Networks will also convert at
     closing approximately $90 of certain current payables and royalties due
     from, and advances made to, Arris Interactive into a new membership
     interest in Arris Interactive. Subject to the satisfaction of certain
     conditions, Nortel Networks will have the right to require Arris
     Interactive to redeem this new interest. The transaction is subject to
     customary regulatory approvals, the approval of ANTEC shareholders, the
     completion of ANTEC's new working capital financing arrangements, and the
     satisfaction of certain conditions relating to the new membership interest.
     The transaction is expected to close in the second quarter of 2001.

16.  COMPARATIVE FIGURES

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






                                       17
<PAGE>   18


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

     You should read this section in conjunction with our unaudited consolidated
financial statements and notes, which begin on page 4. This section adds
additional analysis of our operations and current financial condition and also
contains forward-looking statements and should be read in conjunction with the
factors set forth below under "Forward-looking statements," on page 28. All
dollar amounts in this Management's Discussion and Analysis of Financial
Condition and Results of Operations are in millions of United States dollars
unless otherwise stated.

     Where we say the "Company," we mean Nortel Networks Limited without its
subsidiaries. Where we say "we," "us," "our," or "Nortel Networks," we mean the
Company and its subsidiaries.

OVERVIEW

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

DEVELOPMENTS IN 2001

Legal proceedings

     Subsequent to Nortel Networks Corporation's February 15, 2001 announcement
in which it provided revised guidance for financial performance for the fiscal
year and first quarter 2001, Nortel Networks Corporation and certain of its then
current officers and directors were named as defendants in a number of purported
class action lawsuits. These lawsuits, which have been filed through April 13,
2001 in the United States, and in Ontario and Quebec, Canada, on behalf of
shareholders who acquired Nortel Networks Corporation's securities as early as
November 1, 2000 and as late as February 15, 2001, allege violations of United
States federal and Canadian provincial securities laws. Nortel Networks
Corporation intends to vigorously defend all such served actions. See "Legal
proceedings" on page 27 for additional details.

Special charges

     In light of the current economic environment, and in order to optimize
profitability and drive efficiencies in the business, Nortel Networks
Corporation has announced aggregate net reductions of approximately 20,000
employees from the number of employees at December 31, 2000. The number of
affected employees is expected to be minimized as a result of normal attrition,
including retirement, and is expected to be substantially completed by the end
of the first half of 2001. See "Special charges" on page 24 for additional
details.

Debt issuance

     On February 8, 2001, the Company completed an offering of $1,500 of 6.125
percent notes, which mature on February 15, 2006. The notes will pay interest on
a semi-annual basis on February 15 and August 15, beginning on August 15, 2001.
The notes are redeemable, at any time at the Company's option, at a redemption
price equal to the principal amount thereof plus accrued and unpaid interest and
a "make-whole" premium. See "Liquidity and capital resources" on page 25 for
additional details.


                                       18
<PAGE>   19


FINANCIAL RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2001

     Revenue for the three months ended March 31, 2001 decreased slightly
compared to the same period in 2000. However, due to costs associated with our
acquisitions and a decrease in gross profit, we reported a net loss applicable
to common shares of $1,531. Gross margin for the three months ended March 31,
2001 was 29.7 percent compared to 41.2 percent for the same period in 2000.

RESULTS OF OPERATIONS

     Our customers, markets, and solutions continue to evolve. As a result, the
specific customer groups identified within our previous service provider and
carrier segment and enterprise segment have now merged or become uniform. In
response to this change, we have changed the way we manage our business to
reflect a focus on providing seamless networking solutions and service
capabilities to our customers. In addition, subsequent to the April 19, 2001
announcement of Nortel Network Corporation's financial results for the three
months ended March 31, 2001, we have reallocated certain solutions from our
network infrastructure segment to other to reflect our current management
structure. Financial information by segment and customer solution has been
restated and reported on the new basis commencing with the three months ended
March 31, 2001.

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

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

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

REVENUES

Segment revenues

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


<TABLE>
<CAPTION>
                                                                                                     2001              2000
                                                                                                  -------           -------
<S>                                                                                               <C>               <C>
Network infrastructure                                                                            $ 4,512           $ 4,620
Photonics components                                                                                  300               402
Other                                                                                               1,511             1,611
Intersegment sales elimination                                                                       (210)             (311)
                                                                                                  -------           -------
CONSOLIDATED                                                                                      $ 6,113           $ 6,322
                                                                                                  =======           =======
</TABLE>



                                       19
<PAGE>   20


Customer solutions revenues

The following table sets forth external revenues by customer solutions for the
three months ended March 31:

<TABLE>
<CAPTION>
                                                                                           2001              2000
                                                                                     --------------    ---------------
<S>                                                                                   <C>              <C>
Optical inter-city                                                                    $         992    $         1,424
Local internet                                                                                2,055              2,134
Wireless internet                                                                             1,465              1,062
Other (a)                                                                                     1,601              1,702
                                                                                     --------------    ---------------
CONSOLIDATED                                                                          $       6,113    $         6,322
                                                                                      =============    ===============
</TABLE>

(a)   Other includes the external customer solutions revenue of $90 and $91 of
      the photonics components segment for the three months ended March 31, 2001
      and 2000, respectively.

CONSOLIDATED

     The $209, or three percent, decline in revenues for the three months ended
March 31, 2001 compared to the same period in 2000, was primarily due to a
decline in other revenues and a modest decrease in network infrastructure
segment revenues. Consolidated revenues declined overall as a result of reduced
and/or deferred capital spending by our customers and certain pricing actions by
some customers, particularly in the United States.

     Following a period of rapid infrastructure build-out and strong economic
conditions in 1999 and 2000, we saw tighter capital markets and a rapid and
severe slowdown in the United States economy in the three months ended March 31,
2001, which resulted in lower capital spending by industry participants and less
demand for our products and services. As a result, overall revenues in the
United States declined substantially for the three months ended March 31, 2001
compared to the same period in 2000. There can be no certainty as to the
continued degree of the severity or duration of this slowdown. Also, certain
network operators are having, and we expect will continue to have, difficulty
accessing the capital markets in 2001.

     We have seen customers globally assessing the effect of the economic
slowdown in the United States on their businesses. We expect that the severe
lack of available funding from capital markets, high debt levels at many service
providers and the compounding effect of the United States economic slowdown and
its impact on other regions will continue to constrain capital spending by
service providers. As a result, it is not currently possible to provide specific
guidance for the Company's financial performance for the second quarter or full
year 2001 and we do not expect that results of operations for any quarter will
necessarily be consistent with our quarterly historical profile or indicative of
results to be expected for future quarters. We only expect a meaningful rebound
in capital spending following a period of industry rationalization and an
improved economic environment. We cannot predict the extent and duration of the
impact, if any, of the economic slowdown in the United States on economies in
Canada, Europe, and other countries and geographic regions in which we conduct
business.

     We expect to continue to focus on high-growth areas including the wireless
internet and optical inter-city customer solutions and the metro and core
Internet Protocol networks portions of local internet customer solutions and to
continue to reduce our investment in non-strategic businesses. Also, in light of
the current business environment, uncertain performance outlook, and adjustment
of technology market valuations, we are assessing whether we should dispose of
or otherwise exit certain businesses and review the recoverability of our
tangible and intangible assets. Any decisions to limit investments or to exit or
otherwise dispose of businesses may result in the recording of accrued
liabilities for special one-time charges and may reduce our ability to realize
certain of our recorded tangible and intangible assets. A significant one-time
charge or reduction in the value of assets could have a material adverse effect
on our business, results of operations, or financial condition.


                                       20
<PAGE>   21


NETWORK INFRASTRUCTURE

     The $108, or two percent, decline in revenues for the three months ended
March 31, 2001 compared to the same period in 2000, was primarily due to a
substantial decline in sales of optical inter-city customer solutions, nearly
offset by a considerable increase in sales of wireless internet customer
solutions.

Optical inter-city

     The $432, or 30 percent, decline in revenues for the three months ended
March 31, 2001 compared to the same period in 2000, was the result of decreases
and/or deferrals in capital spending by our major United States customers and
certain pricing actions by some customers. The substantial decrease in sales in
the United States and Canada was partially offset by considerable growth in
Europe, the Asia Pacific region, and the Caribbean and Latin America region.

Local internet

     The $79, or four percent, decline in revenues for the three months ended
March 31, 2001 compared to the same period in 2000, was primarily the result of
substantial decreases in sales of the circuit switching portion of our local
internet customer solutions, partially offset by considerable increases in sales
of the core Internet Protocol networks and metro portions of our local internet
customer solutions. The substantial decrease in sales of the circuit switching
portion of our local internet customer solutions was primarily the result of
reduced demand by the exchange carrier markets as a result of the severe
slowdown in the United States economy and the tightening capital markets. The
considerable growth in sales of both the core Internet Protocol networks and
metro portions of our local internet customer solutions was primarily driven by
increased demand for new product introductions. The modest decline in overall
sales of local internet customer solutions was due to a substantial decline in
the United States, which was nearly offset by growth in all other regions.

Wireless internet

     The $403, or 38 percent, growth in revenues for the three months ended
March 31, 2001 compared to the same period in 2000, was the result of continuing
network expansions by major United States customers and increased revenues from
third generation, or 3G, technologies. The substantial increase in sales of
wireless internet customer solutions was driven by substantial growth in the
United States, the Asia Pacific region and Canada, partially offset by a decline
in Europe.

PHOTONICS COMPONENTS

     The $102, or 25 percent, decline in revenues for the three months ended
March 31, 2001 compared to the same period in 2000, was the result of a
substantial decline in internal sales to the network infrastructure segment due
to the decreased and/or deferred capital spending by our major United States
customers. Sales to external customers were essentially flat for the three
months ended March 31, 2001, primarily as a result of a considerable increase in
the Asia Pacific region and solid growth in Europe, essentially offset by a
substantial decline in the United States.

OTHER

     Other declined $100, or six percent, for the three months ended March 31,
2001 compared to the same period in 2000, primarily due to a substantial
increase in sales of global professional services, more than offset by
significant declines in sales of customer premises-based solutions, access
solutions, and civil works and original equipment manufacturer offerings. The
substantial increase in sales of global professional services  was due to
increasing professional services opportunities in the market as a result of
tightening capital markets and accelerating industry rationalization. The
decline in sales of customer premises-based solutions of $83, to $682, was due
to decreased sales volumes in Canada, and the United States as a result of the
severe economic slowdown. The decline in sales of access solutions of $80, to
$422, was primarily due to lower sale volumes of mature, narrow-band products
and the severe downturn in the competitive local exchange carrier market. The
modest decline overall in other revenues was due to significant declines in the
United States and Canada, partially offset by considerable increases in Europe,
the Caribbean and Latin America region, and the Asia Pacific region.




                                       21
<PAGE>   22


GROSS PROFIT AND GROSS MARGIN

The following tables set forth information by segment for the three months ended
March 31:

<TABLE>
<CAPTION>
                                                                                                     2001              2000
                                                                                                  -------           -------
<S>                                                                                               <C>               <C>
Gross profit
Network infrastructure                                                                            $ 1,502           $ 2,052
Photonics components                                                                                   56               128
Other                                                                                                 263               434
Intersegment inventory unrealized profit elimination - net                                             (6)              (10)
                                                                                                  -------           -------
CONSOLIDATED                                                                                      $ 1,815           $ 2,604
                                                                                                  =======           =======


GROSS MARGIN
Network infrastructure                                                                              33.3%             44.4%
Photonics components                                                                                18.7%             31.8%
Other                                                                                               17.4%             26.9%
Consolidated                                                                                        29.7%             41.2%
                                                                                                  =======           =======
</TABLE>


CONSOLIDATED

     Gross profit decreased substantially for the three months ended March 31,
2001 compared to the same period in 2000 due to a modest decline in revenues and
a substantial decline in gross margin. The decrease in gross margin of 11.5
percentage points, or 28 percent, was due to substantial decreases in gross
margin across all segments.

NETWORK INFRASTRUCTURE

     The decrease in gross margin of 11.1 percentage points, or 25 percent, for
the three months ended March 31, 2001 compared to the same period in 2000, was
primarily the result of fixed infrastructure costs that could not be reduced to
reflect the lower sales volumes for the three months ended March 31, 2001, and a
shift in the geographical mix of sales from the United States to Europe and the
Asia Pacific region, where we generally earn lower gross margins. We are
currently undertaking initiatives to streamline our businesses and reduce our
cost structure. However, the severe slowdown in the United States economy may
lead to further shifts in the geographical mix of sales from the United States
to Europe and the Asia Pacific region, resulting in further reductions in gross
margin.

PHOTONICS COMPONENTS

     The decrease in gross margin of 13.1 percentage points, or 41 percent, for
the three months ended March 31, 2001 compared to the same period in 2000, was
due to fixed infrastructure costs, which, in part, related to significant
capital expenditures incurred in 2000 to meet expected demand for photonics
components.

OTHER

     Gross margin for other decreased by 9.5 percentage points, or 35 percent,
for the three months ended March 31, 2001 compared to the same period in 2000,
primarily due to modest increases in gross margin for global professional
services and customer premises-based solutions, more than offset by substantial
declines in gross margins for access solutions. The increase in gross margin for
global professional services was primarily due to product mix. The increase of
1.8 percentage points in gross margin, to 39.6 percent, for customer
premises-based solutions was primarily due to various cost-reduction programs,
nearly offset by pricing pressures and an increase in the percentage of overall
revenues generated from lower gross margin service activities for the three
months ended March 31, 2001 compared to the same period in 2000. The decline of
21.8 percentage points in gross margin, to negative 2.1 percent, for access
solutions was primarily due to fixed costs that could not be reduced to reflect
lower sales volumes. Additionally, access solutions gross margins were
negatively impacted as a result of product returns and order cancellations due
to the severe downturn of the competitive local exchange carrier market.



                                       22
<PAGE>   23

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE

The following table sets forth selling, general and administrative expense for
the three months ended March 31:

<TABLE>
<CAPTION>
                                                         2001              2000
                                                      -------           -------
<S>                                                   <C>               <C>
Selling, general and administrative expense           $ 1,358           $ 1,192
  As a percentage of revenues                           22.2%             18.9%
</TABLE>

     For the three months ended March 31, 2001, selling, general and
administrative expense, or SG&A expense, increased by $166, and as a percentage
of revenues increased by 3.3 percentage points, compared to the same period in
2000. SG&A expense in absolute dollars has decreased significantly for the three
months ended March 31, 2001 compared to the three months ended December 31,
2000. SG&A expense in absolute dollars and as a percentage of revenue are both
expected to decline as we move forward in 2001 as the full impact of initiatives
undertaken by us to streamline our business and reduce our cost structure are
realized. We intend to continue focusing on reducing SG&A expense as percentage
of revenues. In absolute dollars, the increase in SG&A expense for the three
months ended March 31, 2001 compared to the same period in 2000, reflected the
funding of North American and international market investments across the
network infrastructure and photonics components segments in 2000 to support our
revenue growth during that period.

RESEARCH AND DEVELOPMENT EXPENSE

The following table sets forth research and development expense for the three
months ended March 31:

<TABLE>
<CAPTION>
                                                       2001              2000
                                                      -----             -----
<S>                                                   <C>               <C>
Research and development expense                    $   986           $   851
  As a percentage of revenues                         16.1%             13.5%
</TABLE>

     For the three months ended March 31, 2001, research and development expense
increased by $135 and as a percentage of revenues increased by 2.6 percentage
points, compared to the same period in 2000. This increased planned investment
in research and development was primarily in the network infrastructure segment
including wireless internet and optical inter-city customer solutions. The
increase of 2.6 percentage points in research and development expense as a
percentage of revenues for the three months ended March 31, 2001 compared to the
same period in 2000, was primarily due to a significant increase in research and
development expense in absolute dollars. Research and development expense in
absolute dollars has declined for the three months ended March 31, 2001 compared
to the three months ended December 31, 2000, as a result of initiatives
undertaken during the quarter to streamline our business and reduce our cost
structure. As a result, research and development expense in absolute dollars is
expected to remain flat in 2001, compared to 2000.

IN-PROCESS RESEARCH AND DEVELOPMENT EXPENSE AND AMORTIZATION OF INTANGIBLES

The following table sets forth in-process research and development expense and
amortization of intangibles for the three months ended March 31:

<TABLE>
<CAPTION>
                                                         2001              2000
                                                        -----             -----
<S>                                                     <C>               <C>
In-process research and development expense             $   -             $ 673

Amortization of intangibles

     Acquired technology                                $ 208             $ 181
     Goodwill                                           $ 744             $ 479
</TABLE>



                                       23
<PAGE>   24

     For the three months ended March 31, 2000, in-process research and
development expense primarily related to the acquisition of Qtera Corporation.

     The amortization of acquired technology for the three months ended March
31, 2001 and 2000, respectively, primarily reflected the charges related to the
acquisition of Bay Networks, Inc. As at March 31, 2001 and December 31, 2000,
the capitalized amount of acquired technology - net was $461 and $668,
respectively.

     The amortization of goodwill for the three months ended March 31, 2001
primarily reflected the charges related to the acquisitions of Bay Networks,
Qtera Corporation, and Clarify Inc. The amortization of goodwill for the same
period in 2000 primarily reflected the charges related to the acquisitions of
Bay Networks and Qtera. As at March 31, 2001 and December 31, 2000, the
capitalized amount of goodwill - net was $6,428 and $7,279, respectively.

     The above impacts to our results of operations for the three months ended
March 31, 2001 were primarily a result of the large number and value of
acquisitions completed from 1998 to 2000. Though we anticipate a slower pace of
acquisition activity in 2001 compared to 2000, the amortization of intangibles
for acquisitions completed from 1998 to 2000 will continue to negatively impact
results of operations as they are amortized over a period of two to five years
from the date of acquisition.

SPECIAL CHARGES

2001

     For the three months ended March 31, 2001, we recorded special charges of
$388 relating to restructuring and other costs associated with our initiatives
that began in 2000 to optimize profitability and drive efficiencies in our
business by streamlining operations and activities that are not aligned with our
core markets and leadership strategies. In addition, in the three months ended
March 31, 2001, we continued with the outsourcing of the Information Services
function begun in the fourth quarter of 2000.

     Special charges were primarily related to workforce reduction costs
associated with restructuring activities announced during the three months ended
March 31, 2001, to reduce the number of employees from December 31, 2000 levels,
and contract settlement and lease costs related to the restructuring activities.
Additional charges are expected in the second quarter of 2001 as the previously
announced workforce reduction initiative is completed and criteria for the
recording of such charges are met. In addition, the special charges related to a
write-off of the remaining net book value of goodwill related to the
acquisitions of MICOM Communications Corp. and Broadband Networks Inc. as a
result of the decision made to exit the technologies associated with these prior
acquisitions.

     Workforce reduction cost savings as a result of the restructuring
activities will reduce employee expense. The reduction in employee expense began
in the first quarter of 2001. The annual costs and amortization associated with
the contract and lease obligations and write-off of goodwill will not have a
significant impact on future results. The decrease in costs as a result of the
restructuring activities outlined above will primarily impact cost of revenues,
selling, general and administrative expense, and research and development
expense.


     The remaining cash outlays of $191 related to the above restructuring
activities are expected to be completed by the third quarter of 2001 and will be
funded from operating cash flows.

2000

     In the year ended December 31, 2000, we recorded special charges
aggregating to $271 relating to restructuring and other charges. The remaining
cash outlays related to the above restructuring activities were completed in the
first three months of 2001.

1999

     In the year ended December 31, 1999, we recorded special charges
aggregating to $160 relating to restructuring costs. The remaining cash outlays
at March 31, 2001 of $11 related to the above restructuring activities, are
expected to be completed in the second quarter of 2001, and will be funded from
operating cash flows.



                                       24
<PAGE>   25
     For additional information related to these restructuring activities see
"Special charges and one-time costs" on page 13 in Note 6.

OTHER INCOME - NET

     For the three months ended March 31, 2001, other income - net was $97
compared to $543 for the same period in 2000. Other income - net for the three
months ended March 31, 2001, primarily related to increased interest income from
customer financing. For the three months ended March 31, 2000, other income -
net primarily related to a pre-tax gain of $513 (after-tax $344), due to a sale
of a portion of our share ownership in Entrust Technologies, Inc.

INCOME TAX PROVISION (RECOVERY)

     Our effective tax rates for the three months ended March 31, 2001 and 2000
were 32.0 percent and 33.0 percent, respectively, excluding the impact of
after-tax charges of Acquisition Related Costs (in-process research and
development expense and the amortization of acquired technology and goodwill
from all acquisitions subsequent to July 1998), stock option compensation and,
where applicable, certain of the one-time gains and one-time charges. The lower
effective tax rate for the three months ended March 31, 2001 compared to the
same period in 2000, primarily reflected changes in geographic earnings mix. We
had an income tax recovery for the three months ended March 31, 2001 of $319
compared to an income tax provision of $256 for the same period in 2000,
primarily as a result of the net loss before tax for the three months ended
March 31, 2001 compared to net earnings before tax for the same period in 2000,
excluding certain Acquisition Related Costs, stock option compensation and,
where applicable, certain of the one-time gains and one-time charges.

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

LIQUIDITY AND CAPITAL RESOURCES

     Cash and cash equivalents, or cash, were $1,693 at March 31, 2001, an
increase of $126 from December 31, 2000. The increase in cash was primarily the
result of the Company's debt offering of $1,500 of 6.125 percent notes completed
on February 8, 2001, nearly offset by changes in operating assets and
liabilities, expenditures on plant and equipment, and increases in long-term
receivables.

     Cash flows used in operating activities were $833 for the three months
ended March 31, 2001. Cash flows used in operating activities resulted from a
net loss of $432, adjusted for non-cash items, and the use of cash related to
operating assets and liabilities. The use of cash related to operating assets
and liabilities was primarily the result of a decrease in accounts payable and
accrued liabilities and an increase in income taxes receivable, partially offset
by a decrease in accounts receivable, during the period.

     Cash flows used in investing activities were $852 for the three months
ended March 31, 2001. The use of cash was primarily due to expenditures for
plant and equipment, and a net increase in long-term receivables during the
period. The expenditures of $544 for plant and equipment largely reflect the
capacity expansion for the network infrastructure and photonics components
segments and purchases related to general infrastructure that we were committed
to at the end of 2000. On July 24, 2000, we announced a $1,900 investment to,
among other things, expand optical components and systems production capacity
and capability in North America, the United Kingdom, and Australia. Total
investment and commitments related to this announcement were approximately $500
at March 31, 2001. Additional capital spending will only be incurred in a manner
that is consistent with growth in the optical networking market. The net
increase in long-term receivables during the period was approximately $328,
primarily attributable to increased funding of customer financings.

     Cash flows generated from financing activities were $1,826 for the three
months ended March 31, 2001. Cash flows primarily resulted from the issuance of
long-term debt of $1,505, primarily related to the Company's debt offering of
$1,500 of 6.125 percent notes completed on February 8, 2001.


                                       25
<PAGE>   26
     The Company and one of its subsidiaries, Nortel Networks Capital
Corporation, have the ability to offer from time to time up to an aggregate of
$1,000 of debt securities and warrants to purchase debt securities, pursuant to
a shelf registration statement filed with the United States Securities and
Exchange Commission.

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

     On April 12, 2000, we entered into new five-year syndicated credit
agreements, which permit borrowings in an aggregate amount of up to $750. On
April 11, 2001, we extended and increased our April 12, 2000, 364-day syndicated
credit agreements to permit borrowings in an aggregate amount of up to $1,750
from $1,250.

     The total debt to total capitalization ratio of the Company was 18 percent
at March 31, 2001, compared to nine percent at December 31, 2000 and eight
percent at March 31, 2000. The increase in the total debt to total
capitalization ratio at March 31, 2001, compared to December 31, 2000, was
primarily due to the issuance of $1,500 of 6.125 percent notes on February 8,
2001.

     The competitive environment in which we operate requires that we, and many
of our principal competitors, provide significant amounts of medium-term and
long-term customer financing. Customer financing arrangements may include
financing in connection with the sale of our products and services, as well as
funding for certain non-product and service costs associated with network
installation and integration of our products and services, and financing for
working capital purposes and equity financing.

     We have traditionally been able to place a large amount of our customer
financings with third-party lenders. However, we anticipate that, due to the
larger amounts of financing we expect to provide and the higher risks typically
associated with such financings (particularly when provided to start-up
operations such as competitive local exchange carriers, to customers in
developing countries, or to specific areas of the industry such as turnkey
construction of new networks and/or third-generation, or 3G, wireless customers
which are in their early stages of development), we will be required to directly
support, for at least the initial portion of their term, a significantly greater
amount of such financings.

     We expect to continue to provide customer financing to strategic start-up
customers and for turnkey construction of new networks, particularly 3G wireless
operators. At March 31, 2001, we had entered into certain financing agreements
of which the remaining future provision of unfunded customer financing was up to
approximately $2,800, not all of which is expected to be drawn upon. We expect
to continue to arrange for third-party lenders to assume our customer financing
obligations and to fund other customer financings from working capital and
conventional sources of external financing in the normal course.

     We expect to continue to hold certain customer financing obligations for
longer periods prior to placement with third-party lenders, due to recent
economic uncertainty in various countries and reduced demand for financings in
capital and bank markets. In addition, specific risks associated with customer
financing, including the risks associated with new technologies, new network
construction, market demand and competition, customer business plan viability
and funding risks, may require us to hold certain customer financing obligations
over a longer term.

     Recently, certain competitive local exchange carriers have experienced
financial difficulties. Should customers fail to meet their customer financing
obligations to us, we could incur losses in excess of our provisions. In
addition to being increasingly selective in providing customer financing, we
have various programs in place to monitor and mitigate customer credit risk
including performance milestones and other conditions of funding. Management is
focused on the strategic use of our limited customer financing capacity, and on
revolving that capacity as quickly and efficiently as possible. However, there
can be no assurance that such measures will reduce or eliminate our exposure to
customers' credit risk. Any unexpected developments in our customer financing
arrangements could have a material adverse effect on our business, results of
operations, and financial condition.

     We have entered into supply contracts with customers for products and
services, which in some cases involve new technologies currently being
developed, or which we have not yet commercially deployed, or which require us
to build and operate networks on a turnkey basis. We have also entered into
network outsourcing contracts with customers to operate their networks. These
supply and network outsourcing contracts may contain delivery and installation
timetables,


                                       26
<PAGE>   27
performance criteria and other contractual obligations which, if not
met, could result in our having to pay substantial penalties or liquidated
damages, the termination of the related supply or network outsourcing contract,
and/or the reduction of shared revenues under a turnkey arrangement. Any
unexpected developments in these supply and outsourcing contracts could have a
material adverse effect on our business, results of operations, and financial
condition.

     We believe that our current cash and cash equivalents, proceeds from the
February 8, 2001 debt offering, potential proceeds from the sale of non-core
businesses and/or investments, additional unused sources of cash available to us
as outlined above and other conventional sources of external financing will
satisfy our expected working capital, capital expenditure, and investment
requirements through at least the next 12 months.

LEGAL PROCEEDINGS

     Subsequent to Nortel Networks Corporation's February 15, 2001 announcement
in which Nortel Networks Corporation provided revised guidance for financial
performance for the fiscal year and first quarter 2001, Nortel Networks
Corporation and certain of its then current officers and directors have been
named as defendants in a number of purported class action lawsuits. These
lawsuits, which have been filed through April 13, 2001 in the United States, and
in Ontario and Quebec, Canada on behalf of shareholders who acquired Nortel
Networks Corporation's securities as early as November 1, 2000 and as late as
February 15, 2001, allege violations of United States federal and Canadian
provincial securities laws.

     On February 12, 2001, Nortel Networks Inc., a subsidiary of the Company,
was served with a consolidated amended class action complaint that purported to
add Nortel Networks Corporation, as a defendant to a lawsuit commenced in July
2000 against Entrust Technologies, Inc., and three of its then current officers
in the United States District Court of Texas, Marshall Division. The complaint
alleges that Entrust Technologies, certain then current officers of Entrust
Technologies, and Nortel Networks Corporation violated the Securities Exchange
Act of 1934 with respect to certain statements made by Entrust Technologies.
Nortel Networks Corporation is alleged to be a controlling person of Entrust
Technologies. On April 6, 2001, Nortel Networks Corporation filed a motion to
dismiss the complaint against it.

     On March 4, 1997, Bay Networks, Inc., a company acquired by the Company on
August 31, 1998, announced that some of its shareholders had filed two separate
lawsuits against Bay Networks and ten of Bay Networks' current and former
officers and directors. Both lawsuits sought damages on behalf of a class of
shareholders who purchased Bay Networks' common shares during the period of May
1, 1995 through October 14, 1996. Shareholders filed one lawsuit in the United
States District Court for the Northern District of California and alleged
violations of the federal securities laws. In September 1998, the California
District Court dismissed the plaintiffs' complaint, granting leave for the
plaintiffs to amend the complaint. In November 1998, the California District
Court ordered a stay of the proceedings until the United States Court of Appeals
for the Ninth Circuit rendered a decision regarding pleading standards in
securities litigation in an unrelated case involving Silicon Graphics, Inc. This
decision was rendered on July 2, 1999 favourably to the defense, the plaintiffs
filed a third amended complaint in December 1999, and the defendants filed a
motion to dismiss on January 31, 2000. On August 17, 2000, the defendants'
motion to dismiss was granted and on September 8, 2000, the plaintiffs filed a
notice of appeal. The plaintiffs filed their opening brief in the Ninth Circuit
Court of Appeals in January 2001 and the defendants filed their responsive brief
in April 2001. Plaintiffs filed the other lawsuit announced on March 4, 1997 in
the California Superior Court, County of Santa Clara, alleging violations of the
California Corporations Code. On April 18, 1997, a shareholder (represented by
some of the same plaintiffs' law firms as in the cases discussed above) filed a
second lawsuit in the California Superior Court, alleging violations of the
federal securities laws and California Corporations Code by Bay Networks and
nine of its current and former officers and directors. The second action before
the California Superior Court sought damages on behalf of a class of
shareholders who acquired Bay Networks' common shares pursuant to the
registration statement and prospectus that became effective on November 15,
1995. In April 1998, the California Superior Court granted the plaintiffs'
motion to consolidate both actions before the California Superior Court, but
denied the plaintiffs' motion for class certification. The plaintiffs in the
consolidated California action appealed this decision. Oral arguments in this
appeal were heard in November 1999. On January 19, 2000, the California Court of
Appeals affirmed the order denying the class certification. The plaintiffs filed
a petition for review with the California Supreme Court which was denied. A new
group of plaintiffs, who allege to have been shareholders of Bay Networks during
the relevant periods, filed a motion for intervention in the California Superior
Court on February 22, 2000 seeking to become the representatives of a class of
shareholders. The motion and all other proceedings have been stayed pending
determination of a request for reassignment of the matter to a new judge.



                                       27
<PAGE>   28
     We are also a defendant in various other suits, claims, proceedings and
investigations arising in the normal course of business.

     We cannot determine our total aggregate amount of monetary liability or the
financial impact of these matters. We do not therefore know 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. Unless we have otherwise noted, we and any
of our named directors and officers and those of any of our subsidiaries intend
to vigorously defend these actions, suits, claims, proceedings and
investigations.

ENVIRONMENTAL MATTERS

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

     Nortel Networks has remedial activities under way at six of its facilities
and seven previously occupied sites. An estimate of Nortel Networks anticipated
remediation costs associated with all such facilities and sites, to the extent
probable and reasonably estimable, is included in the Company's environmental
accruals in an approximate amount of $28.

         For a discussion of Environmental matters, see "Environmental matters"
on page F-36 in Note 19 to the Company's Annual Report on Form 10-K for the year
ended December 31, 2000.

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 economies and markets in which we operate and our beliefs and
assumptions regarding these 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. 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.

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



                                       28
<PAGE>   29
     Acquisitions and growth. In order for us to take advantage of the
anticipated growth in demand for IP-optimized networking solutions and 3G
wireless networks, we have made, and may continue to make, strategic
acquisitions, involving significant risks and uncertainties. These risks and
uncertainties include:

     o    the risk that the industry may develop in a different direction than
          anticipated and that the technologies we acquire do not prove to be
          those needed to be successful in the industry;

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

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

     o    the risks of our customers or customers of the acquired businesses
          deferring purchase decisions as they evaluate the impact of the
          acquisitions on our future product strategy;

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

     o    the risk of diverting the attention of senior management from the
          operation of our business; and

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

     We must also manage the growth of our business effectively. Our inability
to successfully integrate significant acquisitions or to otherwise manage
business growth effectively could have a material adverse effect on our
business, results of operations, and financial condition.

     Rapid technological change. The markets for our products are characterized
by rapidly changing technologies, evolving industry standards, frequent new
product introductions and short product life cycles. We expect our success to
depend, in substantial part, on the timely and successful introduction of new
products and upgrades of current products to address the operational speed,
bandwidth and cost requirements of our customers, to comply with emerging
industry standards and to operate with products of other suppliers, and to
address competing technological and product developments carried out by others.
The development of new, technologically advanced products, including
IP-optimized networking solutions and 3G wireless networks, is a complex and
uncertain process requiring high levels of innovation, as well as the accurate
anticipation of technological and market trends. 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
pricing and marketing of such products, and the availability of funding for such
networks. An unanticipated change in one or more of the technologies affecting
telecommunications and data networking, or in market demand for products based
on a specific technology, particularly lower than anticipated, or delays in,
demand for IP-optimized networking solutions or 3G wireless networks, could have
a material adverse effect on our business, results of operations, and financial
condition if we fail to respond in a timely and effective manner to such
changes.

     Competition. Our principal competitors are large telecommunications
equipment suppliers, such as Alcatel, Lucent Technologies Inc., Siemens
Aktiengesellschaft, and Telefonaktiebolagat LM Ericsson, and data networking
companies, such as Cisco Systems, Inc. and Avaya Inc. Other principal
competitors include providers of wireless networking equipment, such as Nokia
Corporation and Motorola, Inc., and providers of optical networking equipment,
including Fujitsu Limited and Marconi plc. Since some of the markets in which we
compete are characterized by rapid growth and, in certain cases, low
barriers to entry and rapid technological changes, smaller niche market
companies and start-up ventures are now and may become principal competitors in
the future. As well, we may face competition from sales of used
telecommunications equipment, including our own on occasion, by failed,
downsized or consolidated high-technology enterprises and competitive local
exchange carriers. One way to maximize market growth, enhance existing products
and introduce new products is through acquisitions of companies, where
advisable. These acquisitions or general market conditions may cause certain of
our other 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.

                                       29
<PAGE>   30
     We expect that we will face additional competition from existing
competitors and from a number of companies that have entered or may enter our
existing and future markets. Some of our current and potential competitors have
greater financial (which includes the ability to provide customer financing in
connection with the sale of its products), marketing and technical resources.
Many of our current and potential competitors have also established, or may in
the future establish, relationships with our current and potential customers.
Increased competition could result in price reductions, reduced profit margins
and loss of market share, each of which could have a material adverse effect on
our business, results of operations, and financial condition.

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

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

     o    exchange controls;

     o    currency fluctuations;

     o    investment policies;

     o    restrictions on repatriation of cash;

     o    nationalization of local industry;

     o    economic, social and political risks;

     o    taxation;

     o    interest rates; and

     o    other factors, depending on the country involved.

     Difficulties in foreign financial markets and economies, and difficulties
experienced by foreign financial institutions, particularly in emerging markets,
could adversely affect demand from customers in the affected countries. As a
result of these risks, it is uncertain whether the recent economic recoveries in
certain foreign countries, such as countries in the Asia Pacific region and the
Caribbean and Latin America region, will continue. An inability to expand our
business in international and emerging markets could have a material adverse
effect on our business, results of operations, and financial condition.

     Foreign exchange. We continue to expand our business globally. Accordingly,
an increasing proportion of our business may be denominated in currencies other
than United States dollars. As a result, fluctuations in foreign currencies may
have an impact on our business, results of operations, and financial condition.
Our primary currency exposures are to Canadian dollars, United Kingdom pounds
and the Euro. These exposures may change over time as we change the geographic
mix of our global business and as our business practices evolve.



                                       30
<PAGE>   31

     We try to minimize the impact of currency fluctuations through our ongoing
commercial practices and by attempting to hedge our exposures to major
currencies. In attempting to manage our foreign exchange risk, we identify
operations and transactions that may have foreign exchange exposure based upon,
among other factors, the excess or deficiency of foreign currency receipts over
foreign currency expenditures in each of our significant foreign currencies.
Given the increasing use of the Euro as a common currency for members of the
European Union and its recent devaluation, and our exposure to other
international markets, we continuously monitor all of our foreign currency
exposures. We cannot predict whether foreign exchange losses will be incurred in
the future, and significant foreign exchange fluctuations may have a material
adverse effect on our business, results of operations, and financial condition.

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

     o    the impact of acquired businesses and technologies;

     o    increased price and product competition in the networking industry;

     o    the introduction and market acceptance of new technologies and
          integrated networking solutions;

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

     o    the size and timing of customer orders;

     o    manufacturing capacity and lead times; and

     o    fixed costs.

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

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

     o    visibility to, and the actual size and timing of, capital expenditures
          by our customers;

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

     o    existing network capacity, sharing of existing network capacity, and
          network capacity utilization rates, of our customers, and by our
          customers;

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

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

     o    governmental regulation or intervention affecting communications or
          data networking;

     o    adverse changes in the public and private equity and debt markets and
          our ability as well as the ability of our customers and suppliers to
          obtain financing or to fund capital expenditures;



                                       31

<PAGE>   32


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

     o    other factors.

     As a consequence, operating results for a particular period are difficult
to predict. Any of the above factors could have a material adverse effect on our
business, results of operations, and financial condition.

     We participate in a highly volatile industry that is characterized by
vigorous competition for market share and rapid technological development. These
factors could result in aggressive pricing practices and growing competition
both from start-up companies and from well-capitalized computer systems and
communications companies, which, in turn, could have a material adverse effect
on our business, results of operations, and financial condition.

     In response to changes in industry and market conditions we may restructure
our activities to more strategically realign our resources. This includes
assessing whether we should consider disposing of or otherwise exiting
businesses and reviewing the recoverability of our tangible and intangible
assets. Any decision to limit investment or to dispose of or otherwise exit
businesses may result in the recording of accrued liabilities for special
one-time charges such as workforce reduction costs. Additionally, accounting
estimates with respect to the useful life and ultimate recoverability of our
carrying basis of assets, including goodwill and other intangible assets, could
change as a result of such assessments and decisions, and could have a material
adverse effect on our business, results of operations, or financial condition.

     Industry standards and intellectual property. Our industry is subject to
uncertainty over adoption of industry standards and protection of intellectual
property rights. Our success is dependent on our proprietary technology, which
we rely on patents, copyrights, trademarks and trade secret laws to protect. As
well, there can be no assurance that claims of intellectual property
infringement will not be asserted against us or our customers in connection with
their use of our products, and there can be no assurance as to the outcome of
any such claims. Failure to react to changing industry standards, lack of
broadly-accepted industry standards, successful claims of intellectual property
infringement against us or our customers, and failure to protect our proprietary
technology could have a material adverse effect on our business, results of
operations, and financial condition.

     Rationalization in telecommunications industry. The telecommunications
industry has experienced the rationalization of industry participants and we
expect this trend to continue. 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 one or more of our competitors
may each supply products to the companies that have merged or will merge. This
consolidation could result in purchasing decision delays by the merged companies
and/or our playing a lesser role in the supply of communications products to the
merged companies. We may also see rationalization among suppliers. Industry
rationalization could have a material adverse effect on our business, results of
operations, and financial condition.

     Uncertainties of the Internet. There are currently few laws or regulations
that apply directly to access or commerce on the Internet. We could be
materially adversely affected by regulation of the Internet in any country where
we operate in respect of such technologies as voice over the Internet,
encryption technology and access charges for Internet service providers, as well
as the continuing deregulation of the telecommunications industry. If a
jurisdiction adopts such measures then we could experience both decreased demand
for our products and increased costs of selling such products. Changes in laws
or regulations governing the Internet and Internet commerce could have a
material adverse effect on our business, results of operations, and financial
condition.

     Employees. Competition for technical personnel in the high-technology
industry is intense. We believe that our future success depends in part on our
continued ability to hire, assimilate and retain qualified personnel,
particularly in areas such as optical networking. To date, we believe that we
have been successful in recruiting and retaining qualified employees. There can
be no assurance that we will be successful in retaining or recruiting qualified
employees in the future and a failure to do so could have a material adverse
effect on our business, results of operations, and financial condition.


                                       32
<PAGE>   33
     Increase in customer financing and customer credit risk. The competitive
environment in which we operate requires that we, and many of our principal
competitors, provide significant amounts of medium-term and long-term customer
financing. Customer financing arrangements may include financing in connection
with the sale of our products and services, as well as funding for certain
non-product and service costs associated with network installation and
integration of our products and services, and financing for working capital
purposes and equity financing.

     We have traditionally been able to place a large amount of our customer
financings with third-party lenders. However, we anticipate that, due to the
larger amounts of financing we expect to provide and the higher risks typically
associated with such financings (particularly when provided to start-up
operations such as competitive local exchange carriers, to customers in
developing countries, or to specific areas of the industry such as turnkey
construction of new networks and/or 3G wireless customers which are in their
early stages of development), we will be required to directly support, for at
least the initial portion of their term, a significantly greater amount of such
financings.

     We expect to continue to provide customer financing to strategic start-up
customers and for turnkey construction of new networks, particularly 3G wireless
operators. We expect to continue to arrange for third-party lenders to assume
our customer financing obligations and to fund other customer financings from
working capital and conventional sources of external financing in the normal
course.

     We expect to continue to hold certain customer financing obligations for
longer periods prior to placement with third-party lenders, due to recent
economic uncertainty in various countries and reduced demand for financings in
capital and bank markets. In addition, specific risks associated with customer
financing including the risks associated with new technologies, new network
construction, market demand and competition, customer business plan viability
and funding risks, may require us to hold certain customer financing obligations
over a longer term.

     Recently, certain competitive local exchange carriers have experienced
financial difficulties. Should customers fail to meet their customer financing
obligations to us, we could incur losses in excess of our provisions. In
addition to being increasingly selective in providing customer financing, we
have various programs in place to monitor and mitigate customer credit risk
including performance milestones and other conditions of funding. Management is
focused on the strategic use of our limited customer financing capacity, and on
revolving that capacity as quickly and efficiently as possible. However, there
can be no assurance that such measures will reduce or eliminate our exposure to
customers' credit risk. Any unexpected developments in our customer financing
arrangements could have a material adverse effect on our business, results of
operations, and financial condition.

     Supply contracts, network outsourcing contracts, and turnkey arrangements.
We have entered into supply contracts with customers for products and services,
which in some cases involve new technologies currently being developed, or which
we have not yet commercially deployed, or which require us to build and operate
networks on a turnkey basis. We have also entered into network outsourcing
contracts with customers to operate their networks. These supply and network
outsourcing contracts may contain delivery and installation timetables,
performance criteria and other contractual obligations which, if not met, could
result in our having to pay substantial penalties or liquidated damages, the
termination of the related supply or network outsourcing contract, and/or the
reduction of shared revenues under a turnkey arrangement. Any unexpected
developments in these supply and outsourcing contracts could have a material
adverse effect on our business, results of operations, and financial condition.

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


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<PAGE>   34
RECENT PRONOUNCEMENTS

     The Financial Accounting Standards Board has issued a Revised Exposure
Draft, "Business Combinations and Intangible Assets - Accounting for Goodwill."
This Revised Exposure Draft is still being deliberated but is expected to be
effective for periods beginning July 1, 2001. Under the proposed standard,
goodwill and certain other intangibles would no longer be amortized but would be
revalued under certain circumstances. The impact of this proposed standard may
be material to our consolidated financial statements but cannot be fully
assessed until after the final standard is available. For a discussion of recent
pronouncements, see "Recently issued pronouncements" on page 17 in Note 14.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Market risk represents the risk of loss that may impact the Consolidated
Financial Statements of the Company due to adverse changes in financial market
prices and rates. The Company's market risk exposure is primarily a result of
fluctuations in interest rates and foreign exchange rates. Disclosure of market
risk is contained on page 43 of the Company's Annual Report on Form 10-K for the
year ended December 31, 2000.



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<PAGE>   35


                                     PART II
                                OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     For a discussion of our material legal proceedings, see "Legal proceedings"
commencing on page 27 in Management's Discussion and Analysis of Financial
Condition and Results of Operations.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a)   Exhibits:

     None

b)   Reports on Form 8-K:

     The Company filed a Report on Form 8-K dated March 14, 2001 related to the
     announcement of the intention of its chief operating officer to take a
     medical leave of absence.

     The Company filed a Report on Form 8-K dated March 28, 2001 related to its
     parent company Nortel Networks Corporation's revised financial outlook for
     the first quarter of 2001.

     The Company filed a Report on Form 8-K dated April 24, 2001 related to its
     parent company Nortel Networks Corporation's financial results for the
     first quarter of 2001.

     The Company filed a Report on Form 8-K dated May 14, 2001 related to the
     announcement of the intention of its chief operating officer to resign as
     an officer and director.




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<PAGE>   36
                                  SIGNATURES




PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED.





                             NORTEL NETWORKS LIMITED
                                  (REGISTRANT)




Chief Financial Officer                                 Chief Accounting Officer



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




DATE: MAY 15, 2001




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