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

FORM 10-K

|  |  |                                                                                                                                                                | 
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|x |  | Annual report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2002                               | 
|  |  |                                                                                                                                                                | 
|o |  | Transition report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from _________________ to _________________ | 

Commission file number 000-30758

Nortel Networks Limited(Exact name of registrant as specified in its charter)

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

|                                                                                               |  |                   
|---------------------------------------------------------------------------------------------- |  | ------------------
|8200 Dixie Road, Suite 100, Brampton, Ontario, Canada
(Address of principal executive offices) |  | L6T 5P6
(Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

|                                            |  |                                          
|------------------------------------------- |  | -----------------------------------------
|Title of each class                         |  | Name of each exchange on which registered
|Guarantees of Nortel Networks Corporations |  | New York Stock Exchange                  
|4.25% Convertible Senior Notes Due 2008     |  |                                          

Securities registered pursuant to Section 12(g) of the Act:

Title of each class:Common Shares without nominal or par value

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days. Yes  ü          No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. ü

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

At February 28, 2003, 1,460,978,638 common shares of Nortel Networks Limited
were issued and outstanding, all of which were held by Nortel Networks
Corporation. The common shares of the registrant are not traded on any stock
exchange.



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TABLE OF CONTENTS



|                                                                                              |                                                                                                    |  |  |  |  |  |  | 
|--------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                                                                       
|ITEM 1. Business                                                                             
|                                                                                              | Overview                                                                                          
|                                                                                              | Developments in 2002                                                                              
|                                                                                              | Networking solutions                                                                              
|                                                                                              | Wireless Networks segment                                                                         
|                                                                                              | Enterprise Networks segment                                                                       
|                                                                                              | Wireline Networks                                                                                 
|                                                                                              | Optical Networks segment                                                                          
|                                                                                              | Sales and distribution                                                                            
|                                                                                              | Product standards, certification and regulation                                                   
|                                                                                              | Sources and availability of materials                                                             
|                                                                                              | Seasonality                                                                                       
|                                                                                              | Strategic alliances, acquisitions and minority investments                                        
|                                                                                              | Research and development                                                                          
|                                                                                              | Intellectual property                                                                             
|                                                                                              | Employee relations                                                                                
|                                                                                              | Environmental matters                                                                             
|                                                                                              | Financial information by operating segment and product category                                   
|                                                                                              | Financial information by geographic area                                                          
|                                                                                              | Working capital                                                                                   
|                                                                                              | Risk factors                                                                                      
|ITEM 2.   Properties                                                                         
|ITEM 3.   Legal Proceedings                                                                  
|ITEM 4   Submission of Matters to a Vote of Security Holders                                 
|PART II                                                                                      
|ITEM 5.   Market for the Registrants Common Equity and Related Stockholder Matters          
|                                                                                              | Securities Authorized for Issuance Under Equity Compensation Plans                                
|ITEM 6.   Selected Financial Data (Unaudited)                                                
|ITEM 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                                                              | Business overview                                                                                 
|                                                                                              | Developments in 2002                                                                              
|                                                                                              | Developments in 2003                                                                              
|                                                                                              | Results of operations  continuing operations                                                     
|                                                                                              | Results of operations  discontinued operations                                                   
|                                                                                              | Application of critical accounting policies                                                       
|                                                                                              | Liquidity and capital resources                                                                   
|                                                                                              | Off-balance sheet arrangements, contractual obligations and contingent liabilities and commitments
|                                                                                              | Market risk                                                                                       
|                                                                                              | Legal proceedings                                                                                 
|                                                                                              | Environmental matters                                                                             
|                                                                                              | Forward-looking statements                                                                        
|                                                                                              | Recent pronouncements                                                                             
|ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk                          
|ITEM 8. Consolidated Financial Statements and Supplementary Data                             
|ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III                                                                                     
|ITEM 10. Directors and Executive Officers of the Registrant                                  
|                                                                                              | Directors of the registrant                                                                       
|                                                                                              | Executive officers and certain other non-executive board appointed officers of the registrant     
|                                                                                              | Section 16(a) beneficial ownership reporting compliance                                           
|ITEM 11. Executive Compensation                                                              
|                                                                                              | Summary compensation table                                                                        
|                                                                                              | Option grants in 2002                                                                             
|                                                                                              | Aggregate option exercises in 2002 and year-end option values                                     
|                                                                                              | Long-term incentive plans  awards in last fiscal year                                            
|                                                                                              | Pension plans                                                                                     
|                                                                                              | Certain employment arrangements                                                                   
|                                                                                              | Compensation of directors                                                                         
|                                                                                              | Compensation committee interlocks and insider participation                                       
|ITEM 12.     Security Ownership of Certain Beneficial Owners and Management                  
|                                                                                              | Security ownership of certain beneficial owners                                                   
|                                                                                              | Security ownership of directors and management                                                    
|ITEM 13. Certain Relationships and Related Transactions                                      
|                                                                                              | Indebtedness of management                                                                        
|                                                                                              | Related party transactions                                                                        
|ITEM 14. Controls and Procedures                                                             
|                                                                                              | Evaluation of disclosure controls and procedures                                                  
|                                                                                              | Changes in internal control                                                                       
|PART IV                                                                                      
|ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|ITEM 16. Principal Accountant Fees and Services                                              
|                                                                                              | Audit Fees                                                                                        
|                                                                                              | Audit-Related Fees                                                                                
|                                                                                              | Tax Fees                                                                                          
|                                                                                              | All Other Fees                                                                                    
|Signatures                                                                                   
|CERTIFICATIONS                                                                               



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TABLE OF CONTENTS

|         |  |                                                                                       |  |  |                                                                                                    |  |    |      |  | 
|-------- |  | ------------------------------------------------------------------------------------- |  |  | -------------------------------------------------------------------------------------------------- |  | -- | ---- |  | 
|         |  |                                                                                       |  |  |                                                                                                    |  |    | PAGE
|         |  |                                                                                       |  |  |                                                                                                    |  |    |     
|PART I   |  |                                                                                       |  | 
|         |  |                                                                                       |  | 
|ITEM 1.  |  | Business                                                                              |  |  | 1                                                                                                  | 
|         |  |                                                                                       |  |  | Overview                                                                                           |  |    | 1    | 
|         |  |                                                                                       |  |  | Developments in 2002                                                                               |  |    | 2    | 
|         |  |                                                                                       |  |  | Networking solutions                                                                               |  |    | 2    | 
|         |  |                                                                                       |  |  | Wireless Networks                                                                                  |  |    | 3    | 
|         |  |                                                                                       |  |  | Enterprise Networks                                                                                |  |    | 7    | 
|         |  |                                                                                       |  |  | Wireline Networks                                                                                  |  |    | 11   | 
|         |  |                                                                                       |  |  | Optical Networks                                                                                   |  |    | 14   | 
|         |  |                                                                                       |  |  | Sales and distribution                                                                             |  |    | 17   | 
|         |  |                                                                                       |  |  | Product standards, certification and regulation                                                    |  |    | 18   | 
|         |  |                                                                                       |  |  | Sources and availability of materials                                                              |  |    | 18   | 
|         |  |                                                                                       |  |  | Seasonality                                                                                        |  |    | 19   | 
|         |  |                                                                                       |  |  | Strategic alliances, acquisitions and minority investments                                         |  |    | 19   | 
|         |  |                                                                                       |  |  | Research and development                                                                           |  |    | 19   | 
|         |  |                                                                                       |  |  | Intellectual property                                                                              |  |    | 20   | 
|         |  |                                                                                       |  |  | Employee relations                                                                                 |  |    | 21   | 
|         |  |                                                                                       |  |  | Environmental matters                                                                              |  |    | 21   | 
|         |  |                                                                                       |  |  | Financial information by operating segment and product category                                    |  |    | 22   | 
|         |  |                                                                                       |  |  | Financial information by geographic area                                                           |  |    | 22   | 
|         |  |                                                                                       |  |  | Working capital                                                                                    |  |    | 22   | 
|         |  |                                                                                       |  |  | Risk factors                                                                                       |  |    | 22   | 
|ITEM 2.  |  | Properties                                                                            |  |  | 23                                                                                                 | 
|ITEM 3.  |  | Legal Proceedings                                                                     |  |  | 24                                                                                                 | 
|ITEM 4.  |  | Submission of Matters to a Vote of Security Holders                                   |  |  | 24                                                                                                 | 
|PART II  |  |                                                                                       |  | 
|         |  |                                                                                       |  | 
|ITEM 5.  |  | Market for the Registrants Common Equity and Related Stockholder Matters             |  |  | 25                                                                                                 | 
|         |  |                                                                                       |  |  | Securities authorized for issuance under equity compensation plans                                 |  | 25 |     
|ITEM 6.  |  | Selected
Financial Data (Unaudited)                                                   |  |  | 26                                                                                                 | 
|ITEM 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  |  | 27                                                                                                 | 
|         |  |                                                                                       |  |  | Business overview                                                                                  |  |    | 27   | 
|         |  |                                                                                       |  |  | Developments in 2002                                                                               |  |    | 27   | 
|         |  |                                                                                       |  |  | Developments in 2003                                                                               |  |    | 29   | 
|         |  |                                                                                       |  |  | Results of operations  continuing operations                                                      |  |    | 29   | 
|         |  |                                                                                       |  |  | Results of operations  discontinued operations                                                    |  |    | 41   | 
|         |  |                                                                                       |  |  | Application of critical accounting policies                                                        |  |    | 41   | 
|         |  |                                                                                       |  |  | Liquidity and capital resources                                                                    |  |    | 47   | 
|         |  |                                                                                       |  |  | Off-balance sheet arrangements, contractual obligations and contingent liabilities and
commitments |  |    | 55   | 
|         |  |                                                                                       |  |  | Market risk                                                                                        |  |    | 57   | 
|         |  |                                                                                       |  |  | Legal proceedings                                                                                  |  |    | 58   | 
|         |  |                                                                                       |  |  | Environmental matters                                                                              |  |    | 58   | 
|         |  |                                                                                       |  |  | Forward-looking statements                                                                         |  |    | 59   | 
|         |  |                                                                                       |  |  | Recent pronouncements                                                                              |  |    | 70   | 
|ITEM 7A. |  | Quantitative and Qualitative Disclosures about Market Risk                            |  |  | 71                                                                                                 | 
|ITEM 8.  |  | Consolidated Financial Statements and Supplementary Data                              |  |  | 72                                                                                                 | 
|ITEM 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  |  | 73                                                                                                 | 

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|           |                |                                                                 |  |  |                                                                                               |     |  |      |  | 
|---------- | -------------- | --------------------------------------------------------------- |  |  | --------------------------------------------------------------------------------------------- | --- |  | ---- |  | 
|           |                |                                                                 |  |  |                                                                                               |     |  | PAGE
|           |                |                                                                 |  |  |                                                                                               |     |  |     
|PART III   |                |                                                                 |  | 
|           |                |                                                                 |  | 
|ITEM 10.   |                | Directors and Executive Officers of the Registrant              |  |  | 73                                                                                            |    
|           |                |                                                                 |  |  | Directors of the registrant                                                                   |     |  | 73   | 
|           |                |                                                                 |  |  | Executive officers and certain other non-executive board appointed officers
of the registrant |     |  | 75   | 
|           |                |                                                                 |  |  | Section 16(a) beneficial ownership reporting compliance                                       |     |  | 77   | 
|ITEM 11.   |                | Executive Compensation                                          |  |  | 78                                                                                            |    
|           |                |                                                                 |  |  | Summary compensation table                                                                    |     |  | 78   | 
|           |                |                                                                 |  |  | Option grants in 2002                                                                         |     |  | 80   | 
|           |                |                                                                 |  |  | Aggregate option exercises in 2002 and year-end option values                                 |     |  | 81   | 
|           |                |                                                                 |  |  | Long-term incentive plans  awards in last fiscal year                                        |     |  | 82   | 
|           |                |                                                                 |  |  | Pension plans                                                                                 |     |  | 82   | 
|           |                |                                                                 |  |  | Certain employment arrangements                                                               |     |  | 84   | 
|           |                |                                                                 |  |  | Compensation of directors                                                                     |     |  | 85   | 
|           |                |                                                                 |  |  | Compensation committee interlocks and insider participation                                   |     |  | 86   | 
|ITEM 12.   |                | Security Ownership of Certain Beneficial Owners and Management  |  |  | 87                                                                                            |    
|           |                |                                                                 |  |  | Security ownership of certain beneficial owners                                               |     |  | 87   | 
|           |                |                                                                 |  |  | Security ownership of directors and management                                                |     |  | 87   | 
|ITEM 13.   |                | Certain Relationships and Related Transactions                  |  |  | 89                                                                                            |    
|           |                |                                                                 |  |  | Indebtedness of management                                                                    |     |  | 90   | 
|           |                |                                                                 |  |  | Related party transactions                                                                    |     |  | 90   | 
|ITEM 14.   |                | Controls and Procedures                                         |  |  | 91                                                                                            |    
|           |                |                                                                 |  |  | Evaluation of disclosure controls and procedures                                              |     |  | 91   | 
|           |                |                                                                 |  |  | Changes in internal control                                                                   |     |  | 91   | 
|PART IV    |                |                                                                 |  | 
|           |                |                                                                 |  | 
|ITEM 15.   |                | Exhibits, Financial Statement Schedules and Reports on Form 8-K |  |  | 91                                                                                            |    
|ITEM 16.   |                | Principal Accountant Fees and Services                          |  |  | 98                                                                                            |    
|           |                |                                                                 |  |  | Audit fees                                                                                    |     |  | 98   | 
|           |                |                                                                 |  |  | Audit-related fees                                                                            |     |  | 98   | 
|           |                |                                                                 |  |  | Tax fees                                                                                      |     |  | 98   | 
|           |                |                                                                 |  |  | All other fees                                                                                |     |  | 99   | 
|SIGNATURES |                |                                                                 |  |  | 126                                                                                           |    
|           | CERTIFICATIONS |                                                                 |  |  |                                                                                               | 128 | 

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

NORTEL NETWORKS, NORTEL NETWORKS LOGO,
NT, The GLOBEMARK, BAYSTACK, CALLPILOT, CONTIVITY, DMS, EPICON, MERIDIAN,
NORSTAR, OPTERA, PASSPORT, PERIPHONICS, PRESIDE,
SHASTA, SUCCESSION, and UNIVERSAL EDGE are trademarks of Nortel
Networks.

ALTEON is a trademark of Alteon WebSystems.

CDMA2000 is a trademark of the
Telecommunication Industry Association.
CDMAONE - design mark is a trademark of the CDMA Development Group, Inc.

CLARIFY is a trademark of Amdocs Software Systems Limited.

JUNGLEMUX is a trademark of GE Industrial Systems Technology
Management Inc.

MICROSOFT and WINDOWS XP are trademarks of Microsoft Corporation.

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

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

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PART I




ITEM 1.     Business




Overview

Nortel Networks Limited is an industry leader and innovator focused on
transforming how the world communicates and exchanges information. We supply
products and services that support the Internet and other public and private
data, voice and multimedia communications networks using wireline and wireless
technologies, which we refer to as networking solutions. Our networking
solutions generally bring together diverse networking products from our various
product families, and related services, to create either a customized or off
the shelf solution for our customers. Our business consists of the design,
development, manufacture, assembly, marketing, sale, licensing, installation,
servicing and support of networking solutions. A substantial portion of Nortel Networks has a technology focus and is dedicated to research and development.
This focus forms a core strength and a factor differentiating us from many of our
competitors. We envision an information society where people will be able to
connect and interact with information and with each other instantly, simply and
reliably, seamlessly accessing data, voice and multimedia communications
services and sharing experiences anywhere, anytime.

Our networking solutions include network equipment, software and other
technologies that enable local and long-distance communications companies,
wireless service providers, cable multiple system operators and other
communications service providers to provide their customers with services to
communicate locally, regionally or globally through the use of data, voice and
multimedia communications.

Also, our networking solutions provide enterprises, such as large and
small businesses, governments, educational institutions and other
organizations, with the ability to communicate locally or globally within their
organization and with other organizations and individuals through the use of
data, voice and multimedia communications. We are focused on providing
high-performance networking solutions that transform the way people and
companies communicate and conduct business.

During the third quarter of 2002, we changed the way we managed our
business to streamline and focus more directly on our customers in four core
business areas. We now conduct business in the following four reportable
segments: Wireless Networks; Enterprise Networks; Wireline Networks; and
Optical Networks (formerly named Optical Long-Haul Networks). During the second quarter of 2002, we shifted the
accountability for the metro optical portion of Metro and Enterprise Networks
(now split into Enterprise Networks and Wireline Networks) into Optical
Networks. We refer you to the descriptions
of Wireless Networks, Enterprise Networks, Wireline Networks and Optical Networks below. All financial
information has been restated to reflect these re-organizations. For financial
information by reporting segment and product category, see Segmented
information in note 5 of the accompanying consolidated financial statements
and Results of operations  continuing operations
 Segment revenues in
Managements Discussion and Analysis of Financial Condition and Results of
Operations.

The Companys principal executive offices are located at 8200 Dixie Road,
Suite 100, Brampton, Ontario, Canada, L6T 5P6; telephone number (905) 863-0000.
The Company was originally incorporated under the laws of Canada as the
Northern Electric Company, Limited (a successor to the business of Northern
Electric and Manufacturing Company, Limited, a subsidiary of Bell Canada
incorporated in 1895) on January 5, 1914. The Company participated in a
corporate amalgamation with two of its wholly owned subsidiaries on January 4,
1982. The Company changed its name to Northern Telecom Limited on March 1,
1976, to Nortel Networks Corporation on April 29, 1999, and to Nortel Networks
Limited on May 1, 2000. On May 1, 2000, the Company participated in a Canadian
court-approved plan of arrangement with Nortel Networks Corporation, previously
known as New Nortel Inc., and BCE Inc., the largest shareholder of the Company
prior to the plan of arrangement. In connection with the plan of arrangement
on May 1, 2000:



| |  |  | the company changed its name to Nortel Networks Limited;                                                                              
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------
| |  |  | the holders of the outstanding publicly traded common shares of the
Company became common shareholders of Nortel Networks Corporation;

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| |  |  | common shares of Nortel Networks Corporation were distributed to the common shareholders of BCE; and
| | - |  | ----------------------------------------------------------------------------------------------------

| |  |  | the Company became the principal operating subsidiary of Nortel Networks Corporation.
| | - |  | -------------------------------------------------------------------------------------

References
to the
Company mean Nortel Networks Limited without its subsidiaries. References
to we, our, us, or Nortel Networks mean the Company and its
subsidiaries.

We make our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and all amendments to those reports available free
of charge under Investor Relations on our website at
www.nortelnetworks.com
as soon as reasonably practicable after we electronically file this material
with, or furnish this material to, the United States Securities and Exchange
Commission. Information contained on our website is not incorporated
by reference into our annual report on Form 10-K.




Developments in 2002

In 2002, the
telecommunications industry continued to experience
significant adjustment which began in 2001. Industry demand for networking
equipment continued to decline in response to the ongoing industry
adjustment, economic downturn and to the related
tightening in the global capital markets. As a result of the continued
industry adjustment, the business marketplace has changed. Excess network
capacity still exists as a result of the pace of new network construction and
strong economic growth in 1999 and 2000 and due to the financial difficulties
of a number of communications service providers around the world. In 2002, the
industry also experienced continuing consolidation.

Our customers continued to focus in 2002 on conserving capital, decreasing
their debt levels, reducing costs and/or increasing the capacity utilization
rates and efficiency of existing networks. Customers are no longer building new networks in anticipation of
market demand but are waiting until actual end user demand warrants such
increased network capacity. Enterprises and service providers are focused on
conservative capital spending that can reduce their costs, provide new revenue
growth and maximize their return on invested capital. As a result, capital
spending by enterprises and service providers around the world continued to
decline in 2002.

In
response to the ongoing industry adjustment, we engaged in a number of activities in 2002 to further streamline our
operations and activities around our four core businesses and to strengthen our
financial position. Some of our activities in 2002 included:



| |  |  | realignment of Optical Networks, including the sale of certain optical components assets;                
| | - |  | ---------------------------------------------------------------------------------------------------------
| |  |  | restructuring, including additional workforce reductions and asset writedowns;                           
| |  |  | equity offerings by Nortel
Networks Corporation during the second quarter; and                           
| |  |  | expiration and termination of certain of our credit
facilities and amendments to our security agreements.

As a result of these initiatives, we have made substantial progress in
reducing our costs and creating a business model that we believe is better
aligned to the current state of our industry. For information on these and
other developments in 2002, see Special charges in note 6, Divestitures,
closures and acquisitions in note 9, Long-term debt and credit facilities in
note 10 and Capital stock in note 14 of the accompanying consolidated
financial statements and Developments in 2002 in Managements Discussion and
Analysis of Financial Condition and Results of Operations.




Networking solutions

Our networking solutions include network equipment, software and other
technologies that enable communications through the use of data, voice and
multimedia networking. In our industry, networking refers to:



| |  |  | the connecting of two or more communications devices, such as
telephones for voice communications and personal computers for data
communications, across short or long distances to create a network;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  |  | the connecting of two or more networks; or    
| | - |  | ----------------------------------------------
| |  |  | the connecting of equipment used in a network.

A telecommunications network generally consists of network access
equipment, network transport equipment and core networking equipment.

Network access

Network access refers to the portion of a network that runs from an end
user to the network access equipment that resides in locations between the end
users site and the interior or core areas of a
network. For our network access solutions, we refer you to each of
our segment
descriptions below.

Network transport

Network transport refers to the portion of a network that runs from
network access equipment to core networking equipment, or from core networking
equipment in one location to core networking equipment in another location.
Network transport may be over wireline cabling (fiber optic, copper wire or
coaxial), or over wireless radio signals transmitted through the air between
locations using antennas. The most common method for long-distance network
transport is optical networking, which uses light waves to transmit
communications signals through fiber optic cables. Network transport by
wireless radio signals is also known as digital radio transport, which we do
not offer as part of our products and services. For our optical transport
products, we refer you to our Optical Networks description below.

Core networking

Core networking refers to the apparatus and workings of the interior areas
of a network. Core networking equipment directs, routes or switches the
data, voice and multimedia communications signals from one part of the network
to another. Core networking uses either packet-based networking or circuit
networking. Packet-based networking involves the partitioning of a data, voice
or multimedia communications signal into pieces, or packets, that are
directed or routed
through the network independently and then re-assembled at the
destination. This enables large numbers of communications signals to be
directed or routed simultaneously and more efficiently than in circuit
networking, which requires a separate network circuit to be maintained for each
communications signal for the duration of the transmission. For our core
networking solutions, we refer you to each of our segment descriptions below.




Wireless Networks

Products

Wireless networking, also known as mobility networking, refers to
communications networks that enable end users to be mobile while they send and
receive voice and data communications using wireless devices, such as cellular
telephones and personal digital assistants. These networks use specialized
network access equipment and specialized core networking equipment that enable
an end user to be connected and identified when not in a fixed location. The
technology for wireless communications networks has evolved and continues to
evolve, through various technology generations.



| |  |  | First generation (1G) wireless technology refers to analog wireless
communications networks based on circuit switching technology that are
limited to voice communications.                             
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Second generation (2G) wireless technology refers to digital wireless
communications networks based on circuit switching technology with
modest data transmission capabilities.                         
|
| |  |  | Third generation (3G) wireless technology refers to digital wireless
communications networks based on packet networking technology with
voice, high-speed data and multimedia transmission capabilities.

Our existing wireless solutions span second and third generation wireless
technologies and most major global digital standards for mobile networks. The
majority of wireless communications networks existing today are based on 2G
wireless

3



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technologies. However, 3G networks have been launched in several
regions. There are several main international standards for wireless
communications networks.



| |  |  | Time Division Multiple Access (TDMA) is a 2G wireless standard
supported mainly in the United States, Canada and the Caribbean and
Latin America region, or CALA, that uses timeslots within a radio
frequency channel to separate users conversations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Code Division Multiple Access
(CDMA) is a 2G wireless standard, also known as cdmaOne supported in each geographic region. CDMA uses codes, much
like encryption, to distinguish one call from another, with all calls in
a given cell transmitted over the entire range of radio frequencies
assigned to the network operator within the cell. CDMA networks based
are evolving to 3G according to the CDMA 3G
1xRTT (Single Channel (1x) Radio Transmission Technology) standard,
also known as cdma 2000, for
voice and high-speed data mobility. CDMA 3G 1xEV-DO (EVolution
Data Only)
and CDMA 3G 1xEV-DV (EVolution Data and Voice) are extensions of CDMA 3G
standards for high speed wireless networks for data, voice and
multimedia communications.
|
| |  |  | Global System for Mobile communications (GSM) is a 2G wireless
standard supported all over the world that, like TDMA, uses time slots
within a specified radio frequency channel to distinguish one call from
another. GSM networks are evolving to carry data, as well as voice,
with the introduction of General Packet Radio Standard (GPRS). GPRS is
viewed as a 2.5G technology that provides faster and therefore
increased data transmission capabilities. Enhanced Data Rates for
Global Evolution (EDGE) is a further evolution of GSM systems to support
higher data speeds. In addition to higher data speeds, EDGE provides
increased voice capacity for existing GSM operators.                                                               
|
| |  |  | Universal Mobile Telecommunications System (UMTS) is an emerging
standard for 3G networks based on Wideband CDMA (WCDMA) technology.
UMTS combines WCDMA-based radio access with packet switching technology
to yield high capacity, high speed wireless networks for data, voice and
multimedia communications.                                                                                                                                                                                                                                                                                                                                                                                                                                             

We offer a broad portfolio of solutions for wireless communications
networks. Our wireless networking products support the TDMA, CDMA/CDMA 3G,
GSM/GPRS/EDGE and UMTS standards. We also offer a range of related
professional services to our customers, including: network design and
engineering services; installation services; network
optimization services; network operation services; and technical operations and
maintenance services.

Network access

Radio network access equipment uses radio waves to provide wireless access
to the subscribers hand held device, enabling the wireless subscriber to
connect to the network to send and receive data, voice and multimedia
communications. The key network elements in radio access are base station
transceivers and base station controllers. As a mobile subscriber moves away
from the area covered by a base station transceiver, also known as a cell site,
the subscriber will lose the call unless an adjacent cell site provides the
coverage. This requires that an active wireless call be transferred from one
cell to another cell without breaking or disconnecting the call in progress,
also known as a hand-off. Base station transceivers and base station
controllers work together with core networking equipment to perform a call
hand-off. We offer our customers a wide range of base station transceivers and
base station controllers for TDMA, CDMA/CDMA 3G, GSM/GPRS/EDGE and UMTS
standards. The base stations are available in the common frequency spectrum
bands that are assigned to mobile communications and support a wide variety of
network requirements, including metropolitan and dense urban networks. These
are generally available in micro, macro and mini base station transceiver
packages and are available in both outdoor and indoor versions of base station
transceivers. We do not manufacture or sell cellular phones.



| |  |  | Our CDMA base station transceivers
support CDMA 2G (IS-95) and CDMA
3G transmission standards. Many of our customers have already deployed
CDMA 3G base station transceivers that support 1xRTT and are upgradeable
to support emerging CDMA 3G 1xEV-DO and CDMA 3G 1xEV-DV standards in
the future.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Our GSM base station products support wireless service providers with
licensed radio spectrum and can be upgraded to support GPRS.                                                                                                                                                                  
|
| |  |  | Our UMTS Access Network radio network access equipment is now
available for commercial deployment.                                                                                                                                                                                                  

4



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##### Table of Contents



Core networking

Core networking equipment directs, routes or switches communications
signals within a service providers wireless communications network. The
primary functions of core networking equipment in wireless communications
networks are: identifying and authenticating the called party; locating the
called party; directing the call through the system; and generating call detail
records for billing purposes. The key network elements in the core part of a
wireless communications network are mobile switching centers and home location
registers.



| |  |  | Mobile switching centers direct or switch data, voice and
multimedia communications signals from one network circuit to
another. Mobile switching centers also support advanced voice
services like 3-way calling, calling party number/name delivery, call
holding and call redirection. Mobile switching centers work in
conjunction with adjunct systems like voice mail systems, short
message service centers and multimedia messaging systems to provide
voice, text and multimedia messaging services.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | A home location register is a database that contains permanent
subscriber data, such as provisioning and service information and
dynamic information, such as the wireless handsets current location.                                                                                                                                                                                                                                                                                                         

We offer mobile switching centers and home location registers that support
TDMA, CDMA/CDMA 3G, GSM/GPRS/EDGE and UMTS core networks. Our GPRS core
network portfolio includes Serving GPRS Support Node and Gateway GPRS Support
Node. Our Serving GPRS Support Node, which connects the GPRS backbone
network to the base station transceiver and the home location register,
registers and tracks mobile users and delivers data communications to
cellular phones and other mobile devices in a given service area. Our
GPRS Gateway Support Node routes data communications and connects the GPRS
backbone network to external data networks. Our UMTS 3G core networking
equipment, including our UMTS Serving Support Node and our UMTS Gateway Support
Node, are commercially available. Our 3G product portfolio reuses the same
platforms used in 2G and 2.5G products, providing significant investment
protection for our customers.

Product development

Our wireless networking products in development include
the next evolution of our CDMA 3G products, our GSM/GPRS/EDGE
products and our UMTS products.



|
|
|
|
|
|
|
|
|

Markets

The original wireless communications networks were built using 1G analog
technology. In the early 1990s, advanced 2G digital technology based systems,
including TDMA, CDMA and GSM, were introduced. Over the next couple of years,
we expect most of the remaining analog wireless networks to migrate to digital
technologies.



5



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##### Table of Contents



| |  |  | Wireless service providers operating TDMA networks, a mature
technology, are expected to migrate to either GSM/GPRS/EDGE or
CDMA/CDMA 3G systems based on their business strategies.                                                                                                                                           
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Many CDMA operators have already upgraded their network to
support CDMA 3G technology that provides higher data speeds and
increased voice capacity. These networks are expected to evolve to
CDMA 3G 1xEV-DO and CDMA 3G 1xEV-DV standards to further increase
data speeds and voice capacity.                                
|
| |  |  | Since the beginning of 2000, many wireless service providers
have been upgrading their GSM networks to GPRS. The upgrade to EDGE
is expected to occur over the next several years, and is viewed by
many operators as 3G. GSM will continue to be an important standard
for the United States, Canada and developing countries.
|
| |  |  | Certain operators in EMEA and the Asia Pacific region have
either launched or announced their intention to launch 3G networks
based on UMTS technology.                                                                                                                                                                        

There are two key aspects to the migration from 2G wireless communications
technologies to 2.5G and 3G wireless communications technologies. The first is
that all current 3G technologies, including CDMA 3G and UMTS are based on
spread spectrum technology. The second is that the migration from 2G to 2.5G
and 3G technologies is largely based on a transition from circuit switching
technologies in 2G core networks to packet-based networking technologies in 3G
core networks. We believe that our extensive experience in deploying CDMA
wireless communications networks, combined with our expertise in
packet-based networking for wireline networks, will be a competitive strength during the
market migration from 2G wireless communications networks to 2.5G and 3G
wireless communications networks. However, the timing of this migration has
become increasingly difficult to predict as a result of the complexities and
potential for delays in implementation of 3G network deployments.

We anticipate that demand for wireless networking equipment will be driven
primarily by the growth of 2.5G and 3G wireless networking systems. Several
commercial CDMA 3G networks have been launched in the United States, Canada,
CALA and the Asia Pacific region. GPRS
networks have already been launched in EMEA, the Asia Pacific region, the
United States and Canada. In addition, several existing operators are planning
to upgrade their networks to EDGE to support higher data rates. While
the first launches did take place in EMEA and the Asia Pacific
region, the timing of UMTS network deployments remains uncertain,
generally due to delays in UMTS hand set availability as a result of technology
issues, the high license fees and continued financial difficulty of
certain UMTS
wireless service providers.

In the United States and Canada, usage rates of wireless communications
services continue to increase, and we anticipate that capital spending
decisions by wireless service providers will be driven by capacity
requirements, new wireless subscribers, increased use of wireless devices for
Internet access and technology migration from 2G wireless technologies to 2.5G
and 3G wireless technologies. We also anticipate that the migration from 2G
to 2.5G and 3G wireless will be driven by CDMA 3G 1xRTT deployment for
CDMA-based networks, and by GPRS and UMTS deployment for GSM and TDMA-based
networks. However, the timing of this migration is uncertain given the
ongoing industry adjustment.

Within EMEA, wireless subscriber growth has slowed dramatically over the
last two years in many Western European countries, largely due to very high
wireless subscriber penetration levels. However, other parts of EMEA continue
to grow their subscriber base due to the lower market penetration for wireless
services. Investment decisions by wireless service providers in Western Europe
are being driven by anticipated growth in wireless data communications
services. As a result, infrastructure spending in Western Europe is currently
primarily driven by the migration from GSM to GPRS and UMTS technologies, and
the associated migration from circuit switching technologies to packet-based
networking technologies. However, many wireless service providers in Europe
have delayed new 3G investments as a result of financing constraints as well as
the significant debt incurred to obtain government licenses for 3G wireless
networks.

In the Asia Pacific region, we anticipate that capital spending by
wireless service providers will be driven by the migration to 3G technologies
in Japan and Korea, and by continued growth in wireless subscribers
in the Peoples Republic of China, or China.
Growth in China may be further driven by anticipated new national licenses for 3G,
and a CDMA 3G network build-out by China Unicom. Many countries in South and
South East Asia have very low wireless subscriber penetration levels, and are
expected to experience increased wireless subscriber growth over the next five
years. India is also anticipated to be a major wireless infrastructure market
in the next five years. In CALA, our customers wireless subscriber base has continued to grow in
2002, largely due to the popularity and increased affordability of wireless
communications

6



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##### Table of Contents



services. In Brazil, capital spending by service providers has
begun to shift from wireline communications networks to wireless communications
networks.

For a discussion of important trends in Wireless Networks, see Results of
operations  continuing operations  Wireless Networks in Managements
Discussion and Analysis of Financial Condition and Results of Operations.

Customers

Our Wireless Networks customers are wireless service providers, and their
customers are the subscribers for wireless communications services. The top 20
global wireless service providers collectively account for a majority of all
wireless subscribers around the world. We are currently focused on increasing
our market presence among the top global wireless service providers. We expect
to see the continued consolidation of wireless service providers, particularly
in light of the large UMTS 3G license fees paid by wireless service providers
in EMEA, and the large capital investments they must make to build their 3G
wireless networks. None of our Wireless Networks customers represented more
than 10 percent of Nortel Networks consolidated revenues in 2002.

Competition

Our major competitors in the global wireless infrastructure business have
traditionally included Telefonaktiebolaget LM Ericsson, Lucent Technologies
Inc., Motorola, Inc., Siemens Aktiengesellschaft and Nokia Corporation. Nokia
and Siemens compete in the sale of GSM and UMTS equipment, whereas Lucent
competes in the sale of CDMA and TDMA equipment. Motorola is a competitor in
the sale of GSM, UMTS and CDMA radio network access equipment. Ericsson
competes in the sale of equipment for all of the major wireless communications
technologies. More recently, Samsung Electronics Co., Ltd. has emerged as a
competitor in the sale of CDMA systems, and Huawei Technologies Co., Ltd. has
emerged as a competitor for GSM in China and many other developing countries.
The primary global factors of competition for our Wireless Networks products
include:



| |                                                                                                
| | -----------------------------------------------------------------------------------------------
| |      technology leadership, product features and availability;                                
| |      product quality and reliability;                                                         
| |      conformity to existing and emerging regulatory and industry standards;                   
| |      warranty and customer support;                                                           
| |      price and cost of ownership;                                                             
| |      provision of customer financing;                                                         
| |      interoperability with other networking products;                                         
| |      network management capabilities;                                                         
| |      traditional supplier relationships, particularly in EMEA and the Asia Pacific region; and
| |      regulatory certification.                                                                

We intend to continue to compete with our traditional competitors as the
global market for wireless networking equipment migrates to 3G technologies.
We also expect newer competitors, such as NEC Corporation and Matsushita
Electric Industrial Co., Ltd. (also known as Panasonic), to emerge.




Enterprise Networks

Products

Our Enterprise Networks portfolio of products provide wireline voice and
multimedia communications for our customers. We also provide our customers with related professional services
including: strategic planning and network design services; operations planning
and consulting services; technology and process outsourcing services; network
applications and network content services; and installation and ongoing
technical support.

7



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##### Table of Contents



Circuit and packet voice solutions

Our voice portfolio includes a
broad range of circuit and packet voice communications solutions.
These include circuit to packet convergence systems, combined voice
and data integration solutions, as well as next generation and legacy
voice systems.



| |  |  | Our enterprise Succession solutions are combined voice and data
communications systems for service providers and large enterprises.
These solutions are designed to give our customer the ability to support
data and large enterprises networking without replacing their existing
voice networks, or the ability to add voice services to existing data
networks. Our enterprise Succession solutions can be used by customers
building new networks, and customers who want to transform their
existing voice communications network into a more cost effective
packet-based network supporting data, voice and multimedia
communications.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Our Business Communications Manager is a combined voice and data
communications system for branch offices and small to medium-sized
businesses that uses both digital and Internet Protocol (IP) technologies. This solution
allows migration from an enterprises separate voice and data
communications infrastructures to a combined next generation
Internet-based system. Available applications include voice messaging,
cordless phones, contact center software and data communications
routing.                                                                                                                                     
|
| |  |  | Our Meridian digital telephone switching systems (Meridian) are
designed for small, medium and large commercial enterprises and
government agencies. These circuit network telephone systems provide
voice communications features, such as voice messaging, call waiting and
call forwarding, as well as advanced voice services, multimedia
applications and other networking capabilities. Our customers can also
configure their Meridian to send voice communications over the Internet
with our Internet Telephony Gateway products and our i2004/i2050 Internet
telephones.                                                           
|
| |  |  | Our remote office portfolio contains a combination of products that
allow remote users, whether individuals at home or groups of employees
in small offices, to access the full complement of Meridian features.                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  |  | Our Norstar digital telephone switching systems are designed for
small to medium-sized businesses and branch offices of large
organizations. These circuit networking telephone systems can be
configured with a suite of applications, such as voice messaging,
cordless phones, contact center software and interactive voice response
systems.                                                                                                                                                                                                                                                                                            
|
| |  |  | Our customer contact and voice portal solutions provide the means for
enterprises to do business with their customers consistently regardless
of where they are located, the time or whether they interact over the
telephone or Internet. Our solutions include our:                                                                                                                                                                                                                                                                                                                                                                        
|

| |  |  | Periphonics interactive voice response systems that
automate functions often conducted by a companys telephone
agents. Our interactive voice response systems answer the
telephone, greet callers, offer menu options and provide
information to the caller in a consistent, accurate manner. These
systems use advanced speech recognition systems to allow a caller
to interact with the system by orally responding to questions or
prompts presented to the caller by the system.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Symposium call center portfolio of products that provide
call center solutions for small, medium and large organizations.
Our Symposium call center solutions can provide either a standard
circuit-switched voice system or an Internet-based call center
solution.                                                                                                                                                                                                                  
|
| |  |  | CallPilot, which is a unified messaging tool that
utilizes speech recognition and Transmission Control Protocol/IP
digital networking to give complete access and total control of
facsimile, e-mail and voice messages. Using simple voice commands
like play or print, a user can remotely manage their
multimedia communications over the telephone. The user can print
facsimiles, store or delete voice messages and more by simply
speaking.                                

Data networking and security solutions

We offer
a broad range of data networking (packet switching and routing) and
security solutions for our customers. Our packet switching and routing systems
include data switching systems, aggregation products, virtual private network
gateways and routers.

8



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| |  |  | Our Alteon Web products provide data switching designed to allow
service providers and enterprises to provide Internet data security, to
manage and prioritize the Internet content that is provided to end
users, and to balance the amount of communications traffic on multiple
Internet servers.                                                                                                                                                                                                                                                            
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Our Baystack and Business Policy Switch 2000 portfolio is a series of
high performance packet switches for our enterprise customers small to
large local area networks that use the Ethernet, a standard computer
networking protocol for local area networks. These switching systems
are designed to allow the prioritization of communications traffic to
ensure network integrity for certain applications, such as systems for
voice communications over the Internet.                                                                                    
|
| |  |  | Our Passport family of multi-service switching products offers
high-speed, high-capacity data switching to support a wide range of data
communications technologies, including multi-protocol label switching,
asynchronous transfer mode, IP and frame relay
services. These products are also key components of our Succession
solution voice over packet applications and IP virtual private network services.
Our Passport Ethernet Routing Switch delivers IP routing
and switching.                                                                       
|
| |  |  | Our Bay router portfolio is a family of routers that work with a
variety of data networking protocols to offer expandable, contractible
and cost-effective connections for use in our enterprise customers
local area networks, campus networks and wide area networks. These
solutions use the IP standard to route data communications traffic from
one corporate site to another within an enterprises network.                                                                                                                                            
|
| |  |  | The Contivity Secure IP Services Gateways (Contivity) are a family of
products delivering security and IP services in a single integrated
platform. IP services including IP routing, virtual private networks,
firewall applications, policy management and Quality of Service
services, which normally would require several different devices are
provided by a single Contivity device. Designed for enterprise
networks, Contivity leverages the cost advantages of the Internet while
providing secure communications across the public IP infrastructure.

Product development

We are currently focused on developing products that support the
continuing evolution of voice and data communications systems toward converged
or combined voice and data networks including:



| |  |  | The development of a communication server for enterprise multimedia
exchange, a Succession product that will provide the capability to
deliver multimedia applications and enhanced networking capabilities.                                                                                                                                                                                                                                                                 
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Additions to our applications in our Succession products to allow
integration of voice over IP with voice extensible markup language and
Microsoft Windows XP and the development of new integrated voice
recognition speech products offering expanded scalability and
functionality.                                                                                                                                                                                       
|
| |  |  | New developments in data networking with our BayStack Layer 2
switches that will deliver resiliency and Quality of Service
capabilities and Power over Ethernet to provide network connectivity and
power to devices over the same line, along with the development of the
next generation Alteon Web platform which will feature higher
performance, scalability (i.e. the ability to grow a group service or
capability with incremental cost) and integrated applications.
|
| |  |  | Enhancements to our security portfolio including the new Alteon SSL
and Web Switching products and a new high-end Contivity product, which
is in development scheduled for launch in 2003.                                                                                                                                                                                                                                                                                   
|
| |  |  | Enhanced capabilities in our Passport 8600 version 3.3 software,
delivering 10 Gigabit Ethernet on either local area network or wide
area network platforms that will feature improved scaling, multicast and
resilience for better overall performance.                                                                                                                                                                                                                     

Markets

We offer Enterprise Networks products to enterprises around the world.
With the growth of voice and data communications over the public telephone
network, the public Internet and private voice and data communications
networks, there is an increasing opportunity to converge disparate networks
towards a single, high performance network that can support most types of
communications traffic and applications.

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We believe that in order to meet the growing demand for increased capacity
at lower per-minute rates, enterprises will transition their digital circuit-based voice communications to more cost effective packet-based
technologies. As a result, we anticipate growth in demand for
packet-based
networking equipment that supports the convergence of data, voice and
multimedia communications over a single communications network and that
provides greater network capacity, reliability, speed, quality and performance.
However, the timing of this progression is unclear given the continuing
industry adjustment and reduction in our enterprise customers spending.

Based on the uncertainty in todays political environment, network
security and resiliency has become a significant focus for enterprise customers
worldwide. Globally, enterprise customers continue to invest in equipment for
their communications networks, primarily for network security and resiliency,
for voice over IP and for virtual private networks. In the United States and
Canada, enterprise customers are investing in voice over IP as they transition
from legacy voice products to our enterprise Succession products. Our
enterprise Succession products enable this conversion from voice communication
networks to packet-based networks supporting data, voice and multimedia
communications. In EMEA, our customers are beginning to invest in new
technology such as voice over IP. In the Asia Pacific region, Enterprise Networks customers are continuing
to invest in networking equipment to improve the connections among their
regional sites and branch offices. In CALA, enterprises are continuing to
drive demand for networking equipment that supports the growing use of the
Internet in the region.

For a discussion of important trends in Enterprise Networks, see Results
of operations  continuing operations  Enterprise Networks in Managements
Discussion and Analysis of Financial Condition and Results of Operations.

Customers

We offer our products and services to a broad range of enterprise
customers around the world, including large businesses and their branch
offices, small businesses and home offices, as well as government
agencies, educational institutions
and utility organizations. Key industry sectors for our business customers
include the telecommunications, high-technology manufacturing and financial
services sectors. We also serve customers in the healthcare, retail,
hospitality, services, transportation, governments and other industry sectors.
We are currently focused on increasing our market presence with enterprise
customers. In particular, we intend to focus on leading enterprise customers
with high performance networking needs. Certain of our service provider
customers also act as a distribution channel for our Enterprise Networks sales and
include incumbent local telephone companies, competitive local telephone
companies and system integrators. None of our Enterprise Networks customers
represent more than 10 percent of Nortel Networks consolidated revenues in 2002.

Competition

Our principal competitors in the sale of our Enterprise Networks solutions
to enterprises are Cisco Systems, Inc., Avaya Inc., Alcatel S.A. and Siemens.
Avaya is our largest competitor in the sale of voice equipment while Cisco is
our largest competitor in the sale of data networking equipment to enterprises.
We also compete with smaller companies that address specific niches, such as
Foundry Networks, Inc., Extreme Networks, Inc., Enteresys Networks,
Inc., 3Com Corporation in Internet-based voice communications solutions and Genesys
Telecommunications Laboratories, Inc. in call centers. We expect competition
to remain intense enterprises look for ways to maximize the
effectiveness of their existing networks while reducing ongoing
capital expenditures and operating costs. The principal global factors of competition in the sale of our
Enterprise Networks products include:



| |  |  | technology leadership product features and availability;              
| | - |  | ----------------------------------------------------------------------
| |  |  | product quality and reliability;                                      
| |  |  | conformity to existing and emerging regulatory and industry standards;
| |  |  | sales distribution and channel marketing strategy;                    
| |  |  | warranty and customer support;                                        
| |  |  | price and cost of ownership;                                          

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| |  |  | interoperability with other networking products;                  
| | - |  | ------------------------------------------------------------------
| |  |  | installed base of product; and                                    
| |  |  | alternative solutions offered to enterprises by service providers.

The principal competitive factors for the sale of our products to
enterprises also include the leveraging of existing customer-supplier
relationships and the availability of distribution channels.




Wireline Networks

Products

Our wireline portfolio addresses the demand by our service provider
customers for cost efficient data, voice and multimedia communication
solutions. Our converged wireline solutions, including related professional
services, simplify network architectures bringing voice, video, data and
emerging broadband applications for revenue generating services together on one
easy-to-manage packet network.

Circuit and packet voice solutions

We are a leader in the development and deployment of highly scalable
circuit switched and secure voice over packet solutions such as voice over IP
for wireline and wireless service providers around the world. Our voice over
packet solutions offer service providers and cable multiple system operators
sustainable operating and capital cost reduction, new revenue opportunities, as
well as high levels of reliability and network resiliency.



| |  |  | Our wireline Succession solutions are voice over packet network solutions for
service providers. Succession provides the complete range of voice over
packet solutions, including local, toll, long-distance, operator
services and international gateway capabilities and enables voice
applications to run on the new multi-services packet network.
Succession solutions leverage more efficient packet-based, as opposed to
circuit-based technologies, which drive reduced capital and operational
costs for service providers and provide a platform for the delivery of
new, revenue-generating services, such as Centrex IP and voice over IP
virtual private networks.                                                                                                                                                                                                                                                    
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Our Interactive Multimedia Server (IMS) is a Session Initiation
Protocol (SIP) based application server. SIP is a standard protocol
for initiating an interactive user session that involves multimedia
elements such as video, voice, chat, gaming and virtual reality. IMS
works as a stand-alone solution or in conjunction with our Digital
Multiplex System (DMS) or our Succession solutions to provide advanced
packet voice and multimedia capabilities to service providers. Using
IMS, our customers can deploy new, enhanced multimedia services,
including video, collaboration and personal agent services. Personal
agent services allow a user to customize their communications by
selecting the medium over which they wish to receive a particular
message such as wireline or wireless telephony, e-mail and instant
messaging by setting screening criteria such as time of day and day of
week, month or year.
|
| |  |  | Our DMS is a family of digital, circuit-based telephone switches that
provide local, toll, long-distance and international gateway
capabilities for service providers and includes Directory and Operator
Services for our customers in the United States and Canada. Our DMS
systems enable service providers to connect people making local and
long-distance telephone calls. Our DMS systems also provide for a broad
range of service capabilities, including revenue-generating features
such as caller identification and call waiting that are offered to the
service providers residential and business customers. Our DMS family
of products can evolve to Succession solutions.                                                                                                                                                                                                                                        

These
products work alone or in combination with each other to provide
traditional voice services, advanced packet voice services and
multimedia services to service providers around the world.

Data networking and security solutions

We offer a wide range of data networking (packet switching and routing)
solutions to our service provider customers. The Passport family of
multi-service wide area network switches and the Shasta Broadband Service Node
enable our service provider customers to offer connectivity solutions and high
value services to both enterprises and residential

11



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customers. The connectivity
solutions include access services such as: frame relay; Asynchronous Transfer
Mode (ATM); digital subscriber line; and Internet access. High-value services
such as IP virtual private networks connect enterprise sites and remote users.
As well, they provide enhanced network capabilities, such as network security,
network address translation and class of service, that enable service providers
to offer a wide range of networking services beyond basic connection to the
network.



| |  |  | Our Passport family of products, which have the ability to combine
multiple services on a single platform, provide for reliable packet
switching, as well as enabling emerging applications such as wireless
packet core networking,
radio access network aggregation, IP network aggregation, circuit
networking traffic grooming and packet voice gateway applications.                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Our Shasta Broadband Service Node is designed to give service
providers the ability to logically group tens of thousands of
residential and business subscribers in order to re-direct them to
various IP virtual private networks, and to centrally apply data network
services, such as security, firewall applications and class of service,
on a per subscriber and/or per application basis. These value-add
services also play a key role in enabling next generation communications
services, such as those enabled by our Succession voice over packet
product portfolio. The Shasta Broadband Service Node supports a wide
range of data network access technologies, including standard dial-up
over copper telephone wire, digital subscriber line, ATM, wireless,
frame relay and coaxial cable technologies.

Product development

Research and development investments are focused on creating new and
improving existing, packet-based residential and business services for wireline
and wireless service providers and cable multiple system operators. As well, we
continue to develop products that support the evolution of voice and data
communications systems toward converged or combined voice and data networks
including:



| |  |  | Enhancements to our Succession packet voice solutions that will allow
service providers to connect any business telephone system, using
standard voice over IP protocols, into a common dialing plan with
connectivity to the public switched telephone network. Additional
enhancements to our packet voice solutions will focus on
interoperability with other manufacturers, including gateway and
integrated access device manufacturers, as well as on meeting the needs
of the Asian and European markets.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Enhancements to the Succession IMS that
will allow a service provider to offer intelligent multimedia services
across any manufacturers circuit switches. Additionally, development
will focus on increasing the breadth and usability of the Succession
IMS applications.                                                                                                                                                                                                                                     
|
| |  |  | Additions to the DMS portfolio that will allow service providers to
offer and manage IP voice and multimedia (Centrex IP) services to those
businesses that use traditional business telephones as well as to those
business that use next-generation telephones designed for use in IP
networks.                                                                                                                                                                                                               
|
| |  |  | The development of a new, lower-capacity, next-generation data
product as well as enhancements to our existing line of Passport and
Shasta data products that will increase capacity and speed.                                                                                                                                                                                                                                                                                                                 
|
| |  |  | A focus on cable standards
compliance to drive revenue from the cable
multiple system operator market.                                                                                                                                                                                                                                                                                                                                                                                                          
|

Markets

With the growth of voice and data communications over the public
telephone network, the public Internet and private voice and data
communications networks, there is an increasing opportunity to converge
disparate networks towards a single, high performance network that can support
most types of communications traffic and applications. As data, voice and
multimedia communications technologies continue to converge, we anticipate that
in the future all communications networks will be able to carry data, voice and
multimedia communications effectively, and we anticipate that these networks
will use packet-based technologies. Converged voice and data networks also
provide an opportunity for service providers to offer new revenue
generating services while reducing their ongoing
operational costs year over year as they incorporate packet-based technology in
their networks. We believe our advantage lies in our ability to transition and
upgrade our customers installed base of DMS and Passport solutions to
packet-based solutions.

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To meet the growing demand for increased capacity which these new
multimedia applications will drive at lower per-minute rates, we anticipate
that service providers will transition their digital circuit-based voice
communications to more cost effective packet-based technologies. As a result,
we anticipate growth in demand for packet-based networking
equipment that supports the convergence of data, voice and multimedia
communications over a single communications network and that provides greater
network capacity, reliability, speed, quality and performance. However, the
timing of this convergence is unclear given the continuing industry adjustment
and reduction in capital spending by our service provider customers spending.

We also expect new entrants, such as cable multiple system operators to
increase the size of the voice and data market, as well as increase the
competitive pressure on established service providers.

The market for our Wireline Networks products is global. In the United
States and Canada, many service providers have focused on reducing their
capital spending in response to continuing industry adjustment and economic
slowdown. However, service providers are expected over the long term to
continue to modernize with packet-based networks and converge voice and data communications networks in
order to deploy new revenue generating service offerings. As well, service
providers are focused on capital spending that reduces their ongoing
operational costs, albeit with emphasis on shorter payback periods. In EMEA,
we continue to see market demand for certain networking products including
equipment for voice over IP and equipment for virtual
private networking. Service providers in EMEA are also focused on reducing
their capital spending, and we anticipate that a higher portion of capital
spending in 2003 will come from the leading national public telephone
companies, as opposed to alternative service providers.

In the
Asia Pacific region, we continue to see market demand for certain
networking products including equipment for voice over IP and equipment for virtual private networking. Deregulation in China has created opportunities for new entrants who we
anticipate will build-out their networks with packet-based technologies. In
CALA, service providers are also focused on reducing their capital spending
tempered by the need to increase their revenue generating service offerings.

For a discussion of important trends in Wireline Networks see Results of
operations  continuing operations  Wireline Networks in Managements
Discussion and Analysis of Financial Condition and Results of Operations.

Customers

We offer our Wireline Networks products and services to a wide range of
wireline and wireless service providers around the world. We are focused on
increasing our market presence with key global service providers who we
currently expect to account for a substantial proportion of service provider
capital spending in 2003 and beyond. Our service provider customers include:



| |  |  | incumbent local telephone
companies (also known as incumbent local exchange carriers and post
telegraph and telecommunications companies);
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | competitive local telephone companies (also known globally as competitive local exchange carriers);                                       
| |  |  | long-distance telephone companies (also known as interexchange carriers in the United States);                                            
| |  |  | wireless service providers;                                                                                                               
| |  |  | internet service providers; and                                                                                                           
| |  |  | cable multiple system operators.                                                                                                          

We also offer applicable data networking, and security solutions from our
Wireline Networks to enterprises for private networking as well as to service
providers and system integrators that build, operate and manage networks for
their customers such as businesses, government agencies and utility
organizations. None of our Wireline Networks customers represented more than
10 percent of Nortel Networks consolidated revenues in 2002.

13



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Competition

Our principal competitors are large communications companies, such as
Cisco, Lucent, Alcatel and Siemens. In addition, we compete with smaller
companies that address specific niches within this market, such as Sonus
Systems Limited, BroadSoft, Inc. and Taqua Inc. in packet and Internet-based
voice communications solutions, Redback Networks Inc. in aggregation products,
as well as Equipe Communications Corporation, Laurel Networks, Inc. and
Wavesmith Networks, Inc. in ATM/multi-protocol label switching, multiservice
core and edge switching. Certain competitors also are strong on a regional
basis, such as ZTE Corporation and Huawei in the Asia Pacific region. Some
niche competitors are partnering with larger companies to enhance their product
offerings and large communications competitors are also looking for these
partnerships or alliances to complete their product offerings. No one
competitor is dominant in this market. The primary global factors of
competition for our wireline products include:



| |  |  | technology leadership, product features and availability;                                                
| | - |  | ---------------------------------------------------------------------------------------------------------
| |  |  | price and total cost of ownership;                                                                       
| |  |  | ability to create new revenue generating services for service providers and cable multi-system operators;
| |  |  | conformity to existing and emerging regulatory and industry standards;                                   
| |  |  | installed base of products and customer relationships;                                                   
| |  |  | network management capabilities;                                                                         
| |  |  | product quality and reliability; and                                                                     
| |  |  | warranty and customer support.                                                                           

The competition has increased in intensity given the continued decline in
market demand, the substantially reduced availability of capital, the continued
consolidation in the service provider industry, and the renewed focus by
suppliers on selling to the remaining large service providers with financial
resources.




Optical Networks

Products

Our Optical Networks solutions portfolio addresses the varying
communication needs of service providers and enterprises. Optical networks
transport data, voice and multimedia communications within and between cities,
countries or continents by transmitting communications signals in the form of
light waves through fiber optic cables. Optical networking is the most common
method for transporting communications signals between the various locations
within a service providers network and is unmatched for delivering vast
amounts of data reliably and cost-effectively with service and bandwidth
flexibility and scalability.

Our optical networking solutions are designed to provide metropolitan,
regional and long-haul, high-capacity transport and switching of data, voice
and multimedia communications signals. These solutions include photonic Dense
Wavelength Division Multiplexing (DWDM) transmission solutions, synchronous
optical transmission solutions, optical
switching solutions and network
management and intelligence software. We also offer our customers a variety of
related engineering expertise, installation and support services worldwide.



| |  |  | Photonic networking DWDM technology allows multiple light wave
signals to be transmitted on the same fiber optic strand simultaneously
by using different wavelengths of light to distinguish specific signals,
thereby increasing the capacity and flexibility of a network. Our DWDM
line systems include optical transmission terminals and optical
transmission repeaters. Optical transmission terminals are connected at
the ends of the fiber optic cable and send communication signals through
this medium using light waves. Optical transmission repeaters are used
at locations along fiber optic cables that span long distances to
strengthen and reform light wave signals. Our OPTera long-haul DWDM
line systems span distances up to 1200 kilometres without the need for
optical transmission repeaters and allow the adding and dropping of
communication signals at intermediate locations along the route. Our
OPTera Metro 5000 metro DWDM series provides market leading protocol and
bit rate tolerant scalable multi-service networking solutions within a
city or region for up to 200 kilometres.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  |  | Our synchronous optical transmission systems use traditional optical
standards, including the Synchronous Optical Network
(SONET) standard,
which is the most common standard in the United States and Canada and
some countries in the Asia Pacific region, and the Synchronous Digital
Hierarchy (SDH) standard, which is the most common standard in EMEA and
many other countries. Our synchronous optical transmission equipment
includes our next generation SONET/SDH solutions: the OPTera Metro 4000
family (next generation SDH); the OPTera Metro 3000 family
(next generation SONET); and the OPTera Metro Connect. These solutions
deliver a multi-service optical platform that integrates diverse
protocols and technology-based services over a cost effective, scalable
and reliable converged services network.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Our optical switching solutions enable communication signals in
optical fibers to be selectively directed or switched from one network
circuit to another. Our optical switching products provide grooming,
aggregation (the efficient re-packing of lower speed signals into higher
speed signals to maximize the use of network capacity) and protection of
the end users communications traffic. These systems focus on
delivering cost-efficient solutions to switch large amounts of
information between optical transmission systems. Our optical switching
products include the OPTera Connect HDX and OPTera Connect DX platforms.                                                                                                                                                                                    
|
| |  |  | Our network management software and intelligence solutions are
designed to give our customers the ability to monitor and improve the
performance of their networks. Our network management software includes
our Preside for Optical end-to-end network management software portfolio
which support the functions required for controlling, planning and
monitoring the equipment and performance of an optical network, such as
predetermined traffic routing, equipment configuration management, fault
reporting, connection management, performance management and network
security.                                                                                                                                                                                                                                         

Our Optical Networks solutions enable customers to enhance and transform
their networks towards a scalable and reliable network for delivering diverse
high speed data and voice connectivity services. Such network transformation
will increase deployment of managed broadband services, such as:



| |  |  | Optical Ethernet solutions that combine the ubiquity, flexibility and
simplicity of the Ethernet network computing protocol with the
reliability and speed of optics. Optical Ethernet solutions transport
communications signals carrying Ethernet packets in the form of light
waves through fiber optic cables between locations within a city or
between cities. Our Optical Ethernet solutions:
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|

| |  |  | enable service providers to extend Ethernets benefits
outside of local area networks and sell enterprises Ethernet
connectivity services in conjunction with Internet access and
other applications made possible due to greater bandwidth; and            
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | deliver economical site-to-site connectivity for
enterprises through these solutions, which are designed to
alleviate the congested and complex metropolitan networking
bottleneck created by the wide range of users and services that
exist within cities.
|

| |  |  | Optical storage connectivity solutions, which allow the
interconnection of data centers for the efficient preservation and
sharing of business-critical data to ensure business continuity and
disaster recovery.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Managed wavelength solutions, which offer multiple protocol and
transmission speed networking capability to reliably interconnect
business sites.                                                                

Product development

We are
committed to providing next generation optical networking systems,
including the evolution of our next generation SONET/SDH systems, our metro
DWDM systems and our optical long-haul line and terminal solutions.



| |  |  | New releases of our OPTera Metro portfolio are under development to
enhance the services supported and the efficiency of service
implementation.                                                                  
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Our OPTera Connect HDX switching system had its first network
deployment in 2002 with its first product release and the second release
is currently under development to provide additional customer
applications.
|
| |  |  | We continue to invest in improving the density, capacity and
flexibility of our optical long-haul transmission systems.                                                                                           

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We continue to invest in core technologies, such as efficient service
adaptation, aggregation, switching and management that enable our customers
worldwide to deploy innovative optical networking services and which we believe
will lead the networking transformation towards high performance packet-based
networks.

Markets

We are a leading provider of optical networking products to service
providers and enterprises around the world. Starting in 2001 and continuing
through 2002, capital spending in optical networking equipment by service
providers around the world decreased substantially. Service providers remain focused on
maximizing return on invested capital by increasing capacity utilization rates
and efficiency of existing networks. With the ongoing
industry adjustment, many service providers with excess capacity in their
optical networks continued to focus on optimizing existing networks and delayed the
deployment of next generation products.

The outlook for optical equipment sales is further impacted by service
providers preferring to lease excess network capacity from others with excess
capacity or to purchase assets from distressed operators rather than making
capital investments in their networks. We expect that any additional capital
spending by our customers will be increasingly directed to opportunities that
enhance customer performance, generate revenue and reduce cost in the near
term. However, as service providers begin to more effectively utilize and
eventually exceed their network capacity, we expect that they may incrementally enhance their network capacity. In addition, regulatory
developments in the United States and other countries, such as the recent
success of regional bell operating companies in obtaining permission to offer
long-distance voice services, may result in new capital spending by service
providers. However, the timing and impact of these developments are difficult to
predict.

The market for our Optical Networks products is global. In the United
States and Canada, we anticipate that new networks will no longer be built by
service providers in anticipation of market demand, but will be more closely
aligned with actual end user demand. Within EMEA, the building of
pan-European optical networks by service providers is now mature and many
service providers have begun to focus on building their metropolitan and
regional optical networks. Some service providers in Europe are experiencing
capital constraints after having invested in government licenses for 3G
wireless networks, and have postponed significant optical network expansions.
We expect that the increased usage of broadband wireless data provided by 3G
may eventually drive the increased deployment of optical networks. In EMEA,
European government-sponsored service providers and networking equipment
suppliers enjoy favorable positions within many European countries, with
foreign vendors such as Nortel Networks frequently limited to secondary vendor
positions with these service providers.

We expect that the Asia Pacific region, where the industry is continuing
to undergo deregulation, may provide the largest market for optical networking
equipment over the next several years. As a result, there has been an
increased focus on the Asia Pacific region by virtually all suppliers of
optical networking equipment. In CALA, where a few service providers account
for a significant percentage of the industry, the building of national optical
network infrastructures is largely complete. Prospects for increased capital
expenditures have been dampened by the weak economic climate and the political
uncertainty in the region.

For a discussion of important trends in
Optical Networks, see Results of
operations  continuing operations  Optical Networks in Managements
Discussion and Analysis of Financial Condition and Results of Operations.

Customers

Our Optical Networks business is primarily focused on offering our optical
networking products and services to service providers around the world. The
service provider customers for our optical networking products include, local
and long-distance telephone companies, cable multiple system operators, Internet
service providers and other communications service providers. We are currently
focused on increasing our market presence with key service provider customers
worldwide, who we expect to account for a substantial proportion of service
provider capital spending in 2003 and beyond.

We are also focused on enterprises and we continue to provide optical
solutions for private enterprise networking and also for service providers to
build and operate custom dedicated networks for enterprises. We leverage
numerous

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channels for delivering optical networking solutions to enterprises
from our own direct sales force for large enterprises and governments and
through distributors, resellers and partners to offer our solution to medium
sized enterprises and smaller
enterprises. None of our Optical Networks customers represented more
than 10 percent of Nortel Networks consolidated revenues in 2002.

Competition

Our major competitors in the sale of optical networking equipment include
Alcatel, Lucent, Siemens, Fujitsu Limited, Marconi plc, Cisco,
Huawei, NEC, Ciena and ADVA
International Inc. In 2002, we sold certain of our optical components assets
and are therefore focused on competing primarily with optical systems vendors.
Market position in the global market for optical networking equipment
fluctuates significantly on a quarter-by-quarter basis. However, we continue to be a leading global provider of optical networking
equipment. The primary global factors of competition for our Optical Networks
products include:



| |  |  | technology leadership, product features and availability;                                        
| | - |  | -------------------------------------------------------------------------------------------------
| |  |  | product quality and reliability;                                                                 
| |  |  | conformity to existing and emerging regulatory and industry standards;                           
| |  |  | warranty and customer support;                                                                   
| |  |  | price and cost of ownership;                                                                     
| |  |  | interoperability with other networking products;                                                 
| |  |  | network management capabilities;                                                                 
| |  |  | traditional supplier relationships, particularly in EMEA and the Asia Pacific region; and        
| |  |  | regulatory certification, particularly for incumbent local and long-distance telephone companies.

We and many of our competitors have been negatively impacted by the severe
decline in service provider optical network spending. As a result, our focus
is on increasing market share relative to our competitors. In particular, the
financial difficulties of certain of our competitors have created the potential
for new relationships with international-incumbent service providers in EMEA
and elsewhere. In addition, the competition from optical networking
start-up
companies has decreased due to general concerns by many service providers about
these start-up companies long term viability.




Sales and distribution

All of
our four reportable segments use the Nortel Networks direct sales
force to market and sell to customers around the world. The Nortel Networks
global sale force is divided into regional groups. The head office for the
United States and Canadian sales forces is located in Richardson, Texas and the
EMEA sales force head office is based in Maidenhead, U.K. The Asia
Pacific regions head office is based in Hong Kong and there is also
an office in Beijing for Greater China. The CALA sales
force head office is based in Sunrise, Florida. Within these regional sales
groups, we have dedicated sales account teams for certain major service
provider customers. These dedicated teams are located close to the customers
main purchasing locations. In addition, within the
regional sales groups are
teams dedicated to our enterprise customers. Our Enterprise Networks sales
teams work directly with the top regional enterprises, and are also responsible
for managing regional distribution channels. We also have centralized
marketing, product management and technical support teams dedicated to
individual product lines that support the global sales and support teams.

In the Asia Pacific region, particularly in the Peoples Republic of
China, we also use agents to interface with our customers. In addition, we
have some small non-exclusive distribution agreements with distributors in
EMEA, CALA and the Asia Pacific region. In Enterprise Networks, certain
service providers, system integrators, value added resellers and stocking
distributors act as non-exclusive distribution channels for our products.

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Product standards, certification and regulation

Our products are subject to equipment standards, registration and
certification in Canada, the United States and other countries. We design and
manufacture our products to satisfy a variety of regulatory requirements and
protocols established to, for instance, avoid interference among users of radio
frequencies and to permit interconnection of equipment. For example, our
equipment must satisfy the United States Federal Communications Commission
emissions testing requirements, and must be certified to safety, electrical
noise and communications standards compliance. Different regulations and
regulatory processes exist in each country.

In order for our products to be used in some jurisdictions, regulatory
approval and, in some cases specific country compliance testing and re-testing
may be required. The delays inherent in this regulatory approval process may
force us to reschedule, postpone or cancel introduction of products or new
capabilities in certain geographic areas, and may result in reductions in our
sales. The failure to comply with current or future regulations or changes in
the interpretation of existing regulations in a particular country could result
in the suspension or cessation of sales in that country or require us to incur
substantial costs to modify our products to comply with the regulations of that
country. To support our compliance efforts, we work with consultants and
testing laboratories as necessary to ensure that our products comply with the
requirements of Industry Canada in Canada, the Federal Communications
Commission in the United States, and the European Telecommunications Standards
Institute in Western Europe, as well as with the various regulations of other
countries.

The operations of our service provider customers are
subject to extensive country-specific telecommunications regulations.
In the United States, on February 20, 2003, the Federal
Communications Commission (FCC) announced a decision in its triennial
review proceeding of the rules regarding unbundled network elements
(UNEs). The text of the FCCs order and reasons for the decision were
not immediately released. Although the decision may impact the
business decisions of our United States based service provider
customers, the extent of that impact has not been determined. These
new UNE rules and/or material
changes in other country-specific telecommunications regulations at any time or from time to time may affect
capital spending by service providers in the United States and/or around the world, and this may in turn
affect the United States and/or global market for networking solutions.




Sources and availability of materials

We are generally able to obtain sufficient materials and components from
global sources to meet the needs of our reportable segments. In each of
our reportable segments, we:



| |  |  | make significant purchases of electronic components and assemblies,
optical components, original equipment manufacturer, or OEM products,
software products, outsourced assemblies and other materials and
components from many domestic and foreign sources;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | develop and maintain alternative sources for certain essential
materials and components; and                                                                                                                                                                 
| |  |  | occasionally maintain special inventories of components internally or
request that they be maintained by suppliers to satisfy customer demand
or to minimize effects of possible market shortages.                                                           

Market conditions in 2002 were similar to conditions in 2001. With the
ongoing industry adjustment, we continued to face supply surpluses and excess
inventories in some areas including optical components, memory
devices and semi-conductors. However, we were able to effectively manage our inventories in
2002 with minimal negative impact to our supply chain.

During 2002, we continued to refine our relationships with our electronics
manufacturing services suppliers by focusing on service, quality, cost
reduction and inventory management. In 2003, we intend to focus on inventory
management and component cost reduction, and expect to continue to purchase,
manufacture, or otherwise obtain sufficient components and materials to supply
our products, systems and networks within customary delivery periods.

For more
information on our supply arrangements, see Guarantees and
commitments in note 12, of the accompanying consolidated
financial statements and Liquidity and
capital resources  Commitments and guarantees  Supply and network
outsourcing contracts and Off-balance sheet arrangements,
contractual obligations and contingent

18



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liabilities and commitments  Contingent
liabilities and commitments  Purchase commitments in Managements
Discussion and Analysis of Financial Condition and Results of
Operations.




Seasonality

Prior to
2001, our business results in all of our reportable segments were
generally strongest in our fourth quarter, second strongest in our second
quarter, third strongest in our third quarter and the weakest in our first
quarter, primarily due to the networking industry purchasing cycles exhibited
by our customers. With the continued industry adjustment and economic downturn
in the United States and elsewhere in 2001 and 2002, our customers have faced
restricted capital markets, which affected their traditional purchasing
patterns, the demand for our products and services and the traditional
seasonality of our business. Although we anticipate our revenues in the first
quarter of 2003 will be impacted by the seasonal softness traditionally typical
of our first quarter, it is unclear whether, for the remainder of 2003 our
customers will follow any seasonal pattern, or whether our business results
will return to our historical revenue patterns. See Forward-looking
statements in Managements Discussion and Analysis of Financial Condition and
Results of Operations.




Strategic alliances, acquisitions and minority investments

We use strategic alliances to deliver certain solutions to our customers.
These alliances are typically formed to fill product or service gaps in areas
that we do not consider to be part of our core businesses but support our core
businesses. Strategic alliances also augment our access to potential new
customers. We intend to continue to pursue strategic alliances with businesses
that offer the technology and/or resources that would enhance our ability to
compete in existing markets or exploit new market opportunities.

We did not acquire any companies in 2002. However, in the future, we may
consider selective opportunistic acquisitions of companies with resources and
product or service offerings capable of providing us with additional
enhancements to our networking solutions.  For
information regarding the risks associated with strategic alliances
and acquisitions, see
Forward-looking statements in Managements Discussion and Analysis of
Financial Condition and Results of Operations.

We continue to hold minority investments in certain start-up businesses
with technology, products or services that, at the time of investment, had the
potential to fulfill key existing or emerging market opportunities. When
minority investments are no longer required to maintain our strategic
relationship, or the relationship is no longer strategic to our core businesses,
we intend to exit such investments at an opportune time. In
addition, our investment activity decreased in 2002 and we do not expect to
increase our minority investments in start-up businesses in the near future.
However, we may make selective minority investments in start-up ventures where
we believe the relationship could lay the foundation for future alliances that
would support our customer solutions.




Research and development

We intend to continue to make strategic investments in our research and
development activities, to remain among the technology leaders in anticipated
growth areas. Our research and development activities  specifically,
research, design and development, systems engineering and other product
development activities  represent focused investments to drive market
leadership across our product portfolios. We refer you to the four Product
Development discussions contained in the descriptions of Wireless Networks,
Enterprise Networks, Wireline Networks and Optical Networks above.

Our research and development investments are focused on network
transformations and next generation products including packetized networks, secure multimedia services,
broadband and the dynamic optical foundation. We also conduct network planning
and systems engineering on behalf of, or in conjunction with, major customers.
Although we derive many of our products from
substantial internal research and development activities, we supplement
this with technology acquired or licensed from third parties.

19



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Our research and development forms a core strength and a factor
differentiating us from many of our competitors. As at December 31, 2002, we
employed approximately 13,570 regular full-time research and development
employees (excluding employees on notice of termination) including
approximately:



| |  |  | 5,770 regular full-time research and development employees in Canada;           
| | - |  | --------------------------------------------------------------------------------
| |  |  | 5,260 regular full-time research and development employees in the United States;
| |  |  | 2,200 regular full-time research
and development employees in EMEA; and         
| |  |  | 340 regular full-time research
and development employees in other countries.    

We also conduct research and development activities through affiliated
laboratories in other countries.

The following table sets forth our consolidated expenses for research and
development for each of the last three fiscal years ended December 31:

|                                             |  |      |       |      |  |      |       |  |  |   |       | 
|-------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                            
|(millions of dollars)                        |  | 2002 |       | 2001 |  | 2000
|                                            
|R & D expense                                |  | $    | 2,228 |      |  | $    | 3,230 |  |  | $ | 3,626 | 
|R & D costs incurred on behalf of others (a) |  |      | 49    |      |  |      | 68    |  |  |   | 64    | 
|                                            
|Total                                        |  | $    | 2,277 |      |  | $    | 3,298 |  |  |   | 3,690 | 
|                                            

|(a) |  | These costs include research and development charged to our customers
pursuant to contracts that provide for full recovery of the estimated cost
of development, material, engineering, installation and all other
attracted costs, which are accounted for as contract costs.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Intellectual property

Our intellectual property is fundamental to the Company and business of
each of our four reportable segments. We generate, maintain, utilize and
enforce a substantial portfolio of intellectual property rights, including
trademarks, and an extensive portfolio of patents covering significant
innovations arising from research and development activities. In all of our
reportable segments, we use our intellectual property rights to protect our
investments in research and development activities, to strengthen our
leadership positions, to protect our good name, to promote our brand name
recognition, to enhance our competitiveness and to otherwise support our
business goals and objectives.

As of December 31, 2002, we and our parent, Nortel Networks Corporation
have, on a consolidated basis, approximately:



| |  |  | 2,800 United States patents;                
| | - |  | --------------------------------------------
| |  |  | 2,650 patents in other countries; and       
| |  |  | 6,000 pending patent applications worldwide.

In 2002, we were granted 441 United States patents, continuing our plan of
improving our patent holdings. At December 31, 2002, the patents
were primarily allocated as follows:



| |  |  | 23 percent to Wireless Networks;                                      
| | - |  | ----------------------------------------------------------------------
| |  |  | 22 percent to Enterprise Networks;                                    
| |  |  | 24 percent to Wireline Networks;                                      
| |  |  | 12 percent to Optical Networks; and                                   
| |  |  | 19 percent span multiple reportable segments or relate to other areas.

Our patents outside of the United States are primarily counterparts to our
United States patents. We have entered into some mutual patent cross-license
agreements with several major corporations to enable each party to operate
without risk of a patent infringement claim from the other. In addition, we
are actively licensing certain of our patents and/or technology to third
parties. We also occasionally license single patents or groups of patents from
third parties.

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Our trademark and trade name, Nortel Networks, is one of our most valuable
assets. We sell our products primarily under the Nortel Networks brand name.
We have registered the Nortel Networks trademark, and many of our other
trademarks, in countries around the world. As of December 31, 2002, we and our
parent, Nortel Networks Corporation own, on a consolidated basis approximately
130 registered trademarks in the United States, and approximately 2,100
registered trademarks in other countries. In addition, we have approximately
200 pending trademark registrations worldwide.




Employee relations

At December 31, 2002, we employed approximately 36,760 regular full-time
employees (excluding employees on notice of termination), including
approximately:



| |  |  | 13,580 regular full-time employees in the United States;
| | - |  | --------------------------------------------------------
| |  |  | 10,140 regular full-time employees in Canada;           
| |  |  | 8,350 regular full-time employees in EMEA; and          
| |  |  | 4,690 regular full-time employees in other countries.   

We also employ individuals on a part-time basis and we engage the services of
independent contractors. As part of our resizing activities to further reduce
our cost structure and streamline operations, we notified for termination and
provisioned for the exit of approximately 12,100 regular full time employees during 2002.
As well, the divestiture of non-core businesses completed or entered into
in 2002 resulted in additional employee reductions. For additional
information, see Special charges in note 6 to the accompanying consolidated
financial statements and Results of operations  continuing operations 
Operating expenses  Special charges in Managements Discussion and Analysis
of Financial Condition and Results of Operations.

Labor
contracts cover approximately five percent of our employees worldwide.
Five labor contracts cover approximately 12 percent of our employees in Canada including:



| |  |  | one labor contract covering approximately nine percent of Canadian unionized employees which was renewed, ratified and became effective February 26, 2003;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | one labor contract covering less
than one percent of Canadian unionized employees which expires in the third quarter of 2003;                             
| |  |  | two labor contracts covering approximately 74  percent of Canadian unionized employees which expire in 2004; and                                          
| |  |  | one labor contract covering approximately 17 percent of Canadian unionized employees which expires in 2008.                                               

Labor
contracts cover approximately four percent of
our employees in EMEA and all of our employees in Brazil. The labor contracts
generally have a one-year term in EMEA and Brazil, and primarily relate to
remuneration. We have no labor contracts in the United States.

We believe our employee relations are generally positive. We are
currently focused on rebuilding employee morale following the substantial
workforce reductions and other restructuring activities in 2001 and 2002.
Although the recruitment and retention of technically skilled employees in
recent years was highly competitive in the global networking industry,
current economic conditions have lessened the competition for skilled
employees in our industry. We do, however, believe that our ability to recruit
and retain skilled employees will continue to be critical to our future
success. See Forward-looking statements in Managements Discussion and
Analysis of Financial Condition and Results of Operations.




Environmental matters

Our manufacturing and research operations are subject to a wide range of
environmental protection laws in various jurisdictions around the world. We
seek to operate our business in compliance with such laws, and have a corporate
environmental management system standard and an environmental protection
program to promote compliance. We also have a periodic, risk-based, integrated
environment, health and safety audit program. As part of our environmental
program, we attempt to evaluate and assume responsibility for the environmental
impacts of our products throughout their life cycles.

21



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Our environmental program focuses on design for the environment, supply chain and packaging
reduction issues. We work with our suppliers and other external groups to
encourage the sharing of non-proprietary information on environmental research.
For additional information on environmental matters, see
Contingencies  Environmental matters in note 19 of the accompanying
consolidated financial statements.




Financial information by operating segment and product category

For financial information by operating segment and product category, see
Segmented information in note 5 of the accompanying consolidated financial
statements and Results of operations  continuing operations   Segment
revenues in Managements Discussion and Analysis of Financial Condition and
Results of Operations.




Financial information by geographic area

For financial information by geographic area, see Segmented information
in note 5 to the accompanying consolidated financial statements and Results of
operations  continuing operations  Geographic revenues in Managements
Discussion and Analysis of Financial Condition and Results of Operations.




Working capital

For a discussion of our working capital, see Long-term debt and credit
facilities in note 10 of the accompanying consolidated financial statements
and Liquidity and capital resources in Managements Discussion and Analysis
of Financial Condition and Results of Operations.




Risk factors

THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING INFORMATION THAT
IS SUBJECT TO IMPORTANT RISKS AND UNCERTAINTIES. THE RESULTS OR EVENTS
PREDICTED IN THESE STATEMENTS MAY DIFFER MATERIALLY FROM ACTUAL RESULTS OR
EVENTS. RESULTS OR EVENTS COULD DIFFER FROM CURRENT EXPECTATIONS AS A RESULT
OF A WIDE RANGE OF RISK FACTORS. FOR INFORMATION REGARDING SOME OF THE RISK
FACTORS INVOLVED IN OUR BUSINESS AND OPERATIONS, SEE FORWARD-LOOKING
STATEMENTS IN MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

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##### Table of Contents






ITEM 2.   Properties

At December 31, 2002, we operated 220 sites around the world occupying
approximately 14.9 million square feet. The following table sets forth
additional information regarding these sites:

|                                                  |  |                 |    |        |  |                      |     |  |  |                                                         |  | 
|------------------------------------------------- |  | --------------- | -- | ------ |  | -------------------- | --- |  |  | ------------------------------------------------------- |  | 
|                                                 
|                                                  |  | Number of Sites |    |        |  |                     
|                                                  |  |                 |    |        |  |                     
|Type of Site*                                     |  | Owned           |    | Leased |  | Geographic Locations
|                                                 
|Manufacturing and repair                          |  |                 | 5  |        |  |                      | 4   |  |  | All geographic regions                                 
|Distribution centers                              |  |                 |   |        |  |                      | 4   |  |  | United States, Canada, EMEA and the Asia Pacific region
|Offices
(administration, sales
and field service) |  |                 | 5  |        |  |                      | 189 |  |  | All geographic regions                                 
|Research and development                          |  |                 | 3  |        |  |                      | 10  |  |  | United States, Canada, EMEA and the Asia Pacific region
|                                                 
|TOTAL                                             |  |                 | 13 |        |  |                      | 207 |  |  |                                                         |  | 
|                                                 

|* |  | Indicates the primary use of the site. A number of our sites are mixed-use facilities.
|- |  | --------------------------------------------------------------------------------------

At
December 31, 2002, we and our parent, Nortel Networks
Corporation, primarily used, on a consolidated basis, the facilities as follows:



| |  |  | 12 percent by Wireless Networks;                                                
| | - |  | --------------------------------------------------------------------------------
| |  |  | 5 percent by Enterprise Networks;                                               
| |  |  | 6 percent by Wireline Networks;                                                 
| |  |  | 5 percent by Optical Networks;                                                  
| |  |  | 25 percent by global operations; and                                            
| |  |  | 47 percent by one or more of our reporting segments and/or corporate facilities.

As part of our work plan, we continued to substantially reduce the number
of sites and square footage of our global facilities to align ourselves with
current market conditions.

Security over substantially all of our assets, including real estate
assets in North America, became effective in April 2002 under certain credit
and security agreements entered into by us and several of our subsidiaries. If
our senior long-term debt rating by Moodys returns to Baa2 (with a stable
outlook) and our rating by Standard & Poors returns to BBB (with a stable
outlook), the security, including the pledge over the real estate assets, will
be released in full. If both the $750 April 2000 five year credit facilities
and the support facility with Export Development Canada, or EDC, are
terminated or expire, the security will also be released in full. We may
provide EDC with cash collateral (or any other alternative collateral
acceptable to EDC), in an amount equal to the total amount of our outstanding
obligations and undrawn commitments and expenses under this facility, in lieu
of the security provided under the security agreements. We believe our
facilities are suitable and adequate, and have sufficient capacity to meet our
current needs.

For additional details, see Special charges in note 6 and Long-term
debt and credit facilities in note 10 of the accompanying consolidated
financial statements, and Liquidity and capital resources  Sources of
liquidity in Managements Discussion and Analysis of Financial Condition and
Results of Operations.

23



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##### Table of Contents






ITEM 3.   Legal Proceedings

For a discussion of our material legal proceedings, see Contingencies in
note 20 to the accompanying Consolidated Financial Statements, and Legal
proceedings in Managements Discussion and Analysis of Financial Condition and
Results of Operations.




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

Pursuant to a unanimous written resolution and in accordance with
applicable Canadian corporate laws, on December 19, 2002, Nortel Networks
Corporation, as the sole holder of the common shares of the Company, approved a
reduction of approximately $1,190 million in the legal stated capital of the
common shares of the Company.

The reduction in the legal stated capital of the common shares of the
Company, among other things, enhanced the ability of the Company to continue to
declare and pay dividends on the outstanding preferred shares of the Company
under applicable Canadian corporate laws.

24



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##### Table of Contents






PART II




ITEM 5.   Market for the Registrants Common Equity and Related Stockholder Matters

The common shares of the Company are no longer listed and posted for
trading on any stock exchange. Nortel Networks Corporation is the sole holder
of 100 percent of the issued and outstanding common shares of the Company. The
common shares of Nortel Networks Corporation are listed and posted for trading
on the New York Stock Exchange in the United States and on the Toronto Stock
Exchange in Canada.

On December 19, 2002, Nortel Networks Corporation subscribed for one
common share of the Company and the Company issued one of its common shares to
Nortel Networks Corporation in exchange for cash consideration of approximately
$290 million. The issuance of the common share by the Company to Nortel
Networks Corporation was exempt from registration under the
Securities Act of 1933, the Securities Act, on
the basis that it occurred outside the United States, within the meaning of
Regulation S under the Securities Act.




Securities authorized for issuance under equity compensation plans

Not applicable.

25



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##### Table of Contents






ITEM 6.   Selected Financial Data (Unaudited)

|                                                                         |                                            |      |        |       |   |      |         |        |   |      |        |       |   |   |        |       |   |   |        |       |  
|------------------------------------------------------------------------ | ------------------------------------------ | ---- | ------ | ----- | - | ---- | ------- | ------ | - | ---- | ------ | ----- | - | - | ------ | ----- | - | - | ------ | ----- | -
|                                                                        
|(millions of U.S. dollars, except per share amounts)                     |                                            | 2002 |        | 2001  |   | 2000 |         | 1999   |   | 1998
|                                                                        
|Results of Operations                                                    |                                            |      |        |       |   |      |         |        |   |      |        |       |   |   |        |       |   |   |        |      
|Revenues                                                                 |                                            | $    | 10,546 |       |   | $    | 17,375  |        |   | $    | 27,853 |       |   | $ | 19,628 |       |   | $ | 16,084 |      
|Research and development expense                                         |                                            |      | 2,228  |       |   |      | 3,230   |        |   |      | 3,626  |       |   |   | 2,724  |       |   |   | 2,318  |      
|Other income (expense)  net                                             |                                            |      | 2      |       |   |      | (325    | )      |   |      | 835    |       |   |   | 236    |       |   |   | 201    |      
|Income tax benefit (provision)                                           |                                            |      | 447    |       |   |      | 3,073   |        |   |      | (1,200 | )     |   |   | (576   | )     |   |   | (488   | )    
|Net loss from continuing operations(1)                                   |                                            |      | (3,039 | )     |   |      | (11,555 | )      |   |      | (871   | )     |   |   | (230   | )     |   |   | (561   | )    
|Net loss from discontinued operations-net of tax                         |                                            |      |       |       |   |      | (2,538  | )      |   |      | (414   | )     |   |   | (94    | )     |   |   | (689   | )    
|Dividends on preferred shares                                            |                                            |      | 22     |       |   |      | 27      |        |   |      | 31     |       |   |   | 27     |       |   |   | 32     |      
|Net loss applicable to common shares                                     |                                            |      | (3,061 | )     |   |      | (14,105 | )      |   |      | (1,316 | )     |   |   | (351   | )     |   |   | (1,282 | )    
|                                                                        
|Financial Position at December 31                                        |                                            |      |        |       |   |      |         |        |   |      |        |       |   |   |        |       |   |   |        |      
|Total assets                                                             |                                            | $    | 15,753 |       |   | $    | 19,993  |        |   | $    | 30,192 |       |   | $ | 24,007 |       |   | $ | 21,828 |      
|Long-term debt                                                           |                                            |      | 2,152  |       |   |      | 2,677   |        |   |      | 1,622  |       |   |   | 1,426  |       |   |   | 1,529  |      
|Minority interest in subsidiary companies                                |                                            |      | 78     |       |   |      | 100     |        |   |      | 161    |       |   |   | 45     |       |   |   | 91     |      
|Preferred shares                                                         |                                            |      | 536    |       |   |      | 536     |        |   |      | 609    |       |   |   | 609    |       |   |   | 609    |      
|Common shareholders equity                                              |                                            |      | 3,616  |       |   |      | 5,437   |        |   |      | 17,959 |       |   |   | 13,072 |       |   |   | 12,190 |      
|Book value per common share                                              |                                            |      | 2.48   |       |   |      | 3.72    |        |   |      | 12.36  |       |   |   | 9.49   |       |   |   | 9.19   |      
|                                                                        
|(1)   Included in net loss from continuing operations are the following: |                                            |      |        |       |   |      |         |        |   |      |        |       |   |   |        |       |   |   |        |      
|                                                                         | Acquisition-Related Costs(2)               |      | $      | 20    |   |      | $       | 2,614  |   |      | $      | 3,857 |   |   | $      | 2,075 |   |   | $      | 1,809 |  
|                                                                         | Stock option compensation                  |      |        |      |   |      |         |       |   |      |        | 99    |   |   |        |      |   |   |        |      |  
|                                                                         | Gain on sale of businesses                 |      |        | (22   | ) |      |         | (125   | ) |      |        | (174  | ) |   |        | (131  | ) |   |        | (258  | )
|                                                                         | Special charges                            |      |        | 1,816 |   |      |         | 5,443  |   |      |        | 269   |   |   |        | 174   |   |   |        | 353   |  
|                                                                         | Equity in net loss of associated companies |      |        |      |   |      |         | 119    |   |      |        | 22    |   |   |        |      |   |   |        |      |  
|                                                                         | Other income  net                         |      |        | (60   | ) |      |         |       |   |      |        | (682  | ) |   |        | (133  | ) |   |        | (183  | )
|                                                                         | Net tax impact on above                    |      |        | (80   | ) |      |         | (1,041 | ) |      |        | 11    |   |   |        | (222  | ) |   |        | (66   | )

|    |  |                                                                                                                                                    
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
|(2) |  | In-process research and development expense and the amortization of acquired technology and goodwill from all acquisitions subsequent to July 1998.

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|ITEM 7. |  | Managements Discussion and Analysis of
Financial Condition and Results of Operations
|------- |  | -------------------------------------------------------------------------------------

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

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




Business overview

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

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

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




Developments in 2002

Business segments re-organizations

During the third quarter of 2002, we changed the way we managed our
business to streamline and focus more directly on our customers in our four
core business areas: Wireless Networks; Enterprise Networks (formerly part of
Metro and Enterprise Networks); Wireline Networks (formerly part of Metro and
Enterprise Networks); and Optical Networks (formerly named Optical Long-Haul
Networks). During the second quarter of 2002, we shifted the accountability
for the metro optical portion of Metro and Enterprise Networks into Optical
Networks. All financial information has been restated to reflect these
re-organizations.

Optical Networks

On May 29, 2002, Nortel Networks Corporation announced plans to further
realign our Optical Networks segment, including optical components, given that
it does not expect a meaningful recovery in the long-haul optical market before
early 2004. As part of this realignment, we sold certain optical components
assets to Bookham Technology plc, or Bookham, in November 2002 for shares,
warrants, debt and cash consideration resulting in a gain of $18. The
transaction included a minimum purchase commitment of $120. The terms of the
commitment require us to purchase approximately $120 of product from Bookham
prior to March 31, 2004 and to make a cash payment to Bookham for a portion of
any shortfall in the purchase commitment. For additional information, see
Divestitures, closures and acquisitions in note 9 of the accompanying
consolidated financial statements.

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##### Table of Contents



Filing of shelf registration statement and base shelf prospectus

In the second quarter of 2002, Nortel Networks Corporation and Nortel
Networks Limited filed a shelf registration statement with the United States
Securities and Exchange Commission and a base shelf prospectus with the
applicable securities regulatory authorities in Canada, for the purpose of
qualifying the potential sale, from time to time, in the United States and/or
Canada of up to an aggregate of $2,500 of various types of securities by Nortel
Networks Corporation and of guaranteed debt securities of Nortel Networks
Limited. On June 12, 2002, Nortel Networks Corporation utilized approximately
$1,700 of the $2,500 in connection with two concurrent equity offerings.
Approximately $800 remains available under the shelf registration and base
shelf prospectus. During the second and third quarters of 2002, Nortel
Networks Corporation contributed approximately $1,472 of the proceeds from its
June 12, 2002 equity offerings to Nortel Networks Limited in return for 2
common shares. See Liquidity and capital resources for additional
information.

Credit facilities

On December 13, 2002, Nortel Networks Corporation announced amendments to
our existing security agreements to facilitate our future financial
flexibility. These security agreements pledged substantially all of our assets
in favor of certain lenders and the holders of Nortel Networks Corporations
and our public debt. As part of the amendments, we terminated the $1,175 April
2002 364-day revolving facilities that would have expired in April 2003. Also,
on December 13, 2002, our $1,510 December 2001 364-day credit facilities
expired and were not extended. As of December 31, 2002, our $750 April 2000
five year credit facilities remained available and undrawn. See Available
credit and support facilities for additional details.

Debt rating downgrades

On April 4, 2002, Moodys Investor Services, Inc. lowered our senior
long-term debt rating below investment grade to Ba3 and on November 1, 2002,
lowered the rating from Ba3 to B3 with a negative outlook.

On April 9, 2002, Standard & Poors Ratings Service lowered our credit
rating to below investment grade to BB- and on September 18, 2002, lowered the
rating from BB- to B with a negative outlook.

As a result of the April 2002 debt rating downgrades, various liens,
pledges and guarantees became effective under certain credit and security

agreements entered into by us. Our obligations under our public debt and our
support facility entered into with Export Development Canada, or EDC, on
February 14, 2003 are secured by these liens, pledges and guarantees. Further,
any amounts drawn under our $750 April 2000 five year credit facilities would
also be secured by these liens, pledges and guarantees. These liens, pledges
and guarantees also apply equally and ratably to the obligations under our
guarantee of Nortel Networks Corporations 4.25% convertible senior notes due
on September 1, 2008.

See Liquidity and capital resources for additional details on our credit
ratings and the granting of security under our credit and support facilities.
For additional financial information related to those subsidiaries providing
guarantees, see Supplemental consolidating financial information in note 21
of the accompanying consolidated financial statements.

Deferred income taxes

As part of our quarterly review procedures, we performed an evaluation of
the recoverability of our deferred income tax assets. In the third quarter of
2002, in addition to recording a write down of our existing deferred tax asset,
we began recording full valuation allowances against the benefit of our
quarterly losses. In 2002, we recorded a net income tax benefit of $447 on a
pre-tax loss of $3,486. Our gross income tax valuation allowances in 2002 were
$1,053, including certain additional income tax valuation allowances of $536.
If market conditions deteriorate further or future results of operations are
less than expected, additional tax valuation allowances may be required for all
or a portion of our deferred tax assets. See Income tax benefit for
additional information.

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Employee benefit plans

In the fourth quarter of 2002, we recorded a non-cash charge of $692 ($559
after-tax) to shareholders equity related to the increase in the minimum
required recognizable deficit associated with our registered defined benefit
pension plans. This charge was the result of the negative impact that changes
in global capital markets and interest rates have had on our pension plan
assets and obligations.

During 2002, we made $75 in required cash contributions to our registered
defined benefit pension plans as well as additional voluntary contributions of
$75. In 2003, we expect required cash contributions under applicable
legislation to be similar to those made in 2002. For additional information on
our registered defined benefit pension plans, see Application of critical
accounting policies.

Restructuring and asset write downs

We recorded special charges of $1,816 in 2002 and $5,443 in 2001. These
charges related to restructuring activities and write downs of goodwill and
other assets. The special charges relating to restructuring were associated
with our work plan to streamline operations and activities around core markets
and leadership strategies. We began implementing our work plan in 2001 and it
has continued throughout 2002. The goodwill write down in 2002 related to a
fair value impairment in our Optical Networks segment. We expect that
additional charges will be required in 2003 related to our remaining announced
workforce reductions and related charges. See Special charges for additional
information.




Developments in 2003

Support facility with EDC

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

Stock options

We adopted fair value accounting for new grants of stock options beginning
January 1, 2003. As a result, all stock option grants in 2003 and beyond will
be expensed over the stock option vesting period based on the fair value at the
date the options are granted. For additional information, see Significant
accounting policies in note 2(t) of the accompanying consolidated financial
statements.




Results of operations  continuing operations

Segment revenues

|                    |  |                                  |        |              |      |   |              |      |  |   |          |  |  |          |        |   |          |  |     |          |  |   |         |   |  |  |     |  
|------------------- |  | -------------------------------- | ------ | ------------ | ---- | - | ------------ | ---- |  | - | -------- |  |  | -------- | ------ | - | -------- |  | --- | -------- |  | - | ------- | - |  |  | --- | -
|                   
|                    |  | For the years ended December 31, |        | 2002 vs 2001 |      |   | 2001 vs 2000 |     
|                    |  | 2002                             |        |              | 2001 |   |              | 2000 |  |   | $ Change |  |  | % Change |        |   | $ Change |  |     | % Change | 
|                   
|Wireless Networks   |  | $                                | 4,211  |              |      | $ | 5,714        |      |  | $ | 5,438    |  |  | $        | (1,503 | ) |          |  | (26 | )        |  | $ | 276     |   |  |  | 5   |  
|Enterprise Networks |  |                                  | 2,574  |              |      |   | 3,241        |      |  |   | 3,889    |  |  |          | (667   | ) |          |  | (21 | )        |  |   | (648    | ) |  |  | (17 | )
|Wireline Networks   |  |                                  | 2,254  |              |      |   | 4,447        |      |  |   | 7,728    |  |  |          | (2,193 | ) |          |  | (49 | )        |  |   | (3,281  | ) |  |  | (42 | )
|Optical Networks    |  |                                  | 1,461  |              |      |   | 3,334        |      |  |   | 9,732    |  |  |          | (1,873 | ) |          |  | (56 | )        |  |   | (6,398  | ) |  |  | (66 | )
|Other(a)            |  |                                  | 46     |              |      |   | 639          |      |  |   | 1,066    |  |  |          | (593   | ) |          |  | (93 | )        |  |   | (427    | ) |  |  | (40 | )
|                   
|Consolidated        |  | $                                | 10,546 |              |      | $ | 17,375       |      |  | $ | 27,853   |  |  | $        | (6,829 | ) |          |  | (39 | )        |  | $ | (10,478 | ) |  |  | (38 | )
|                   

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

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Geographic revenues

|                |  |                                  |        |              |      |   |              |      |  |   |          |  |  |          |        |   |          |  |     |          |  |   |         |   |  |  |     |  
|--------------- |  | -------------------------------- | ------ | ------------ | ---- | - | ------------ | ---- |  | - | -------- |  |  | -------- | ------ | - | -------- |  | --- | -------- |  | - | ------- | - |  |  | --- | -
|               
|                |  | For the years ended December 31, |        | 2002 vs 2001 |      |   | 2001 vs 2000 |     
|                |  | 2002                             |        |              | 2001 |   |              | 2000 |  |   | $ Change |  |  | % Change |        |   | $ Change |  |     | % Change | 
|               
|United States   |  | $                                | 5,322  |              |      | $ | 8,524        |      |  | $ | 16,798   |  |  | $        | (3,202 | ) |          |  | (38 | )        |  | $ | (8,274  | ) |  |  | (49 | )
|EMEA(a)         |  |                                  | 2,574  |              |      |   | 4,326        |      |  |   | 5,835    |  |  |          | (1,752 | ) |          |  | (40 | )        |  |   | (1,509  | ) |  |  | (26 | )
|Canada          |  |                                  | 676    |              |      |   | 936          |      |  |   | 1,505    |  |  |          | (260   | ) |          |  | (28 | )        |  |   | (569    | ) |  |  | (38 | )
|Other regions   |  |                                  | 1,974  |              |      |   | 3,589        |      |  |   | 3,715    |  |  |          | (1,615 | ) |          |  | (45 | )        |  |   | (126    | ) |  |  | (3  | )
|               
|Consolidated(b) |  | $                                | 10,546 |              |      | $ | 17,375       |      |  | $ | 27,853   |  |  | $        | (6,829 | ) |          |  | (39 | )        |  | $ | (10,478 | ) |  |  | (38 | )
|               

|(a) |  | The Europe, Middle East and Africa region (EMEA)                      
|--- |  | ------------------------------------------------------------------------
|(b) |  | Revenues by geographic regions are based on the location of the customer

Consolidated revenues

2002 compared to 2001

In 2002, the industry continued to experience a significant adjustment
which began in 2001. Following a period of rapid infrastructure build-out and
strong economic growth in 1999 and 2000, we saw a continued tightening in the
global capital markets and slowdown in the industry throughout 2001. Our
revenues declined sequentially in 2001 due to lower capital spending by
industry participants and substantially less demand for our products and
services as customers focused on maximizing their return on invested capital.
During 2002, we continued to see these constraints on capital expenditures by
our customers. Also, excess network capacity continued to exist in the
industry. In addition, we saw continuing consolidation of service providers
within the industry. This environment created a change in our customers focus
from building new networks to conserving capital, decreasing their debt levels,
reducing costs and/or increasing the capacity utilization rates and efficiency
of existing networks. As a result, our 2002 consolidated revenues
declined 39%
compared to 2001. From a geographic perspective, we experienced considerable
declines across all regions in 2002 compared to 2001.

2001 compared to 2000

The significant adjustment in the industry in 2001, which was initially
felt and was most severe in the United States, also impacted the Europe, Middle
East and Africa region, or EMEA, the Caribbean and Latin America region, or
CALA, and the Asia Pacific region during 2001. Revenues in 2001 declined 38%
compared to 2000. Revenues also declined substantially across all regions,
with the exception of the Asia Pacific region. Revenues in the Asia Pacific
region grew 24% in 2001 compared to 2000 due to considerable growth in the
first half of 2001. This growth was the result of expansion in the Peoples
Republic of China as contracts entered into during 2000 were completed.
However, we experienced a substantial sequential decline in the second half of
2001 in the Asia Pacific region. EMEA experienced a substantial sequential
decline in the second quarter of 2001 and significant sequential declines in the third
and fourth quarters of 2001. The decline in CALA reflected substantial
sequential declines in the second and third quarters of 2001. The United
States was essentially flat sequentially in the fourth quarter of 2001
following three quarters of substantial sequential declines in 2001.

2003

Entering 2003, we expect overall spending in the telecommunications
equipment market to be down modestly in 2003 compared to 2002. However, we
cannot predict the economic impact of acts of war or terrorism on the market.
We expect to see continued constraints on capital spending by customers due to:

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

Also, we expect to experience increased pricing pressures on sales of our
products as a result of increased competition. Anticipating cautious spending
by our customers in the near term and the seasonal softness traditionally
typical of the first quarter, we expect that revenues in the first quarter of
2003 will be lower than revenues in the fourth quarter of 2002. It is
difficult to predict the duration of the current industry adjustment, as growth
in industry spending is not expected to occur until global economic and
financial concerns have subsided. Market visibility remains limited and we do
not expect that our results of operations for any quarter will necessarily be
consistent with our quarterly historical profile or indicative of our expected
results in future quarters.

See Forward-looking statements for factors that may affect our revenues.

Wireless Networks

2002 compared to 2001

The 26% decline in Wireless Networks revenues in 2002 compared to 2001 was
primarily due to a continued deterioration in wireless service providers
financial condition and subscriber growth and increased competition for
customers by service providers which has resulted in the decision of many
wireless service providers to delay capital expenditures.

Time Division Multiple Access, or TDMA, revenues declined substantially in
2002 compared to 2001 primarily due to a substantial decline in the United
States as customers migrated from TDMA to Code Division Multiple Access, or
CDMA, and Global System for Mobile communications, or GSM, technologies as a
result of TDMA technology and networks being in its maturity stage. TDMA
revenues continued to be a smaller portion of Wireless Networks in 2002
compared to 2001. Also CDMA revenues declined in 2002 compared to 2001.
Continued capital spending constraints and financial difficulties experienced
by our customers globally contributed to both the CDMA and TDMA revenue
declines. In 2002, we continued to experience significant pricing pressures on
our CDMA and TDMA technologies in the United States and CALA resulting from the
increased competition for customers.

Overall GSM revenues, which includes General Packet Radio Standard, or
GPRS, and Enhanced Data Rates for Global Evolution, or EDGE, 2.5G technologies,
declined substantially in 2002 compared to 2001 due to substantial declines in
EMEA and the Asia Pacific region. These substantial declines were primarily
due to a continued deterioration in wireless service providers financial
condition and subscriber growth, and delays in capital expenditures. Also in
the Asia Pacific region, customers began to deploy CDMA technology solutions as
they migrated away from the maturing GSM technologies. This shift in
technology focus contributed to the substantial decline in GSM revenues in the
Asia Pacific region.

In 2002, Universal Mobile Telecommunications Systems, or UMTS, revenues
continued to be an insignificant portion of overall Wireless Networks revenues.
While the first commercial launches in the industry did take place in EMEA and
the Asia Pacific region, technology issues associated with third generation, or
3G, handsets contributed to delays in larger deployments of 3G networks in
2002. Also, some of our 3G customers in EMEA incurred significant costs in 2002
associated with licensing fees, which, along with their continued financial
difficulties, limited their spending on network deployments. As a result, 3G
network deployments suffered delays in EMEA in 2002.

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From a geographic perspective, the 26% decrease in Wireless Networks
revenues in 2002 compared to 2001 was primarily due to a:



| |  |  | 53% decline in revenues in the Asia Pacific region;
| | - |  | ---------------------------------------------------
| |  |  | 19% decline in revenues in the United States;      
| |  |  | 15% decline in revenues in EMEA; and               
| |  |  | 28% decline in revenues in CALA.                   

2001 compared to 2000

The 5% increase in Wireless Networks revenues in 2001 compared to 2000 was
primarily due to a substantial increase in revenues in the first half of 2001,
driven by growth in the United States and the Asia Pacific region as our major
customers continued their network expansion programs. Subsequently, Wireless
Networks revenues declined in the second half of 2001 compared to 2000 as a
result of deterioration in our customers financial condition, our providing
limited, incremental customer financing as a result of the market conditions
and the decision of many wireless service providers to delay certain capital
expenditures.

CDMA revenues increased substantially in 2001 compared to 2000 primarily
due to significant growth in CDMA technology in the Asia Pacific region, driven
by new network deployments. This significant growth was offset by the global
decline in TDMA technology caused by pricing pressures and this technology
reaching its maturity stage.

GSM revenues decreased substantially in 2001 compared to 2000 primarily
due to a substantial decline in EMEA and a significant decline in the Asia
Pacific region. The substantial decline in EMEA was due to deterioration in
our wireless service providers financial condition and subscriber growth, and
reductions in capital spending as many customers completed their initial
network deployments in 2000. In the Asia Pacific region, the significant
decline was due to a reduction in capital expenditures by some of our wireless
customers. Revenues in the United States and CALA increased in 2001 compared
to 2000 as new customers began network deployments. In 2001, the United States
and CALA represented a larger proportion of GSM and GPRS revenues compared to
2000.

UMTS revenues were not a significant portion of Wireless Networks in 2001.
UMTS revenues increased substantially in 2001 compared to 2000 primarily due
to a substantial increase in EMEA as some of our customers began their 3G
network deployments.

From a geographic perspective, the 5% increase in Wireless Networks
revenues in 2001 compared to 2000 was primarily due to a:



| |  |  | 16% increase in revenues in the United States; and                      
| | - |  | ------------------------------------------------------------------------
| |  |  | 38% increase in revenues in the Asia Pacific region; partially offset by
| |  |  | 43% decline in revenues in CALA; and                                    
| |  |  | 22% decline in revenues in EMEA.                                        

2003

In 2002, Wireless Networks revenues continued to be primarily generated by
sales of CDMA and GSM technologies. In 2003, TDMA revenues are
expected to decline. Overall GSM sales are also expected to decline as
technology transitions from GSM to GPRS and EDGE. In 2003, our CDMA 3G and
UMTS technology sales are expected to grow and represent a larger proportion of
Wireless Networks revenues as 3G technologies are expected to gain a greater
foothold in the market due to increased wireless data traffic and requirements
for greater wireless spectrum efficiency. Also, we expect to experience
increased pricing pressures on sales of Wireless Networks products as a result
of increased competition.

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

Enterprise Networks

2002 compared to 2001

The 21% reduction in Enterprise Networks revenues in 2002 compared to 2001
was primarily a result of enterprise customers continuing to reduce their
spending due to the ongoing industry adjustment, the overall economic
conditions and uncertainties surrounding the technology evolution of next
generation products.

Revenues from the circuit and packet voice portion of this segment
declined significantly in 2002 compared to 2001. The significant decline was
primarily due to reductions in customer spending in the United States and EMEA.
Revenues for traditional circuit switching products did begin to show signs of
improvement in the United States in the second half of 2002 after experiencing
sequential quarterly reductions during 2001 and the first half of 2002. In
2002, traditional circuit switching also continued its evolution towards
internet protocol, or IP, telephony, as reliability and quality of service
concerns, traditionally associated with voice over packet solutions, were
reduced. Regardless, customers remained cautious in 2002 with respect to their
investment decisions due to uncertainties surrounding the migration to packet
voice solutions.

The data networking and security portion of this segment experienced
substantial declines in 2002 compared to 2001. The substantial decrease in
revenues was primarily due to customer spending constraints and a decline in
demand for mature products across all regions. Pricing pressures continued in
2002 in the data networking and security portion of this segment as we
experienced continued significant competition for enterprise customers.

From a geographic perspective, the 21% decline in Enterprise Networks
revenues in 2002 compared to 2001 was primarily due to a:



| |  |  | 20% decline in revenues in the United States;      
| | - |  | ---------------------------------------------------
| |  |  | 27% decline in revenues in EMEA; and               
| |  |  | 13% decline in revenues in the Asia Pacific region.

2001 compared to 2000

The 17% decline in revenues in 2001 compared to 2000 was primarily due to
the significant industry adjustment and the impact this adjustment had on
spending by our enterprise customers.

The substantial decrease in sales of the circuit and packet voice portion
of this segment was primarily the result of reduced demand in the enterprise
market due to the significant industry adjustment, industry consolidation,
tightened capital markets and our circuit switching products reaching their
maturity stage.

The significant decline in sales of the data networking and security
portion of this segment was primarily due to a decline in demand for mature
products, compounded by the continued industry adjustment as customers delayed
their purchase of next generation products.

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From a geographic perspective, the 17% decline in Enterprise Networks
revenues in 2001 compared to 2000 was primarily due to a:



| |  |  | 20% decline in revenues in the United States;                          
| | - |  | -----------------------------------------------------------------------
| |  |  | 43% decline in revenues in Canada;                                     
| |  |  | 44% decline in revenues in CALA; and                                   
| |  |  | 17% decline in revenues in the Asia Pacific region; partially offset by
| |  |  | 4% increase in revenues in EMEA.                                       

2003

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

Wireline Networks

2002 compared to 2001

The 49% decline in Wireline Networks revenues in 2002 compared to 2001 was
primarily due to a substantial reduction in capital spending by our service
provider customers.

The considerable decline in the circuit and packet voice portion of this
segment was the result of continued reduced demand in the local exchange and
interexchange carrier markets due to the significant industry adjustment,
including industry consolidation and tightened capital markets, and the decline
in demand for traditional circuit switching products. During 2002, many of our
service provider customers continued to delay their investment decisions on our
packet voice solutions due to the technology evolution uncertainty in the
industry. In 2002, we continued to experience significant pricing pressures on
our traditional circuit switching products due to the increased competition for
service provider customers. In addition, the lack of packet-based technology
choices from competitive suppliers hindered our ability to respond to these
pricing pressures.

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

From a geographic perspective, the 49% decline in Wireline Networks
revenues in 2002 compared to 2001 was primarily due to a:



| |  |  | 57% decline in revenues in the United States;          
| | - |  | -------------------------------------------------------
| |  |  | 32% decline in revenues in EMEA;                       
| |  |  | 47% decline in revenues in the Asia Pacific region; and
| |  |  | 52% decline in revenues in Canada.                     

2001 compared to 2000

The 42% decline in revenues in 2001 compared to 2000 was due to a
substantial decline in sales of the circuit and packet voice portion of this
segment and a significant decline in the data networking and security portion
of this segment.

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The substantial decrease in sales in the circuit and packet voice portion
of this segment was primarily the result of reduced demand in the interexchange
carrier market due to the significant industry adjustment, industry
consolidation, tightened capital markets and the maturing of circuit switching
products.

The significant decline in sales in the data networking and security
portion of this segment was primarily due to a decline in demand for mature
products, compounded by the continued industry adjustment as customers delayed
the purchase of next generation products.

From a geographic perspective, the 42% decline in Wireline Networks revenues was primarily due to a:



| |  |  | 48% decline in revenues in the United States;
| | - |  | ---------------------------------------------
| |  |  | 36% decline in EMEA; and                     
| |  |  | 46% decline in Canada.                       

2003

In the future, we anticipate that service providers will increase the use
of packet-based technologies in their communications networks as they look for
ways to optimize their existing networks and offer new revenue generating
services while controlling capital expenditures and operating costs. However,
the timing of this transition is unclear. We expect that the continuing
industry adjustment, continuing industry consolidation and reduction in capital
spending by our customers will have a negative impact on the level of spending
by our service provider customers and could adversely affect Wireline Networks
revenues in the future.

Optical Networks

2002 compared to 2001

The 56% decline in Optical Networks revenues in 2002 compared to 2001 was
primarily the result of substantial reductions in capital spending by our major
United States and EMEA customers.

Our major customers in the long-haul portion of this segment focused on
maximizing return on invested capital by increasing the capacity utilization
rates and efficiency of existing networks. Revenues in the optical long-haul
portion of the segment declined substantially in 2002 compared to 2001. The
considerable decline was primarily due to the continued industry adjustment,
including industry consolidation, continued capital spending constraints and,
to a lesser extent, the large redeployment of assets that occurred in 2001 and
continued throughout 2002. The spending constraints and redeployment of assets
were caused primarily by significant excess inventories which resulted in
significant pricing pressures.

Revenues in the metro optical portion of the segment are primarily driven
by demand for enterprise connectivity and storage solutions. The substantial
decline in revenue in the metro optical portion of the segment in 2002 compared
to 2001 was primarily due to a decline in demand for mature products. This
decline was compounded by the ongoing industry adjustment as customers
continued to focus on optimizing existing networks and delayed the deployment
of next generation products. Industry consolidation also contributed to the
reduction in service provider capital spending during 2002 and 2001. The
current generation of metro products, namely, the OPTera Metro family of
products were the key products contributing to revenue in 2002 and accounted
for a substantial portion of the overall Optical Networks revenues. Revenue in
the metro optical portion of the segment increased as a percentage of total
Optical Networks revenue in 2002 compared to 2001.

From a geographic perspective, the 56% decline in Optical Networks
revenues in 2002 compared to 2001 was primarily due to a:



| |  |  | 61% decline in revenues in EMEA;                       
| | - |  | -------------------------------------------------------
| |  |  | 60% decline in revenues in the United States;          
| |  |  | 41% decline in revenues in the Asia Pacific region; and

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| |  |  | 78% decline in revenues in CALA.
| | - |  | --------------------------------

2001 compared to 2000

The 66% decline in revenues in 2001 compared to 2000 was primarily the
result of substantial reductions in capital spending, primarily by our major
United States customers. Our major customers in the long-haul portion of this
segment focused on maximizing return on invested capital by increasing the
capacity utilization rates and efficiency of existing networks. Our revenues in
the first quarter of 2001 reflected the then in-process network build-outs that
had begun in 2000. However, when the industry began experiencing a significant
adjustment and the capital markets tightened, our customers reduced their
purchases significantly and focused on reducing inventory levels to complete
existing network build-outs and on improving the efficiency of existing
networks. The continuing industry consolidation in 2001 also contributed to
the reduction in service provider capital spending during 2001. Overall, a
large redeployment of assets occurred in this segment of the industry in 2001
primarily due to significant excess inventories. This redeployment, in
conjunction with the continuing industry consolidation, resulted in significant
pricing pressures in 2001. Due to the severe reduction, in number and size, of
new network build-outs during 2001, we experienced a substantial decline in the
long-haul portion of this segment compared to 2000.

The substantial decline in sales of the metro optical portion of this
segment in 2001 compared to 2000 was primarily due to a decrease in sales
volumes of mature optical products that have a metropolitan or regional
application.

From a geographic perspective, the 66% decline in Optical Networks
revenues in 2001 compared to 2000 was primarily due to a:



| |  |  | 83% decline in revenues in the United States; and
| | - |  | -------------------------------------------------
| |  |  | 28% decline in revenues in EMEA.                 

2003

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

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

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

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Gross profit and gross margin

|             |  |                                  |       |              |      |   |              |      |  |   |        |   |  |          |      |  |        |  |    |          |  |   |        |   |  |  |     |  
|------------ |  | -------------------------------- | ----- | ------------ | ---- | - | ------------ | ---- |  | - | ------ | - |  | -------- | ---- |  | ------ |  | -- | -------- |  | - | ------ | - |  |  | --- | -
|            
|             |  | For the years ended December 31, |       | 2002 vs 2001 |      |   | 2001 vs 2000 |     
|             |  | 2002                             |       |              | 2001 |   |              | 2000 |  |   | Change |   |  | % Change |      |  | Change |  |    | % Change | 
|            
|Gross profit |  | $                                | 3,401 |              |      | $ | 3,134        |      |  | $ | 12,784 |   |  | $        | 267  |  |        |  | 9  |          |  | $ | (9,650 | ) |  |  | (75 | )
|Gross margin |  |                                  | 32.2  | %            |      |   | 18.0         | %    |  |   | 45.9   | % |  |          | 14.2 |  |        |  | 79 |          |  |   | (27.9  | ) |  |  | (61 | )
|            

The substantial increase in gross profit in 2002 compared to 2001 was
primarily due to approximately $209 of incremental charges recorded in 2002
versus approximately $1,478 of incremental charges in 2001. These charges
primarily related to incremental inventory provisions and contract and customer
settlement costs. After adjusting for these incremental costs, the substantial
increase in gross profit in 2002 was primarily due to improvements in our cost
structure as we have reduced inventory levels to more closely reflect our sales
volume and received more favorable supplier pricing in 2002. Gross profit

increased even though we experienced substantial pricing pressures in 2002.

Gross profit decreased substantially in 2001 compared to 2000 due to
substantial declines in revenues and gross margin. The overall decrease in
gross margin was primarily due to:



| |  |  | approximately $1,478 of incremental charges, related to the entire
supply chain and contract and customer settlement costs, resulting from
the significant industry adjustment;                                                                                           
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | our fixed cost structure that was not reflective of the lower sales
volumes in 2001;                                                                                                                                                                                      
| |  |  | pricing pressures across certain products and services, primarily in
Optical Networks, resulting from increased competition; and                                                                                                                                          
| |  |  | shifts in the geographic mix of sales from the United States to EMEA
and the Asia Pacific region, where we generally earn lower gross
margins. Sales in the United States accounted for approximately 49% of
overall sales in 2001, compared to approximately 60% in 2000.

While we cannot predict the extent to which changes in product mix and
pricing pressures will impact our gross margin, we have begun to see the
effects of our work plan which we began implementing in 2001 to create a cost
structure that is more reflective of the current industry and economic
environment. As a result, we expect that gross margin will continue to trend
towards the low 40% range in 2003.

See Forward-looking statements for factors that may affect our gross
margins.

Operating expenses

Selling, general and administrative expense

|             |                             |   |                                  |      |              |      |       |              |      |   |       |          |   |   |          |     |  |          |     |     |          |   |     |     |  |  |   |     | 
|------------ | --------------------------- | - | -------------------------------- | ---- | ------------ | ---- | ----- | ------------ | ---- | - | ----- | -------- | - | - | -------- | --- |  | -------- | --- | --- | -------- | - | --- | --- |  |  | - | --- | 
|            
|             |                             |   | For the years ended December 31, |      | 2002 vs 2001 |      |       | 2001 vs 2000 |     
|             |                             |   | 2002                             |      |              | 2001 |       |              | 2000 |   |       | $ Change |   |   | % Change |     |  | $ Change |     |     | % Change |  
|            
|SG&A expense |                             | $ | 2,662                            |      |              | $    | 5,815 |              |      | $ | 5,371 |          |   | $ | (3,153   | )   |  |          | (54 | )   |          | $ | 444 |     |  |  | 8 |    
|             | As a percentage of revenues |   |                                  | 25.2 | %            |      |       | 33.5         | %    |   |       | 19.3     | % |   |          | N/A |  |          |     | N/A |          |   |     | N/A |  |  |   | N/A | 
|            

Selling, general and administrative, or SG&A, expense declined
substantially in 2002 compared to 2001, primarily reflecting the impact of our
work plan. Incremental charges of $220 were recorded in 2002 compared to
incremental charges of $1,067 in 2001. The incremental charges in both 2002
and 2001 related to increased provisioning for trade and customer financed
receivables. The remaining substantial decrease in SG&A expense in 2002
compared to 2001 was primarily due to the impact of workforce reductions, which
in turn has also resulted in a reduction in other related costs such as
information services and real estate.

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SG&A expense increased in 2001 compared to 2000. During the first half of
2001, we incurred incremental costs that resulted from increasing our
investment in North America and international markets across all of our
reporting segments. We increased our investment to support our revenue growth
in the second half of 2000 and the then anticipated revenue growth for 2001.
The increase in SG&A expense in 2001 also resulted from increased provisions of
approximately $1,067 related to various trade and customer-financed receivables
due to the worsening financial position of certain customers. Excluding the
impact of these increased provisions, SG&A expense in 2001 declined
significantly compared to 2000.

In 2003, we expect that our annual SG&A expense will continue to decline
although not to the same extent as was experienced in 2002 compared to 2001.

Research and development expense

|            |                             |   |                                  |      |   |              |       |      |              |   |       |          |   |   |          |     |  |          |     |     |          |   |      |     |  |  |     |     | 
|----------- | --------------------------- | - | -------------------------------- | ---- | - | ------------ | ----- | ---- | ------------ | - | ----- | -------- | - | - | -------- | --- |  | -------- | --- | --- | -------- | - | ---- | --- |  |  | --- | --- | 
|           
|            |                             |   | For the years ended December 31, |      |   | 2002 vs 2001 |       |      | 2001 vs 2000 |  
|            |                             |   | 2002                             |      |   | 2001         |       |      | 2000         |   |       | $ Change |   |   | % Change |     |  | $ Change |     |     | % Change |  
|           
|R&D expense |                             | $ | 2,228                            |      |   | $            | 3,230 |      |              | $ | 3,626 |          |   | $ | (1,002   | )   |  |          | (31 | )   |          | $ | (396 | )   |  |  | (11 | )  
|            | As a percentage of revenues |   |                                  | 21.1 | % |              |       | 18.6 | %            |   |       | 13.0     | % |   |          | N/A |  |          |     | N/A |          |   |      | N/A |  |  |     | N/A | 
|           

Research and development, or R&D, expense represents our planned
investment in our next generation core products across all businesses. R&D
expense decreased substantially in 2002 compared to 2001, reflecting focused
investments to drive market leadership across our product portfolios.

R&D expense decreased significantly in 2001 compared to 2000, reflecting
the impact of our initiatives to focus our spending on key potential growth
areas.

Our continuing strategic investments in R&D are aligned with technology
leadership in anticipated growth areas, while targeting a level of R&D expense
that is representative of our overall cost structure. In 2003, we expect that
our annual R&D expense will continue to decline although not to the same extent
as was experienced in 2002 compared to 2001.

Amortization of intangibles

|                            |                     |  |                                  |    |              |      |   |              |      |  |   |          |  |  |          |        |   |          |  |      |          |  |  |      |   |  |  |     | 
|--------------------------- | ------------------- |  | -------------------------------- | -- | ------------ | ---- | - | ------------ | ---- |  | - | -------- |  |  | -------- | ------ | - | -------- |  | ---- | -------- |  |  | ---- | - |  |  | --- | 
|                           
|                            |                     |  | For the years ended December 31, |    | 2002 vs 2001 |      |   | 2001 vs 2000 |     
|                            |                     |  | 2002                             |    |              | 2001 |   |              | 2000 |  |   | $ Change |  |  | % Change |        |   | $ Change |  |      | % Change | 
|                           
|Amortization of intangibles |                     |  |                                  |    |              |      |   |              |      |  |   |          |  |  |          |        |   |          |  |      |          |  |  |      |   |  |  |    
|                            | Acquired technology |  | $                                | 20 |              |      | $ | 574          |      |  | $ | 789      |  |  |          | (554   | ) |          |  | (97  | )        |  |  | (215 | ) |  |  | N/A | 
|                            | Goodwill            |  |                                  |   |              |      |   | 2,082        |      |  |   | 2,492    |  |  |          | (2,082 | ) |          |  | (100 | )        |  |  | (410 | ) |  |  | N/A | 
|                           

Amortization of acquired technology

The amortization of acquired technology in 2002 primarily reflected the
charge related to the acquisition of Bay Networks, Inc. The amortization of
acquired technology in 2001 primarily reflected the charges related to the
acquisitions of Bay Networks, and Clarify Inc. The amortization of acquired
technology in 2000 primarily reflected the charge related to the acquisition of
Bay Networks.

Amortization of goodwill

On January 1, 2002, we adopted the provisions of Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets, or SFAS
142. As a result, amortization of goodwill, including goodwill recorded in
past business combinations, and amortization of intangibles with an indefinite
life ceased upon adoption of SFAS 142. We completed the first SFAS 142
transitional impairment test during the second quarter of 2002 and concluded at
that time that there was no impairment of recorded goodwill, as the fair values
of our reporting units exceeded their carrying amount as of

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January 1, 2002.
Therefore, the second step of the transitional impairment test under SFAS 142
was not required to be performed.

As part of our review of financial results during the third quarter of
2002, we evaluated the goodwill associated with the businesses within Optical
Networks for potential impairment. The conclusion of those evaluations was
that we wrote down the remaining value of goodwill in the amount of $264. For
additional information on the write down of goodwill, see Special charges in
note 6 of the accompanying consolidated financial statements.

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

The amortization of goodwill for 2000 primarily reflected the charges
related to the acquisitions of Bay Networks, Qtera and Clarify.

The remaining net carrying value of goodwill was $2,021 on December 31,
2002 and $2,283 on December 31, 2001.

Special charges

In 2002, we recorded special charges of $1,816, related to restructuring
activities and write downs of goodwill and other assets. The special charges
relating to restructuring were associated with our work plan to streamline
operations and activities around core markets and leadership strategies. Our
special charges in 2002 related to workforce reduction costs of $902, contract
settlement and lease costs of $221, plant and equipment write downs of $341,
other charges of $88 and a goodwill write down of $264.

In 2001, we recorded special charges of $5,443 related to restructuring
activities and write downs of goodwill and other assets. The special charges
related to workforce reduction costs of $1,343, contract settlement and lease
costs of $883, plant and equipment write downs of $939, other charges of $39
and a goodwill write down of $2,239.

In 2000, we recorded special charges of $267 related to restructuring
activities and a one-time intangible asset write down.

On December 31, 2002, our workforce numbered approximately 37,000 and our
previously announced employee reductions were nearing completion. As a result
of changes in certain outsourcing plans, we expect to have approximately 36,000
employees by the end of the first quarter of 2003, compared to our previous
estimate of approximately 35,000. Going forward, our focus will be on managing
each of our businesses based on financial performance, the market and customer
priorities. Additional charges will be required in 2003 related to our
remaining announced workforce reductions and related charges.

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

Gain on sale of businesses

In 2002, the gain on sale of businesses of $22 was primarily related to a
gain of $18 on the sale of certain assets relating to our optical components
business to Bookham Technology plc. For additional information relating to the
sale of these assets, see Divestitures, closures and acquisitions in note 9
of the accompanying consolidated financial statements.

Gain on sale of businesses for 2001 of $125 was primarily related to net
gains associated with both the outsourcing of certain activities as part of our
continued supply chain transformation strategy that began in 1999 and the
divestiture of certain non-core businesses in connection with our work plan to
streamline our business around core markets.

In 2000, the gain on sale of businesses of $174 was primarily related to
the divestiture of certain manufacturing operations and tangible and intangible
assets in connection with our operations strategy.

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Other income (expense)  net

For 2002, other expense  net of $2 was primarily related to interest
income of $87 and income of $23 relating to minority interests. This was
partially offset by a $29 loss on sale or write down of certain minority
investments and other expenses of $83.

For 2001, other expense  net of $325 was primarily related to a loss on
sale or write down of certain minority investments. This write down occurred
during the third quarter from our review of our investment portfolio, and was
due to a change in our strategic focus relative to certain minority
investments, as well as an other than temporary decline in carrying values
caused by the continued significant downturn in both the industry and economic
environment. Public company investments were generally written down against
earnings to their current market value. Private company investments were
written down to the estimated current market value by applying a
telecommunications market average adjustment factor calculated using the
declines of a representative group of public companies. Previous
mark-to-market adjustments on both our public and private company investments
were recorded in accumulated other comprehensive income.

For 2000, other income  net of $835 was primarily related to a $513
pre-tax ($344 after-tax) gain from the sale of a portion of our share ownership
in Entrust, Inc. (formerly Entrust Technologies, Inc.) in the first quarter of
2000, and a $169 pre-tax ($116 after-tax) gain due to a reduction in our
investment in Entrust from 33.5% to 27.0% primarily as a result of Entrusts
issuance of common shares in connection with its acquisition of enCommerce,
Inc. in the third quarter of 2000.

Interest expense

Interest expense decreased $112 in 2002 compared to 2001. The decrease
was primarily related to a lower level of short-term notes payable in 2002,
partially offset by additional interest expense due to long-term debt offerings
during 2001. The increase in interest expense of $116 in 2001, compared to
2000, was primarily related to our new debt offerings during the year, and an
increase in the amount and cost of borrowings under the commercial paper
program during the first and second quarters of 2001.

Income tax benefit (provision)

In 2002, we recorded a net income tax benefit of $447 on a pre-tax loss of
$3,486. Our gross income tax valuation allowances in 2002 were $1,053,
including certain additional income tax valuation allowances of $536. We
assessed positive evidence including forecasts of future taxable income to
support realization of the net deferred tax assets, and other negative evidence
including our eight consecutive quarters of tax losses, and concluded that it
was more likely than not, that certain additional tax valuation allowances of
$536 were required. If market conditions improve and future results of
operations exceed our current expectations, our existing tax valuation
allowances may be adjusted, resulting in future tax benefits. Alternatively,
if market conditions deteriorate further or future results of operations are
less than expected, additional tax valuation allowances may be required for all
or a portion of our deferred tax assets.

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

Our effective tax benefit/provision rate fluctuates from period to period
primarily as a result of the impact of non-tax deductible goodwill amortization
and write downs, non-tax deductible restructuring charges, certain additional
valuation allowances, stock option compensation expense and in-process research
and development expense. As a result, our effective tax rates were neither
comparable nor meaningful in 2002, 2001 and 2000.

For additional information, see Income taxes in note 7 of the
accompanying consolidated financial statements and Application of critical
accounting policies.

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Net loss from continuing operations

As a result of the items discussed under our results of operations, our
reported net loss from continuing operations improved by $8,516 in 2002
compared to 2001 and increased by $10,684 in 2001 compared to 2000.




Results of operations  discontinued operations

|                                      |                           |   |                                  |     |              |      |        |              |      |   |       |          |   |   |          |       |  |          |     |     |          |   |        |        |   |  |      |     | 
|------------------------------------- | ------------------------- | - | -------------------------------- | --- | ------------ | ---- | ------ | ------------ | ---- | - | ----- | -------- | - | - | -------- | ----- |  | -------- | --- | --- | -------- | - | ------ | ------ | - |  | ---- | --- | 
|                                     
|                                      |                           |   | For the years ended December 31, |     | 2002 vs 2001 |      |        | 2001 vs 2000 |     
|                                      |                           |   | 2002                             |     |              | 2001 |        |              | 2000 |   |       | $ Change |   |   | % Change |       |  | $ Change |     |     | % Change |  
|                                     
|Revenues                              |                           | $ | 141                              |     |              | $    | 994    |              |      | $ | 2,325 |          |   | $ | (853     | )     |  |          | (86 | )   |          | $ | (1,331 | )      |   |  | (57  | )  
|                                     
|Net loss from discontinued operations |                           |   |                                  |     |              |      |        |              |      |   |       |          |   |   |          |       |  |          |     |     |          |   |        |        |   |  |      |    
|                                      |  net of tax              |   |                                  |    |              |      |        | (354         | )    |   |       | (414     | ) |   |          | 354   |  |          |     | 100 |          |   |        | 60     |   |  |      | 14  | 
|Net loss on disposal of operations    |                           |   |                                  |     |              |      |        |              |      |   |       |          |   |   |          |       |  |          |     |     |          |   |        |        |   |  |      |    
|                                      |  net of tax              |   |                                  |    |              |      |        | (2,184       | )    |   |       |         |   |   |          | 2,184 |  |          |     | 100 |          |   |        | (2,184 | ) |  |      | N/A | 
|                                     
|Net loss from discontinued operations |                           | $ |                                 |     |              | $    | (2,538 | )            |      | $ | (414  | )        |   | $ | 2,538    |       |  |          | 100 |     |          | $ | (2,124 | )      |   |  | (513 | )  
|                                     
|Net cash from (used in)               |                           |   |                                  |     |              |      |        |              |      |   |       |          |   |   |          |       |  |          |     |     |          |   |        |        |   |  |      |    
|                                      |  discontinued operations |   | $                                | 371 |              |      | $      | (678         | )    |   | $     | (1,057   | ) |   |          | 1,049 |  |          |     | 155 |          |   |        | 379    |   |  |      | 36  | 
|                                     

During 2002, we continued to wind down our access solutions operations and
there has been no change to the initial disposal strategy or intent to exit the
business since June 14, 2001. However, the continued deterioration in industry
and market conditions has delayed certain disposal activities beyond the
original planned timeframe of one year. In particular, actions involving
negotiations with customers, who have also been affected by industry
conditions, are taking longer than expected. Therefore, although disposal
activities continue beyond the one-year period, we continue to present the
access solutions operations as discontinued operations in the accompanying
consolidated financial statements. We now expect to complete this plan by mid
2003, subject to the closing of specific transactions, the timing of which may
continue to be impacted by customer and business issues and any applicable
regulatory requirements.

For additional information, see Discontinued operations in note 17 of
the accompanying consolidated financial statements.




Application of critical accounting policies

Our consolidated financial statements are based on the selection and
application of accounting policies, generally accepted in the United States,
which require us to make significant estimates and assumptions. We believe
that the following accounting policies may involve a higher degree of judgment
and complexity in their application and represent our critical accounting
policies. The application of these policies requires us to make subjective and
objective judgments.

In general, any changes in estimates or assumptions relating to revenue
recognition, provisions for receivables, provisions for inventory and other
contingencies (excluding legal contingencies) are directly reflected in the
results of our reportable operating segments. Changes in estimates or
assumptions pertaining to our tax asset valuations, our pension and post
retirement benefits and our legal contingencies are generally not reflected in
our reportable operating segments, but are reflected on a consolidated basis.

We have discussed the application of these critical accounting policies
with the Audit Committee of our Board of Directors.

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Revenue recognition

Our material revenue streams are the result of a wide range of activities,
from custom design and installation over a long period of time to pack and
ship, with many variations in between. Our networking solutions also cover a
broad range of technologies and are offered on a global basis. As a result,
our revenue recognition policies can differ depending on the level of
customization within the solution and the contractual terms with the customer.
Newer technologies within one of our reporting segments may also have different
revenue recognition policies, depending on, among other factors, the specific
performance and acceptance criteria within the applicable contract. Therefore,
management must use judgment in determining how to apply the current accounting
standards and interpretations, not only based on the networking solution, but
also within networking solutions based on reviewing the level of customization
and contractual terms with the customer. As a result, our revenues may
fluctuate from period to period based on the mix of solutions sold and in which
geographic region they are sold.

The collectibility of trade and notes receivables is also critical in
determining whether revenue should be recognized, especially considering the
current economic environment within our industry. As part of the revenue
recognition process, we determine whether trade or notes receivables are
reasonably assured of collection and whether there has been deterioration in
the credit quality of our customers that could result in our inability to
collect the receivables. We will defer revenue and related costs if we are
uncertain as to whether we will be able to collect the receivable. When we
determine that collection of the receivable is unlikely, we will defer revenue
but continue to recognize any related costs. When we determine that a loss
exists on a particular contract, we will recognize the loss immediately.

For further information on our revenue recognition policies relating to
our material revenue streams, you should also refer to note 2(d) of the
accompanying consolidated financial statements.

Provisions for receivables

In establishing the appropriate provisions for trade, notes and long-term
receivables due from customers, we make assumptions with respect to their
future collectibility. Our assumptions are based on an individual assessment
of a customers credit quality as well as subjective factors and trends,
including the aging of receivable balances. Generally, these individual credit
assessments occur prior to the inception of the credit exposure and at regular
reviews during the life of the exposure and consider:



| |  |  | a customers ability to meet and sustain their financial commitments;              
| | - |  | -----------------------------------------------------------------------------------
| |  |  | a customers current and projected financial condition;                            
| |  |  | the positive or negative effects of the current and projected industry outlook; and
| |  |  | the economy in general.                                                            

Once we consider all of these individual factors, we make a determination
as to the probability of default. An appropriate provision is then made, which
takes into consideration the severity of the likely loss on the outstanding
receivable balance based on our experience in collecting these amounts. In addition to
these individual assessments, in general, outstanding trade accounts receivable
amounts that are greater than 365 days are fully provisioned for and amounts
greater than 180 days are 50% provisioned for. A misinterpretation or
misunderstanding of any of the above mentioned conditions
could result in bad debts in excess of the provisions determined to be
appropriate as of the balance sheet date.

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We recorded receivable provisions, relating to continuing operations, of
$268 in 2002, $1,341 in 2001 and $330 in 2000. The following table summarizes
our accounts receivable and long-term receivable balances and related reserves
of our continuing operations:

|                                                                           |  |                    |       |   |      |   |       |  
|-------------------------------------------------------------------------- |  | ------------------ | ----- | - | ---- | - | ----- | -
|                                                                          
|                                                                           |  | As at December 31,
|                                                                           |  | 2002               |       |   | 2001 |  
|                                                                          
|Gross accounts receivable                                                  |  | $                  | 2,470 |   |      | $ | 3,578 |  
|Related reserves                                                           |  |                    | (477  | ) |      |   | (655  | )
|                                                                          
|Net accounts receivable                                                    |  | $                  | 1,993 |   |      | $ | 2,923 |  
|                                                                          
|Accounts receivable reserves as a percentage of gross accounts receivables |  |                    | 19    | % |      |   | 18    | %
|                                                                          
|Gross long-term receivables                                                |  | $                  | 822   |   |      | $ | 1,031 |  
|Related reserves                                                           |  |                    | (781  | ) |      |   | (828  | )
|                                                                          
|Net long-term receivables                                                  |  | $                  | 41    |   |      | $ | 203   |  
|                                                                          
|Long-term receivable reserves as a percentage of long-term receivables     |  |                    | 95    | % |      |   | 80    | %
|                                                                          

Our level of reserves for both accounts receivable and long-term
receivables fluctuate depending on all of the factors mentioned above. In 2002
and 2001, significant provisions have been recorded; however, due to the
current market conditions and the creditworthiness of some of our customers, it
is difficult to determine the extent to which this trend will continue in the
future.

Provisions for inventory

Management must make estimates about the future customer demand for our
products when establishing the appropriate provisions for inventory. When
making these estimates, we consider general economic conditions and growth
prospects within our customers ultimate marketplace, and the market acceptance
of our current and pending products. These judgments must be made in the
context of our customers shifting technology needs and changes in the
geographic mix of our customers. With respect to our provisioning policy, in
general, we fully reserve for surplus inventory in excess of our 365 day demand
forecast or that we deem to be obsolete. Generally, our inventory provisions
have an inverse relationship with the projected demand for our products. For
example, our provisions usually increase as projected demand decreases due to
adverse changes in the conditions mentioned above. We have experienced
significant changes in required reserves in recent periods due to changes in
strategic direction, such as discontinuances of product lines, as well as
declining market conditions. A misinterpretation or misunderstanding of any of
these conditions could result in inventory losses in excess of the provisions
determined to be appropriate as of the balance sheet date.

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We recorded inventory provisions and other provisions related to our
contract manufacturers and suppliers, relating to continuing operations, of
$555 in 2002, $1,646 in 2001 and $448 in 2000. The following table summarizes
our inventory balances and related reserves of our continuing operations:

|                                                                                 |  |                    |        |   |      |   |       |  
|-------------------------------------------------------------------------------- |  | ------------------ | ------ | - | ---- | - | ----- | -
|                                                                                
|                                                                                 |  | As at
December 31,
|                                                                                 |  | 2002               |        |   | 2001 |  
|                                                                                
|Gross inventory                                                                  |  | $                  | 1,903  |   |      | $ | 2,474 |  
|Related reserves                                                                 |  |                    | (1,014 | ) |      |   | (911  | )
|                                                                                
|Net inventory                                                                    |  | $                  | 889    |   |      | $ | 1,563 |  
|                                                                                
|Inventory reserves as a percentage of gross inventory                            |  |                    | 53     | % |      |   | 37    | %
|Other reserves for claims related to our contract manufacturers and suppliers(a) |  |                    | (168   | ) |      |   | (565  | )
|                                                                                

|(a) |  | Included in other accrued liabilities and relating to cancellation
charges, inventory in excess of future demand and for the settlement
of certain other claims
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

In 2003, we believe that we will continue to see constraints on capital
expenditures by our customers. As a result, we will continue to closely
monitor our inventory reserves to ensure that our provisions appropriately
reflect the current market conditions; however, the inventory provisions we
have recorded in the past may not be reflective of those in future quarters.

Tax asset valuation

We currently have deferred tax assets resulting from net operating loss
carryforwards, tax credit carryforwards, and deductible temporary differences,
all of which will reduce taxable income in the future. We assess the
realization of these deferred tax assets quarterly to determine whether an
income tax valuation allowance is required. Based on available evidence, both
positive and negative, we determine whether it is more likely than not that all
or a portion of the remaining net deferred tax assets will be realized. The
main factors that we consider include:



| |  |  | future earnings potential determined through the use of internal forecasts;
| | - |  | ---------------------------------------------------------------------------
| |  |  | cumulative losses in recent years;                                         
| |  |  | history of loss carryforwards and other tax assets expiring;               
| |  |  | the carryforward period associated with the deferred tax assets; and       
| |  |  | the nature of the income that can be used to realize the deferred tax asset

If it is our belief that it is more likely than not that some portion of
these assets will not be realized, an income tax valuation allowance is
recorded. Gross income tax valuation allowances were $1,053 in 2002, including
certain additional income tax valuation allowances of $536. We assessed
positive evidence including forecasts of future taxable income to support
realization of the net deferred tax assets, and negative evidence including our
eight consecutive quarters of tax losses, and concluded that it was more likely
than not, that certain additional tax valuation allowances of $536 were
required.

If market conditions improve and future results of operations exceed our
current expectations, our existing tax valuation allowances may be adjusted,
resulting in future tax benefits. Alternatively, if market conditions
deteriorate further or future results of operations are less than expected,
future assessments may result in a determination that some or all of the net
deferred tax assets are not realizable. As a result, we may need to establish
additional tax valuation allowances for all or a portion of the net deferred
tax assets, which may have a material adverse effect on our business, results
of operations and financial condition.

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Goodwill valuation

Commencing January 1, 2002, we test goodwill for possible impairment on an
annual basis and at any other time if an event occurs or circumstances change
that would more likely than not reduce the fair value of a reporting unit below
its carrying amount. Circumstances that could trigger an impairment test include, but are not limited to:



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

The determination as to whether a write down of goodwill is necessary
involves significant judgment based on the short-term and long-term projections
of the future performance of the reporting unit to which the goodwill is
attributed. The assumptions supporting the estimated future cash flows of the
reporting unit, including the discount rate used and estimated terminal value
reflect our best estimates.

In 2002, we incurred a goodwill write down of $264. As a result of the
continued decline in both our overall market value generally and within Optical
Networks specifically, we evaluated the goodwill associated with the businesses
within Optical Networks for potential impairment. The conclusion of those
evaluations was that the fair value associated with the businesses within
Optical Networks could no longer support the carrying value of the remaining
goodwill associated with them. Fair value was estimated using the expected
present value of discounted future cash flows of these businesses. The
discount rate used ranged from 12% to 16% and the terminal values were
estimated based on terminal growth rates ranging from 3% to 5%.

In 2001, we incurred a goodwill write down of $2,239. In 2001, we
performed an assessment of the carrying values of goodwill associated with our
acquisitions. The assessment during that period was performed in light of the
significant negative industry and economic trends impacting our operations and
expected future growth rates, and the adjustment of technology valuations. The
conclusion of our assessment was that the decline in market conditions within
the industry was significant and other than temporary. The write downs were
primarily related to the goodwill within Enterprise Networks, Optical Networks
and Other. Fair value was determined based on discounted future cash flows for
the businesses within these reportable segments that had separately
distinguishable goodwill balances and whose operations had not yet been fully
integrated. The cash flow periods used were five years, the discount rate used
was 20%, and the terminal values were estimated based upon terminal growth
rates ranging from 5% to 11%. The discount rate was based on our weighted
average cost of capital, adjusted for the risks associated with the operations.

In 2000, we incurred a goodwill write down of $133 related to certain
operations in EMEA and as a result of a change in business mandate for those
operations from a product focus to a focus on distribution channels.

For additional information on our goodwill write-downs, see Special
charges in note 6 of the accompanying consolidated financial statements.

The carrying value of goodwill was $2,021 at December 31, 2002 and $2,283
at December 31, 2001. For more information on the goodwill amounts attributed
to each reportable segment, you should refer to Consolidated financial
statement details in note 4 of the accompanying consolidated financial
statements.

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Pension and post retirement benefits

We maintain various pension and post-retirement benefit plans for our
employees in North America and the United Kingdom. These plans include
significant pension and post retirement benefit obligations which are
calculated based on actuarial valuations. Key assumptions are made in
determining these obligations and related expenses, including expected rates of
return on plan assets and discount rates. For 2002, the expected long-term
rate of return on plan assets used to estimate pension expenses was 7.8% on a
weighted average basis, which was the rate determined at September 30, 2001.
The expenses for 2001 were based on a weighted average long-term rate of return
of 8.1%. The discount rate used to estimate the net pension obligations and
expenses for 2002 were 6.3% and 6.7% respectively on a weighted average basis,
compared to 6.7% and 7.0% respectively in 2001. The lower rates reflected the
decline in global capital markets and interest rates.

The key assumptions used to estimate the post-retirement costs for 2002
were an expected long-term rate of return on plan assets of 8.0% and a discount
rate of 6.8% and 7.0% for the obligations and costs, respectively, both on a
weighted average basis. The expected long-term rate of return on plan assets
remained unchanged from 2001. The discount rates for the obligations and costs
decreased from 7.0% and 7.5% respectively in 2001 due to the decline in global
interest rates.

The difference between the expected long-term rate of return on plan
assets and the discount rate reported for the net pension obligations and
expenses and the post-retirement benefit obligations and costs is due to the
weighted average calculation as a result of the number of countries in which we
offer either pension or pension and post-retirement benefits. In developing
these assumptions, we evaluated, among other things, input from our actuaries,
expected long-term market returns and current high-quality bond rates.

Plan assets are comprised primarily of common stocks, bonds, debentures,
secured mortgages and property. Included in plan assets are common shares of
Nortel Networks Corporation with an aggregate market value of $3 in 2002 ($23
in 2001).

Unrecognized actuarial gains and losses are being recognized over
approximately a 12 year period, which represents the weighted average expected
remaining service life of the employee group. Unrecognized actuarial gains and
losses arise from several factors including experience and assumption changes
in the obligations and from the difference between expected returns and actual
returns on assets. At the end of 2002, we had unrecognized net actuarial
losses of $1,400 which could result in an increase to pension expenses in
future years depending on several factors, including whether such losses exceed
the corridor in accordance with SFAS No. 87, Employers Accounting for
Pensions.

The estimated accumulated benefit obligations for the defined benefit
plans exceeded the fair value of the plan assets at September 30, 2002 as a
result of the negative impact that declines in global capital markets and
interest rates had on our pension plan assets and obligations. Accordingly, we
recorded a non-cash charge of $692 ($559 after-tax) to shareholders equity for
the minimum pension liability. A similar charge may be required in the future
as the impact of changes in global capital markets and interest rates on the
value of our pension plan assets and obligations is measured.

During 2002, we made $75 in required cash contributions to our registered
defined benefit pension plans as well as additional voluntary contributions of
$75. In 2003, we expect required cash contributions under applicable
legislation to be similar to those made in 2002, although global capital market
and interest rate fluctuations could impact future funding requirements.

For 2003, our expected rate of return on plan assets remains unchanged
from 2002 for pension expenses and post-retirement costs. However, for 2003,
we lowered our discount rate approximately 0.4% to 6.3% on a weighted average
basis for pension expenses and 0.25% to 6.8% on a weighted average basis for
post-retirement costs given the current global interest rates. We will
continue to evaluate our expected long-term rates of return on plan assets and
discount rates at least annually and make adjustments as necessary, which could
change the pension and post-retirement obligations and expenses in the future.
If the actual operation of the plans differs from the assumptions, additional
contributions by us may be required. If we are required to make significant
contributions to fund the defined benefit plans, reported results could be
materially and adversely affected and our cash flow available for other uses
may be significantly reduced.

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Other contingencies

We are subject to the possibility of various loss contingencies arising in
the ordinary course of business. As a result, we consider the likelihood of
loss or impairment of an asset or the incurrence of a liability, as well as our
ability to reasonably estimate the amount of loss in determining loss
contingencies. We recognize a reserve for an estimated loss contingency when it
is probable that an asset has been impaired or a liability has been incurred
and the amount of loss can be reasonably estimated. We regularly evaluate
current information available to us to determine whether such accruals should
be adjusted.

We are also subject to proceedings, lawsuits and other claims (some of
which may involve substantial dollar amounts), including proceedings under laws
and government regulations related to securities, environmental, labor, product
and other matters. We are required to assess the likelihood of any adverse
judgments or outcomes in these matters, as well as potential ranges of probable
losses. A determination of the amount of reserves required, if any, for these
contingencies is based on an analysis of each individual issue. The required
reserves may change in the future due to new developments in each matter or
changes in approach such as a change in settlement strategy in dealing with
these matters. We cannot determine whether these matters will, individually or collectively, have a
material adverse effect on our business, results of operations and financial
condition. For more information related to our outstanding legal proceedings,
see Contingencies in note 20 of the accompanying consolidated financial
statements.




Liquidity and capital resources

Cash flows

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

|                                                                      |  |                         |       |   |      |   |       |  
|--------------------------------------------------------------------- |  | ----------------------- | ----- | - | ---- | - | ----- | -
|                                                                     
|                                                                      |  | Year ended December 31,
|                                                                      |  | 2002                    |       |   | 2001 |  
|                                                                     
|Net cash from (used in) operating activities of continuing operations |  | $                       | (794  | ) |      | $ | 405   |  
|Net cash used in investing activities of continuing operations        |  |                         | (263  | ) |      |   | (778  | )
|Net cash from financing activities of continuing operations           |  |                         | 968   |   |      |   | 2,951 |  
|Effect of foreign exchange rate changes on cash and cash equivalents  |  |                         | 74    |   |      |   | (10   | )
|                                                                     
|Net cash from (used in) continuing operations                         |  |                         | (15   | ) |      |   | 2,568 |  
|Net cash from (used in) discontinued operations                       |  |                         | 371   |   |      |   | (678  | )
|                                                                     
|Net increase in cash and cash equivalents                             |  |                         | 356   |   |      |   | 1,890 |  
|Cash and cash equivalents at beginning of year  net                  |  |                         | 3,457 |   |      |   | 1,567 |  
|                                                                     
|Cash and cash equivalents at end of year  net                        |  | $                       | 3,813 |   |      | $ | 3,457 |  
|                                                                     

During 2002 and 2001, we took actions to strengthen our cash and liquidity
positions. As of December 31, 2002, our primary source of liquidity is our
current cash and cash equivalents, or cash. At December 31, 2002, we had cash
of $3,813, excluding $249 of restricted cash. We believe this cash will be
sufficient to fund our current business model, manage our investments and meet
our customer commitments for at least the next 12 months. However, if capital
spending by service providers and other customers declines more significantly
than we currently expect, we may be required to adjust our current business
model. As a result, our revenues and cash flows may be materially lower than
we expect and we may be required to further reduce our capital expenditures and
investments or take other measures in order to meet our cash requirements. We
may seek additional funds from liquidity-generating transactions and other
conventional sources of external financing (which may include a variety of
debt, convertible debt and/or equity financings). We cannot provide any
assurance that our net cash requirements will be as we currently expect, that
we will continue to have access to our credit facilities when and as needed, or
that liquidity-generating transactions or financings will be available to us on
acceptable terms or at all.

Cash flows used in operating activities were $794 due to a net loss of
$3,039, less an adjustment of $1,803 for non-cash related items, plus a net
cash inflow of $442 from operating assets and liabilities. The reduction in
income tax was

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primarily due to the collection of $1,385 in income tax refunds
during the period. Any future income tax payments are expected to be minimal
versus historical levels until we utilize our available income tax loss
carryforwards and tax credits. The reduction in the remaining operating assets
and liabilities was primarily due to the continued decline in sales volumes and
the associated size of the business, as well as the utilization of certain
contract manufacturer and supplier provisions and restructuring provisions.

Cash flows used in investing activities were $263 and were primarily due
to: an increase of $231 in restricted cash held as cash collateral for certain
customer bid and performance bonds and contracts; and expenditures for plant
and equipment of $335. These amounts were partially offset by: proceeds on
disposal of certain plant and equipment of $236, mainly related to the sale of
certain real estate in the United Kingdom; a net decrease of $35 in our
long-term receivables; and net proceeds on the sale/acquisition of investments
and businesses of $32, primarily related to the sale of certain assets of our
Service Commerce operation support system business. In 2003, we expect that
our expenditures for plant and equipment will be similar in amount to 2002.

Cash flows generated from financing activities were $968 and were
primarily due to $1,472 received from Nortel Networks Corporation in return for
2 common shares, relating to the proceeds from its June 12, 2002 equity
offerings, and $815 received from Nortel Networks Corporation in return for an
additional 2 common shares. These amounts were partially offset by a stock option fair value increment of $525, which was a payment made
by one of our subsidiaries to Nortel Networks Corporation representing the
difference between the market value of Nortel Networks Corporation common
shares issued upon option exercises and the exercise price of Nortel Networks
Corporation stock options exercised by employees of the subsidiary; net cash of
$445 used to reduce our long-term debt; a net reduction of $318 in notes payable;
and $22 in preferred share dividends.

Uses of liquidity

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



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

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

Obligations under special charges

The remaining cash payments of $416 relating to workforce reduction
initiatives are expected to be substantially completed by the end of 2003. The
remaining cash payments of $668 related to contract settlement and lease costs
are expected to be substantially completed by the end of 2006. Additional
charges will be required in 2003 related to our remaining announced workforce
reductions and related charges. We expect restructuring related cash outflows
of approximately $900 in 2003.

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Contractual cash obligations

|                                   |  |              |     |  |       |   |     |      |  |   |      |  |  |      |       |  |            |   |     |             |  |   |       |  |  |   |       | 
|---------------------------------- |  | ------------ | --- |  | ----- | - | --- | ---- |  | - | ---- |  |  | ---- | ----- |  | ---------- | - | --- | ----------- |  | - | ----- |  |  | - | ----- | 
|                                  
|                                   |  | Payments due |     |  |       |   |    
|                                   |  |              |     |  | Total |  
|Contractual cash obligations(a)    |  | 2003         |     |  | 2004  |   |     | 2005 |  |   | 2006 |  |  | 2007 |       |  | Thereafter |   |     | Obligations | 
|                                  
|Long-term debt                     |  | $            | 233 |  |       | $ | 20  |      |  | $ |     |  |  | $    | 1,465 |  |            | $ |    |             |  | $ | 434   |  |  | $ | 2,152 | 
|Outsourcing contracts              |  |              | 291 |  |       |   | 273 |      |  |   | 270  |  |  |      | 268   |  |            |   | 265 |             |  |   | 263   |  |  |   | 1,630 | 
|Operating leases                   |  |              | 305 |  |       |   | 220 |      |  |   | 195  |  |  |      | 144   |  |            |   | 117 |             |  |   | 690   |  |  |   | 1,671 | 
|Unconditional purchase obligations |  |              | 80  |  |       |   | 30  |      |  |   |     |  |  |      |      |  |            |   |    |             |  |   |      |  |  |   | 110   | 
|                                  
|Total contractual obligations      |  | $            | 909 |  |       | $ | 543 |      |  | $ | 465  |  |  | $    | 1,877 |  |            | $ | 382 |             |  | $ | 1,387 |  |  | $ | 5,563 | 
|                                  

|(a) |  | Contractual cash obligations do not include provisioned lease costs as they were included in our special charges
|--- |  | ----------------------------------------------------------------------------------------------------------------

On October 1, 2002, we repaid the $300 6.88% Notes due October 1, 2002,
including accrued interest, as part of our normal course debt repayments. Also
during 2002, we purchased $36 of our 6.00% Notes due September 1, 2003 and $186
of our 6.125% Notes due February 15, 2006. In 2002, we have made all required
cash contributions to our registered pension plans as well as additional
voluntary contributions, totaling approximately $150. In 2003, we plan to
repay the remaining $164 of our 6.00% Notes due September 1, 2003.

Commitments and guarantees

Bid and performance related bonds

We enter into bid and performance related bonds in connection with various
contracts. These contracts generally have terms ranging from two to five
years. Performance related bonds generally have a term of about twelve months
and are typically renewed, as required, over the term of the applicable
contract. Bid bonds generally have a much shorter term than performance
related bonds, depending on the length of the bid period for the applicable
contract. Any potential payments that we would be required to make are related
to our performance under the applicable contract. The following table
provides information related to these types of bonds:

|                                     |  |                    |     |  |      |   |       | 
|------------------------------------ |  | ------------------ | --- |  | ---- | - | ----- | 
|                                    
|                                     |  | As at December 31,
|Bid and performance related bonds(a) |  | 2002               |     |  | 2001
|                                    
|Performance guarantees(b)            |  | $                  | 362 |  |      | $ | 1,170 | 
|                                    

|(a) |  | Represents available and undrawn commitments as at December 31, 2002 and December 31, 2001                            
|--- |  | ----------------------------------------------------------------------------------------------------------------------
|(b) |  | $249 in cash and cash equivalents was restricted as cash collateral and is excluded from the December 31, 2002 balance

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

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

Our support facility with EDC provides support for certain of our
obligations under bid and performance related bonds and may reduce the
requirement for us to provide cash collateral to support these obligations.
Although this facility provides for up to $750 in support, only $300 is
committed support for these bonds (within certain parameters). In addition,
any bid or performance related bonds with terms that extend beyond June 30,
2004, which is the expiry date of this facility, are currently not eligible for
the support provided by this facility. Unless EDC agrees to an extension of
the facility or agrees

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to provide support in respect of any such bid or
performance related bonds on a case-by-case basis outside the scope of the
facility, we may be required to provide cash collateral to support these
obligations. In addition to the support facility with EDC, our existing
security agreements permit us to secure additional obligations under bid and
performance related bonds with the assets pledged under the security agreements
and to provide cash collateral as security for these types of bonds. See
Available credit and support facilities for additional information on this
support facility and the security agreements.

Third party debt agreements

In the normal course of business, we have guaranteed the debt of certain
customers. These third party debt agreements require us to make debt payments
throughout the term of the related debt instrument if the customer fails to
make a scheduled payment.

The following table provides information related to our third party debt
agreements:

|                               |  |                    |    |  |      |   |    | 
|------------------------------ |  | ------------------ | -- |  | ---- | - | -- | 
|                              
|                               |  | As at December 31,
|Third party debt agreements(a) |  | 2002               |    |  | 2001 |  
|                              
|Financial guarantees           |  | $                  | 13 |  |      | $ | 12 | 
|                              

|(a) |  | Represents available and undrawn commitments as at December 31, 2002 and December 31, 2001
|--- |  | ------------------------------------------------------------------------------------------

Historically, we have not had to make material payments and currently, we
do not anticipate that we will be required to make material payments under
these debt instruments. See Guarantees and commitments in note 12 of the
accompanying consolidated financial statements for additional information.

Supply and network outsourcing contracts

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



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

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

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

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Customer financing

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

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

|                                 |  |                    |       |   |      |   |       |  
|-------------------------------- |  | ------------------ | ----- | - | ---- | - | ----- | -
|                                
|                                 |  | As at December 31,
|                                 |  | 2002               |       |   | 2001
|                                
|Drawn and outstanding  gross(a) |  | $                  | 1,091 |   |      | $ | 1,351 |  
|Related provisions               |  |                    | (799  | ) |      |   | (887  | )
|                                
|Drawn and outstanding (net)      |  |                    | 292   |   |      |   | 464   |  
|Undrawn commitments              |  |                    | 801   |   |      |   | 1,611 |  
|                                
|Total customer financing         |  | $                  | 1,093 |   |      | $ | 2,075 |  
|                                

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

We currently have customer financing commitments and/or balances
outstanding in connection with the construction of new networks, including 3G
wireless networks. Although we may commit to provide customer financing to
customers in areas that are strategic to our core businesses, we remain focused
on reducing our overall customer financing exposures consistent with our
financing agreements. During 2002, we reduced undrawn commitments by $810
reflecting commitment expiration, cancellations and changing customer business
plans. In addition to being highly selective in providing customer
financing, we have programs in place to monitor and mitigate customer
credit risk, including performance milestones and other conditions of funding.
Management is focused on the strategic use of our customer financing capacity
and on reducing the amount of our existing and future customer financing
exposure.

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

In 2001 and 2002, our ability to place customer financing with third-party
lenders was significantly reduced primarily due to:



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

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

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Joint ventures/minority interests

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

For additional information, see Guarantees and commitments in note 12 of
the accompanying consolidated financial statements.

Discontinued operations

As of December 31, 2002, the remaining accruals of the discontinued access
solutions operations totaled $44 and were related to future contractual
obligations and estimated liabilities, and estimated operating losses during
the planned period of disposition. The remaining accruals are expected to be
substantially drawn down by cash payments over the period of disposition, the
impact of which is expected to be partially offset by proceeds from the sale of
certain remaining assets. During 2002, we generated cash of approximately $82
on the disposition of various assets from the access solutions operations.

For additional information related to our discontinued operations, see
Discontinued operations in note 17 of the accompanying consolidated financial
statements.

Sources of liquidity

Available credit and support facilities

We currently have $750 in available and undrawn credit facilities which
expire in April 2005. These credit facilities were entered into on April 12,
2000 by us and Nortel Networks Inc. and permit borrowings for general corporate
purposes. As of December 31, 2002, there were no outstanding balances under
our available credit facilities.

The following table summarizes our credit facilities:

|                                               |  |                    |     |  |      |   |       | 
|---------------------------------------------- |  | ------------------ | --- |  | ---- | - | ----- | 
|                                              
|                                               |  | As at December 31,
|                                               |  | 2002               |     |  | 2001
|                                              
|December 2001 364-day credit facilities        |  | $                  |    |  |      | $ | 1,575 | 
|April 2000 five year credit facilities         |  |                    | 750 |  |      |   | 750   | 
|April 2002 364-day revolving credit facilities |  |                    |    |  |      |   | 1,750 | 
|                                              
|Total available credit facilities              |  | $                  | 750 |  |      | $ | 4,075 | 
|                                              

The $750 April 2000 five year credit facilities contain a financial
covenant requiring that our consolidated tangible net worth at any time be not
less than $1,888. As of December 31, 2002, we were in compliance with this
covenant. We continue to monitor our financial position in light of this
covenant and if we continue to incur net losses or record additional charges
relating to our restructuring work plan, the accounting of our registered
pension plans, the valuation of deferred income tax assets or for other events,
our consolidated tangible net worth may be reduced below the $1,888 threshold.
If we are unable to comply with the consolidated tangible net worth covenant,
we will be unable to access the $750 April 2000 five year credit facilities.

On December 13, 2002, Nortel Networks Corporation announced amendments to
our security agreements to facilitate our future financial flexibility. These
security agreements pledge substantially all of our assets in favor of certain

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lenders and the holders of our outstanding public debt. The amendments, among
other things, permit us to secure additional obligations with the assets
pledged under the security agreements. These additional obligations include
those under the support facility with EDC and other indemnity, guarantee and
reimbursement obligations with respect to letters of credit, letters of
guarantee, performance bonds, surety bonds, indemnification arrangements and
other instruments. As part of the amendments to the security agreements, we
terminated the $1,175 April 2002 364-day revolving credit facilities that would
have expired in April 2003. These credit facilities had previously been
amended and extended, and reduced in size from $1,750 to $1,175 on April 8,
2002. Also on December 13, 2002, our $1,510 December 2001 364-day credit
facilities expired and were not extended. During 2002, we sold certain real
estate in the United Kingdom, which resulted in reductions in the available
commitments under the December 2001 364-day credit facilities from $1,575 to
$1,510.

On February 14, 2003, we entered into an agreement with EDC regarding
arrangements to provide support, on a secured basis, of certain of our
contingent obligations arising out of normal course business activities,
including letters of credit, letters of guarantee, indemnity arrangements,
performance bonds, surety bonds, receivables sales, securitizations, and
similar instruments issued or entered into for our benefit. This facility,
which expires on June 30, 2004, provides for up to $750 in performance-related
support and is comprised of:



| |  |  | up to $300 of committed support for performance bonds (within certain parameters);                      
| | - |  | --------------------------------------------------------------------------------------------------------
| |  |  | up to $150 of uncommitted support for receivables sales/securitizations; and                            
| |  |  | up to $300 of additional uncommitted support for performance bonds and receivable sales/securitizations.

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

Any amounts that are drawn under the $750 April 2000 five year credit
facilities and all of the obligations under the support facility with EDC, our
current outstanding public debt and our guarantee of Nortel Networks
Corporations 4.25% convertible senior notes, or the Senior Notes, are secured
equally and ratably with each other. The security provided under the security
agreements is comprised of:



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

The security agreements were entered into in connection with the $1,510
December 2001 364-day credit facilities, which have expired. The security
became effective in the second quarter of 2002, following Moodys downgrade of
our senior long-term debt rating to below investment grade. At that time, the
security became effective in respect of the $1,510 December 2001 364-day credit
facilities, as well as any other credit facilities and outstanding public debt
which, by their terms, required that the security also apply to them. This
included the $1,175 April 2002 364-day revolving credit facilities, which we
have terminated, the $750 April 2000 five year credit facilities, our
outstanding public debt and our guarantee of the Senior Notes.

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

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For additional information relating to our outstanding public debt and the
$750 April 2000 five year credit facilities, see Long-term debt and credit
facilities in note 10 of the accompanying consolidated financial statements.
For additional information relating to our guarantee of the Senior Notes, see
Related party transactions in note 18 of the accompanying consolidated
financial statements. For additional information relating to the support
facility with EDC, see Subsequent events in note 20 of the accompanying
consolidated financial statements. For additional financial information
related to those subsidiaries providing guarantees, see Supplemental
consolidating financial information in note 21 of the accompanying
consolidated financial statements. For information relating to our debt
ratings, see Credit ratings below. See Forward-looking statements for
factors that may affect our ability to comply with covenants and conditions in
our credit and support facilities in the future.

Shelf registration statement and base shelf prospectus

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

At the same time as the filing of the shelf registration statement and
base shelf prospectus, Nortel Networks Limited and its financing subsidiary
withdrew a shelf registration statement filed with the United States Securities
and Exchange Commission under which they were previously eligible to issue up
to $1,000 in debt securities and warrants to purchase debt securities.

Credit ratings

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

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

Preferred Shares

Nortel Networks Corporation, as the sole holder of the common shares of
Nortel Networks Limited, approved reductions in the legal stated capital of the
common shares of Nortel Networks Limited in the amount of $3,187 in 2002 and
$16,800 in 2001. Among other things, these reductions enhance our ability to
continue to declare and pay dividends on our outstanding preferred shares under
applicable Canadian corporate laws.

Beginning December 1, 2001, the holders of our Cumulative Redeemable Class
A Preferred Shares Series 5, or Series 5 preferred shares, are entitled (if
declared) to a monthly floating cumulative preferential cash dividend based on
the average prime rate of two Canadian banks. Prior to that time, the holders
were entitled to an annual fixed cumulative preferential cash dividend of
Canadian $1.275 per share (5.1%), which was payable on a quarterly basis up to
November 30,

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2001. Also, as of December 1, 2001, the holders of the Series 5
preferred shares had the right to convert their shares into Cumulative
Redeemable Class A Preferred Shares Series 6, or Series 6 preferred shares,
provided that a minimum number of Series 5 preferred shares were tendered for
conversion. This condition was not satisfied and, as a result, no Series 6
preferred shares were issued. Holders of Series 6 preferred shares would have
been entitled to an annual fixed cumulative preferential cash dividend of
Canadian $0.821 per share (3.284%), payable (if declared) on a quarterly basis.
The Series 5 shares are redeemable at our option any time after December 1,
2001, at Canadian $25.50 per share, plus any declared and unpaid dividends.
The next opportunity for conversion of Series 5 preferred shares into Series 6
preferred shares will be as of December 1, 2006.

Beginning December 1, 2002, the holders of our Non-cumulative Redeemable
Class A Preferred Shares Series 7, or Series 7 preferred shares, are entitled
(if declared) to a monthly floating non-cumulative preferential cash dividend
based on the average prime rate of two Canadian banks. Prior to that time, the
holders were entitled to an annual fixed non-cumulative preferential cash
dividend of Canadian $1.225 per share (4.9%), which was payable on a quarterly
basis up to November 30, 2002. Also, as of December 1, 2002, the holders of
Series 7 preferred shares had the right to convert their shares into

Non-cumulative Redeemable Class A Preferred Shares Series 8, or Series 8
preferred shares, provided that a minimum number of Series 7 preferred shares
were tendered for conversion. This condition was not satisfied and, as a
result, no Series 8 preferred shares were issued. Holders of Series 8
preferred shares would have been entitled to an annual fixed non-cumulative
preferential cash dividend of Canadian $0.84725 per share (3.389%), payable (if
declared) on a quarterly basis. The Series 7 Shares are redeemable at our
option any time after December 1, 2002, at Canadian $25.50 per share, plus any
declared and unpaid dividends. The next opportunity for conversion of Series 7
preferred shares into Series 8 preferred shares will be as of December 1, 2007.

For additional information about our preferred shares, see Capital stock
in note 14 of the accompanying consolidated financial statements.

Debt to capitalization ratio

The total debt to total capitalization ratio of Nortel Networks was 35% at
December 31, 2002, compared to 34% at December 31, 2001. The ratio reflects
the increase in our deficit, partially offset by the $1,472 in common share
equity received from Nortel Networks Corporation, in connection with the equity
offerings on June 12, 2002.

See our Forward-looking statements for factors that may impact our
liquidity and capital resources.




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

Off-balance sheet arrangements

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

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

Certain lease financing transactions are structured through single
transaction special purpose entities that currently do not have sufficient
equity at risk as defined in FIN 46. In addition, we retain certain risks
associated with guaranteeing recovery of between 75 percent and 88 percent of
the unamortized principal balance of debt which is expected to represent the
majority of the risks associated with the special purpose entities activities.
This percentage will be adjusted over time as the underlying debt matures.
Therefore, we expect that unless the existing arrangements are modified prior
to July 1, 2003, we will be required to consolidate the assets, liabilities and
any non-controlling interests of these special purpose entities

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effective July
1, 2003. The total assets and total liabilities held by these entities at
December 31, 2002 were approximately $176 and $176 respectively.

Contractual obligations

The following table summarizes our contractual obligations over the
periods noted below:

|                                   |  |              |     |       |      |   |     |      |  |   |      |  |  |      |       |  |            |   |     |             |  |   |       |  |  |   |       | 
|---------------------------------- |  | ------------ | --- | ----- | ---- | - | --- | ---- |  | - | ---- |  |  | ---- | ----- |  | ---------- | - | --- | ----------- |  | - | ----- |  |  | - | ----- | 
|                                  
|                                   |  | Payments due |     |       |      |  
|                                   |  |              |     | Total
|Contractual cash obligations(a)    |  | 2003         |     |       | 2004 |   |     | 2005 |  |   | 2005 |  |  | 2007 |       |  | Thereafter |   |     | Obligations
|                                  
|Long-term debt                     |  | $            | 233 |       |      | $ | 20  |      |  | $ |     |  |  | $    | 1,465 |  |            | $ |    |             |  | $ | 434   |  |  | $ | 2,152 | 
|Outsourcing contracts              |  |              | 291 |       |      |   | 273 |      |  |   | 270  |  |  |      | 268   |  |            |   | 265 |             |  |   | 263   |  |  |   | 1,630 | 
|Operating leases                   |  |              | 305 |       |      |   | 220 |      |  |   | 195  |  |  |      | 144   |  |            |   | 117 |             |  |   | 690   |  |  |   | 1,671 | 
|Unconditional purchase obligations |  |              | 80  |       |      |   | 30  |      |  |   |     |  |  |      |      |  |            |   |    |             |  |   |      |  |  |   | 110   | 
|                                  
|Total contractual obligations      |  | $            | 909 |       |      | $ | 543 |      |  | $ | 465  |  |  | $    | 1,877 |  |            | $ | 382 |             |  | $ | 1,387 |  |  | $ | 5,563 | 
|                                  

|(a) |  | Contractual cash obligations do not include provisioned lease costs as they were included in our special charges
|--- |  | ----------------------------------------------------------------------------------------------------------------

Contingent liabilities and commitments

Customer financing commitments

In certain instances, we are committed to provide future financing to
certain customers in connection with their purchases of our products and
services. The undrawn commitments were $801 at December 31, 2002 and $1,611 at
December 31, 2001. Commitments to extend future financing generally have
conditions for funding, fixed expiration or termination dates and specific
interest rates and purposes. Based on the terms of the existing agreements, we
expect that a substantial amount of these undrawn commitments will not be
funded in 2003. However, we cannot predict with certainty the extent to which
our customers will satisfy the applicable conditions for funding, and
subsequently request funding, prior to the termination date of the commitments.

Purchase commitments

We have entered into purchase commitments with certain suppliers under
which we commit to buy a minimum amount or percentage of designated products in
exchange for price guarantees or similar concessions. In certain of these
agreements, we may be required to acquire and pay for such products up to the
prescribed minimum or forecasted purchases.

We entered into an arrangement with a minimum purchase commitment of $120
with Bookham Technology plc. The terms of the commitment require us to purchase
$120 of product from Bookham between November 8, 2002 and March 31, 2004.
Should there be a shortfall, we would make a cash payment for a portion of the
balance.

Joint ventures/minority interests

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

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Other contingent liabilities and commitments

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



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

Historically, we have not made any significant payments under any of these
indemnifications or guarantees. In certain cases, due to the nature of the
agreement, we have not been able to estimate our maximum potential loss or the
maximum potential loss has not been specified. However, for those agreements
where we have been able to make an estimate, the maximum amount that we would
be obliged to pay under these indemnifications and guarantees would be $207.

For more information on these contingent liabilities and commitments, you
should refer to Guarantees and commitments in note 12 of the accompanying
consolidated financial statements.




Market risk

Market risk represents the risk of loss that may impact our consolidated
financial statements through adverse changes in financial market prices and
rates. Our market risk exposure results primarily from fluctuations in
interest rates and foreign exchange rates. To manage the risk from these
fluctuations, we enter into various derivative-hedging transactions that we
have authorized under our policies and procedures. We maintain risk management
control systems to monitor market risks and counter-party risks. These systems
rely on analytical techniques including both sensitivity analysis and
value-at-risk estimations. We do not hold or issue financial instruments for
trading purposes.

For a discussion of our accounting policies for derivative financial
instruments, see Significant accounting policies in note 2(s) of the
accompanying consolidated financial statements. Additional disclosure of our
financial instruments is included in Financial instruments and hedging
activities in note 11 of the accompanying consolidated financial statements.

We manage foreign exchange exposures using forward and option contracts to
hedge firm sale and purchase commitments. Our most significant foreign
exchange exposures are in the Canadian dollar, the United Kingdom pound and the
Euro. We enter into United States to Canadian dollar forward and option
contracts intended to hedge the United States to Canadian dollar exposure on
future revenue and expenditure streams. We recognize the gains and losses on
these contracts in income when the hedged transaction occurs.

We expect to continue to expand our business globally and, as such, expect
that an increasing proportion of our business will be denominated in currencies
other than United States dollars. As a result, fluctuations in foreign
currencies may have a material impact on our business, results of operations
and financial condition. We try to minimize the impact of such currency
fluctuations through our ongoing commercial practices and by attempting to
hedge our exposures to major currencies. In attempting to manage this foreign
exchange risk, we identify operations and transactions that may have exposure
based upon the excess or deficiency of foreign currency receipts over foreign
currency expenditures. Our significant currency flows for the year ended
December 31, 2002 were in United States dollars, Canadian dollars, United
Kingdom pounds and the Euro. The net impact of foreign exchange
fluctuations resulted in a gain of $30 in 2002, a loss of $25 in 2001
and a gain of $10 in 2000.
Given our exposure to international markets, we regularly monitor all of our
foreign currency exposures. We cannot predict whether we will incur foreign
exchange losses in the future; however, if significant foreign exchange losses
are experienced, they could have a material adverse effect on our business,
results of operations and financial condition.

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We manage interest rate exposures using a diversified portfolio of fixed
and floating rate instruments denominated in several major currencies. We
manage these exposures using interest rate swaps, which reduce our cost of
financing and the fluctuations in the total interest expense. We record net
settlements on these swap instruments as adjustments to interest expense.

We use sensitivity analysis to measure our foreign currency risk by
computing the potential decrease in cash flows that may result from adverse
changes in foreign exchange rates. The balances are segregated by source
currency, and a hypothetical unfavorable variance in foreign exchange rates of
10% is applied to each net source currency position using year-end rates, to
determine the potential decrease in cash flows over the next year. The
sensitivity analysis includes all foreign currency-denominated cash, short-term
and long-term debt, and derivative instruments that will impact cash flows over
the next year that are held at December 31, 2002 and 2001, respectively. The
underlying cash flows that relate to the hedged firm commitments are not
included in the analysis. The analysis is performed at the reporting date and
assumes no future changes in the balances or timing of cash flows from the
year-end position. Further, the model assumes no correlation in the movement
of foreign exchange rates. Based on a one-year time horizon, a 10% adverse
change in the exchange rates would result in a potential decrease in after-tax
cash flows of $132 as of December 31, 2002 and $91 as of December 31, 2001.
This potential decrease would result primarily from our exposure to the
Canadian dollar, the United Kingdom pound and the Euro.

We also use sensitivity analysis to measure our interest rate risk. As of
December 31, 2002, a 100 basis point adverse change in interest rates would not
have a material effect on our business, results of operations and financial
condition.




Legal proceedings

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

For additional information related our legal proceedings, see
Contingencies in note 19 of the accompanying consolidated financial
statements.




Environmental matters

We are subject to numerous environmental protection laws and regulations
in various jurisdictions around the world, primarily due to our manufacturing
operations. As a result, we are exposed to liabilities and compliance costs
arising from our past and current generation, management and disposition of
hazardous substances and wastes.

We have remedial activities under way at twelve of our facilities which
are either currently occupied or were previously owned or occupied. We have
also been listed as a potentially responsible party at five Superfund sites in
the United States. An estimate of our anticipated remediation costs associated
with all such facilities and sites, to the extent probable and reasonably
estimable, is included in our environmental accruals in an approximate amount
of $30.

For a discussion of Environmental matters, see Contingencies in note 19
of the accompanying consolidated financial statements.

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Forward-looking statements

Certain
statements in this Annual Report on Form 10-K, contain words such as could,
expects, may, anticipates, believes, intends, estimates, plans,
envisions and other similar language and are considered forward-looking
statements. These statements are based on our expectations, estimates,
forecasts and projections about the operating environment, economies and
markets in which we operate. In addition, other written or oral statements
which are considered forward-looking may be made by us or others on our behalf.

These statements are subject to important risks, uncertainties and
assumptions, which are difficult to predict and the actual outcome may be
materially different. Some of the factors which could cause results or events to differ from current expectations
include, but are not limited to, the factors described below. Unless required
by applicable securities laws, we do not have any intention or obligation to
publicly update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise.

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

We continue to restructure our business to realign resources and achieve
desired cost savings. We have based our restructuring efforts on certain
assumptions regarding the cost structure of our business and the nature,
severity and duration of the industry downturn which may or may not be correct.
Our restructuring efforts may not be sufficient for us to achieve
profitability and meet the changes in industry and market conditions. We must
be able to successfully implement our work plan and refine, expand or extend it
if necessary, if we are to reduce our cost structure appropriately to respond
to changing market conditions. We must also manage the potentially higher
growth areas of our business, as well as the non-core areas, in order for us to
achieve a return to profitability.

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

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



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

We have stated that we will continue to review our work plan based on an
ongoing assessment of the industry adjustment.

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

A continued slowdown in capital spending by service providers and other
customers may affect our revenues more than we currently expect. Moreover, the
significant slowdown in capital spending by our customers, coupled with
existing economic and geopolitical uncertainties and the potential impact on
customer demand, has created uncertainty as to market demand. As a result,
revenues and operating results for a particular period can be difficult to
predict. In addition, there can be no certainty as to the severity or duration
of the current industry adjustment. Many of our traditional customers have
already begun to invest in data networking and/or are in the process of
transitioning from voice-only networks to networks which include data traffic.
However, as a result of changes in industry and market conditions, many of our
customers have significantly reduced their capital spending. Our revenues and
operating results have been and may continue to be materially and adversely
affected by the continued reductions in capital spending by our customers. If
the reduction of capital spending continues longer than we expect and we
continue to incur net losses as a result or if we are required to record
additional charges relating to our restructuring work plan, the valuation of
deferred income tax assets or for other events, we may be

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unable to comply with
the financial covenant under our current credit facilities. As well, we have
focused on the larger customers in certain markets, which provide a substantial
portion of our revenues. A reduction or delay in business from one or more of
these customers, or a failure to achieve a significant market share with these
customers, could have a material adverse effect on our business, results of
operations and financial condition.

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

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



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

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

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

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

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

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



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

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

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

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



| |  |  | increased price competition;                                                            
| | - |  | ----------------------------------------------------------------------------------------
| |  |  | excess capacity or excess fixed assets;                                                 
| |  |  | customer and contract settlements;                                                      
| |  |  | higher product, material or labour costs;                                               
| |  |  | increased inventory provisions or contract and customer settlement costs;               
| |  |  | warranty costs;                                                                         
| |  |  | obsolescence charges;                                                                   
| |  |  | loss of cost savings on future inventory purchases as a result of high inventory levels;

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| |  |  | introductions of new products and costs of entering new markets;
| | - |  | ----------------------------------------------------------------
| |  |  | increased levels of customer services;                          
| |  |  | changes in distribution channels; and                           
| |  |  | changes in product and geographic mix.                          

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

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

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

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

Our working capital requirements and cash flows historically have been,
and are expected to continue to be, subject to quarterly and yearly
fluctuations, depending on such factors as timing and size of capital
expenditures, levels of sales, timing of deliveries and collection of
receivables, inventory levels, customer payment terms, customer financing
obligations and supplier terms and conditions. In addition, due to the current
general economic and industry environment, and our current credit condition, an
increased portion of our cash and cash equivalents may be restricted as cash
collateral for customer performance bonds and contracts, notwithstanding our
support facility with EDC. Also, except for the $750 April 2000 five year
credit facilities, all of the credit facilities previously available to us
until December 13, 2002 have either expired or been terminated. We continue to
have ongoing discussions with our banks and other financial institutions to
explore additional financing opportunities and credit and support arrangements.
As we continue to assess our overall liquidity and business needs as well as
our expected financial performance, we may elect or it may be necessary to
reduce or terminate our $750 April 2000 five year credit facilities prior to
their expiries. We believe our cash on hand will be sufficient to fund our
current business model, manage our investments and meet our customer
commitments for at least the next 12 months. However, a greater than expected
slow down in capital spending by service providers and other customers may
require us to adjust our current business model. As a result, our revenues and
cash flows may be materially lower than we expect and we may be required to
further reduce our capital expenditures and investments or take other measures
in order to meet our cash requirements. We may seek additional funds from
liquidity-generating transactions and other conventional sources of external
financing (which may include a variety of debt, convertible debt and/or equity
financings). We cannot provide any assurance that our net cash requirements
will be as we currently expect, that we will continue to have access to the
$750 April 2000 five year credit facilities or the support facility with EDC
when and as needed, or that liquidity-generating transactions or financings
will be available to us on acceptable terms or at all. Our inability to
manage cash flow fluctuations resulting from the above factors and the
potential reduction or termination of our $750 April 2000 five year credit
facilities or the support facility with EDC could have a material adverse
effect on our ability to fund our working capital requirements from operating
cash flows and other sources of liquidity or to achieve our business objectives
in a timely manner.

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

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

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



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

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

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

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

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

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

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

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

We have risks related to our defined benefit plans.

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

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

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

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

We expect that data communications traffic will grow at a faster rate than
the growth expected for voice traffic and that the use of the Internet will
continue to increase. We expect the growth of data traffic and the use of the
Internet will significantly impact traditional voice networks, both wireline
and wireless. We believe that this will create market

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

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

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

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



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

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| |  |  | the risk that our customers or customers of the acquired businesses
may defer purchase decisions as they evaluate the impact of the
acquisitions on our future product strategy;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | the potential loss of key employees of the acquired businesses;                                                                                                                 
| |  |  | the risk that acquired businesses will divert the attention of our
senior management from the operation of our business; and                                                    
| |  |  | the risks of entering new markets in which we have limited experience
and where competitors may have a stronger market presence.                                                

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

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

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

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

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

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

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

Our major competitors in Wireless Networks have traditionally included
Telefonaktiebolagat LM Ericsson, Lucent Technologies Inc., Motorola, Inc.,
Siemens Aktiengesellschaft and Nokia Corporation. More recently, Samsung
Electronics

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

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

We face certain barriers in our efforts to expand internationally.

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



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

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

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

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

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

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

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

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

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

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

The current downturn in the economy has increased, and could continue to
increase, our exposure to our customers credit risk and the risk that our
customers will not be able to fulfill their payment obligations to us under
customer financing arrangements.

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

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

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

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

We have entered into supply contracts with customers to provide products
and services, which in some cases involve new technologies currently being
developed, or which we have not yet commercially deployed, or which require us
to build and operate networks. We have also entered into network outsourcing
contracts with customers to operate their networks. Some of these supply and
network outsourcing contracts contain delivery and installation timetables,
performance criteria and other contractual obligations which, if not met, could
result in our having to pay substantial penalties or liquidated

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damages, the
termination of the related supply or network outsourcing contract, and/or the
reduction of shared revenues, in certain circumstances. Unexpected
developments in these supply and outsourcing contracts could have a material
adverse effect on our revenues, cash flows and relationships with our
customers.

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

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

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

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

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

We and/or Nortel Networks Corporation are currently a defendant in
numerous class actions and other lawsuits, including lawsuits initiated against
Nortel Networks Corporation and certain of its officers and directors on behalf
of holders of Nortel Networks Corporations common shares, which seek damages
of material and indeterminate amounts, as well as lawsuits in the normal course of business. We are and may in the future
be subject to other litigation arising in the normal course of our business.
Litigation may be time consuming, expensive and distracting from the conduct of
our business and the outcome of litigation is difficult to predict. The
adverse resolution of any specific lawsuit could have a material adverse effect
on our business, results of operations and financial condition.




Recent pronouncements

For a discussion of recent pronouncements, see Significant accounting
policies in note 2 of the accompanying financial statements.

70



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ITEM 7A. Quantitative and
Qualitative Disclosures about Market Risk

Refer to Market Risk in Managements Discussion and Analysis of
Financial Condition and Results of Operations.

71



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ITEM 8.     Consolidated Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                |  |      |      | 
|----------------------------------------------- |  | ---- | ---- | 
|                                                |  | Page
|                                                |  |     
|Independent Auditors Report                    |  |      | F-1  | 
|                                               
|Consolidated Statements of Operations           |  |      | F-2  | 
|                                               
|Consolidated Balance Sheets                     |  |      | F-3  | 
|                                               
|Consolidated Statements of Shareholders Equity |  |      | F-4  | 
|                                               
|Consolidated Statements of Cash Flows           |  |      | F-5  | 
|                                               
|Notes to Consolidated Financial Statements      |  |      | F-6  | 
|                                               
|Quarterly Financial Data (Unaudited)            |  |      | F-63 | 

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INDEPENDENT AUDITORS REPORT

To the Shareholders of Nortel Networks Limited

We have audited the accompanying consolidated balance sheets of Nortel Networks
Limited and its subsidiaries (Nortel Networks) as at December 31, 2002 and
2001 and the related consolidated statements of operations, shareholders
equity and cash flows for each of the years in the three-year period ended
December 31, 2002. These financial statements are the responsibility of Nortel
Networks management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Nortel Networks as at December 31,
2002 and 2001 and the results of its operations and its cash flows for each of
the years in the three-year period ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States of America.

As discussed in note 3 to the consolidated financial statements, effective
January 1, 2002, Nortel Networks changed its method of accounting for goodwill
in accordance with Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets.

On February 10, 2003, except for note 19, which is as of February 14, 2003 we
reported separately to the shareholders of Nortel Networks on consolidated
financial statements for the same periods, audited in accordance with Canadian
generally accepted auditing standards and prepared in accordance with Canadian
generally accepted accounting principles.



/s/ Deloitte & Touche LLP

Chartered Accountants

Toronto, Canada
February 10, 2003, except for note 20, which is as of February 14, 2003

F-1



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##### Table of Contents



NORTEL NETWORKS LIMITED
Consolidated Statements of Operations for the years ended December 31

|                                                                                  |                       |      |        |       |   |      |         |       |   |   |        |       |  
|--------------------------------------------------------------------------------- | --------------------- | ---- | ------ | ----- | - | ---- | ------- | ----- | - | - | ------ | ----- | -
|                                                                                 
|(millions of U.S. dollars)                                                        |                       | 2002 |        | 2001  |   | 2000
|                                                                                 
|Revenues                                                                          |                       | $    | 10,546 |       |   | $    | 17,375  |       |   | $ | 27,853 |      
|Cost of revenues                                                                  |                       |      | 7,145  |       |   |      | 14,241  |       |   |   | 15,069 |      
|                                                                                 
|Gross profit                                                                      |                       |      | 3,401  |       |   |      | 3,134   |       |   |   | 12,784 |      
|                                                                                 
|Selling, general and administrative expense (excluding stock option
compensation) |                       |      | 2,662  |       |   |      | 5,815   |       |   |   | 5,371  |      
|Research and development expense                                                  |                       |      | 2,228  |       |   |      | 3,230   |       |   |   | 3,626  |      
|In-process research and development expense                                       |                       |      |       |       |   |      |        |       |   |   | 623    |      
|Amortization of intangibles                                                       |                       |      |        |       |   |      |         |       |   |   |        |      
|                                                                                  | Acquired technology   |      |        | 20    |   |      |         | 574   |   |   |        | 789   |  
|                                                                                  | Goodwill              |      |        |      |   |      |         | 2,082 |   |   |        | 2,492 |  
|Stock option compensation                                                         |                       |      |       |       |   |      |        |       |   |   | 99     |      
|Special charges                                                                   |                       |      |        |       |   |      |         |       |   |   |        |      
|                                                                                  | Goodwill impairment   |      |        | 264   |   |      |         | 2,239 |   |   |        | 133   |  
|                                                                                  | Other special charges |      |        | 1,552 |   |      |         | 3,204 |   |   |        | 134   |  
|Gain on sale of businesses                                                        |                       |      | (22    | )     |   |      | (125    | )     |   |   | (174   | )    
|                                                                                 
|Operating loss                                                                    |                       |      | (3,303 | )     |   |      | (13,885 | )     |   |   | (309   | )    
|                                                                                 
|Equity in net loss of associated companies                                        |                       |      | (9     | )     |   |      | (134    | )     |   |   | (29    | )    
|Other income (expense)  net                                                      |                       |      | (2     | )     |   |      | (325    | )     |   |   | 835    |      
|Interest expense                                                                  |                       |      |        |       |   |      |         |       |   |   |        |      
|                                                                                  | Long-term debt        |      |        | (131  | ) |      |         | (165  | ) |   |        | (86   | )
|                                                                                  | Other                 |      |        | (41   | ) |      |         | (119  | ) |   |        | (82   | )
|                                                                                 
|(Loss) earnings from continuing operations before income taxes                    |                       |      | (3,486 | )     |   |      | (14,628 | )     |   |   | 329    |      
|Income tax benefit (provision)                                                    |                       |      | 447    |       |   |      | 3,073   |       |   |   | (1,200 | )    
|                                                                                 
|Net loss from continuing operations                                               |                       |      | (3,039 | )     |   |      | (11,555 | )     |   |   | (871   | )    
|Net loss from discontinued operations  net of tax                                |                       |      |       |       |   |      | (2,538  | )     |   |   | (414   | )    
|                                                                                 
|Net loss before cumulative effect of accounting change                            |                       |      | (3,039 | )     |   |      | (14,093 | )     |   |   | (1,285 | )    
|Cumulative effect of accounting change  net of tax                               |                       |      |       |       |   |      | 15      |       |   |   |       |      
|                                                                                 
|Net loss                                                                          |                       |      | (3,039 | )     |   |      | (14,078 | )     |   |   | (1,285 | )    
|Dividends on preferred shares                                                     |                       |      | 22     |       |   |      | 27      |       |   |   | 31     |      
|                                                                                 
|Net loss applicable to common shares                                              |                       | $    | (3,061 | )     |   | $    | (14,105 | )     |   | $ | (1,316 | )    
|                                                                                 

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

F-2



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NORTEL NETWORKS LIMITED
Consolidated Balance Sheets as at December 31

|                                                                    |                                                                                  |      |         |       |  |   |         |       | 
|------------------------------------------------------------------- | -------------------------------------------------------------------------------- | ---- | ------- | ----- |  | - | ------- | ----- | 
|                                                                   
|(millions of U.S. dollars)                                          |                                                                                  | 2002 |         | 2001 
|                                                                   
|ASSETS                                                              |                                                                                  |      |         |       |  |   |         |      
|Current assets                                                      |                                                                                  |      |         |       |  |   |         |      
|                                                                    | Cash and cash equivalents                                                        |      | $       | 3,813 |  |   | $       | 3,457 | 
|                                                                    | Restricted cash and cash equivalents                                             |      |         | 249   |  |   |         |      | 
|                                                                    | Accounts receivable (less provisions of $477 for 2002, $655 for 2001)            |      |         | 1,993 |  |   |         | 2,923 | 
|                                                                    | Inventories  net                                                                |      |         | 889   |  |   |         | 1,563 | 
|                                                                    | Income taxes recoverable                                                         |      |         | 58    |  |   |         | 790   | 
|                                                                    | Deferred income taxes  net                                                      |      |         | 793   |  |   |         | 1,401 | 
|                                                                    | Other current assets                                                             |      |         | 494   |  |   |         | 847   | 
|                                                                    | Current assets of discontinued operations                                        |      |         | 212   |  |   |         | 698   | 
|                                                                   
|Total current assets                                                |                                                                                  |      | 8,501   |       |  |   | 11,679  |      
|                                                                   
|Investments at cost and associated companies at equity              |                                                                                  |      | 246     |       |  |   | 263     |      
|Plant and equipment  net                                           |                                                                                  |      | 1,441   |       |  |   | 2,459   |      
|Goodwill                                                            |                                                                                  |      | 2,021   |       |  |   | 2,283   |      
|Intangible assets  net                                             |                                                                                  |      |        |       |  |   | 20      |      
|Deferred income taxes  net                                         |                                                                                  |      | 2,797   |       |  |   | 2,106   |      
|Other assets                                                        |                                                                                  |      | 747     |       |  |   | 1,183   |      
|                                                                   
|Total assets                                                        |                                                                                  | $    | 15,753  |       |  | $ | 19,993  |      
|                                                                   
|LIABILITIES AND SHAREHOLDERS EQUITY                                |                                                                                  |      |         |       |  |   |         |      
|Current liabilities                                                 |                                                                                  |      |         |       |  |   |         |      
|                                                                    | Notes payable                                                                    |      | $       | 100   |  |   | $       | 426   | 
|                                                                    | Trade and other accounts payable                                                 |      |         | 931   |  |   |         | 1,638 | 
|                                                                    | Payroll and benefit-related liabilities                                          |      |         | 513   |  |   |         | 613   | 
|                                                                    | Contractual liabilities                                                          |      |         | 1,546 |  |   |         | 1,841 | 
|                                                                    | Restructuring                                                                    |      |         | 761   |  |   |         | 871   | 
|                                                                    | Other accrued liabilities                                                        |      |         | 2,803 |  |   |         | 3,772 | 
|                                                                    | Long-term debt due within one year                                               |      |         | 233   |  |   |         | 384   | 
|                                                                   
|Total current liabilities                                           |                                                                                  |      | 6,887   |       |  |   | 9,545   |      
|                                                                   
|Long-term debt                                                      |                                                                                  |      | 1,919   |       |  |   | 2,293   |      
|Deferred income taxes  net                                         |                                                                                  |      | 366     |       |  |   | 477     |      
|Other liabilities                                                   |                                                                                  |      | 2,351   |       |  |   | 1,605   |      
|Minority interest in subsidiary companies                           |                                                                                  |      | 78      |       |  |   | 100     |      
|                                                                   
|                                                                    |                                                                                  |      | 11,601  |       |  |   | 14,020  |      
|                                                                   
|Guarantees, commitments and contingencies (notes 12 and 19)         |                                                                                  |      |         |       |  |   |         |      
|                                                                   
|SHAREHOLDERS EQUITY                                                |                                                                                  |      |         |       |  |   |         |      
|Preferred shares, without par value  Authorized shares: unlimited; |                                                                                  |      |         |       |  |   |         |      
|                                                                    | Issued and outstanding shares: 30,000,000 for 2002 and 30,000,000 for 2001       |      |         | 536   |  |   |         | 536   | 
|Common shares, without par value  Authorized shares: unlimited;    |                                                                                  |      |         |       |  |   |         |      
|                                                                    | Issued and outstanding shares: 1,460,978,638 for 2002 and 1,460,978,634 for 2001 |      |         | 1,211 |  |   |         | 2,111 | 
|Additional paid-in capital                                          |                                                                                  |      | 21,991  |       |  |   | 18,797  |      
|Deficit                                                             |                                                                                  |      | (18,093 | )     |  |   | (14,507 | )    
|Accumulated other comprehensive loss                                |                                                                                  |      | (1,493  | )     |  |   | (964    | )    
|                                                                   
|Total shareholders equity                                          |                                                                                  |      | 4,152   |       |  |   | 5,973   |      
|                                                                   
|Total liabilities and shareholders equity                          |                                                                                  | $    | 15,753  |       |  | $ | 19,993  |      
|                                                                   

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

F-3



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##### Table of Contents



NORTEL NETWORKS LIMITED
Consolidated Statements of Shareholders Equity

|                                      |                                      |                                                                              |        |         |        |      |         |         |         |   |        |        |        |  
|------------------------------------- | ------------------------------------ | ---------------------------------------------------------------------------- | ------ | ------- | ------ | ---- | ------- | ------- | ------- | - | ------ | ------ | ------ | -
|                                     
|(millions of U.S. dollars)            |                                      | 2002                                                                         |        | 2001    |        | 2000
|                                     
|Preferred shares                      |                                      |                                                                              |        |         |        |      |         |         |         |   |        |       
|                                      | Balance at the beginning of the year |                                                                              | $      | 536     |        |      | $       | 609     |         |   | $      | 609    |       
|                                      |                                      | Conversion of series 4 preferred shares                                      |        |         |       |      |         |         | (73     | ) |        |        |       |  
|                                     
|                                      | Balance at the end of the year       |                                                                              | $      | 536     |        |      | $       | 536     |         |   | $      | 609    |       
|                                     
|Common shares                         |                                      |                                                                              |        |         |        |      |         |         |         |   |        |       
|                                      | Balance at the beginning of the year |                                                                              | $      | 2,111   |        |      | $       | 17,024  |         |   | $      | 11,745 |       
|                                      |                                      | Common shares issued  net                                                   |        |         | 2,287  |      |         |         | 1,800   |   |        |        | 206    |  
|                                      |                                      | Common shares issued for acquisitions  net                                  |        |         |       |      |         |         | 26      |   |        |        | 4,922  |  
|                                      |                                      | Fair value and costs associated with assumed options and stock purchase plan |        |         |       |      |         |         |        |   |        |        | 151    |  
|                                      |                                      | Conversion of series 4 preferred shares                                      |        |         |       |      |         |         | 61      |   |        |        |       |  
|                                      |                                      | Reduction of legal stated capital                                            |        |         | (3,187 | )    |         |         | (16,800 | ) |        |        |       |  
|                                     
|                                      | Balance at the end of the year       |                                                                              | $      | 1,211   |        |      | $       | 2,111   |         |   | $      | 17,024 |       
|                                     
|Additional paid-in capital            |                                      |                                                                              |        |         |        |      |         |         |         |   |        |       
|                                      | Balance at the beginning of the year |                                                                              | $      | 18,797  |        |      | $       | 1,878   |         |   | $      | 794    |       
|                                      |                                      | Additions resulting from acquisitions                                        |        |         |       |      |         |         |        |   |        |        | 805    |  
|                                      |                                      | Fair value and costs associated with assumed options and stock purchase plan |        |         |       |      |         |         |        |   |        |        | (168   | )
|                                      |                                      | Conversion of series 4 preferred shares                                      |        |         |       |      |         |         | 12      |   |        |        |       |  
|                                      |                                      | Reduction of legal stated capital                                            |        |         | 3,187  |      |         |         | 16,800  |   |        |        |       |  
|                                      |                                      | Tax benefit associated with stock options                                    |        |         | 13     |      |         |         | 105     |   |        |        | 447    |  
|                                      |                                      | Other                                                                        |        |         | (6     | )    |         |         | 2       |   |        |        |       |  
|                                     
|                                      | Balance at the end of the year       |                                                                              | $      | 21,991  |        |      | $       | 18,797  |         |   | $      | 1,878  |       
|                                     
|Retained earnings (deficit)           |                                      |                                                                              |        |         |        |      |         |         |         |   |        |       
|                                      | Balance at the beginning of the year |                                                                              | $      | (14,507 | )      |      | $       | (402    | )       |   | $      | 967    |       
|                                      |                                      | Net loss                                                                     |        |         | (3,039 | )    |         |         | (14,078 | ) |        |        | (1,285 | )
|                                      |                                      | Dividends on preferred shares                                                |        |         | (22    | )    |         |         | (27     | ) |        |        | (31    | )
|                                      |                                      | Dividends on common shares                                                   |        |         |       |      |         |         |        |   |        |        | (53    | )
|                                      |                                      | Stock option fair value increment                                            |        |         | (525   | )    |         |         |        |   |        |        |       |  
|                                     
|                                      | Balance at the end of the year       |                                                                              | $      | (18,093 | )      |      | $       | (14,507 | )       |   | $      | (402   | )     
|                                     
|Accumulated other comprehensive loss  |                                      |                                                                              |        |         |        |      |         |         |         |   |        |       
|                                      | Balance at the beginning of the year |                                                                              | $      | (964    | )      |      | $       | (541    | )       |   | $      | (434   | )     
|                                      |                                      |                                                                              |        |        
|                                      |                                      | Foreign currency translation adjustment                                      |        |         | 12     |      |         |         | (288    | ) |        |        | (129   | )
|                                      |                                      | Unrealized gain (loss) on investments  net                                  |        |         | 6      |      |         |         | (40     | ) |        |        | 22     |  
|                                      |                                      | Unrealized derivative (gain) losses on cash flow hedges  net                |        |         | 12     |      |         |         | (7      | ) |        |        |       |  
|                                      |                                      | Minimum pension liability adjustment  net                                   |        |         | (559   | )    |         |         | (81     | ) |        |        |       |  
|                                      |                                      | Cumulative effect of accounting change                                       |        |         |       |      |         |         | (7      | ) |        |        |       |  
|                                      |                                      |                                                                              |        |        
|                                      | Other comprehensive loss             |                                                                              |        | (529    | )      |      |         | (423    | )       |   |        | (107   | )     
|                                     
|                                      | Balance at the end of the year       |                                                                              | $      | (1,493  | )      |      | $       | (964    | )       |   | $      | (541   | )     
|                                     
|                                     
|Total shareholders equity            |                                      | $                                                                            | 4,152  |         |        | $    | 5,973   |         |         | $ | 18,568 |       
|                                     
|Total comprehensive loss for the year |                                      |                                                                              |        |         |        |      |         |         |         |   |        |       
|                                      | Net loss                             |                                                                              | $      | (3,039  | )      |      | $       | (14,078 | )       |   | $      | (1,285 | )     
|                                      | Other comprehensive loss             |                                                                              |        | (529    | )      |      |         | (423    | )       |   |        | (107   | )     
|                                     
|Total comprehensive loss for the year |                                      | $                                                                            | (3,568 | )       |        | $    | (14,501 | )       |         | $ | (1,392 | )     
|                                     

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

F-4



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##### Table of Contents



NORTEL NETWORKS LIMITED
Consolidated Statements of Cash Flows for the years ended December 31

|                                                     |                                                                                                                                                                                |                                                                   |                                          |        |     |        |       |         |        |       |       |        |        |        |  
|---------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------- | ---------------------------------------- | ------ | --- | ------ | ----- | ------- | ------ | ----- | ----- | ------ | ------ | ------ | -
|                                                    
|(millions of U.S. dollars)                           |                                                                                                                                                                                | 2002                                                              |                                          | 2001   |     | 2000  
|                                                    
|Cash flows from (used in) operating activities       |                                                                                                                                                                                |                                                                   |                                          |        |     |        |       |         |        |       |       |       
|                                                     | Net loss from continuing operations                                                                                                                                            |                                                                   | $                                        | (3,039 | )   |        | $     | (11,555 | )      |       | $     | (871   | )     
|                                                     | Adjustments to reconcile net loss from continuing operations to net cash from (used
in) operating activities, net of effects from acquisitions and divestitures of businesses: |                                                                   |                                          |        |     |        |       |         |        |       |       |        |       
|                                                     |                                                                                                                                                                                | Amortization and depreciation                                     |                                          |        | 557 |        |       |         | 3,370  |       |       |        | 4,046  |       
|                                                     |                                                                                                                                                                                | In-process research and development expense                       |                                          |        |    |        |       |         |       |       |       |        | 623    |       
|                                                     |                                                                                                                                                                                | Non-cash portion of special charges and related asset write downs |                                          |        | 793 |        |       |         | 3,164  |       |       |        | 137    |       
|                                                     |                                                                                                                                                                                | Equity in net loss of associated companies                        |                                          |        | 9   |        |       |         | 134    |       |       |        | 29     |       
|                                                     |                                                                                                                                                                                | Stock option compensation                                         |                                          |        |    |        |       |         |       |       |       |        | 99     |       
|                                                     |                                                                                                                                                                                | Deferred income taxes                                             |                                          |        | (51 | )      |       |         | (2,758 | )     |       |        | 62     |       
|                                                     |                                                                                                                                                                                | Other liabilities                                                 |                                          |        | 15  |        |       |         | 78     |       |       |        | 105    |       
|                                                     |                                                                                                                                                                                | Gain on repurchases of outstanding debt securities                |                                          |        | (60 | )      |       |         |       |       |       |        |       |       
|                                                     |                                                                                                                                                                                | (Gain) loss on sale or write down of investments and businesses   |                                          |        | 7   |        |       |         | 229    |       |       |        | (1,058 | )     
|                                                     |                                                                                                                                                                                | Other  net                                                       |                                          |        | 533 |        |       |         | 40     |       |       |        | 574    |       
|                                                     |                                                                                                                                                                                | Change in operating assets and liabilities                        |                                          |       
|                                                     |                                                                                                                                                                                |                                                                   | Accounts receivable                      |        |     | 1,008  |       |         |        | 5,521 |       |        |        | (629   | )
|                                                     |                                                                                                                                                                                |                                                                   | Inventories                              |        |     | 672    |       |         |        | 2,027 |       |        |        | (1,581 | )
|                                                     |                                                                                                                                                                                |                                                                   | Income taxes                             |        |     | 687    |       |         |        | (953  | )     |        |        | (180   | )
|                                                     |                                                                                                                                                                                |                                                                   | Accounts payable and accrued liabilities |        |     | (1,874 | )     |         |        | 597   |       |        |        | 612    |  
|                                                     |                                                                                                                                                                                |                                                                   | Other operating assets and liabilities   |        |     | (51    | )     |         |        | 511   |       |        |        | (898   | )
|                                                    
|                                                     | Net cash from (used in) operating activities of continuing operations                                                                                                          |                                                                   |                                          | (794   | )   |        |       | 405     |        |       |       | 1,070  |       
|                                                    
|Cash flows from (used in) investing activities       |                                                                                                                                                                                |                                                                   |                                          |        |     |        |       |         |        |       |       |       
|                                                     | Expenditures for plant and equipment                                                                                                                                           |                                                                   |                                          | (335   | )   |        |       | (1,267  | )      |       |       | (1,838 | )     
|                                                     | Proceeds on disposals of plant and equipment                                                                                                                                   |                                                                   |                                          | 236    |     |        |       | 208     |        |       |       | 33     |       
|                                                     | Increase in restricted cash and cash equivalents                                                                                                                               |                                                                   |                                          | (231   | )   |        |       |        |        |       |       |       |       
|                                                     | Increase in long-term receivables                                                                                                                                              |                                                                   |                                          | (267   | )   |        |       | (706    | )      |       |       | (1,658 | )     
|                                                     | Decrease in long-term receivables                                                                                                                                              |                                                                   |                                          | 302    |     |        |       | 472     |        |       |       | 1,300  |       
|                                                     | Acquisitions of investments and businesses  net of cash acquired                                                                                                              |                                                                   |                                          | (29    | )   |        |       | (89     | )      |       |       | (316   | )     
|                                                     | Proceeds on sale of investments and businesses                                                                                                                                 |                                                                   |                                          | 61     |     |        |       | 604     |        |       |       | 1,633  |       
|                                                    
|                                                     | Net cash used in investing activities of continuing operations                                                                                                                 |                                                                   |                                          | (263   | )   |        |       | (778    | )      |       |       | (846   | )     
|                                                    
|Cash flows from (used in) financing activities       |                                                                                                                                                                                |                                                                   |                                          |        |     |        |       |         |        |       |       |       
|                                                     | Dividends on common and preferred shares                                                                                                                                       |                                                                   |                                          | (22    | )   |        |       | (27     | )      |       |       | (84    | )     
|                                                     | Increase (decrease) in notes payable  net                                                                                                                                     |                                                                   |                                          | (318   | )   |        |       | 140     |        |       |       | 114    |       
|                                                     | Proceeds from long-term debt                                                                                                                                                   |                                                                   |                                          | 33     |     |        |       | 1,530   |        |       |       | 107    |       
|                                                     | Repayments of long-term debt                                                                                                                                                   |                                                                   |                                          | (478   | )   |        |       | (469    | )      |       |       | (69    | )     
|                                                     | Decrease in capital leases payable                                                                                                                                             |                                                                   |                                          | (9     | )   |        |       | (23     | )      |       |       | (2     | )     
|                                                     | Issuance of common shares                                                                                                                                                      |                                                                   |                                          | 2,287  |     |        |       | 1,800   |        |       |       | 206    |       
|                                                     | Stock option fair value increment                                                                                                                                              |                                                                   |                                          | (525   | )   |        |       |        |        |       |       |       |       
|                                                    
|                                                     | Net cash from financing activities of continuing operations                                                                                                                    |                                                                   |                                          | 968    |     |        |       | 2,951   |        |       |       | 272    |       
|                                                    
|                                                     | Effect of foreign exchange rate changes on cash and cash equivalents                                                                                                           |                                                                   |                                          | 74     |     |        |       | (10     | )      |       |       | (25    | )     
|                                                    
|                                                     | Net cash from (used in) continuing operations                                                                                                                                  |                                                                   |                                          | (15    | )   |        |       | 2,568   |        |       |       | 471    |       
|                                                     | Net cash from (used in) discontinued operations                                                                                                                                |                                                                   |                                          | 371    |     |        |       | (678    | )      |       |       | (1,057 | )     
|                                                    
|Net increase (decrease) in cash and cash equivalents |                                                                                                                                                                                |                                                                   | 356                                      |        |     |        | 1,890 |         |        |       | (586  | )     
|                                                    
|Cash and cash equivalents at beginning of year  net |                                                                                                                                                                                |                                                                   | 3,457                                    |        |     |        | 1,567 |         |        |       | 2,153 |       
|                                                    
|Cash and cash equivalents at end of year  net       |                                                                                                                                                                                | $                                                                 | 3,813                                    |        |     | $      | 3,457 |         |        | $     | 1,567 |       
|                                                    

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

F-5



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##### Table of Contents



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



|1. |  | Nortel Networks Limited
|-- |  | -----------------------



| |  | Effective May 1, 2000, Nortel Networks Limited (Old Nortel) and a newly
formed Canadian corporation (New Nortel) participated in a Canadian
court-approved plan of arrangement (the Arrangement) with BCE Inc. (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 Old Nortel immediately after the
Arrangement.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | All of the business and operations conducted by Old Nortel and its
subsidiaries immediately prior to the effective date of the Arrangement
continued to be conducted by Old Nortel and its subsidiaries as subsidiaries
of New Nortel immediately after the Arrangement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | As part of the Arrangement, the outstanding common shares of Old Nortel were
exchanged for common shares of New Nortel. The aggregate number of New
Nortel common shares issued in the Arrangement was the same as the aggregate
number of Old Nortel common shares outstanding immediately prior to the
Arrangement (excluding the effect of the reservation of certain shares for
issuance pursuant to stock option plans).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | All acquisitions completed prior to May 1, 2000 were consummated by Old
Nortel or its subsidiaries. Since May 1, 2000, acquisitions involving any
share consideration have been consummated by New Nortel, while acquisitions
not involving share consideration have continued to be consummated by Old
Nortel or its subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             



|2. |  | Significant accounting policies
|-- |  | -------------------------------



| |  | Basis of Presentation
| |  | ---------------------



| |  | The accompanying consolidated financial statements of Nortel Networks Limited
(Nortel Networks) include all majority owned subsidiaries over which Nortel
Networks exercises control and have been prepared in accordance with
accounting principles generally accepted in the United States of America
(GAAP). Although Nortel Networks is headquartered in Canada, the
accompanying consolidated financial statements are expressed in United States
dollars as the greater part of the financial results and net assets of Nortel
Networks are denominated in United States dollars.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | (a) | Principles of consolidation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |     | The financial statements of entities which are controlled by Nortel
Networks, referred to as subsidiaries, are consolidated. Entities which
are jointly controlled, referred to as joint ventures, and entities which
are not controlled but over which Nortel Networks has the ability to
exercise significant influence, referred to as associated companies, are
accounted for using the equity method. Intercompany accounts and
transactions are eliminated upon consolidation and unrealized intercompany
gains and losses are eliminated when accounting under the equity method.



| |  | (b) | Use of estimates
| |  | --- | ----------------



| |  |  | Nortel Networks makes estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities as at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results may differ from those estimates. Estimates are used when
accounting for items and matters such as long-term contracts, allowance
for uncollectible accounts receivable and customer financings, receivables
sales, inventory obsolescence, product warranty, amortization, asset
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents





| |  |  | valuations, impairment assessments, employee benefits, taxes,
restructuring and other provisions, in-process research and development
(IPR&D) and contingencies.
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | (c) | Translation of foreign currencies
| |  | --- | ---------------------------------



| |  |  | The functional currency of Nortel Networks is the United States dollar.
The financial statements of Nortel Networks operations whose functional
currency is not the United States dollar (except for highly inflationary
economies as described below), are translated to United States dollars at
the exchange rates in effect at the balance sheet date for assets and
liabilities, and at average rates for the period for revenues and
expenses. The unrealized translation gains and losses on Nortel Networks
net investment in these operations, including long-term intercompany
advances considered to form part of the net investment are accumulated as
a component of other comprehensive income (loss) (OCI).
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Transactions and financial statements for Nortel Networks operations in
countries considered to have highly inflationary economies and whose
functional currency is not the United States dollar are translated into
United States dollars at the exchange rates in effect at the balance sheet
date for monetary assets and liabilities, and at historical exchange rates
for non-monetary assets and liabilities. Revenues and expenses are
translated at average rates for the period, except for amortization and
depreciation which is translated on the same basis as the related assets.
Resulting gains or losses are reflected in net earnings (loss).                                                             
|
| |  |  | When appropriate, Nortel Networks may hedge a designated portion of the
exposure to foreign exchange gains and losses incurred on the translation
of specific foreign operations. Hedging instruments used by Nortel
Networks can include foreign currency denominated debt, foreign currency
swaps and foreign currency forward contracts that are denominated in the
same currency as the hedged foreign operations. The translation gains and
losses on these hedging instruments are recorded in OCI or net earnings
(loss) as appropriate.                                                                                                                                                                             



| |  | (d) | Revenue recognition
| |  | --- | -------------------



| |  |  | Nortel Networks products and services are generally sold as part of a
contract and the terms of the contracts, taken as a whole, determine the
appropriate revenue recognition method.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Nortel Networks recognizes revenue under Statement of Position (SOP)
81-1 Accounting for Performance of Construction-Type and certain
Production-Type Contracts (SOP 81-1), SOP 97-2 Software Revenue
Recognition (SOP 97-2) and Staff Accounting Bulletin (SAB) 101
Revenue Recognition in Financial Statements (SAB 101) depending upon
the terms of the contract.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  |  | Revenue for hardware that does not require significant customization is
recognized under SAB 101. Hardware revenue, net of trade discounts and
allowances, is recognized upon shipment and when all significant
contractual obligations have been satisfied and collection is reasonably
assured.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  |  | Software revenue is generally recognized under SOP 97-2. Software revenue
under SOP 97-2 is recognized when persuasive evidence of an arrangement
exists, when the software is delivered in accordance with all terms and
conditions of the customer contracts, when the fee is fixed or
determinable, and when collection is reasonably assured. Nortel Networks
provides extended payment terms on certain software contracts and may sell
these receivables to third parties. The fees on these contracts are
considered fixed or determinable if the contracts are similar to others
for which Nortel Networks has a standard business practice of providing
extended payment terms and has a history of successfully collecting under
the original payment terms without making concessions. For software
arrangements involving multiple elements, Nortel Networks allocates
revenue to each element based on vendor specific objective evidence of
relative fair values, which are derived by allocating a value to each
element that is based upon the prices charged when the element is sold
separately.
|
| |  |  | For contracts involving multiple elements, Nortel Networks allocates
revenue to each element based on relative fair values. Provided none of
the undelivered elements are essential to the functionality of the
delivered elements, revenue related to the software element is recognized
under SOP 97-2 and revenue related to the hardware element                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

F-7



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##### Table of Contents





| |  |  | is recognized
under SOP 81-1 or SAB 101. Engineering, installation and other services
are recognized as the services are performed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | For long-term contracts, primarily those related to customized network
solutions and network build outs, revenues are recognized under SOP 81-1
using the percentage-of-completion method on the basis of percentage of
costs incurred to date on a contract, relative to the estimated total
contract costs. Profit estimates on long-term contracts are revised
periodically based on changes in circumstances and any losses on contracts
are recognized in the period that such losses become known. Generally, the terms of long-term
contracts provide for progress billing based on completion of certain
phases of work.



| |  |  | Nortel Networks makes certain sales through multiple distribution
channels, primarily resellers and distributors. These customers are
generally given certain rights of return. For products sold through these
distribution channels, revenue is recognized from product sale at the time
of shipment to the distribution channel. Accruals for estimated sales
returns and other allowances are recorded at the time of shipment and are
based on contract terms and prior claims experience.
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | (e) | Research and development
| |  | --- | ------------------------



| |  |  | Research and development (R&D) costs are charged to net earnings (loss)
in the periods in which they are incurred, except for costs incurred
pursuant to specific contracts with third parties which are charged to net
earnings (loss) in the same period as the related revenue is recognized.
Related global investment tax credits are deducted from the income tax
provision.
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | (f) | Income taxes
| |  | --- | ------------



| |  |  | Nortel Networks provides for income taxes using the asset and liability
method. This approach recognizes the amount of taxes payable or
refundable for the current year, as well as deferred tax assets and
liabilities for the future tax consequence of events recognized in the
financial statements and tax returns. Deferred income taxes are adjusted
to reflect the effects of changes in tax laws or enacted tax rates.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | In establishing the appropriate income tax valuation allowances, Nortel
Networks assesses the realizability of its net deferred tax assets
quarterly, and based on all available evidence, both positive and
negative, determines whether it is more likely than not that the net
deferred tax assets or a portion thereof will be realized.                                                                                   



| |  | (g) | Earnings (loss) per common share
| |  | --- | --------------------------------



| |  |  | Basic earnings (loss) per common share is calculated by dividing the net
earnings (loss) by the weighted average number of Nortel Networks
Limiteds common shares outstanding during the period. Diluted earnings
(loss) per common share is calculated by dividing the applicable net
earnings (loss) by the sum of the weighted average number of common shares
outstanding and all additional common shares that would have been
outstanding if potentially dilutive common shares had been issued during
the period. The treasury stock method is used to compute the dilutive
effect of options, warrants and similar instruments.                                                                                                          
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | As all of Nortel Networks Limiteds common shares are held by Nortel
Networks Corporation and are not publicly traded, information concerning
Nortel Networks Limiteds earnings (loss) per common share and weighted
average number of common shares outstanding has not been presented in the
accompanying consolidated financial statements. For information regarding
Nortel Networks Corporations earnings (loss) per common share and
weighted average number of common shares outstanding, see Nortel Networks
Corporations consolidated financial statements and notes thereto for the
year ended December 31, 2002 contained in the Annual Report on Form 10-K
filed with the United States Securities and Exchange Commission (SEC).

F-8



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##### Table of Contents





| |  | (h) | Cash and cash equivalents
| |  | --- | -------------------------



| |  |  | Cash and cash equivalents consist of cash on hand, balances with banks,
and short-term investments. All highly liquid investments with original
maturities of three months or less are classified as cash and cash
equivalents. The fair value of cash and cash equivalents approximates the
amounts shown in the financial statements.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | (i) | Restricted cash and cash equivalents
| |  | --- | ------------------------------------



| |  |  | Cash and cash equivalents are considered restricted when they are subject
to contingent rights of a third party customer under bid and performance
related contracts that Nortel Networks is not able to unilaterally revoke.
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | (j) | Inventories
| |  | --- | -----------



| |  |  | Inventories are valued at the lower of cost (calculated generally on a
first-in, first-out basis) and market. The cost of finished goods and
work in process is comprised of material, labor and manufacturing
overhead.
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | (k) | Receivables sales
| |  | --- | -----------------



| |  |  | Generally, Nortel Networks retains servicing rights and, in some cases,
provides limited recourse when it sells receivables. A gain or loss is
recorded at the date of the receivables sale and is based upon, in part,
the previous carrying amount of the receivables involved in the transfer
allocated between the assets sold and the retained interests based on
their relative fair value at the date of the transfer. Fair value is
generally estimated based on the present value of the estimated future
cash flows expected under managements assumptions, including discount
rates assigned commensurate with risks.                                                                                                                                                                                                                                 
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Nortel Networks, when acting as the servicing agent, generally does not
record an asset or liability related to servicing, as the annual servicing
fees are equivalent to those that would be paid to a third party servicing
agent. Certain transactions will enable Nortel Networks, when acting as
the servicing agent, to receive a servicing bonus at the maturity of the
transaction if certain performance criteria are met. The ultimate
collection of servicing bonuses is based primarily on the collectibility
and credit experience of the receivables sold and is paid at the
discretion of the transferee. Nortel Networks initially values the
servicing bonus at a fair value of nil based on the determination that
future credit losses will offset the servicing bonus and due to the fact
that it is paid at the discretion of the transferee.
|
| |  |  | Nortel Networks reviews the fair value assigned to retained interests,
including the servicing bonus, at each reporting date subsequent to the
date of the transfer. Fair value is reviewed using similar valuation
techniques as those used to initially measure the retained interest and,
if a change in events or circumstances warrants, the fair value is
adjusted and any adjustments are recorded in other income (expense) 
net.                                                                                                                                                                                                                                                                                                                                                                                                                        



| |  | (l) | Investments
| |  | --- | -----------



| |  |  | Investments in publicly traded equity securities of companies over which
Nortel Networks does not exert significant influence are accounted for at
fair value and are classified as available for sale. Unrealized holding
gains and losses related to these securities are excluded from net
earnings (loss) and are included in OCI until such gains or losses are
realized. Nortel Networks monitors these investments for factors
indicating other than temporary impairment and takes a charge to net
earnings (loss) when appropriate.
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Investments in equity securities of private companies over which Nortel
Networks does not exert significant influence are accounted for using the
cost method. Nortel Networks monitors these investments for factors
indicating other than temporary impairment and takes a charge to net
earnings (loss) when appropriate.                                                                                                                                                                                                                
|
| |  |  | Nortel Networks reviews its investments in associated companies, accounted
for using the equity method, for impairment. An impairment loss is
recorded when there has been a loss in value of the investment that is
other than temporary.                                                                                                                                                                                                                                                                                                  

F-9



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##### Table of Contents





| |  | (m) | Plant and equipment
| |  | --- | -------------------



| |  |  | Plant and equipment are stated at cost less accumulated depreciation.
Depreciation is generally calculated on a straight-line basis over the
expected useful lives of the plant and equipment. The expected useful
lives of buildings are twenty to forty years, and of machinery and
equipment are five to ten years.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | (n) | Impairment or disposal of long-lived assets (plant and equipment and
acquired technology)
| |  | --- | -----------------------------------------------------------------------------------------



| |  |  | Long-lived assets held and used                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Nortel Networks tests long-lived assets or asset groups for
recoverability when events or changes in circumstances indicate that
their carrying amount may not be recoverable. Circumstances which
could trigger a review include, but are not limited to: significant
decreases in the market price of the asset; significant adverse changes in the business climate or legal factors; accumulation of costs
significantly in excess of the amount originally expected for the
acquisition or construction of the asset; current period cash flow or
operating losses combined with a history of losses or a forecast of
continuing losses associated with the use of the asset; and current
expectation that the asset will more likely than not be sold or
disposed significantly before the end of its estimated useful life.
|
| |  |  | Recoverability is assessed based on the carrying amount of the asset
and its fair value which is generally determined based on the sum of
the undiscounted cash flows expected to result from the use and the
eventual disposal of the asset. An impairment loss is recognized when
the carrying amount is not recoverable and exceeds fair value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                



| |  |  | Long-lived assets held for sale
| |  |  | -------------------------------



| |  |  | Long-lived assets are classified as held for sale when certain criteria
are met, which include: management commitment to a plan to sell the
assets; the availability of the assets for immediate sale in their
present condition; whether an active program to locate buyers and other
actions to sell the assets has been initiated; whether the sale of the
assets is probable and their transfer is expected to qualify for
recognition as a completed sale within one year; whether the assets are
being marketed at reasonable prices in relation to their fair value;
and how unlikely it is that significant changes will be made to the
plan to sell the assets.
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Nortel Networks measures long-lived assets to be disposed of by sale at
the lower of carrying amount and fair value less cost to sell. Fair
value is determined using quoted market prices or the anticipated cash
flows discounted at a rate commensurate with the risk involved.                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  |  | Long-lived assets to be disposed of other than by sale                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  |  | Nortel Networks classifies an asset or asset group that will be
disposed of other than by sale as held and used until the disposal
transaction occurs. The asset or asset group continues to be
depreciated based on revisions to its estimated useful life until the
date of disposal or abandonment.                                                                                                                                                                                                                                                                                                                                                                  
|
| |  |  | Recoverability is assessed based on the carrying amount of the asset
and the sum of the undiscounted cash flows expected to result from the
remaining period of use and the eventual disposal of the asset. An
impairment loss is recognized when the carrying amount is not
recoverable and exceeds the fair value of the asset.                                                                                                                                                                                                                                                                                                                                       



| |  | (o) | Goodwill
| |  | --- | --------



| |  |  | Goodwill represents the excess of the purchase price of an acquired
enterprise over the fair values of the identifiable assets acquired and
liabilities assumed. Commencing January 1, 2002, Nortel Networks tests
for impairment of goodwill on an annual basis and at any other time if
events occur or circumstances change that would more likely than not
reduce the fair value of the reporting unit goodwill below its carrying
amount (see note 3(a)).
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents





| |  |  | Circumstances that could trigger an impairment test include but are not
limited to: a significant adverse change in the business climate or legal
factors; an adverse action or assessment by a regulator; unanticipated
competition; loss of key personnel; the likelihood that a reporting unit
or significant portion of a reporting unit will be sold or otherwise
disposed; results of testing for recoverability of a significant asset
group within a reporting unit; and recognition of a goodwill impairment
loss in the financial statements of a subsidiary that is a component of a
reporting unit.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | If the carrying amount of the reporting unit goodwill exceeds the implied
fair value of that goodwill, an impairment loss is recorded in net
earnings (loss). Measurement of the fair value of a reporting unit is
based on one or more of the following fair value measures including:
amounts at which the unit as a whole could be bought or sold in a current
transaction between willing parties; using present value techniques of
estimated future cash flows; or using valuation techniques based on
multiples of earnings or revenue, or a similar performance measure.                               



| |  | (p) | Acquired technology and IPR&D
| |  | --- | -----------------------------



| |  |  | Acquired technology represents the value of the proprietary know-how which
was technologically feasible as of the acquisition date, and is charged to
net earnings (loss) on a straight-line basis over its estimated useful
life of two to three years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | An impairment loss is recognized as the amount by which the carrying value
of the acquired technology exceeds the fair value. Fair value is
determined using the anticipated cash flows discounted at a rate
commensurate with the risk involved.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  |  | IPR&D represents the value, on closing of a business combination, of
acquired research and development which was not technologically feasible
as of the acquisition date and, other than its intended use, had no
alternative future use. Independent valuations are performed to assess
and allocate a value to IPR&D. The value allocated to IPR&D represents
the estimated fair value based on risk-adjusted future cash flows
generated from the products that would result from each of the in-process
projects. Estimated future after tax cash flows of each project, on a
product by product basis, are based on Nortel Networks estimates of
revenues less operating expenses, cash flow adjustments, income taxes and
charges for the use of contributory assets. Future cash flows are also
adjusted for the value contributed by any core technology and development
efforts that would be completed post-acquisition. IPR&D is charged to net
earnings (loss) as at the date of acquisition.



| |  | (q) | Warranty costs
| |  | --- | --------------



| |  |  | Nortel Networks products are covered by product warranty plans that
generally range from one to five years. A liability for the expected cost
of warranty-related claims is established when products are sold and the
related revenue is recognized. The amount of the warranty liability
accrued reflects an estimate of the expected future costs of honoring
obligations under the warranty plan. In estimating the warranty
liability, historical material replacement costs and associated labor to
correct the product failure are considered. Should future product failure
rates and/or replacement costs differ from historical levels, revisions to
the estimated warranty liability may be required.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | (r) | Pension, post-retirement and post employment benefits
| |  | --- | -----------------------------------------------------



| |  |  | Pension expense, based on managements assumptions, consists of: the
actuarially computed costs of pension benefits in respect of the current
years service; imputed returns on plan assets and imputed interest on
pension obligations; and straight-line amortization under the corridor
approach of experience gains and losses, assumption changes and plan
amendments over the expected average remaining service life of the
employee group.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The expected costs of post-retirement and certain post-employment
benefits, other than pensions, to active employees are accrued in the
consolidated financial statements during the years employees provide
service to Nortel Networks. Other post-employment benefits are recognized
when the event triggering the obligation occurs.                                                                                                            

F-11



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##### Table of Contents





| |  | (s) | Derivative financial instruments
| |  | --- | --------------------------------



| |  |  | 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 contracts, foreign currency swaps, foreign
currency option contracts, interest rate swaps, and equity forward
contracts. For a derivative designated as a fair value hedge, changes in
the fair value of the derivative and of the hedged item attributable to
the hedged risk are recognized in net earnings (loss). For a derivative
designated as a cash flow hedge, the effective portions of changes in the
fair value of the derivative are recorded in 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 or if it becomes ineffective, changes in the fair value of
the derivative are recognized in net earnings (loss).
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Nortel Networks may also 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 to
be derivative financial instruments. Such warrants, however, 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 embedded derivative financial instruments. For these
embedded derivatives, for which the matching is not clearly and closely
related to the terms of the contract, the underlying exposure is recorded
in net earnings (loss).                                                                                                                                                                                                                                                                                                                                                                                                                                               



| |  | (t) | Stock-based compensation
| |  | --- | ------------------------



| |  |  | Under various stock option programs of Nortel Networks Corporation,
options may be granted to various eligible employees and directors of
Nortel Networks to purchase common shares of Nortel Networks Corporation.
Nortel Networks, as permitted under Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-based Compensation
(SFAS 123), applies Accounting Principles Board Opinion (APB) No. 25,
Accounting for Stock Issued to Employees (APB 25) and related
interpretations in accounting for its stock-based compensation plans.
SFAS 123 requires disclosure of pro forma amounts to reflect the impact if
Nortel Networks had elected to adopt the optional recognition provisions
of SFAS 123 for its stock option plans and employee stock purchase plans.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Had Nortel Networks applied the fair value based method in prior years,
regarding the participation of Nortel Networks eligible employees and
directors in the stock option programs of Nortel Networks Corporation,
Nortel Networks reported net loss applicable to common shares would have
been increased to the pro forma amounts as indicated below for each of the
three years ended December 31:                                                                                                                                                                                                                                                                                                                                                                                                        

|                                                 |  |      |        |      |  |      |         |   |  |   |        |  
|------------------------------------------------ |  | ---- | ------ | ---- |  | ---- | ------- | - |  | - | ------ | -
|                                                
|                                                 |  | 2002 |        | 2001 |  | 2000
|                                                
|Net loss applicable to common shares  reported  |  | $    | (3,061 | )    |  | $    | (14,105 | ) |  | $ | (1,316 | )
|Stock option expense as reported(a)              |  |      |       |      |  |      |        |   |  |   | 99     |  
|Pro forma stock option expense(b)                |  |      | (946   | )    |  |      | (1,258  | ) |  |   | (1,173 | )
|                                                
|Net loss applicable to common shares  pro forma |  | $    | (4,007 | )    |  | $    | (15,363 | ) |  | $ | (2,390 | )
|                                                

| |  | (a) | Stock option expense as reported represents the amortization of
deferred stock option compensation related primarily to unvested
stock options held by employees of companies acquired in a purchase
acquisition. The amount is tax effected and offset by a full
valuation allowance.
| |  | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | (b) | Pro forma stock option expense is net of tax of $276, $365 and
$316 for the years ended December 31, 2002, 2001 and 2000,
respectively.                                                                                                                                               

F-12



---



##### Table of Contents





| |  |  | The fair value of Nortel Networks stock options used to compute pro forma
net earnings (loss) is the estimated fair value at grant date applicable
to Nortel Networks, using the Black-Scholes option-pricing model with the
following weighted average assumptions related to Nortel Networks
Corporation, for each of the three years ended December 31:
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                              |  |      |       |      |  |      |       |   |  |  |       |  
|----------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | -
|                             
|Weighted-average assumptions  |  | 2002 |       | 2001 |  | 2000
|                             
|Expected dividend             |  |      | 0.00  | %    |  |      | 0.00  | % |  |  | 0.13  | %
|Expected volatility           |  |      | 71.25 | %    |  |      | 70.36 | % |  |  | 54.01 | %
|Risk-free interest rate       |  |      | 4.43  | %    |  |      | 4.49  | % |  |  | 4.94  | %
|Expected option life in years |  |      | 4     |      |  |      | 4     |   |  |  | 4     |  
|                             



| |  |  | The weighted average fair values of Nortel Networks stock options,
calculated using the Black-Scholes option-pricing model, granted during
the three years ended December 31, 2002, 2001 and 2000 were $3.50, $8.38
and $27.25 per option, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option-pricing models require the input
of highly subjective assumptions including the expected price volatility.
Nortel Networks uses expected volatility rates which are based on
historical volatility rates. Changes in the subjective input assumptions
can materially affect the fair value estimate, and therefore the existing
models do not necessarily provide a reliable single measure of the fair
value of Nortel Networks stock options.                                                                                                                                                                                                                                                            
|
| |  |  | In December 2002, the Financial Accounting Standards Board (the FASB)
issued SFAS No. 148 Accounting for Stock-Based Compensation  Transition
and Disclosure  an amendment of FASB Statement No. 123 (SFAS 148)
which amended the transitional provisions of SFAS 123 for entities
choosing to recognize stock-based compensation under the fair value based method of SFAS 123, rather than
electing to continue to follow the intrinsic value method of APB 25.
Under SFAS 148, Nortel Networks may adopt the recommendations of SFAS 123
either (1) prospectively to awards granted or modified after the beginning
of the year of adoption, (2) retroactively with restatement for awards
granted or modified since January 1, 1995, or (3) prospectively to awards
granted or modified since January 1, 1995.                                                                               
|
| |  |  | Nortel Networks will commence expensing employee stock-based compensation
using the fair value based method prospectively, in accordance with SFAS
123, for all awards granted or modified after January 1, 2003, as
permitted under SFAS 148. Stock-based compensation will be measured using
the Black-Scholes option pricing model. The impact of adopting the fair
value based method will depend on various factors including, but not
limited to, the extent to which Nortel Networks will use stock-based
compensation in the future and the fair value of the awards, which is
dependent on a number of variables including Nortel Networks Corporation
common share price and its historical volatility. Because of the
uncertainty associated with each of these factors, the expense to be
recognized by Nortel Networks will vary as a result of the adoption of the
fair value based method.



| |  | Recent pronouncements
| |  | ---------------------



| |  | (a) | In January 2003, the FASB issued Interpretation No. (FIN) 46 
Consolidation of Variable Interest Entities (FIN 46). FIN 46
clarifies the application of Accounting Research Bulletin No. 51 
Consolidated Financial Statements to those entities defined as Variable
Interest Entities (more commonly referred to as special purpose
entities) in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at
risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 applies
immediately to all Variable Interest Entities created after January 31,
2003, and by the beginning of the first interim or annual reporting
period commencing after June 15, 2003 for Variable Interest Entities
created prior to February 1, 2003.
| |  | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Nortel Networks currently conducts certain receivable sales and lease
financing transactions through special purpose entities and is in the
process of assessing the structure of these transactions against the
criteria set out in FIN 46. Receivable sales transactions are generally
conducted either directly with financial institutions or with multi-seller
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-13



---



##### Table of Contents





| |  |  | conduits. It is not expected that Nortel Networks will be required to
consolidate any of these special purpose entities or provide any of the
additional disclosures set out in FIN 46.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Certain lease financing transactions are structured through single
transaction special purpose entities that currently do not have sufficient
equity at risk as defined in FIN 46. In addition, Nortel Networks retains
certain risks associated with guaranteeing recovery of between 75 percent
and 88 percent of the unamortized principal balance of the debt which is
expected to represent the majority of the risks associated with the
special purpose entities activities. This percentage will be adjusted
over time as the underlying debt matures. Therefore, it is expected that
unless the existing arrangements are modified prior to July 1, 2003,
Nortel Networks will be required to consolidate the assets, liabilities
and any non-controlling interests of these special purpose entities
effective July 1, 2003. The total assets and total liabilities held by
these entities at December 31, 2002 are approximately $176 and $176,
respectively.



| |  | (b) | In December 2002, the FASB issued SFAS 148 which is effective for
years ending after December 15, 2002 (see note 2(t)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | (c) | In November 2002, the FASB issued FIN 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45), which requires elaborating on the
disclosures that must be made by a guarantor in financial statements
about its obligations under certain guarantees. It also requires that a
guarantor recognize, at the inception of certain types of guarantees, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The disclosure requirements of FIN 45 are effective for
financial statements issued after December 15, 2002, and have been
applied in the presentation of the accompanying consolidated financial
statements. The recognition requirements of FIN 45 are applicable for
guarantees issued or modified after December 31, 2002. Nortel Networks
has not yet determined the effect, if any, the recognition requirement
for guarantees issued or modified after December 31, 2002 will have on
its business, results of operations and financial condition.



| |  | (d) | In June 2002, the FASB issued SFAS No. 146 Accounting for Costs
Associated with Exit or Disposal Activities (SFAS 146), which is
effective for exit or disposal activities initiated after December 31,
2002. SFAS 146 supercedes Emerging Issues Task Force (EITF) Issue No.
94-3 Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in
Restructuring) (EITF 94-3). SFAS 146 requires that costs associated
with an exit or disposal activity be recognized when the liability is
incurred, whereas EITF 94-3 required recognition of a liability when an
entity committed to an exit plan. Therefore, the effect of SFAS 146 will
be to change the timing of recognition of certain liabilities and no
material valuation differences are expected. Plans initiated before
December 31, 2002 continue to be accounted for under EITF 94-3. Nortel
Networks does not expect the adoption of SFAS 146 to have a material
impact on its business, results of operations and financial condition.
| |  | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | (e) | In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations (SFAS 143), which is effective for financial
statements issued for fiscal years beginning after June 15, 2002. SFAS
143 addresses the recognition and measurement of obligations associated
with the retirement of tangible long-lived assets. Nortel Networks
does not expect the adoption of SFAS 143 to have a material impact on
its business, results of operations and financial condition.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               



| |  | Comparative figures                                                                                                                            
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Certain 2001 and 2000 figures in the accompanying consolidated financial
statements have been reclassified to conform to the 2002 presentation.

F-14



---



##### Table of Contents





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



| |  | (a) | Accounting for goodwill and other intangible assets
| |  | --- | ---------------------------------------------------



| |  |  | In June 2001, the FASB issued SFAS 142 effective for fiscal years
beginning after December 15, 2001. SFAS 142 changed the accounting for
goodwill from an amortization method to an impairment-only approach.
Thus, amortization of goodwill, including goodwill recorded in past
business combinations and amortization of intangibles with an indefinite
life, ceased upon adoption of SFAS 142. For any acquisitions completed
after June 30, 2001, goodwill and intangible assets with an indefinite
life are not amortized. Nortel Networks adopted the provisions of SFAS
142 effective January 1, 2002.                                                                                                                                              
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Nortel Networks completed the SFAS 142 transitional impairment test during
the second quarter of 2002 and concluded that there was no impairment of
recorded goodwill, as the fair value of its reporting units exceeded their
carrying amount as of January 1, 2002. Therefore, the second step of the
transitional impairment test under SFAS 142 was not required to be
performed.                                                                                                                                                                                                                                                                                                                                                                       
|
| |  |  | As a result of the continued decline in both Nortel Networks overall
market value generally and within the Optical Networks segment
specifically, Nortel Networks as part of its review of financial results
during the three months ended September 30, 2002, evaluated the goodwill
associated with the businesses within the Optical Networks segment for
potential impairment. The conclusion of those evaluations was that the
fair value associated with the businesses within the Optical Networks
segment could no longer support the carrying value of the goodwill
associated with them. As a result, Nortel Networks recorded a goodwill
impairment charge of $264. See note 6 for further information regarding
this goodwill impairment charge.



| |  |  | The following table presents the impact on net loss from both continuing
and discontinued operations of the SFAS 142 requirement to cease the
amortization of goodwill as if the standard had been in effect beginning
January 1, 2000, for each of the years ended December 31:
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                               |                                                                     |   |        |        |      |   |         |         |   |   |        |       |  
|------------------------------ | ------------------------------------------------------------------- | - | ------ | ------ | ---- | - | ------- | ------- | - | - | ------ | ----- | -
|                              
|                               |                                                                     |   | 2002   |        | 2001 |   | 2000   
|                              
|Reported results:              |                                                                     |   |        |        |      |   |         |         |   |   |        |      
|                               | Net loss from continuing operations                                 |   | $      | (3,039 | )    |   | $       | (11,555 | ) |   | $      | (871  | )
|                               | Net loss from discontinued operations  net of tax                  |   |        |       |      |   |         | (2,538  | ) |   |        | (414  | )
|                               | Cumulative effect of accounting change  net of tax of $9           |   |        |       |      |   |         | 15      |   |   |        |      |  
|                              
|Net loss  reported            |                                                                     | $ | (3,039 | )      |      | $ | (14,078 | )       |   | $ | (1,285 | )    
|                              
|Adjustments:                   |                                                                     |   |        |        |      |   |         |         |   |   |        |      
|                               | Amortization of goodwill from continuing operations
 net of tax(a) |   | $      |       |      |   | $       | 2,091   |   |   | $      | 2,507 |  
|                               | Amortization of goodwill from discontinued operations               |   |        |       |      |   |         | 121     |   |   |        | 195   |  
|                              
|Total net adjustments          |                                                                     | $ |       |        |      | $ | 2,212   |         |   | $ | 2,702  |      
|                              
|Adjusted results:              |                                                                     |   |        |        |      |   |         |         |   |   |        |      
|                               | Net earnings (loss) from continuing operations                      |   | $      | (3,039 | )    |   | $       | (9,464  | ) |   | $      | 1,636 |  
|                               | Net loss from discontinued operations  net of tax                  |   |        |       |      |   |         | (2,417  | ) |   |        | (219  | )
|                               | Cumulative effect of accounting change  net of tax of $9           |   |        |       |      |   |         | 15      |   |   |        |      |  
|                              
|Net earnings (loss)  adjusted |                                                                     | $ | (3,039 | )      |      | $ | (11,866 | )       |   | $ | 1,417  |      
|                              

| |  | (a) | Includes goodwill amortization of equity accounted investments
of nil, $9 (net of tax of $5) and $15 (net of tax of $7) for the
years ended December 31, 2002, 2001 and 2000, respectively.
| |  | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | (b) | Impairment or disposal of long-lived assets (plant and equipment and
acquired technology)
| |  | --- | -----------------------------------------------------------------------------------------



| |  |  | In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS 144), which addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. SFAS 144 applies to certain long-lived assets,
including those reported as discontinued operations, and develops one
accounting model for long-lived assets to be disposed of by sale. SFAS
144 supersedes SFAS No.
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-15



---



##### Table of Contents





| |  |  | 121, Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to be Disposed Of, and APB No. 30,
Reporting the Results of Operations  Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions (APB 30), for the disposal of a
segment of a business. Nortel Networks adopted the provisions of SFAS 144
effective January 1, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | SFAS 144 requires that long-lived assets to be disposed of by sale be
measured at the lower of carrying amount or fair value less cost to sell,
whether reported in continuing operations or in discontinued operations.
Discontinued operations will no longer be measured at net realizable value
or include amounts for operating losses that have not yet been incurred.
SFAS 144 also broadens the reporting of discontinued operations to include
the disposal of a component of an entity provided that the operations and
cash flows of the component will be eliminated from the ongoing operations
of the entity and the entity will not have any significant continuing
involvement in the operations of the component. During the year ended
December 31, 2002, Nortel Networks recorded write downs for plant and
equipment of $170 related to long-lived assets held and used, $122 related
to long-lived assets held for sale. See note 6 for further information
regarding these write downs.



| |  | (c) | Derivative financial instruments
| |  | --- | --------------------------------



| |  |  | Effective January 1, 2001, Nortel Networks adopted SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities (SFAS
133), and the corresponding amendments under SFAS No. 138, Accounting
for Certain Derivative Instruments and Certain Hedging Activities  an
amendment of SFAS No. 133 (SFAS 138). SFAS 133 requires that all
derivative financial instruments be recognized in the financial statements
and measured at fair value regardless of the purpose or intent for holding
them. If the derivative is designated as a fair value hedge, changes in
the fair value of the derivative and of the hedged item attributable to
the hedged risk are recognized in net earnings (loss). If the derivative
is designated as a cash flow hedge, the effective portions of changes in
the fair value of the derivative are recorded in 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).
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | For the year ended December 31, 2001, the adoption of SFAS 133 resulted in
a cumulative decrease in 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.
The adoption of SFAS 133 did not materially affect either the basic or
diluted loss per common share.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  | The following consolidated financial statement details are presented as at
December 31, for the consolidated balance sheet details, and for each of the
years ended December 31, for the consolidated statements of operations and
consolidated statements of cash flows.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Consolidated statements of operations                                                                                                                                                                                                                                    
|
| |  | Research and development expense:                                                                                                                                                                                                                                        

|                                          |  |      |       |      |  |      |       |  |  |   |       | 
|----------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                         
|                                          |  | 2002 |       | 2001 |  | 2000
|                                         
|R&D expense                               |  | $    | 2,228 |      |  | $    | 3,230 |  |  | $ | 3,626 | 
|R&D costs incurred on behalf of others(a) |  |      | 49    |      |  |      | 68    |  |  |   | 64    | 
|                                         
|Total                                     |  | $    | 2,277 |      |  | $    | 3,298 |  |  | $ | 3,690 | 
|                                         

| |  | (a) | These costs include R&D charged to customers of Nortel Networks
pursuant to contracts that provide for full recovery of the estimated
cost of development, material, engineering, installation and all other
attracted costs, which are accounted for as contract costs.
| |  | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-16



---



##### Table of Contents





| |  | Other income (expense)  net:
| |  | -----------------------------

|                                                 |  |      |     |      |  |      |      |   |  |   |      |  
|------------------------------------------------ |  | ---- | --- | ---- |  | ---- | ---- | - |  | - | ---- | -
|                                                
|                                                 |  | 2002 |     | 2001 |  | 2000
|                                                
|Interest income                                  |  | $    | 87  |      |  | $    | 119  |   |  | $ | 130  |  
|Minority interest                                |  |      | 23  |      |  |      | 22   |   |  |   | (55  | )
|Gain (loss) on sale or write down of investments |  |      | (29 | )    |  |      | (354 | ) |  |   | 884  |  
|Other  net                                      |  |      | (83 | )    |  |      | (112 | ) |  |   | (124 | )
|                                                
|Other income (expense)  net                     |  | $    | (2  | )    |  | $    | (325 | ) |  | $ | 835  |  
|                                                



| |  | Currency exchange gains:
| |  | ------------------------

|                           |  |      |    |      |  |      |     |   |  |   |    | 
|-------------------------- |  | ---- | -- | ---- |  | ---- | --- | - |  | - | -- | 
|                          
|                           |  | 2002 |    | 2001 |  | 2000
|                          
|Currency exchange gains(a) |  | $    | 30 |      |  | $    | (25 | ) |  | $ | 10 | 
|                          

| |  | (a) | Currency exchange gains included in net loss.
| |  | --- | ---------------------------------------------



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

|                     |  |      |     |      |  |   |       | 
|-------------------- |  | ---- | --- | ---- |  | - | ----- | 
|                    
|                     |  | 2002 |     | 2001
|                    
|Raw materials        |  | $    | 343 |      |  | $ | 744   | 
|Work in process      |  |      | 308 |      |  |   | 576   | 
|Finished goods       |  |      | 238 |      |  |   | 243   | 
|                    
|Inventories  net(a) |  | $    | 889 |      |  | $ | 1,563 | 
|                    

| |  | (a) | Net of inventory provisions of $1,014 and $911 as at December 31,
2002 and 2001, respectively. Included in other accrued liabilities are
accruals of $168 and $565 at December 31, 2002 and 2001, respectively
for cancellation charges, inventory in excess of future demand and the
settlement of certain other claims related to contract manufacturers or
suppliers.
| |  | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

|                               |                         |   |        |        |      |   |        |        |  
|------------------------------ | ----------------------- | - | ------ | ------ | ---- | - | ------ | ------ | -
|                              
|                               |                         |   | 2002   |        | 2001
|                              
|Cost:                          |                         |   |        |        |      |   |        |       
|                               | Land                    |   | $      | 54     |      |   | $      | 124    |  
|                               | Buildings               |   |        | 1,169  |      |   |        | 1,752  |  
|                               | Machinery and equipment |   |        | 3,732  |      |   |        | 4,374  |  
|                              
|                               |                         |   | 4,955  |        |      |   | 6,250  |       
|                              
|Less accumulated depreciation: |                         |   |        |        |      |   |        |       
|                               | Buildings               |   |        | (463   | )    |   |        | (792   | )
|                               | Machinery and equipment |   |        | (3,051 | )    |   |        | (2,999 | )
|                              
|                               |                         |   | (3,514 | )      |      |   | (3,791 | )     
|                              
|Plant and equipment  net      |                         | $ | 1,441  |        |      | $ | 2,459  |       
|                              

F-17



---



##### Table of Contents





| |  | Goodwill:
| |  | ---------

|                                      |                  |   |          |   |            |   |          |    |          |   |       |    |       |   |     |      |   |   |   |   |  |   |       |      |  
|------------------------------------- | ---------------- | - | -------- | - | ---------- | - | -------- | -- | -------- | - | ----- | -- | ----- | - | --- | ---- | - | - | - | - |  | - | ----- | ---- | -
|                                     
|                                      |                  |   | Wireless |   | Enterprise |   | Wireline |    | Optical  |   |       |    |       |   |     |      |  
|                                      |                  |   | Networks |   | Networks   |   | Networks |    | Networks |   | Other |    | Total
|                                     
|Balance  net as at January 1, 2002   |                  | $ | 21       |   |            | $ | 1,523    |    |          | $ | 481   |    |       | $ | 258 |      |   | $ |  |   |  | $ | 2,283 |     
|Change:                               |                  |   |          |   |            |   |          |    |          |   |       |    |       |   |     |      |   |   |   |   |  |   |       |     
|                                      | Disposal         |   |          |  |            |   |          |   |          |   |       |   |       |   |     |     |   |   |   |  |  |   |       |     |  
|                                      | Impairment(a)    |   |          |  |            |   |          |   |          |   |       |   |       |   |     | (264 | ) |   |   |  |  |   |       | (264 | )
|                                      | Foreign exchange |   |          |  |            |   |          | (3 | )        |   |       | (1 | )     |   |     | 6    |   |   |   |  |  |   |       | 2    |  
|                                     
|Balance  net as at December 31, 2002 |                  | $ | 21       |   |            | $ | 1,520    |    |          | $ | 480   |    |       | $ |    |      |   | $ |  |   |  | $ | 2,021 |     
|                                     

| |  | (a) | See note 6 for further information regarding this goodwill impairment
charge.
| |  | --- | -----------------------------------------------------------------------------



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

|                               |  |      |   |      |  |   |     |  
|------------------------------ |  | ---- | - | ---- |  | - | --- | -
|                              
|                               |  | 2002 |   | 2001
|                              
|Acquired technology            |  | $    |  |      |  | $ | 66  |  
|Less: accumulated amortization |  |      |  |      |  |   | (46 | )
|                              
|Acquired technology  net      |  | $    |  |      |  | $ | 20  |  
|                              



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

|                                                            |  |      |       |      |  |   |       | 
|----------------------------------------------------------- |  | ---- | ----- | ---- |  | - | ----- | 
|                                                           
|                                                            |  | 2002 |       | 2001
|                                                           
|Outsourcing and selling, general and administrative related |  | $    | 690   |      |  | $ | 693   | 
|Customer deposits                                           |  |      | 389   |      |  |   | 610   | 
|Product related                                             |  |      | 372   |      |  |   | 763   | 
|Warranty                                                    |  |      | 238   |      |  |   | 244   | 
|Deferred income                                             |  |      | 218   |      |  |   | 121   | 
|Miscellaneous taxes                                         |  |      | 121   |      |  |   | 75    | 
|Income taxes payable                                        |  |      | 98    |      |  |   | 143   | 
|Current liabilities of discontinued operations              |  |      | 46    |      |  |   | 384   | 
|Interest expense                                            |  |      | 52    |      |  |   | 57    | 
|Other                                                       |  |      | 579   |      |  |   | 682   | 
|                                                           
|Other accrued liabilities                                   |  | $    | 2,803 |      |  | $ | 3,772 | 
|                                                           



| |  | Consolidated statements of cash flows          
| |  | -----------------------------------------------
|
| |  | Cash and cash equivalents at end of year  net:

|                                                     |  |      |       |      |  |      |       |  |  |   |       | 
|---------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                                    
|                                                     |  | 2002 |       | 2001 |  | 2000
|                                                    
|Cash on hand and balances with banks                 |  | $    | 903   |      |  | $    | 1,249 |  |  | $ | 1,141 | 
|Short-term investments                               |  |      | 2,910 |      |  |      | 2,208 |  |  |   | 426   | 
|                                                    
|Cash and cash equivalents at the end of the year-net |  | $    | 3,813 |      |  | $    | 3,457 |  |  | $ | 1,567 | 
|                                                    

F-18



---



##### Table of Contents





| |  | Acquisitions of investments and businesses  net of cash acquired:
| |  | ------------------------------------------------------------------

|                                                                  |                                                                                          |   |      |   |      |   |      |   |  |   |        |       | 
|----------------------------------------------------------------- | ---------------------------------------------------------------------------------------- | - | ---- | - | ---- | - | ---- | - |  | - | ------ | ----- | 
|                                                                 
|                                                                  |                                                                                          |   | 2002 |   | 2001 |   | 2000
|                                                                 
|Cash acquired                                                     |                                                                                          | $ |     |   |      | $ |     |   |  | $ | (166   | )    
|Total net assets acquired other than cash                         |                                                                                          |   | (29  | ) |      |   | (89  | ) |  |   | (5,453 | )    
|                                                                 
|Total purchase price                                              |                                                                                          |   | (29  | ) |      |   | (89  | ) |  |   | (5,619 | )    
|Less:                                                             |                                                                                          |   |      |   |      |   |      |   |  |   |        |      
|                                                                  | Cash acquired                                                                            |   |      |  |      |   |      |  |  |   |        | 166   | 
|                                                                  | Non-cash consideration paid other than common share options
and contingent consideration |   |      |  |      |   |      |  |  |   |        | 4,307 | 
|                                                                  | Common share consideration paid                                                          |   |      |  |      |   |      |  |  |   |        | 791   | 
|                                                                  | Cash consideration contingent upon the achievement of certain
operational milestones     |   |      |  |      |   |      |  |  |   |        | 39    | 
|                                                                 
|Acquisitions of investments and businesses  net of cash acquired |                                                                                          | $ | (29  | ) |      | $ | (89  | ) |  | $ | (316   | )    
|                                                                 



| |  | Interest and income taxes paid (recovered):
| |  | -------------------------------------------

|                             |  |      |        |      |  |      |     |  |  |   |     | 
|---------------------------- |  | ---- | ------ | ---- |  | ---- | --- |  |  | - | --- | 
|                            
|                             |  | 2002 |        | 2001 |  | 2000
|                            
|Interest paid                |  | $    | 201    |      |  | $    | 252 |  |  | $ | 158 | 
|Income taxes paid (received) |  | $    | (1,218 | )    |  | $    | 18  |  |  | $ | 736 | 
|                            



| |  | Receivables sales:
| |  | ------------------

|                                                                         |  |      |     |      |  |      |     |  |  |   |       | 
|------------------------------------------------------------------------ |  | ---- | --- | ---- |  | ---- | --- |  |  | - | ----- | 
|                                                                        
|                                                                         |  | 2002 |     | 2001 |  | 2000
|                                                                        
|Proceeds from new securitizations                                        |  | $    | 562 |      |  | $    | 789 |  |  | $ | 1,632 | 
|Proceeds from collections reinvested in revolving period securitizations |  | $    | 276 |      |  | $    | 688 |  |  | $ | 1,043 | 
|                                                                        



|5. |  | Segmented information
|-- |  | ---------------------



| |  | General description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Nortel Networks operations are organized around four reportable segments:
Wireless Networks; Enterprise Networks; Wireline Networks; and Optical
Networks. Nortel Networks reportable segments are focused on providing
seamless networking products and service capabilities. These products and
service solutions are used by our service provider and enterprise customers,
including local and long-distance communications companies, wireless service
providers, cable multiple system operators and other communications service
providers, large and small businesses, governments, educational institutions
and other organizations.                                                                                                                                                                                                                                                                                                                     
|
| |  | Wireless Networks includes network access and core networking products for
voice and data communications that span second and third generation wireless
technologies and most major global standards for mobile networks. Enterprise
Networks includes circuit and packet voice solutions, and data networking and
security solutions, along with related professional services used by our enterprise customers. Wireline Networks
includes circuit and packet voice solutions, and data networking and security
solutions, along with related professional services used by our service
provider customers. Optical Networks includes metropolitan, regional and
long-haul photonic dense wavelength division multiplexing transmission
systems, synchronous optical transmission systems, optical switching
solutions, network management software and intelligence solutions and Optical
Ethernet solutions for our service provider and enterprise customers.
|
| |  | Other represents miscellaneous business activities and corporate functions.
None of these activities meet the quantitative criteria to be disclosed as
reportable segments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

F-19



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##### Table of Contents





| |  | As described in note 17, Nortel Networks access solutions operations were
discontinued during the year ended December 31, 2001. These operations were
previously included as a separate segment within Other. The data included
below excludes amounts related to the access solutions operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Nortel Networks President and Chief Executive Officer (CEO) has been
identified as the chief operating decision maker in assessing the performance
of the segments and the allocation of resources to the segments. Each
reportable segment is managed separately with each segment manager reporting
directly to the CEO. The CEO relies on the information derived directly from
the Nortel Networks management reporting system. Contribution margin
represents the primary financial measure used by the CEO in assessing
performance and allocating resources, and includes the cost of revenues, and
selling, general and administrative expense, for which the segment managers
are held accountable. Costs associated with shared services, and other
corporate costs, are allocated to the segments based on usage determined
generally by headcount. Costs not allocated are primarily related to Nortel
Networks corporate compliance and other non-operational activities and are
included in Other. In addition, the CEO does not review asset information on
a segmented basis in order to assess performance and allocate resources. The
accounting policies of the reportable segments are the same as those applied
in the consolidated financial statements.
|
| |  | Segments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | During the three months ended September 30, 2002, Nortel Networks changed the
way it managed its business to streamline and focus more directly on its
customers in four core business areas. Consequently, the former Metro and
Enterprise Networks was split into two new segments, Enterprise Networks and
Wireline Networks, each with its own segment manager reporting directly to
the CEO. In addition, during the three months ended June 30, 2002,
management shifted the accountability for the metro optical portion of the
former Metro and Enterprise Networks segment to Optical Networks (formerly
named Optical Long-Haul Networks). As a result, financial information is
reported on the new basis and historical comparative financial information
has been restated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

F-20



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##### Table of Contents





| |  | The following tables set forth information by segment for each of the years
ended December 31:
| |  | ----------------------------------------------------------------------------------------------

|                                                    |  |      |        |      |  |      |         |   |  |   |        |  
|--------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------- | - |  | - | ------ | -
|                                                   
|                                                    |  | 2002 |        | 2001 |  | 2000
|                                                   
|Revenues                                            |  |      |        |      |  |      |         |   |  |   |        |  
|Wireless Networks                                   |  | $    | 4,211  |      |  | $    | 5,714   |   |  | $ | 5,438  |  
|Enterprise Networks                                 |  |      | 2,574  |      |  |      | 3,241   |   |  |   | 3,889  |  
|Wireline Networks                                   |  |      | 2,254  |      |  |      | 4,447   |   |  |   | 7,728  |  
|Optical Networks                                    |  |      | 1,461  |      |  |      | 3,334   |   |  |   | 9,732  |  
|Other                                               |  |      | 46     |      |  |      | 639     |   |  |   | 1,066  |  
|                                                   
|Total                                               |  | $    | 10,546 |      |  | $    | 17,375  |   |  | $ | 27,853 |  
|                                                   
|Contribution Margin                                 |  |      |        |      |  |      |         |   |  |   |        |  
|Wireless Networks                                   |  |      | 1,070  |      |  |      | 405     |   |  |   | 1,024  |  
|Enterprise Networks                                 |  |      | 422    |      |  |      | 345     |   |  |   | 872    |  
|Wireline Networks                                   |  |      | 435    |      |  |      | 514     |   |  |   | 2,999  |  
|Optical Networks                                    |  |      | (755   | )    |  |      | (3,043  | ) |  |   | 3,196  |  
|Other                                               |  |      | (433   | )    |  |      | (902    | ) |  |   | (678   | )
|                                                   
|Total                                               |  | $    | 739    |      |  | $    | (2,681  | ) |  | $ | 7,413  |  
|                                                   
|Research and development expense                    |  |      | (2,228 | )    |  |      | (3,230  | ) |  |   | (3,626 | )
|In-process research and development expense         |  |      |       |      |  |      |        |   |  |   | (623   | )
|Amortization of acquired technology                 |  |      | (20    | )    |  |      | (574    | ) |  |   | (789   | )
|Amortization of goodwill                            |  |      |       |      |  |      | (2,082  | ) |  |   | (2,492 | )
|Stock option compensation                           |  |      |       |      |  |      |        |   |  |   | (99    | )
|Special charges                                     |  |      | (1,816 | )    |  |      | (5,443  | ) |  |   | (267   | )
|Gain on sale of businesses                          |  |      | 22     |      |  |      | 125     |   |  |   | 174    |  
|Equity in net loss of associated companies          |  |      | (9     | )    |  |      | (134    | ) |  |   | (29    | )
|Other income (expense)  net                        |  |      | (2     | )    |  |      | (325    | ) |  |   | 835    |  
|Interest expense                                    |  |      | (172   | )    |  |      | (284    | ) |  |   | (168   | )
|                                                   
|Loss from continuing operations before income taxes |  | $    | (3,486 | )    |  | $    | (14,628 | ) |  | $ | 329    |  
|                                                   



| |  | Product revenues                                                                                    
| |  | ----------------------------------------------------------------------------------------------------
|
| |  | The following table sets forth external revenues by product for each of the
years ended December 31:

|                                       |  |      |        |      |  |      |        |  |  |   |        | 
|-------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                                      
|                                       |  | 2002 |        | 2001 |  | 2000
|                                      
|Wireless solutions                     |  | $    | 4,211  |      |  | $    | 5,714  |  |  | $ | 5,438  | 
|Circuit and packet voice solutions     |  |      | 3,111  |      |  |      | 5,312  |  |  |   | 8,705  | 
|Optical solutions                      |  |      | 1,637  |      |  |      | 3,695  |  |  |   | 10,039 | 
|Data networking and security solutions |  |      | 1,541  |      |  |      | 2,015  |  |  |   | 2,605  | 
|Other                                  |  |      | 46     |      |  |      | 639    |  |  |   | 1,066  | 
|                                      
|Total                                  |  | $    | 10,546 |      |  | $    | 17,375 |  |  | $ | 27,853 | 
|                                      

F-21



---



##### Table of Contents





| |  | Geographic information                                                                                                                              
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The following table sets forth external revenues by geographic region based
on the location of the customer for each of the years ended December 31:

|                  |  |      |        |      |  |      |        |  |  |   |        | 
|----------------- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                 
|                  |  | 2002 |        | 2001 |  | 2000
|                 
|External revenues |  |      |        |      |  |      |        |  |  |   |        | 
|United States     |  | $    | 5,322  |      |  | $    | 8,524  |  |  | $ | 16,798 | 
|EMEA(a)           |  |      | 2,574  |      |  |      | 4,326  |  |  |   | 5,835  | 
|Canada            |  |      | 676    |      |  |      | 936    |  |  |   | 1,505  | 
|Other regions     |  |      | 1,974  |      |  |      | 3,589  |  |  |   | 3,715  | 
|                 
|Total             |  | $    | 10,546 |      |  | $    | 17,375 |  |  | $ | 27,853 | 
|                 

| |  | (a) | The Europe, Middle East and Africa region (EMEA).
| |  | --- | ---------------------------------------------------



| |  | Long- lived assets                                                                                                                                                      
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The following table sets forth long-lived assets, representing plant and
equipment  net, goodwill, and intangible assets  net, by geographic
region as at December 31:

|                  |  |      |       |      |  |   |       | 
|----------------- |  | ---- | ----- | ---- |  | - | ----- | 
|                 
|                  |  | 2002 |       | 2001
|                 
|Long-lived assets |  |      |       |      |  |   |       | 
|United States     |  | $    | 2,311 |      |  | $ | 2,779 | 
|EMEA              |  |      | 411   |      |  |   | 801   | 
|Canada            |  |      | 603   |      |  |   | 965   | 
|Other regions     |  |      | 137   |      |  |   | 217   | 
|                 
|Total             |  | $    | 3,462 |      |  | $ | 4,762 | 
|                 



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



| |  | During 2002, in light of the continued downturn in both the
telecommunications industry and the economic environment, and capital market
trends impacting Nortel Networks operations and expected future growth rates,
Nortel Networks continued to implement its work plan to streamline its
operations and activities around its core markets and leadership strategies.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-22



---



##### Table of Contents





| |  | Special charges recorded from January 1, 2000 to December 31, 2002 were as
follows:
| |  | -----------------------------------------------------------------------------------

|                                             |                       |   |           |        |           |   |             |      |           |   |       |      |         |   |    |     |            |   |   |        |   |   |       |        |  
|-------------------------------------------- | --------------------- | - | --------- | ------ | --------- | - | ----------- | ---- | --------- | - | ----- | ---- | ------- | - | -- | --- | ---------- | - | - | ------ | - | - | ----- | ------ | -
|                                            
|                                             |                       |   |           |        |           |   | Contract    |      |           |   |       |      |         |   |    |     | Intangible |   |   |        |  
|                                             |                       |   |           |        |           |   | settlement  |      | Plant and |   |       |      | asset   |   |    |     |           
|                                             |                       |   | Workforce |        | and lease |   | equipment   |      |           |   |       |      | impair- |   |    |     |           
|                                             |                       |   | reduction |        | costs     |   | write downs |      | Other     |   | ments |      | Total  
|                                            
|Provision balance as at January 1, 2000      |                       | $ |          |        |           | $ |            |      |           | $ |      |      |         | $ |   |     |            | $ |  |        |   | $ |      |       
|                                             | Goodwill impairment   |   |           |       |           |   |             |     |           |   |       |     |         |   |    |    |            |   |   | 133    |   |   |       | 133    |  
|                                             | Other special charges |   |           | 130    |           |   |             |     |           |   |       |     |         |   |    | 4   |            |   |   |       |   |   |       | 134    |  
|                                             | Cash drawdowns        |   |           | (82    | )         |   |             |     |           |   |       |     |         |   |    |    |            |   |   |       |   |   |       | (82    | )
|                                             | Non-cash drawdowns    |   |           |       |           |   |             |     |           |   |       |     |         |   |    | (4  | )          |   |   | (133   | ) |   |       | (137   | )
|                                            
|Provision balance as at December 31, 2000    |                       | $ | 48        |        |           | $ |            |      |           | $ |      |      |         | $ |   |     |            | $ |  |        |   | $ | 48    |       
|                                            
|                                             | Goodwill impairment   |   |           |       |           |   |             |     |           |   |       |     |         |   |    |    |            |   |   | 2,239  |   |   |       | 2,239  |  
|                                             | Other special charges |   |           | 1,343  |           |   |             | 883  |           |   |       | 939  |         |   |    | 39  |            |   |   |       |   |   |       | 3,204  |  
|                                             | Cash drawdowns        |   |           | (1,012 | )         |   |             | (110 | )         |   |       |     |         |   |    | (8  | )          |   |   |       |   |   |       | (1,130 | )
|                                             | Non-cash drawdowns    |   |           | 14     |           |   |             |     |           |   |       | (939 | )       |   |    |    |            |   |   | (2,239 | ) |   |       | (3,164 | )
|                                            
|Provision
balance as at December 31, 2001(a) |                       | $ | 393       |        |           | $ | 773         |      |           | $ |      |      |         | $ | 31 |     |            | $ |  |        |   | $ | 1,197 |       
|                                            
|                                             | Goodwill impairment   |   |           |       |           |   |             |     |           |   |       |     |         |   |    |    |            |   |   | 264    |   |   |       | 264    |  
|                                             | Other special charges |   |           | 902    |           |   |             | 221  |           |   |       | 341  |         |   |    | 88  |            |   |   |       |   |   |       | 1,552  |  
|                                             | Cash drawdowns        |   |           | (779   | )         |   |             | (326 | )         |   |       |     |         |   |    | (20 | )          |   |   |       |   |   |       | (1,125 | )
|                                             | Non-cash drawdowns    |   |           | (100   | )         |   |             |     |           |   |       | (341 | )       |   |    | (88 | )          |   |   | (264   | ) |   |       | (793   | )
|                                            
|Provision
balance as at December 31, 2002(a) |                       | $ | 416       |        |           | $ | 668         |      |           | $ |      |      |         | $ | 11 |     |            | $ |  |        |   | $ | 1,095 |       
|                                            

| |  | (a) | At December 31, 2002 and 2001, the short-term provision balance was
$761 and $871, respectively, and the long-term provision balance was
$334 and $326, respectively (included in other liabilities).
| |  | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

|                                                   |             |  |                         |        |             |  |        |        |  |  |        |        | 
|-------------------------------------------------- | ----------- |  | ----------------------- | ------ | ----------- |  | ------ | ------ |  |  | ------ | ------ | 
|                                                  
|                                                   |             |  | Employees (approximate) |        |             |  |       
|                                                   |             |  |                         |        |             |  |       
|                                                   |             |  | Direct(a)               |        | Indirect(b) |  | Total 
|                                                  
|RFT employee notifications by period:              |             |  |                         |        |             |  |        |        |  |  |        |       
|                                                   | During 2000 |  |                         | 200    |             |  |        | 3,800  |  |  |        | 4,000  | 
|                                                   | During 2001 |  |                         | 13,800 |             |  |        | 21,700 |  |  |        | 35,500 | 
|                                                   | During 2002 |  |                         | 3,300  |             |  |        | 8,800  |  |  |        | 12,100 | 
|                                                  
|RFT employee notifications as at December 31, 2002 |             |  | 17,300                  |        |             |  | 34,300 |        |  |  | 51,600 |       
|                                                  

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



| |  | Year ended December 31, 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | For the year ended December 31, 2002, Nortel Networks recorded total special
charges of $1,816.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Workforce reduction charges of $902 were related to severance and benefit
costs associated with approximately 12,100 employees notified of termination
during 2002 which extended across all segments. Workforce reduction charges
include $124 for pension and post-retirement benefits other than pension,
settlement and curtailment costs. During 2002, the workforce reduction
provision balance was drawn down by cash payments of $779 and by $100 of
non-cash pension and post-retirement benefits other than pension, settlement
and curtailment costs attributable to the notified employee group charged
against the provision. The remaining provision is expected to be
substantially drawn down by the end of 2003.

F-23



---



##### Table of Contents





| |  | Contract settlement and lease costs of $221 include $70 of negotiated
settlements to cancel or renegotiate contracts and $151 of net lease charges
related to a number of leased facilities (comprised of office, warehouse and
manufacturing space), and leased manufacturing equipment no longer required,
across all of Nortel Networks segments. Lease costs represent Nortel
Networks future contractual obligations under its operating leases for those
leases that Nortel Networks cannot terminate. During 2002, Nortel Networks
modified the original disposition plan for certain properties and is pursuing
lease terminations instead of subleasing due to current market conditions.
As at December 31, 2002, the provision balance for contract settlement and
lease costs was drawn down by cash payments of $326, resulting in an ending
provision balance of $668. The remaining provision, net of approximately
$420 in expected sublease revenue, is expected to be substantially drawn down
by the end of 2006.                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Plant and equipment write downs of $341 were net of $28 of additional
proceeds from disposals in excess of amounts previously expected. Plant and
equipment charges include write downs of $19 for owned facilities across all
segments, a $17 reversal for certain leasehold improvements and information
technology equipment associated with the exit of leased and owned facilities,
and $339 for certain plant and manufacturing, and R&D related equipment. The
carrying values of the above noted owned facilities have been reflected at
their net realizable value based on market assessments for general purpose
facilities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | Plant and manufacturing related equipment write downs of $339 include $25 for
equipment within global operations, a function that supports all segments,
$266 for specialized plant infrastructure and equipment within Optical
Networks and $48 for specialized equipment including R&D equipment within all
segments. Within global operations, it was determined that there was excess
equipment at a number of system houses that would no longer be required as a
result of the industry and economic environment. As a result, the identified
equipment was written down to its net realizable value. Within Optical
Networks, Nortel Networks performed assessments of certain plant and
equipment due to the current market conditions and the delay in the
anticipated recovery of that segment and concluded that the assets carrying
value was not fully recoverable from estimated future cash flows. As a
result, Nortel Networks recorded $266 to write down the value of this
equipment to its net realizable value. Included in the $266 write down was
$34 related to equipment held for sale, which were part of the Bookham
Technology plc (Bookham) transaction (see note 9). Within other business
segments, $48 of excess equipment was identified that would no longer be
required as a result of the industry and economic environment and the
identified equipment was written down to its net realizable value.
|
| |  | Other special charges of $88 relates to inventory write downs, reflecting the
net realizable value of these assets on dispositions, associated with assets
held for sale under SFAS 144 within Optical Networks (see note 9).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              



| |  | Goodwill impairment charges were $264. As a result of the continued decline
in both Nortel Networks overall market value generally and within Optical
Networks specifically, Nortel Networks as part of its review of financial
results during the year ended December 31, 2002, evaluated the goodwill
associated with the businesses within Optical Networks for potential
impairment. The conclusion of those evaluations was that the fair value
associated with the businesses within Optical Networks could no longer
support the carrying value of the remaining goodwill associated with them.
As a result, Nortel Networks recorded a goodwill impairment charge of $264.
Fair value was estimated using the expected present value of discounted
future cash flows of the businesses within Optical Networks. The discount
rate used ranged from 12 to 16 percent and the terminal values were estimated
based on terminal growth rates ranging from 3 to 5 percent. The assumptions
supporting the estimated future cash flows, including the discount rate and
estimated terminal values, reflect managements best estimates.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Year ended December 31, 2001                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | For the year ended December 31, 2001, Nortel Networks recorded total special
charges of $5,443.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Workforce reduction charges of $1,343 were related to the cost of severance
and benefits associated with approximately 35,500 employees notified of
termination. The workforce reduction was primarily in the United States,
Canada and EMEA and extended across all segments. As at December 31, 2001,
the workforce reduction provision balance was drawn down by cash payments of
$1,012, offset by $14 of non-cash pension settlement and curtailment costs
attributable to the notified employee group charged against the provision.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

F-24



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##### Table of Contents





| |  | Contract settlement and lease costs of $883 included $126 of negotiated
settlements to cancel or renegotiate contracts and $757 of net lease charges
related to a number of leased facilities (comprised of office, warehouse and
manufacturing space), and leased manufacturing equipment no longer required,
across all segments. Lease costs represent Nortel Networks future
contractual obligations under its applicable operating leases on leases that
Nortel Networks cannot terminate. As at December 31, 2001, the provision
balance for contract settlement and lease costs was drawn down by cash
payments of $110, resulting in a provision balance of $773, net of
approximately $506 in expected sublease revenues.                                                                                                                                                                                                                                                                                                                                                        
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Plant and equipment write downs of $939 include write downs of $186 for owned
facilities, $440 for leasehold improvements and certain information
technology equipment associated with the exiting of leased and owned
facilities and $313 for certain plant and manufacturing related equipment.
Owned facility write downs of $186 include $95 for specific owned facilities
across all segments primarily within the United States, Canada and EMEA and
$91 for a specialized manufacturing facility in the United States within
Optical Networks. The carrying values of the above owned facilities have
been reflected at their net realizable value based on market assessments for
general purpose facilities.                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Plant and manufacturing related equipment write downs of $313 include $66 for
equipment within global operations, and $247 for specialized plant
infrastructure and equipment within Optical Networks.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | Goodwill and intangible asset impairment charges were $2,239 and include a
goodwill impairment charge of $106 related to the remaining net book value of
goodwill associated with the prior acquisitions of MICOM Communications,
Corp. and Dimension Enterprises, Inc. (Dimension). As part of Nortel
Networks work plan to streamline its business, the decision was made to exit
all technologies and consulting services related to these prior acquisitions.
The results related to these prior acquisitions were not material to the
business, results of operations and financial condition of Nortel Networks.                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Nortel Networks, as part of its review of financial results during the year
ended December 31, 2001, performed an assessment of the carrying values of
intangible assets recorded in connection with its various acquisitions. The
assessment during that period was performed in light of the significant
negative industry and economic trends impacting Nortel Networks operations
and expected future growth rates, and the adjustment of technology
valuations. The conclusion of the assessment was that the decline in market
conditions within the telecommunications industry was significant and other
than temporary. As a result, Nortel Networks recorded a $2,133 impairment of
goodwill and other intangible assets based on the amount by which the
carrying amount of these assets exceeded their fair value. The impairment
was primarily related to the goodwill within Enterprise Networks, Optical
Networks and Other and was associated with the acquisitions of Qtera
Corporation (Qtera), Photonic Technologies, Inc. (Photonic) and Clarify
Inc. (Clarify).



| |  | Fair value was determined based on discounted future cash flows for the
businesses that had separately distinguishable goodwill and intangible asset
balances and whose operations had not yet been fully integrated into Nortel
Networks. The cash flow periods used were five years, the discount rate used
was 20 percent, and the terminal values were estimated based upon terminal
growth rates ranging from 5 to 11 percent reflecting managements best
estimates at the time. The discount rate was based upon Nortel Networks
weighted average cost of capital as adjusted for the risks associated with
the operations.                                                                  
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Year ended December 31, 2000                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | For the year ended December 31, 2000, Nortel Networks recorded total special
charges of $267.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Workforce reduction charges of $130 consisted of $100 related to
approximately 2,000 employees connected with Nortel Networks initiative to
strategically realign resources into high growth areas of the business in
response to shifts in customers needs from older to newer technologies
across Nortel Networks product portfolio. The remaining workforce reduction
costs of $30 related to approximately 2,000 employees connected with the
outsourcing of certain information services functions as part of the
outsourcing of certain corporate service functions which began in the third
quarter of 1999. The provision balance of $48 at December 31, 2000 was fully
drawn down in 2001.

F-25



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##### Table of Contents





| |  | The intangible asset impairment charge of $133 represented a reduction of the
goodwill related to certain operations in EMEA and resulted from a change in
business mandate for those operations from a product focus to a focus on
distribution channels.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  | At December 31, 2002, Nortel Networks net deferred tax assets, excluding
discontinued operations, were $3,224, reflecting temporary differences
between the financial reporting and tax treatment of certain current assets
and liabilities, and non-current assets and liabilities, plus the tax benefit
of net operating and capital loss carryforwards and tax credit carryforwards.
These carryforwards expire at various dates beginning in 2003.                                                                                                                                                                                                                                                                                                                                                                            
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | During the year ended December 31, 2002, Nortel Networks recorded a net
income tax benefit of $447 on a pre-tax loss of $3,486. Gross income tax
valuation allowances during the year ended December 31, 2002, were $1,053
including certain additional income tax valuation allowances of $536. Nortel
Networks assessed positive evidence including forecasts of future taxable
income to support realization of the net deferred tax assets, and negative
evidence including Nortel Networks eight consecutive quarters of tax losses,
and concluded that it was more likely than not, that certain additional tax
valuation allowances of $536 were required. If market conditions change or
future results of operations differ from those expected, future evaluations
may result in adjustments to the valuation allowance.
|
| |  | Changes to tax legislation in the United States, during the year ended
December 31, 2002, extended the net operating loss carryback period from two
to five years. As a result, Nortel Networks was able to carryback available
United States losses from 2001 and utilize approximately $700 of deferred
income tax assets previously recognized, generating additional cash
recoveries of approximately $700 for the year ended December 31, 2002.                                                                                                                                                                                                                                                                                                                                                                              

F-26



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##### Table of Contents





| |  | The following is a reconciliation of income taxes, calculated at the Canadian
combined federal and provincial income tax rate, to the income tax benefit
(provision) included in the accompanying consolidated statements of
operations for each of the years ended December 31:
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                                                   |                                                                      |                                                                      |        |      |        |      |         |       |         |   |        |        |      |  
|------------------------------------------------------------------------------------------------------------------ | -------------------------------------------------------------------- | -------------------------------------------------------------------- | ------ | ---- | ------ | ---- | ------- | ----- | ------- | - | ------ | ------ | ---- | -
|                                                                                                                  
|                                                                                                                   |                                                                      |                                                                      |        | 2002 |        | 2001 |         | 2000 
|                                                                                                                  
|Income taxes at Canadian rates
(2002 - 39.4%, 2001 - 40.8%, 2000 - 42.3%)                                          |                                                                      | $                                                                    | 1,374  |      |        | $    | 5,971   |       |         | $ | (139   | )     
|Reduction of Canadian taxes applicable to manufacturing profits                                                    |                                                                      |                                                                      | (62    | )    |        |      | (71     | )     |         |   | 36     |       
|Difference between Canadian rate and rates applicable to subsidiaries in
the United States and other jurisdictions |                                                                      |                                                                      | (37    | )    |        |      | (752    | )     |         |   | 114    |       
|Difference between basic Canadian rate and rates applicable to gain (loss)
on sale of businesses                   |                                                                      |                                                                      | 2      |      |        |      | (31     | )     |         |   | (30    | )     
|Non-deductible amortization of acquired intangibles and IPR&D expense                                              |                                                                      |                                                                      | (90    | )    |        |      | (1,749  | )     |         |   | (1,313 | )     
|Foreign operation tax credit                                                                                       |                                                                      |                                                                      |       |      |        |      | 979     |       |         |   |       |       
|Valuation allowances on tax benefits                                                                               |                                                                      |                                                                      | (1,053 | )    |        |      | (1,331  | )     |         |   |       |       
|Utilization of losses                                                                                              |                                                                      |                                                                      | 65     |      |        |      | 22      |       |         |   | 64     |       
|Other                                                                                                              |                                                                      |                                                                      | 248    |      |        |      | 35      |       |         |   | 68     |       
|                                                                                                                  
|Income tax benefit (provision)                                                                                     |                                                                      | $                                                                    | 447    |      |        | $    | 3,073   |       |         | $ | (1,200 | )     
|                                                                                                                  
|Details of Nortel Networks income taxes:                                                                           |                                                                      |                                                                      |        |      |        |      |         |       |         |   |        |       
|                                                                                                                   | Earnings (loss) from continuing operations before income taxes:      |                                                                      |        |      |        |      |         |       |         |   |        |        |     
|                                                                                                                   |                                                                      | Canadian, excluding gain (loss) on sale of businesses                |        | $    | (1,258 | )    |         | $     | (3,394  | ) |        | $      | 868  |  
|                                                                                                                   |                                                                      | United States and other, excluding gain (loss) on sale of businesses |        |      | (2,251 | )    |         |       | (11,359 | ) |        |        | (713 | )
|                                                                                                                   |                                                                      | Gain (loss) on sale of businesses                                    |        |      | 23     |      |         |       | 125     |   |        |        | 174  |  
|                                                                                                                  
|                                                                                                                   |                                                                      | $                                                                    | (3,486 | )    |        | $    | (14,628 | )     |         | $ | 329    |       
|                                                                                                                  
|Income tax benefit (provision):                                                                                    |                                                                      |                                                                      |        |      |        |      |         |       |         |   |        |       
|                                                                                                                   | Canadian, excluding (gain) loss on sale of businesses                |                                                                      | $      | 120  |        |      | $       | 504   |         |   | $      | (231   | )   
|                                                                                                                   | United States and other, excluding (gain) loss on sale of businesses |                                                                      |        | 334  |        |      |         | 2,651 |         |   |        | (866   | )   
|                                                                                                                   | (Gain) loss on sale of businesses                                    |                                                                      |        | (7   | )      |      |         | (82   | )       |   |        | (103   | )   
|                                                                                                                  
|                                                                                                                   |                                                                      | $                                                                    | 447    |      |        | $    | 3,073   |       |         | $ | (1,200 | )     
|                                                                                                                  
|Income tax benefit (provision):                                                                                    |                                                                      |                                                                      |        |      |        |      |         |       |         |   |        |       
|                                                                                                                   | Current                                                              |                                                                      | $      | 29   |        |      | $       | 1,236 |         |   | $      | (1,420 | )   
|                                                                                                                   | Deferred                                                             |                                                                      |        | 418  |        |      |         | 1,837 |         |   |        | 220    |     
|                                                                                                                  
|Income tax benefit (provision)                                                                                     |                                                                      | $                                                                    | 447    |      |        | $    | 3,073   |       |         | $ | (1,200 | )     
|                                                                                                                  

F-27



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| |  | The following table shows the significant components included in deferred
income taxes as at December 31:
| |  | ---------------------------------------------------------------------------------------------------------

|                               |                                                   |   |        |       |      |   |        |       | 
|------------------------------ | ------------------------------------------------- | - | ------ | ----- | ---- | - | ------ | ----- | 
|                              
|                               |                                                   |   | 2002   |       | 2001
|                              
|Assets:                        |                                                   |   |        |       |      |   |        |      
|                               | Tax benefit of loss carryforwards and tax credits |   | $      | 4,590 |      |   | $      | 2,981 | 
|                               | Provision and reserves                            |   |        | 1,755 |      |   |        | 1,775 | 
|                               | Post-retirement benefits other than pensions      |   |        | 104   |      |   |        | 381   | 
|                               | Plant and equipment                               |   |        | 72    |      |   |        | 25    | 
|                               | Pension plan liabilities                          |   |        | 285   |      |   |        | 49    | 
|                               | Deferred compensation                             |   |        | 32    |      |   |        | 35    | 
|                               | Unrealized losses on investments                  |   |        | 3     |      |   |        | 107   | 
|                               | Other                                             |   |        | 2     |      |   |        | 13    | 
|                              
|                               |                                                   |   | 6,843  |       |      |   | 5,366  |      
|Valuation allowance            |                                                   |   | (2,875 | )     |      |   | (1,573 | )    
|                              
|                               |                                                   |   | 3,968  |       |      |   | 3,793  |      
|                              
|Liabilities:                   |                                                   |   |        |       |      |   |        |      
|                               | Acquired technology                               |   |        |      |      |   |        | 8     | 
|                               | Provision and reserves                            |   |        | 681   |      |   |        | 560   | 
|                               | Plant and equipment                               |   |        | 6     |      |   |        | 166   | 
|                               | Other                                             |   |        | 57    |      |   |        | 29    | 
|                              
|                               |                                                   |   | 744    |       |      |   | 763    |      
|                              
|Net deferred income tax assets |                                                   | $ | 3,224  |       |      | $ | 3,030  |      
|                              



| |  | Included in deferred income taxes as at December 31, 2002 was a valuation
allowance on certain deferred income tax assets of approximately $63, which
pertained to certain provisions and loss carryforwards resulting from certain
acquisitions. When utilized by Nortel Networks, the tax benefit of these
amounts will be accounted for as a credit to goodwill, to the extent that
there is remaining goodwill associated with the specific acquisition, rather
than as a reduction of the income tax provision.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | At December 31, 2002, Nortel Networks had the following net operating and
capital loss carryforwards and tax credits which are scheduled to expire in
the following years:                                                                                                                                                                                                                                                                                                                                          

|             |  |           |       |           |  |            |       |       |  |   |       |  |  |   |        | 
|------------ |  | --------- | ----- | --------- |  | ---------- | ----- | ----- |  | - | ----- |  |  | - | ------ | 
|            
|             |  | Net       |       |           |  |            |       |       |  |   |       |  |  |  
|             |  | operating |       | Capital   |  | Tax        |       |       |  |  
|             |  | losses    |       | Losses(a) |  | credits(b) |       | Total
|            
|2003 - 2006  |  | $         | 573   |           |  | $          |      |       |  | $ | 279   |  |  | $ | 852    | 
|2007 - 2009  |  |           | 1,778 |           |  |            |      |       |  |   | 260   |  |  |   | 2,038  | 
|2010 - 2011  |  |           | 7     |           |  |            |      |       |  |   | 398   |  |  |   | 405    | 
|2017 - 2021  |  |           | 2,358 |           |  |            |      |       |  |   | 262   |  |  |   | 2,620  | 
|Indefinitely |  |           | 1,085 |           |  |            | 3,960 |       |  |   | 12    |  |  |   | 5,057  | 
|            
|             |  | $         | 5,801 |           |  | $          | 3,960 |       |  | $ | 1,211 |  |  | $ | 10,972 | 
|            

| |  | (a) | The capital losses may only be used to offset future capital gains
realized in the United Kingdom. Nortel Networks has recorded a full
valuation allowance against this future tax benefit.                                               
| |  | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | (b) | Global investment tax credits of $116, $153 and $151 have been
applied against the income tax provision in 2002, 2001 and 2000,
respectively. Unused tax credits can be utilized primarily to offset
future Canadian income taxes payable.

F-28



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##### Table of Contents





|8. |  | Employee benefit plans
|-- |  | ----------------------



| |  | Pension plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Nortel Networks maintains various retirement programs covering substantially
all of its employees, consisting of defined benefit, defined contribution and
investment plans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | During 2000, Nortel Networks introduced a balanced capital accumulation and
retirement program (the Balanced Program) and an investor capital
accumulation and retirement program (the Investor Program), to
substantially all of its North American employees and a flexible benefits
plan (the Flexible Benefits Plan) to substantially all of its employees in
the United Kingdom. Those employees who were already a member of one of the
existing defined benefit pension plans (the Traditional Program) could
elect to transfer to one of these new program arrangements, as applicable, or
remain in the existing Traditional Program. With the introduction of the
Balanced Program, the Investor Program, and the Flexible Benefits Plan during
2000, the Traditional Program was closed to new entrants.
|
| |  | In 2002, the decline in global capital markets and interest rates had a
negative impact on Nortel Networks pension plan assets and obligations. As a
result, Nortel Networks was required to adjust the minimum pension liability
for certain plans, representing the amount by which the accumulated benefit
obligation less the fair value of the plan assets was greater than the
liability previously recognized in the consolidated balance sheet. The
pre-tax effect of this adjustment was to decrease prepaid pension costs by
$23, increase pension liabilities by $696, increase intangible assets by $27,
and increase accumulated other comprehensive loss by $692. Because these
adjustments were non-cash, their effect has been excluded from the
accompanying consolidated statements of cash flows.       
|
| |  | Benefits other than pensions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Nortel Networks also provides other benefits, including post-retirement
benefit and post-employment benefits. Employees in the Traditional Program
are eligible for their existing company sponsored post-retirement benefits or
a modified version of these benefits, depending on age and years of service.
Employees in the Balanced Program are eligible for post-retirement benefits
at reduced company contribution levels, while employees in the Investor
Program have access to post-retirement benefits by purchasing a Nortel
Networks-sponsored retiree health care plan at their own cost.                                                                                                                                                                                                                    
|
| |  | Nortel Networks policy is to fund defined benefit pension and other benefits
based on accepted actuarial methods as permitted by regulatory authorities.
The funded amounts reflect actuarial assumptions regarding compensation,
interest and other projections. Plan assets are comprised primarily of common
stocks, bonds, debentures, secured mortgages and property. Included in plan
assets are common shares of Nortel Networks Corporation with an aggregate
market value of $3 in 2002 ($23 in 2001).                                                                                                                                                                                                                                                                                                            
|
| |  | Pension and other benefit costs reflected in the accompanying consolidated
statement of operations are based on the projected benefit method of
valuation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

F-29



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##### Table of Contents





| |  | The following details the unfunded status of the defined benefit plans and
post-retirement benefits other than pensions, and the associated amounts
recognized in the accompanying consolidated balance sheets as at December 31:
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                   |                                         |   |                       |        |                          |   |        |      |      |   |      |      |   |   |      |      |  
|------------------------------------------------------------------ | --------------------------------------- | - | --------------------- | ------ | ------------------------ | - | ------ | ---- | ---- | - | ---- | ---- | - | - | ---- | ---- | -
|                                                                  
|                                                                   |                                         |   | Defined benefit plans |        | Post-retirement benefits
|                                                                  
|                                                                   |                                         |   | 2002                  |        | 2001                     |   | 2002   |      | 2001
|                                                                  
|Change in benefit obligation:                                      |                                         |   |                       |        |                          |   |        |      |      |   |      |      |   |   |      |     
|Benefit obligation  beginning                                     |                                         | $ | 6,020                 |        |                          | $ | 5,888  |      |      | $ | 529  |      |   | $ | 479  |     
|Service cost                                                       |                                         |   | 155                   |        |                          |   | 197    |      |      |   | 10   |      |   |   | 13   |     
|Interest cost                                                      |                                         |   | 400                   |        |                          |   | 405    |      |      |   | 37   |      |   |   | 36   |     
|Plan participants contributions                                   |                                         |   | 11                    |        |                          |   | 17     |      |      |   | 2    |      |   |   | 2    |     
|Actuarial loss (gain)                                              |                                         |   | (23                   | )      |                          |   | 346    |      |      |   | 20   |      |   |   | 28   |     
|Acquisition/divestiture/settlements                                |                                         |   | (386                  | )      |                          |   | (186   | )    |      |   | (3   | )    |   |   | 15   |     
|Benefits paid                                                      |                                         |   | (315                  | )      |                          |   | (427   | )    |      |   | (31  | )    |   |   | (23  | )   
|Foreign exchange loss (gain)                                       |                                         |   | 283                   |        |                          |   | (220   | )    |      |   | 4    |      |   |   | (21  | )   
|                                                                  
|Benefit obligation  ending                                        |                                         | $ | 6,145                 |        |                          | $ | 6,020  |      |      | $ | 568  |      |   | $ | 529  |     
|                                                                  
|Change in plan assets:                                             |                                         |   |                       |        |                          |   |        |      |      |   |      |      |   |   |      |     
|Fair value of plan assets  beginning                              |                                         | $ | 4,980                 |        |                          | $ | 6,357  |      |      | $ | 41   |      |   | $ | 46   |     
|Actual return on plan assets                                       |                                         |   | (265                  | )      |                          |   | (811   | )    |      |   |     |      |   |   | 1    |     
|Employer contributions                                             |                                         |   | 149                   |        |                          |   | 114    |      |      |   | 28   |      |   |   | 20   |     
|Plan participants contributions                                   |                                         |   | 11                    |        |                          |   | 17     |      |      |   | 2    |      |   |   | 2    |     
|Acquisition/divestiture/settlements                                |                                         |   | (423                  | )      |                          |   | (60    | )    |      |   |     |      |   |   |     |     
|Benefits paid                                                      |                                         |   | (315                  | )      |                          |   | (427   | )    |      |   | (31  | )    |   |   | (23  | )   
|Change in valuation                                                |                                         |   |                      |        |                          |   | (64    | )    |      |   |     |      |   |   |     |     
|Foreign exchange gain (loss)                                       |                                         |   | 221                   |        |                          |   | (146   | )    |      |   | 1    |      |   |   | (5   | )   
|                                                                  
|Fair value of plan assets  ending                                 |                                         | $ | 4,358                 |        |                          | $ | 4,980  |      |      | $ | 41   |      |   | $ | 41   |     
|                                                                  
|Unfunded status of the plans                                       |                                         |   | (1,787                | )      |                          |   | (1,040 | )    |      |   | (527 | )    |   |   | (488 | )   
|Unrecognized net plan benefits existing at January 1, 1987         |                                         |   | (7                    | )      |                          |   | (10    | )    |      |   | (31  | )    |   |   |     |     
|Unrecognized prior service cost (credit)                           |                                         |   | 19                    |        |                          |   | 24     |      |      |   |     |      |   |   | (40  | )   
|Unrecognized net actuarial losses (gains)                          |                                         |   | 1,400                 |        |                          |   | 796    |      |      |   | 13   |      |   |   | (8   | )   
|Employer contributions after the measurement date                  |                                         |   | 113                   |        |                          |   | 24     |      |      |   |     |      |   |   |     |     
|                                                                  
|Net amount recognized                                              |                                         | $ | (262                  | )      |                          | $ | (206   | )    |      | $ | (545 | )    |   | $ | (536 | )   
|                                                                  
|Amount recognized in the accompanying consolidated
balance sheets: |                                         |   |                       |        |                          |   |        |      |      |   |      |      |   |   |      |     
|                                                                   | Other liabilities                       |   | $                     | (1,123 | )                        |   | $      | (354 | )    |   | $    | (545 | ) |   | $    | (536 | )
|                                                                   | Other assets  intangible assets        |   |                       | 41     |                          |   |        | 14   |      |   |      |     |   |   |      |     |  
|                                                                   | Other assets  pension assets           |   |                       |       |                          |   |        | 25   |      |   |      |     |   |   |      |     |  
|                                                                   | Foreign currency translation adjustment |   |                       | 19     |                          |   |        |     |      |   |      |     |   |   |      |     |  
|                                                                   | Accumulated other comprehensive loss    |   |                       | 801    |                          |   |        | 109  |      |   |      |     |   |   |      |     |  
|                                                                  
|Net amount recognized                                              |                                         | $ | (262                  | )      |                          | $ | (206   | )    |      | $ | (545 | )    |   | $ | (536 | )   
|                                                                  



| |  | The following details selected information for defined benefit plans with
accumulated benefit obligations in excess of the fair value of plan assets:
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

|                               |  |      |       |      |  |   |       | 
|------------------------------ |  | ---- | ----- | ---- |  | - | ----- | 
|                              
|                               |  | 2002 |       | 2001
|                              
|Benefit obligation             |  | $    | 6,145 |      |  | $ | 4,795 | 
|Accumulated benefit obligation |  | $    | 5,523 |      |  | $ | 4,268 | 
|Fair value of plan assets      |  | $    | 4,358 |      |  | $ | 3,851 | 
|                              

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| |  | The following details the net pension expense and the underlying assumptions
for the defined benefit plans for each of the years ended December 31:
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------

|                                             |  |      |      |      |  |      |      |   |  |   |      |  
|-------------------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  | - | ---- | -
|                                            
|                                             |  | 2002 |      | 2001 |  | 2000
|                                            
|Pension expense:                             |  |      |      |      |  |      |      |   |  |   |      |  
|Service cost                                 |  | $    | 155  |      |  | $    | 197  |   |  | $ | 182  |  
|Interest cost                                |  |      | 400  |      |  |      | 405  |   |  |   | 394  |  
|Estimated return on plan assets              |  |      | (418 | )    |  |      | (461 | ) |  |   | (450 | )
|Amortization of prior service cost           |  |      | 8    |      |  |      | 8    |   |  |   | 10   |  
|Amortization of net losses (gains)           |  |      | 19   |      |  |      | (25  | ) |  |   | 2    |  
|Settlement losses (gains)                    |  |      | 93   |      |  |      | 1    |   |  |   | (7   | )
|Curtailment losses (gains)                   |  |      | 40   |      |  |      | 16   |   |  |   | (35  | )
|                                            
|Net pension expense                          |  | $    | 297  |      |  | $    | 141  |   |  | $ | 96   |  
|                                            
|Allocation of net pension expense:           |  |      |      |      |  |      |      |   |  |   |      |  
|Continuing operations                        |  | $    | 297  |      |  | $    | 139  |   |  | $ | 93   |  
|Discontinued operations                      |  |      |     |      |  |      | 2    |   |  |   | 3    |  
|                                            
|Net pension expense                          |  | $    | 297  |      |  | $    | 141  |   |  | $ | 96   |  
|                                            
|Weighted average assumptions at end of year: |  |      |      |      |  |      |      |   |  |   |      |  
|Discount rate                                |  |      | 6.3  | %    |  |      | 6.7  | % |  |   | 7.0  | %
|Expected rate of return on plan assets       |  |      | 7.8  | %    |  |      | 7.8  | % |  |   | 8.1  | %
|Rate of compensation increase                |  |      | 3.7  | %    |  |      | 4.6  | % |  |   | 4.8  | %
|                                            



| |  | The following details the net cost components and underlying assumptions of
post-retirement benefits other than pensions for each of the years ended
December 31:
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                    |  |      |      |      |  |      |      |   |  |   |      |  
|------------------------------------------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  | - | ---- | -
|                                                                   
|                                                                    |  | 2002 |      | 2001 |  | 2000
|                                                                   
|Post-retirement benefit cost:                                       |  |      |      |      |  |      |      |   |  |   |      |  
|Service cost                                                        |  | $    | 10   |      |  | $    | 13   |   |  | $ | 20   |  
|Interest cost                                                       |  |      | 37   |      |  |      | 36   |   |  |   | 39   |  
|Expected return on plan assets                                      |  |      | (3   | )    |  |      | (3   | ) |  |   | (3   | )
|Amortization                                                        |  |      | (3   | )    |  |      | (5   | ) |  |   | (2   | )
|Settlements and curtailments                                        |  |      | (9   | )    |  |      | (21  | ) |  |   | (26  | )
|                                                                   
|Net post-retirement benefit cost                                    |  | $    | 32   |      |  | $    | 20   |   |  | $ | 28   |  
|                                                                   
|Allocation of net post-retirement benefit cost:                     |  |      |      |      |  |      |      |   |  |   |      |  
|Continuing operations                                               |  | $    | 32   |      |  | $    | 20   |   |  | $ | 27   |  
|Discontinued operations                                             |  |      |     |      |  |      |     |   |  |   | 1    |  
|                                                                   
|Net post-retirement benefit cost                                    |  | $    | 32   |      |  | $    | 20   |   |  | $ | 28   |  
|                                                                   
|Weighted average assumptions at end of year:                        |  |      |      |      |  |      |      |   |  |   |      |  
|Discount rate                                                       |  |      | 6.8  | %    |  |      | 7.0  | % |  |   | 7.5  | %
|Expected rate of return on plan assets                              |  |      | 8.0  | %    |  |      | 8.0  | % |  |   | 8.0  | %
|Weighted average health care cost trend rate                        |  |      | 8.0  | %    |  |      | 7.3  | % |  |   | 7.5  | %
|Weighted average ultimate health care cost trend rate               |  |      | 4.7  | %    |  |      | 5.1  | % |  |   | 5.1  | %
|Year in which ultimate health care cost trend rate will be achieved |  |      | 2009 |      |  |      | 2005 |   |  |   | 2004 |  
|                                                                   

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| |  | Assumed health care cost trend rates have a significant effect on the amounts
reported for health care plans. A one percentage-point change in assumed
health care cost trend rates would have the following effects:
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                          |             |  |      |     |      |  |      |     |   |  |   |     |  
|--------------------------------------------------------- | ----------- |  | ---- | --- | ---- |  | ---- | --- | - |  | - | --- | -
|                                                         
|                                                          |             |  | 2002 |     | 2001 |  | 2000
|                                                         
|Effect on aggregate of service and interest costs         |             |  |      |     |      |  |      |     |   |  |   |    
|                                                          | 1% increase |  | $    | 5   |      |  | $    | 5   |   |  | $ | 8   |  
|                                                          | 1% decrease |  | $    | (4  | )    |  | $    | (4  | ) |  | $ | (6  | )
|Effect on accumulated post-retirement benefit obligations |             |  |      |     |      |  |      |     |   |  |   |    
|                                                          | 1% increase |  | $    | 57  |      |  | $    | 56  |   |  | $ | 47  |  
|                                                          | 1% decrease |  | $    | (46 | )    |  | $    | (46 | ) |  | $ | (38 | )
|                                                         



| |  | Under the terms of the Balanced Program, the Investor Program and the
Traditional Program, eligible employees may contribute a portion of their
compensation to an investment plan. Based on the specific program that the
employee is enrolled in, Nortel Networks matches a percentage of the employees
contribution up to a certain limit. The cost of these investment plans was
$89, $139 and $124 for the years ended December 31, 2002, 2001 and 2000,
respectively.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Under the terms of the Balanced Program and the Flexible Benefits Plan,
Nortel Networks contributes a fixed percentage of employees eligible earnings
to a pension plan arrangement. The cost of these pension plan arrangements
was $29, $48 and $25 for the year ended December 31, 2002, 2001 and 2000,
respectively.                                                                                                                                                    



|9. |  | Divestitures, closures and acquisitions
|-- |  | ---------------------------------------



| |  | Divestitures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | On November 8, 2002, Nortel Networks sold certain plant and equipment,
inventory, patents, and other intellectual property and trademarks, relating
to its optical components business to Bookham. Included in the sale was the
transfer of Nortel Networks transmitter and receiver, pump laser and
amplifier businesses located in Paignton, U.K., Harlow, U.K., Ottawa, Canada,
Zurich, Switzerland and Poughkeepsie, New York. Nortel Networks also
transferred approximately 1,100 employees to Bookham in the transaction.
Nortel Networks received 61 million common shares of Bookham, 9 million
warrants with a strike price of one-third pence Sterling, notes receivable of
$50 and cash of $1. The transaction included a minimum purchase commitment
with Bookham requiring Nortel Networks to purchase approximately $120 of
product from Bookham between November 8, 2002 and March 31, 2004. Should
there be a shortfall, Nortel Networks would make a cash payment for a portion
of the balance (see note 12).
|
| |  | During the three months ended September 30, 2002, Nortel Networks classified
the assets sold to Bookham as available for sale and assigned an estimated
fair value of $46 to them resulting in a charge of $122 (see note 6). A
subsequent increase in Bookhams common share price prior to the November 8,
2002 close date, resulted in an increase in value assigned to the
consideration received. As a result, Nortel Networks recorded a gain from
sale of business of $18 during the year ended December 31, 2002 resulting
from the transaction.                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | As a result of the transaction, Nortel Networks received a 29.8 percent
ownership interest in Bookham. Due to restrictions on Nortel Networks
ability to vote the common shares, ability to appoint directors to the board
or otherwise exercise significant influence over Bookham, the investment has
been accounted for using the cost method.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | On November 28, 2001, Nortel Networks sold substantially all of the assets of
its wholly owned subsidiary Clarify, including patents, intellectual property
and trademarks, to Amdocs Limited for approximately $200 in cash, resulting
in a gain of $16.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Closures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | As part of its work plan to streamline its business, Nortel Networks closed
the operations of Photonic and Dimension in 2001 (see note 6).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

F-32



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| |  | As described in note 6, the amount of goodwill and acquired technology
associated with a number of Nortel Networks prior acquisitions was written
down by $264 during the year ended December 31, 2002 and $2,239 during the
year ended December 31, 2001.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Acquisitions                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The following tables set out certain information for acquisitions completed
by Nortel Networks in the years ended December 31, 2000, excluding those
entities acquired which were subsequently included as discontinued operations
(see note 17). All of these acquisitions were accounted for using the
purchase method. The accompanying consolidated financial statements include
the operating results of each of these businesses from the respective dates
of acquisition.
|
| |  | Purchase price allocation                                                                                                                                                                                                                                                                                                                                                                                                                                                       

|           |  |              |  |          |  |             |  |               |  |       |  |              
|---------- |  | ------------ |  | -------- |  | ----------- |  | ------------- |  | ----- |  | -------------
|          
|           |  |              |  |          |  |             |  |               |  |       |  | Net tangible 
|Closing    |  |              |  | Purchase |  |             |  | Acquired      |  |       |  | assets       
|date       |  | Acquisition  |  | price(e) |  | Goodwill(f) |  | technology(f) |  | IPR&D |  | (liabilities)
|          
|2000       |  |              |  |          |  |             |  |               |  |       |  |              
|May 12     |  | Photonic(a)  |  | 32       |  | 29          |  |              |  |      |  | 3            
|March 16   |  | Clarify(b)   |  | 2,114    |  | 1,812       |  | 210           |  | 64    |  | 28           
|January 28 |  | Qtera(c)     |  | 3,004    |  | 2,412       |  |              |  | 559   |  | 33           
|January 24 |  | Dimension(d) |  | 65       |  | 58          |  |              |  |      |  | 7            
|          

| |  | (a) | Photonic was a developer of optical component technology for
manipulation and control of the polarization of light.                                                           
| |  | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | (b) | Clarify was a provider of eBusiness front office solutions.                                                                                                                   
| |  | (c) | Qtera was a producer of ultra-long reach optical networking systems.                                                                                                          
| |  | (d) | Dimension was an engineering and business strategy consulting firm.                                                                                                           
| |  | (e) | Includes contingent consideration earned after the closing date.                                                                                                              
| |  | (f) | Nortel Networks amortizes acquired technology over two or three
years. Prior to adopting SFAS 142, goodwill for the above acquisitions
was amortized over three or four years.



| |  | Form of consideration included in purchase price allocation
| |  | -----------------------------------------------------------

|            |  |            |      |            |  |            |     |                   |  |      |     |                    |  |   |     |  |  |   |    | 
|----------- |  | ---------- | ---- | ---------- |  | ---------- | --- | ----------------- |  | ---- | --- | ------------------ |  | - | --- |  |  | - | -- | 
|           
|            |  |            |      |            |  | Assumed    |     |                   |  |      |     | Black-Scholes fair |  |   |     | 
|            |  | Common     |      | stock      |  | Assumed    |     | value of assumed  |  |      |     |                   
|            |  | shares     |      | options    |  | warrants   |     | stock options and |  |      |     |                   
|Acquisition |  | (millions) |      | (millions) |  | (millions) |     | warrants          |  | Cash
|           
|2000        |  |            |      |            |  |            |     |                   |  |      |     |                    |  |   |     |  |  |   |    | 
|Photonic    |  |            |     |            |  |            |    |                   |  |      |    |                    |  | $ |    |  |  | $ | 32 | 
|Clarify     |  |            | 31.7 |            |  |            | 8.8 |                   |  |      |    |                    |  | $ | 363 |  |  | $ |   | 
|Qtera       |  |            | 28.2 |            |  |            | 3.7 |                   |  |      | 0.9 |                    |  | $ | 427 |  |  | $ |   | 
|Dimension   |  |            |     |            |  |            |    |                   |  |      |    |                    |  | $ |    |  |  | $ | 37 | 
|           



| |  | In connection with the acquisition of Qtera, approximately 5.2 million Nortel
Networks common shares were issued into escrow related to contingent
consideration. The Black-Scholes fair value included $78 for assumed
warrants. The issued common shares, assumed stock options and warrants
exclude the common shares that were to be issued to the former holders of
assumed stock options and warrants on achievement of certain business
performance objectives.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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---



##### Table of Contents





| |  | Other acquisitions                                                                                                                                                                                                
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Nortel Networks Germany                                                                                                                                                                                           
|
| |  | Effective January 1, 2000, Nortel Networks increased its ownership interest
in Nortel Networks Germany GmbH & Co. KG (formerly known as Nortel Dasa
Network Systems GmbH & Co. KG), from 50 percent to 58 percent.
|
| |  | Nortel Networks France                                                                                                                                                                                            
|
| |  | Effective January 1, 2000, Nortel Networks increased its ownership interest
in Nortel Networks France SAS (formerly known as Matra Nortel Communications
S.A.S), from 50 percent to 55 percent.                   



| |  | Contingent consideration                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In certain acquisition transactions, Nortel Networks agreed to pay additional
purchase consideration upon the achievement of specific objectives by the
acquired business. The achievement of these objectives results in an
increase in the purchase price of the acquired business for consideration
subsequent to the purchase date, and a corresponding increase at that time to
the goodwill recorded on the acquisition. The maximum contingent
consideration is fixed as at the date of acquisition. The following table
outlines acquisitions completed by Nortel Networks for the years ended
December 31, 2001 and 2000, for which it was possible for contingent
consideration to be earned during the years ended December 31, 2002 and 2001,
if the acquired businesses met the specific performance objectives.

|             |  |                          |   |             |  |             |    |                |  |         |     |  |  |  |     |  |  |  |     | 
|------------ |  | ------------------------ | - | ----------- |  | ----------- | -- | -------------- |  | ------- | --- |  |  |  | --- |  |  |  | --- | 
|            
|             |  | Contingent consideration
|             |  |                         
|Acquisition  |  | Earned 2002              |   | Earned 2001 |  | Earned 2000 |    | Earned to date |  | Maximum
|            
|Photonic(a)  |  |                          |  |             |  |             |   |                |  |         |    |  |  |  |    |  |  |  | 5   | 
|Qtera(a)     |  |                          |  |             |  |             |   |                |  |         | 300 |  |  |  | 300 |  |  |  | 500 | 
|Dimension(b) |  |                          |  |             |  |             | 13 |                |  |         | 15  |  |  |  | 28  |  |  |  | 34  | 
|            

| |  | (a) | 2001 contingent consideration was not earned and remaining contingent
consideration will not be paid.
| |  | --- | -----------------------------------------------------------------------------------------------------
| |  | (b) | Remaining contingent consideration is not payable due to the closure
of the Dimension business.      

F-34



---



##### Table of Contents





|10. | Long-term debt and credit facilities
|--- | ------------------------------------



| |  | Long-term debt                              
| |  | --------------------------------------------
|
| |  | At December 31, long-term debt consisted of:

|                                                                                                 |  |      |       |      |  |   |       | 
|------------------------------------------------------------------------------------------------ |  | ---- | ----- | ---- |  | - | ----- | 
|                                                                                                
|                                                                                                 |  | 2002 |       | 2001
|                                                                                                
|6.875% Notes due and paid October 1, 2002                                                        |  | $    |      |      |  | $ | 300   | 
|6.00% Notes due September 1, 2003                                                                |  |      | 164   |      |  |   | 200   | 
|6.125% Notes due February 15, 2006                                                               |  |      | 1,314 |      |  |   | 1,500 | 
|7.40% Notes due June 15, 2006(a)                                                                 |  |      | 150   |      |  |   | 150   | 
|6.875% Notes due September 1, 2023                                                               |  |      | 200   |      |  |   | 200   | 
|7.875% Notes due June 15, 2026(a)                                                                |  |      | 150   |      |  |   | 150   | 
|Other long-term debt with various repayment terms and a weighted average
interest rate of 4.970% |  |      | 88    |      |  |   | 138   | 
|Fair value adjustment attributable to hedged debt obligations                                    |  |      | 80    |      |  |   | 19    | 
|Obligations under capital leases                                                                 |  |      | 6     |      |  |   | 20    | 
|                                                                                                
|                                                                                                 |  | $    | 2,152 |      |  | $ | 2,677 | 
|Less: Long-term debt due within one year                                                         |  |      | 233   |      |  |   | 384   | 
|                                                                                                
|Long-term debt                                                                                   |  | $    | 1,919 |      |  | $ | 2,293 | 
|                                                                                                

| |  | (a) | Notes were issued by Nortel Networks Capital Corporation, an indirect
wholly owned finance subsidiary of Nortel Networks, and are fully and
unconditionally guaranteed by Nortel Networks.
| |  | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | At December 31, 2002, the amounts of long-term debt payable for each of the
years ending December 31 consisted of:
| |  | ------------------------------------------------------------------------------------------------------------------

|                             |  |   |       | 
|---------------------------- |  | - | ----- | 
|                            
|2003                         |  | $ | 233   | 
|2004                         |  |   | 20    | 
|2005                         |  |   |      | 
|2006                         |  |   | 1,465 | 
|2007                         |  |   |      | 
|Thereafter                   |  |   | 434   | 
|                            
|Total long-term debt payable |  | $ | 2,152 | 
|                            



| |  | On February 8, 2001, Nortel Networks completed an offering of $1,500 of 6.125
percent notes due on February 15, 2006 (the 6.125 percent Notes). The
6.125 percent Notes pay interest on a semi-annual basis on February 15 and
August 15, which began on August 15, 2001. The 6.125 percent Notes are
redeemable, at any time at Nortel Networks option, at a redemption price
equal to the principal amount thereof plus accrued and unpaid interest and a
make-whole premium.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | During the year ended December 31, 2002, Nortel Networks paid $162, to
purchase a portion of its 6.00 percent notes due on September 1, 2003 and the
6.125 percent Notes with carrying values of $36 and $186, respectively. The
early extinguishment of debt resulted in a gain of $60 which is included in
the consolidated statement of operations within Other income (expense) 
net.                                                                                       
|
| |  | Credit facilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | At December 31, 2002 and 2001, Nortel Networks had total unused committed
credit facilities of approximately $750 and $4,075, respectively. The $750
April 2000 five year syndicated credit facilities are generally available at
interest rates of LIBOR plus a spread, dependent on the amount drawn under
these credit facilities and, in certain cases, the senior long-term debt
ratings of Nortel Networks.                                                                

F-35



---



##### Table of Contents





| |  | On December 13, 2002, the $1,510 December 2001 364-day syndicated credit
facilities of Nortel Networks and its subsidiary, Nortel Networks Inc.
(NNI), expired in accordance with their terms and Nortel Networks and NNI
agreed to terminate their $1,175 April 2002 364-day syndicated credit
facilities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | On April 12, 2000, NNL and NNI entered into five-year syndicated credit
facilities, which permit borrowings in an aggregate amount of up to $750.
The credit facilities contain a financial covenant that requires the
maintenance of a consolidated tangible net worth of not less than $1,888 at
the consolidated NNL level. These credit facilities also benefit from a
security package over substantially all of NNLs assets and those of most of
its United States and Canadian subsidiaries and either a pledge of shares or
a guarantee by certain of NNLs other subsidiaries. The security was
effective on April 4, 2002 upon the downgrading of NNLs senior long-term
debt ratings to below investment grade, defined as either Baa3 or BBB-, as
determined by Moodys Investor Services, Inc. (Moodys) or Standard &
Poors Ratings Service (S&P), respectively. In addition, Nortel Networks
consolidated public debt securities, as well as Nortel Networks guarantee of
Nortel Networks Corporations 4.25 percent convertible senior notes due on
September 1, 2008, are also secured equally and ratably with the obligations
under Nortel Networks and NNIs $750 April 2000 five year syndicated credit
facilities (see note 21).



|11. | Financial instruments and hedging activities
|--- | --------------------------------------------



| |  | Risk management                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | 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 forwards, foreign currency swaps, foreign currency option contracts,
interest rate swaps, and equity forward contracts. Nortel Networks does not
hold or issue derivative financial instruments for trading purposes.                                                                                                                                                                                                                                                             
|
| |  | 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. Option and forward contracts used to hedge
future revenue or expenditure streams are designated as cash flow hedges and
hedge specific exposures. Option and forward contracts not designated as
hedging instruments 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.



| |  | The following table provides a summary of the notional amounts of option and
forward contracts as at December 31:
| |  | -----------------------------------------------------------------------------------------------------------------

|                |  |         |       |      |  |   |       | 
|--------------- |  | ------- | ----- | ---- |  | - | ----- | 
|               
|Currency        |  | 2002(a) |       | 2001
|               
|Canadian dollar |  | $       | 972   |      |  | $ | 1,873 | 
|British pound   |  |         | 8     |      |  |   | 79    | 
|Euro            |  |         | 555   |      |  |   | 124   | 
|Other           |  |         | 75    |      |  |   | 64    | 
|               
|                |  | $       | 1,610 |      |  | $ | 2,140 | 
|               

| |  | (a) | Expected maturity dates for all notional amounts of option and
forward contracts as at December 31, 2002 is fiscal 2003.
| |  | --- | ------------------------------------------------------------------------------------------------------------------------



| |  | Interest and dividend 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.
These contracts swap floating interest rate payments to fixed interest rate
payments or vice versa. These contracts are designated as fair value hedges
only when they are used to swap fixed interest rates to floating interest
rates. These swap contracts have remaining terms to maturity between 9
months and 3.5 years. Nortel Networks from time to time enters into United
States to Canadian dollar cross currency coupon swap contracts, which are not
designated as hedging instruments, to limit its

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| |  | exposure to foreign currency
fluctuations on the cash dividends payable on the outstanding Non-cumulative
Redeemable Class A Preferred Shares Series 7 of Nortel Networks. These
contracts have remaining terms to maturity of 20 years.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The following table provides a summary of interest rate swap contracts and
cross currency coupon swap contracts and their aggregated weighted-average
rates as at December 31:                                                          

|                                      |                                                 |                                           |   |      |     |      |   |     |     |  
|------------------------------------- | ----------------------------------------------- | ----------------------------------------- | - | ---- | --- | ---- | - | --- | --- | -
|                                     
|                                      |                                                 |                                           |   | 2002 |     | 2001
|                                     
|Interest rate swap contracts:         |                                                 |                                           |   |      |     |      |   |    
|                                      | Received-fixed swaps  notional amount          |                                           | $ | 975  |     |      | $ | 375 |    
|                                      |                                                 | Average fixed rate received               |   |      | 6.3 | %    |   |     | 6.6 | %
|                                      |                                                 | Average floating rate paid                |   |      | 4.1 | %    |   |     | 2.5 | %
|                                     
|Cross currency coupon swap contracts: |                                                 |                                           |   |      |     |      |   |    
|                                      | Received-fixed swaps  notional amount          |                                           | $ |     |     |      | $ | 220 |    
|                                      |                                                 | Average fixed rate received               |   |      |    |      |   |     | 4.9 | %
|                                      |                                                 | Average floating rate paid                |   |      |    |      |   |     | 3.2 | %
|                                      | Received-cross currency swaps  notional amount |                                           | $ | 224  |     |      | $ |    |    
|                                      |                                                 | Average float rate received (Canadian $)  |   |      | 2.9 | %    |   |     |    |  
|                                      |                                                 | Average float rate paid (United States $) |   |      | 1.5 | %    |   |     |    |  
|                                     



| |  | During 2002, the terms of the cross currency coupon swap contracts changed
from fixed to floating, to floating to floating, in accordance with the
counterparty agreement. The notional amounts remained unchanged in the
amount of Canadian $350.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Fair value                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | The estimated fair values approximate amounts at which financial instruments
could be exchanged in a current transaction between willing parties. The
fair values are based on estimates using present value and other valuation
techniques that are significantly affected by the assumptions used concerning
the amount and timing of estimated future cash flows and discount rates that
reflect varying degrees of risk. Specifically, the fair value of interest
rate swaps and forward contracts reflects the present value of the potential
gain or loss if settlement had taken place on December 31, 2002; the fair
value of option contracts reflects the cash flows due to or by Nortel
Networks if settlement had taken place on December 31, 2002; and the fair
value of long-term debt instruments reflects a current yield valuation based
on observed market prices as of December 31, 2002. Accordingly, the fair
value estimates are not necessarily indicative of the amounts that Nortel
Networks could potentially realize in a current market exchange.



| |  | The following table provides the carrying amounts and fair values for all
financial assets and liabilities for which fair value differed from carrying
amount, and fair values recorded for derivative financial instruments in
accordance with SFAS 133, as at December 31:
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                 |                                      |  |          |       |       |  |          |       |       |  |   |       |   |  |   |       |  
|---------------------------------------------------------------- | ------------------------------------ |  | -------- | ----- | ----- |  | -------- | ----- | ----- |  | - | ----- | - |  | - | ----- | -
|                                                                
|                                                                 |                                      |  | 2002     |       | 2001 
|                                                                 |                                      |  |          |       |      
|                                                                 |                                      |  | Carrying |       | Fair  |  | Carrying |       | Fair 
|                                                                 |                                      |  | amount   |       | value |  | amount   |       | value
|                                                                
|Financial liabilities:                                           |                                      |  |          |       |       |  |          |       |       |  |   |       |   |  |   |      
|                                                                 | Long-term debt due within one year   |  | $        | 233   |       |  | $        | 225   |       |  | $ | 384   |   |  | $ | 388   |  
|                                                                 | Long-term debt                       |  | $        | 1,919 |       |  | $        | 1,165 |       |  | $ | 2,293 |   |  | $ | 2,032 |  
|                                                                
|Derivative financial instruments net asset
(liability) position: |                                      |  |          |       |       |  |          |       |       |  |   |       |   |  |   |      
|                                                                 | Interest rate swap contracts         |  | $        | 80    |       |  | $        | 80    |       |  | $ | 20    |   |  | $ | 20    |  
|                                                                 | Forward and option contracts         |  | $        | 4     |       |  | $        | 4     |       |  | $ | (38   | ) |  | $ | (38   | )
|                                                                 | Cross currency coupon swap contracts |  | $        | 1     |       |  | $        | 1     |       |  | $ | (14   | ) |  | $ | (14   | )
|                                                                 | Other                                |  | $        | (2    | )     |  | $        | (2    | )     |  | $ | 3     |   |  | $ | 3     |  
|                                                                

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| |  | Credit risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Credit risk on financial instruments arises from the potential for
counterparties to default on their contractual obligations to Nortel
Networks. Nortel Networks is exposed to credit risk in the event of
non-performance, but does not anticipate non-performance by any of the
counterparties. Nortel Networks limits its credit risk by dealing with
counterparties that are considered to be of high credit quality. The maximum
potential loss on all financial instruments may exceed amounts recognized in
the accompanying consolidated financial statements. However, Nortel Networks
maximum exposure to credit loss in the event of non-performance by the other
party to the derivative contracts is limited to those derivatives that had a
positive fair value at December 31, 2002. Nortel Networks is also exposed to
credit risk from customers. However, Nortel Networks global orientation has
resulted in a large number of diverse customers, which minimizes
concentrations of credit risk.
|
| |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Hedge ineffectiveness and discontinuance of cash flow hedges determined in
accordance with SFAS 133 had no material impact on the net loss for the year
ended December 31, 2002. No fair value hedges were derecognized or
discontinued for the year ended December 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Receivables sales                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | In 2002, 2001 and 2000, Nortel Networks entered into various agreements to
sell certain of its receivables. These receivables were sold at a discount
of $32, $53 and $41 from book value for the years ended December 31, 2002,
2001 and 2000 respectively, at annualized discount rates of approximately 3
percent to 5 percent, 5 percent to 8 percent and 3 percent to 5 percent for
the years ended December 31, 2002, 2001 and 2000, respectively. Certain
receivables have been sold with limited recourse, not exceeding 10 percent,
of $9, $6 and $36 as at December 31, 2002, 2001 and 2000, respectively.                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Under certain agreements, Nortel Networks has continued as servicing agent
and/or has provided limited recourse. The fair value of these retained
interests is based on the market value of servicing the receivables,
historical payment patterns and appropriate discount rates as applicable.
Generally, trade receivables that are sold do not experience prepayments.
The amounts associated with any servicing assets approximate Nortel Networks
cost of servicing and, as such, no servicing asset or liability was
recognized. Also, Nortel Networks has not historically experienced
significant credit losses with respect to receivables sold with limited
recourse and as such no liability was recognized.                                                                                                                                                                                                                                                                                           



| |  | There is a possibility that the actual performance of receivables or the cost
of servicing the receivables will differ from the assumptions used to
determine fair values at the transfer date and at each reporting date.
Assuming hypothetical simultaneous unfavorable variations of up to 20 percent
in credit losses, the discount rate used and the cost of servicing the
receivables, the pre-tax impact on the value of the retained interests would
not be significant.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|12. |  | Guarantees and commitments
|--- |  | --------------------------



| |  | Guarantees                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Nortel Networks has entered into agreements that contain features which meet
the definition of a guarantee under FIN 45. FIN 45 defines a guarantee to be
a contract that contingently requires Nortel Networks to make payments
(either in cash, financial instruments, other assets, common shares of Nortel
Networks Corporation or through the provision of services) to a third party
based on changes in an underlying economic characteristic (such as interest
rates or market

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| |  | value) that is related to an asset, a liability or an equity
security of the other party. Nortel Networks has the following major types
of guarantees that are subject to the disclosure requirements of FIN 45:
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | (a) | Business sale agreements
| |  | --- | ------------------------



| |  |  | In connection with agreements for the sale of portions of its business,
including certain discontinued operations, Nortel Networks has typically
retained the liabilities of a business which relate to events occurring
prior to its sale, such as tax, environmental, litigation and employment
matters. Nortel Networks generally indemnifies the purchaser of a Nortel
Networks business in the event that a third party asserts a claim against
the purchaser that relates to a liability retained by Nortel Networks.
These types of indemnification guarantees typically extend for a number of
years.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Nortel Networks is unable to estimate the maximum potential liability for
these types of indemnification guarantees as the business sale agreements
do not specify a maximum amount and the amounts are dependent upon the
outcome of future contingent events, the nature and likelihood of which
cannot be determined at this time.                                                                                                                                                                                                                                                                        
|
| |  |  | Historically, Nortel Networks has not made any significant indemnification
payments under such agreements and no amount has been accrued in the
accompanying consolidated financial statements with respect to these
indemnification guarantees.                                                                                                                                                                                                                                                                                                                                                             



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



| |  |  | Nortel Networks has entered periodically into agreements with customers
and suppliers that include limited intellectual property indemnification
obligations that are customary in the industry. These guarantees
generally require Nortel Networks to compensate the other party for
certain damages and costs incurred as a result of third party intellectual
property claims arising from these transactions.                                                          
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The nature of the intellectual property indemnification obligations
prevents Nortel Networks from making a reasonable estimate of the maximum
potential amount it could be required to pay to its customers and
suppliers. Historically, Nortel Networks has not made any significant
indemnification payments under such agreements and no amount has been
accrued in the accompanying consolidated financial statements with respect
to these indemnification guarantees.



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



| |  |  | Nortel Networks has entered into agreements with its lessors that
guarantee the lease payments of certain sub-lessees of its facilities to
lessors. Generally, these lease agreements relate to facilities Nortel
Networks vacated prior to the end of the term of its lease. These lease
agreements require Nortel Networks to make lease payments throughout the
lease term if the sub-lessee fails to make scheduled payments. These
lease agreements have expiration dates through June 2012. The maximum
amount that Nortel Networks may be required to pay under these types of
agreements is $40.
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Nortel Networks has also entered into an agreement to indemnify a certain
lessor against certain additional costs, including financing costs, and
costs incurred relating to construction problems with the building,
through the term of the lease, which expires in May 2013. The maximum
amount that Nortel Networks may be required to pay under this lease
agreement is $77.                                                                                                                                                                                                                                                                                                                                
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | In addition, Nortel Networks has entered into agreements to indemnify
certain lessors, through the terms of their leases, which expire through
May 2013, against costs incurred as a result of changes in laws and
regulations (including tax legislation) or in the interpretations of such
laws and regulations, as a result of losses from litigation that may be
suffered by them or, in the case of a particular lessor, if the
transaction becomes invalid. The maximum amount that Nortel Networks may
be required to pay that lessor in the event the transaction becomes
invalid is $77. The maximum potential losses resulting from the other
types of lease guarantees cannot be reasonably estimated.

F-39



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



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



| |  |  | Nortel Networks has guaranteed the debt of certain customers. These third
party debt agreements require Nortel Networks to make debt payments
throughout the term of the related debt instrument if the customer fails
to make scheduled debt payments. These third party debt agreements have
expiration dates extending to May 2012. The maximum amount that Nortel
Networks may be required to pay under these types of debt agreements is
$13.
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Historically, Nortel Networks has not made any significant indemnification
payments under such agreements and no amount has been accrued in the
accompanying consolidated financial statements with respect to these
indemnification guarantees.                                                                                                                                                                                                  



| |  | (e) | Guarantee of Nortel Networks Corporation debt
| |  | --- | ---------------------------------------------



| |  |  | Nortel Networks is the full and unconditional guarantor of Nortel Networks
Corporations $1,800 4.25 percent convertible senior notes due September
1, 2008, in the event that Nortel Networks Corporation does not make
payments for the principal, interest, premium, if any, and other amounts,
if any, as they are due (see note 18).
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The maximum amount that Nortel Networks may be required to pay under this
guarantee is $1,800, plus interest and premium outstanding. No amount has
been accrued in the accompanying consolidated statements with respect to
this guarantee.                                                                                             



| |  | (f) | Indemnification of lenders and agents under credit facilities
| |  | --- | -------------------------------------------------------------



| |  |  | Under its credit facilities, Nortel Networks has agreed to indemnify its
lenders under such facilities against costs or losses resulting from
changes in laws and regulations which would increase the lenders costs,
and from any legal action brought against the lenders related to the use
of loan proceeds. These indemnifications generally extend for the term of
the credit facilities and do not provide for any limit on the maximum
potential liability.
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Historically, Nortel Networks has not made any significant indemnification
payments under such agreements and no amount has been accrued in the
accompanying consolidated financial statements with respect to these
indemnification guarantees.                                                                                                                                                                                                                    



| |  | (g) | Other indemnification agreements
| |  | --- | --------------------------------



| |  |  | Nortel Networks has entered into agreements that provide for other types
of indemnifications to counterparties in transactions including
securitization agreements, investment banking agreements, guarantees
related to the administration of capital trust accounts, guarantees
related to the administration of employee benefit plans, indemnification
of trustees under indentures for outstanding public debt and sales of
assets (other than business sale agreements). These indemnification
agreements generally require Nortel Networks to indemnify the
counterparties
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | for costs incurred as a result of changes in laws and
regulations (including tax legislation) or in the interpretations of such
laws and regulations, and/or as a result of losses from litigation that
may be suffered by the counterparties arising from the transactions. These types of indemnification agreements
normally extend over an unspecified period of time from the date of the
transaction and do not provide for any limit on the maximum potential
amount.                          
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Nortel Networks in the past has also entered into guarantees related to
the escrow of shares in business combinations. These types of
indemnifications generally require Nortel Networks to indemnify
counterparties for loss incurred from litigation that may be suffered by counterparties
arising under the agreement. These types of agreements exist over a
specified period of time from the date of the business combination and do
not provide for any limit on the maximum potential amount.

F-40



---



##### Table of Contents





| |  |  | The nature of such agreements prevents Nortel Networks from making a
reasonable estimate of the maximum potential amount it could be required
to pay to its counterparties. The difficulties in assessing the amount of
liability result primarily from the unpredictability of future changes in
laws, the inability to determine how laws (in particular tax legislation)
apply to counterparties and the unlimited coverage (in time and dollar
amount) offered to counterparties.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Historically, Nortel Networks has not made any significant indemnification
payments under such agreements and no amount has been accrued in the
accompanying consolidated financial statements with respect to these
indemnification guarantees.                                                                                                                                                                                                                                     



| |  | (h) | Product warranties
| |  | --- | ------------------



| |  |  | As part of the normal sale of product, Nortel Networks has provided its
customers with product warranties. These warranties extend for periods
generally ranging from one to five years from the date of sale. The
following summarizes the accrual of product warranties that is recorded as
part of other accrued liabilities in the accompanying consolidated balance
sheets as at December 31, 2002:
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                     |                                   |   |     |      |  
|------------------------------------ | --------------------------------- | - | --- | ---- | -
|                                    
|Balance at the beginning of the year |                                   | $ | 248 |     
|                                     | Payments made during the year     |   |     | (163 | )
|                                     | Warranties issued during the year |   |     | 153  |  
|                                    
|Balance at end of year               |                                   | $ | 238 |     
|                                    



| |  | Bid and performance related bonds                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Nortel Networks has entered into bid and performance related bonds associated
with various contracts. These contracts generally have terms ranging from
two to five years. Performance related bonds generally have a term of twelve
months. Bid bonds generally have a much shorter term. Potential payments
due under these bonds are related to Nortel Networks performance under the
applicable contract. The total amount of bid and performance related bonds
that were available and undrawn was $362, excluding restricted cash and cash
equivalents of $249 (see note 13), as at December 31, 2002 and $1,170 as at
December 31, 2001.
|
| |  | Customer financing                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Pursuant to certain financing agreements, Nortel Networks is committed to
provide future financing in connection with purchases of Nortel Networks
products and services. The unfunded commitments were $801 and $1,611 as at
December 31, 2002 and 2001, respectively. Commitments to extend future
financing generally have conditions for funding, fixed expiration or
termination dates and specific interest rates and purposes. Nortel Networks
attempts to limit its financing credit risk by utilizing an internal credit
committee that actively monitors the credit exposure of Nortel Networks.                                     
|
| |  | In addition, pursuant to these financing agreements, Nortel Networks has
provided financing of $292 (net of a provision of $799) and $464 (net of a
provision of $887), as at December 31, 2002 and 2001, respectively, excluding
discontinued operations.                                                                                                                                                                                                                                                                                                                                                                                     



| |  | Joint ventures/minority interests                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | On October 19, 2002, Nortel Networks entered into a number of put option and
call option agreements (the Options) as well as a share exchange agreement
(the Share Exchange) with its partner in three European joint ventures.
The Options allow the minority interest partner in each joint venture to sell
its interest in that joint venture to the other partner at a fixed amount. The Share Exchange allows each partner to exchange a
stipulated number of shares in its minority interest for a stipulated number
of shares in the other partys minority interest. The Options and the Share
Exchange can be exercised between July 1, 2003 and December 31, 2003 subject
to certain terms and conditions.

F-41



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| |  | If the Options and the Share Exchange are exercised, Nortel Networks would be
required to deliver to the joint venture partner net consideration of
approximately $114, consisting of approximately $42 in cash, and an in-kind
component of approximately $72, representing the return of a loan note
currently owed to Nortel Networks by an affiliate of the joint venture
partner. If completed, the transactions would result in the acquisition by
Nortel Networks of two joint venture minority interests which would be
accounted for under the purchase method of accounting and the disposition of
its minority interest in the third joint venture. These transactions are not
expected to have a material impact on the business, results of operations,
and financial condition of Nortel Networks.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The written Options are required to be marked to fair value through the
consolidated statement of operations at each period end until they are either
exercised or expire. At December 31, 2002, Nortel Networks estimated the
fair value of the written Options to be approximately $78 (included in the
accompanying consolidated balance sheets within other accrued liabilities).
The impact to the consolidated statement of operations for the year ended
December 31, 2002 after the effect of indirectly related transactions was a
net loss of $33 (included within other income (expense)  net). The
purchased Options and the Share Exchange were initially recorded at fair
value and will be assessed for impairment throughout their term until they
are either exercised or expire.             
|
| |  | The estimated fair values of the Options were based on an estimate of the
current fair values of the respective joint ventures using an option-pricing
model that is dependent on the assumptions used concerning the amount of
volatility and the discount rates that reflect varying degrees of risk.
Accordingly, the fair value estimates are not necessarily indicative of the
amounts that Nortel Networks could potentially realize in current market
exchanges.                                                                                                                                                                                                                                                                                                                                         
|
| |  | Purchase commitments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Nortel Networks has entered into purchase commitments with certain suppliers
under which it commits to buy a minimum amount or percentage of designated
products in exchange for price guarantees or similar concessions. In certain
of these agreements, Nortel Networks may be required to acquire and pay for
such products up to the prescribed minimum or forecasted purchases.                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Nortel Networks entered into an arrangement with a minimum purchase
commitment of $120 with Bookham. The terms of the commitment require Nortel
Networks to purchase $120 of product from Bookham between November 8, 2002
and March 31, 2004. Should there be a shortfall, Nortel Networks would make
a cash payment for a portion of the balance.                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Operating leases and other commitments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | At December 31, 2002, the future minimum payments under both operating leases
and outsourcing contracts, net of lease commitments accrued for as part of
restructuring contract settlement and lease costs (see note 6) consisted of :                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

|                              |  |           |       |             |  |   |       | 
|----------------------------- |  | --------- | ----- | ----------- |  | - | ----- | 
|                             
|                              |  | Operating |       | Outsourcing
|                              |  | leases    |       | contracts  
|                             
|2003                          |  | $         | 305   |             |  | $ | 291   | 
|2004                          |  |           | 220   |             |  |   | 273   | 
|2005                          |  |           | 195   |             |  |   | 270   | 
|2006                          |  |           | 144   |             |  |   | 268   | 
|2007                          |  |           | 117   |             |  |   | 265   | 
|Thereafter                    |  |           | 690   |             |  |   | 263   | 
|                             
|Total future minimum payments |  | $         | 1,671 |             |  | $ | 1,630 | 
|                             



| |  | Rental expense on operating leases for the years ended December 31, 2002,
2001 and 2000 amounted to $465, $748 and $676, respectively.                                                                                
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | During the year ended December 31, 2002, Nortel Networks entered into sale
leaseback transactions for certain of its properties with carrying values of
approximately $270 which resulted in a loss on disposal of $3.

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| |  | Expenses related to outsourcing contracts for the years ended December 31,
2002, 2001 and 2000, amounted to $364, $498 and $176, respectively, and are
for services provided to Nortel Networks primarily related to information
services, a portion of payroll, capital services, accounts payable, and
training and resource functions. The minimum amount
payable under Nortel Networks outsourcing contracts is variable to the extent
that Nortel Networks workforce fluctuates from the baseline levels contained
in the contracts.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  | Due to the current general economic and industry environment, and Nortel
Networks current credit ratings, the basis under which customer bid and
performance related bonds and contracts can be obtained has changed,
resulting in (but not limited to) increased cash collateral requirements
and/or increased fees in connection with obtaining new customer bid and
performance related bonds and contracts. As at December 31, 2002,
approximately $249 of cash and cash equivalents was restricted as collateral
for certain customer bid and performance related bonds and contracts.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|14. |  | Capital stock
|--- |  | -------------



| |  | Preferred shares                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Nortel Networks is authorized to issue an unlimited number of Class A
preferred shares, which rank senior to the Class B preferred shares and the
common shares upon a distribution of capital or assets, and Class B preferred
shares, which rank junior to the Class A preferred shares upon a distribution
of capital or assets, in each case without nominal or par value. Each of the
Class A preferred shares and Class B preferred shares are issuable in one or
more series, each series having such rights, restrictions and provisions as
determined by the Board of Directors of Nortel Networks at the time of issue.
|
| |  | Class A preferred shares have been issued for consideration denominated in
Canadian dollars and are presented in United States dollars after translation
at the exchange rate in effect at the date of original issue. Each series of
Class A preferred shares ranks in parity with every other series of Class A
preferred shares. At December 31, 2002 and 2001, included in shareholders
equity were the following outstanding Class A preferred shares:                                                                                                                                                                     

|                                                              |  |             |        |   |  |   |     | 
|------------------------------------------------------------- |  | ----------- | ------ | - |  | - | --- | 
|                                                             
|                                                              |  | Number      |        |   |  |  
|                                                              |  | of shares   |        |   |  |  
|                                                              |  | (thousands) |        | $
|                                                             
|Series 5, issued November 26, 1996 for consideration of C$400 |  |             | 16,000 |   |  | $ | 294 | 
|                                                             
|Series 7, issued November 28, 1997 for consideration of C$350 |  |             | 14,000 |   |  | $ | 242 | 
|                                                             



| |  | In addition, at December 31, 2000, 200 shares of Cumulative Redeemable Class
A Preferred Shares Series 4 (Series 4 Shares) were outstanding and included
in shareholders equity at a value of $73. During the year ended December
31, 2001, the holders of all 200 Series 4 Shares of Nortel Networks exercised
their right to exchange their Series 4 Shares for common shares of Nortel
Networks Corporation. Nortel Networks Corporation issued in aggregate
approximately 9,035,000 common shares to the former holders of Series 4
Shares. As a result, pursuant to an agreement in respect of the Series 4
Shares exchange rights, Nortel Networks issued approximately 4,090,000 common
shares to Nortel Networks Corporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Cumulative Redeemable Class A Preferred Shares Series 5 (Series 5
Shares) are presented net of tax effected issue costs of approximately $4.
Until November 30, 2001, holders of Series 5 Shares, were entitled to an
annual fixed cumulative preferential cash dividend of Canadian $1.275 per
share (5.1 percent), payable quarterly. As of December 1, 2001, holders of
Series 5 Shares are entitled to, if declared, a monthly floating cumulative
preferential cash dividend, which will float in relation to the average of
the prime commercial lending rates of two designated Canadian chartered banks
during the relevant month, as adjusted by the weighted average trading price
of Series 5 Shares during such month, up to a maximum of 100 percent of such
prime rate. Holders of Series 5 Shares will have the right to convert their
shares into Cumulative Redeemable Class A Preferred Shares Series 6 (Series
6 Shares), subject to certain conditions, on December 1, 2006, and on
December 1 of every fifth year thereafter. No Series 6 shares have been
issued. Holders of Series 6 Shares will have a similar right to convert back
into Series 5 Shares every 5 years. In certain

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| |  | circumstances, conversions
may be automatic and mandatory. Series 5 Shares are redeemable at any time
after December 1, 2001, at Nortel Networks option, at Canadian $25.50 per
share together with accrued and unpaid dividends up to, but excluding, the
date of redemption. If issued on December 1, 2006, the Series 6 Shares will
be redeemable at Nortel Networks option at Canadian $25 per share, together
with accrued and unpaid dividends up to but excluding, the date of
redemption, on December 1, 2011, and on December 1 of every fifth year
thereafter.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Non-cumulative Redeemable Class A Preferred Shares Series 7 (Series 7
Shares) are presented net of tax effected issue costs of approximately $4.
Holders of the Series 7 Shares were, until November 30, 2002, entitled to an
annual fixed non-cumulative preferential cash dividend of Canadian $1.225 per
share (4.9 percent), payable, if declared, quarterly on the first day of
March, June, September and December. From December 1, 2002, holders of the
Series 7 Shares are entitled to, if declared, a monthly floating
non-cumulative preferential cash dividend. Holders of Series 7 Shares have
the right to convert their shares into Non-cumulative Redeemable Class A
Preferred Shares Series 8 (Series 8 Shares), subject to certain conditions,
on December 1, 2007 and on December 1 of every fifth year thereafter. No
Series 8 shares have been issued. Holders of the Series 8 shares will have a
similar right to convert back into Series 7 Shares every five years, in
certain circumstances conversions may be automatic. Series 7 Shares are
redeemable at any time after December 1, 2002 at Nortel Networks option, at
Canadian $25.50 per share together with declared and unpaid dividends up to,
but extending, the date of redemption. If issued on December 1, 2007, Series
8 Shares will also be redeemable at Nortel Networks option at Canadian $25
per share, together with declared and unpaid dividends up to, but excluding,
the date of redemption, on December 1, 2012, and on December 1 of every fifth
year thereafter.
|
| |  | Common shares                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Nortel Networks is authorized to issue an unlimited number of common shares
without nominal or par value. At December 31, the outstanding number of
common shares included in shareholders equity consisted of:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

|                                |                                                            |           |           |   |      |           |       |        |        |           |           |       |  |   |        |         |   |  |           |        |  |   |        |       | 
|------------------------------- | ---------------------------------------------------------- | --------- | --------- | - | ---- | --------- | ----- | ------ | ------ | --------- | --------- | ----- |  | - | ------ | ------- | - |  | --------- | ------ |  | - | ------ | ----- | 
|                               
|                                |                                                            |           | 2002      |   | 2001 |           | 2000 
|                               
|                                |                                                            |           | Number    |   |      |           |       |        | Number |           |           |       |  |   | Number |         |   |  |          
|(number of shares in thousands) |                                                            | of shares |           | $ |      | of shares |       | $      |        | of shares |           | $    
|                               
|Balance at beginning of year    |                                                            |           | 1,460,979 |   |      | $         | 2,111 |        |        |           | 1,453,438 |       |  | $ | 17,024 |         |   |  | 1,377,155 |        |  | $ | 11,745 |      
|                                | Share
issuance to parent(a)                                |           |           |  |      |           |       | 2,287  |        |           |           |      |  |   |        | 1,800   |   |  |           |       |  |   |        |      | 
|                                | Conversion of series 4 preferred shares(b)                 |           |           |  |      |           |       |       |        |           |           | 4,090 |  |   |        | 61      |   |  |           |       |  |   |        |      | 
|                                | Reduction of legal stated capital(c)                       |           |           |  |      |           |       | (3,187 | )      |           |           |      |  |   |        | (16,800 | ) |  |           |       |  |   |        |      | 
|                                | Shareholder dividend reinvestment and
stock purchase plans |           |           |  |      |           |       |       |        |           |           |      |  |   |        |        |   |  |           | 9      |  |   |        | 1     | 
|                                | Stock option plans                                         |           |           |  |      |           |       |       |        |           |           |      |  |   |        |        |   |  |           | 12,592 |  |   |        | 205   | 
|                                | Acquisitions                                               |           |           |  |      |           |       |       |        |           |           | 3,451 |  |   |        | 26      |   |  |           | 63,682 |  |   |        | 5,073 | 
|                               
|Balance at end of year          |                                                            |           | 1,460,979 |   |      | $         | 1,211 |        |        |           | 1,460,979 |       |  | $ | 2,111  |         |   |  | 1,453,438 |        |  | $ | 17,024 |      
|                               

| |  | (a) | During the year ended December 31, 2002, Nortel Networks issued 4
common shares to Nortel Networks Corporation for cash consideration of
$2,287. Nortel Networks Corporation, as the holder of all Nortel
Networks issued and outstanding common shares, approved a reduction in
Nortel Networks legal stated capital of $3,187. On August 15, 2001,
Nortel Networks Corporation completed a private offering of $1,800 of
4.25 percent convertible senior notes and loaned the full proceeds to
Nortel Networks for its general corporate purposes. On September 30,
2001, in accordance with the terms of the loan agreement between Nortel
Networks Corporation and Nortel Networks Limited. Nortel Networks
Corporation converted the entire loan into 1 common share of Nortel
Networks.
| |  | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | (b) | During the year ended December 31, 2001, the holders of all 200
Series 4 Shares of Nortel Networks exercised their right to exchange
their Series 4 Shares for common shares of Nortel Networks Corporation.
As a result, Nortel Networks issued approximately 4,090,000 common
shares to Nortel Networks Corporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | (c) | On December 19, 2002, September 27, 2002, August 29, 2002 and June
28, 2002, Nortel Networks Corporation approved a reduction in Nortel
Networks legal stated capital for its common shares in the amount of
$1,190, $672, $525 and $800, respectively. On September 30, 2001 and
June 14, 2001, Nortel Networks Corporation approved a reduction in
Nortel Networks legal stated capital for its common shares in the amount
of $1,800 and $15,000, respectively.                                                                                                                                                                                                                                                                                                                           

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|15. |  | Accumulated other comprehensive loss                                                
|--- |  | ------------------------------------------------------------------------------------
|   
|    |  | The components of accumulated other comprehensive loss, net of tax, were as
follows:

|                                                            |  |                                      |                                                                    |                                                      |      |      |      |      |      |      |      |   |      |    |      |  
|----------------------------------------------------------- |  | ------------------------------------ | ------------------------------------------------------------------ | ---------------------------------------------------- | ---- | ---- | ---- | ---- | ---- | ---- | ---- | - | ---- | -- | ---- | -
|                                                           
|                                                            |  |                                      |                                                                    |                                                      |      | 2002 |      | 2001 |      | 2000
|                                                           
|Accumulated foreign currency translation adjustment         |  |                                      |                                                                    |                                                      |      |      |      |      |      |      |      |  
|                                                            |  | Balance at the beginning of the year |                                                                    | $                                                    | (874 | )    |      | $    | (586 | )    |      | $ | (457 | ) 
|                                                            |  |                                      |                                                                    | Change in foreign currency translation adjustment(a) |      |      | 12   |      |      |      | (288 | ) |      |    | (129 | )
|                                                           
|                                                            |  | Balance at the end of the year       |                                                                    | $                                                    | (862 | )    |      | $    | (874 | )    |      | $ | (586 | ) 
|                                                           
|Unrealized gain (loss) on investments  net                 |  |                                      |                                                                    |                                                      |      |      |      |      |      |      |      |  
|                                                            |  | Balance at the beginning of the year |                                                                    | $                                                    | 5    |      |      | $    | 45   |      |      | $ | 23   |   
|                                                            |  |                                      | Change in unrealized gain (loss) on investments                    |                                                      |      | 6    |      |      |      | (40  | )    |   |      | 22 |     
|                                                           
|                                                            |  | Balance at the end of the year(b)    |                                                                    | $                                                    | 11   |      |      | $    | 5    |      |      | $ | 45   |   
|                                                           
|Unrealized derivative gain (loss) on cash flow hedges  net |  |                                      |                                                                    |                                                      |      |      |      |      |      |      |      |  
|                                                            |  | Balance at the beginning of the year |                                                                    | $                                                    | (14  | )    |      | $    |     |      |      | $ |     |   
|                                                            |  |                                      | Change in unrealized derivative gain (loss) on cash flow hedges(c) |                                                      |      | 12   |      |      |      | (14  | )    |   |      |   |     
|                                                           
|                                                            |  | Balance at the end of the year       |                                                                    | $                                                    | (2   | )    |      | $    | (14  | )    |      | $ |     |   
|                                                           
|Minimum pension liability(d)                                |  |                                      |                                                                    |                                                      |      |      |      |      |      |      |      |  
|                                                            |  | Balance at the beginning of the year |                                                                    | $                                                    | (81  | )    |      | $    |     |      |      | $ |     |   
|                                                            |  |                                      | Change in minimum pension liability                                |                                                      |      | (559 | )    |      |      | (81  | )    |   |      |   |     
|                                                           
|                                                            |  | Balance at the end of the year       |                                                                    | $                                                    | (640 | )    |      | $    | (81  | )    |      | $ |     |   
|                                                           
|Accumulated other comprehensive loss                        |  | $                                    | (1,493                                                             | )                                                    |      | $    | (964 | )    |      | $    | (541 | )
|                                                           

| | (a) |  | The changes in the foreign currency translation adjustments are not
adjusted for income taxes since they relate to indefinite investments in
non-United States subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (b) |  | Unrealized gain on investments is net of tax of $2, $3 and $9 for the
years ended December 31, 2002, 2001 and 2000, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | (c) |  | Includes $7 (pre-tax $11) of net derivative losses related to the
adoption of SFAS 133 during the year ending December 31, 2001.
Unrealized derivative gains (loss) on cash flow hedges are net of tax of
$1 and $6 for the years ended December 31, 2002 and 2001, respectively.
During the year ended December 31, 2002, $18 of net derivative gains
were reclassified to selling, general and administrative expense.
Nortel Networks estimates that $4 of net derivative losses included in
other comprehensive loss will be reclassified into net earnings (loss)
within the next 12 months.
| | (d) |  | Represents non-cash charges to shareholders equity related to the
increase in the minimum required recognizable liability associated with
Nortel Networks pension plans (see note 8). The minimum pension
liability amount is presented net of tax of $133 and $28 for the years
ended December 31, 2002 and 2001, respectively.                                                                                                                                                                                                                                                                



|    |  | The change in unrealized gain (loss) on investments during the year 2001
represented the write down of the value of minority investments due to a
change in Nortel Networks strategic focus as well as an other than temporary
decline in the carrying value caused by a significant downturn in both the
telecommunications industry and the economic environment, resulting in a
charge to other income (expense)  net. During 2002, $6 of unrealized gains
(losses) on investments were reclassified to the statement of operations.                                                                                                                                                                                                                                                                                                     
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|16. |  | Stock-based compensation plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|    |  | Stock options                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|    |  | Under the Nortel Networks Corporation 2000 Stock Option Plan (the 2000
Plan), options to purchase Nortel Networks Corporation common shares may be
granted to employees and directors of Nortel Networks that entitle the holder
to purchase one common share at a subscription price of not less than 100
percent of market value on the effective date of the grant. Subscription
prices are stated and payable in United States dollars for United States
options and in Canadian dollars for Canadian options. Generally, options
outstanding at December 31, 2002, vest 33 1/3 percent on the anniversary
date of the grant for three years. The committee of the Board of Directors
of Nortel Networks that administers the 2000 Plan has the discretion to vary
the period during which the holder has the right to exercise options

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| |  | and, in
certain circumstances, may accelerate the right of the holder to exercise
options, but in no case shall the exercise period exceed ten years.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Under the Nortel Networks Corporation 1986 Stock Option Plan As Amended and
Restated (the 1986 Plan), options to purchase Nortel Networks Corporation
common shares may be granted to employees of Nortel Networks that entitle the
holder to purchase one common share at a subscription price of not less than
100 percent of market value on the effective date of the grant. Subscription
prices are stated in United States dollars for United States options and in
Canadian dollars for Canadian options. Generally, options may be exercised
as follows: options granted in 1997 through 2002 vest 33 1/3 percent on the
anniversary date of the grant for three years; and options granted in 1991
through 1996 vest 50 percent after the first anniversary date of grant and the remainder after the second
anniversary date of grant. The committee of the Board of Directors of Nortel
Networks that administers the 1986 Plan has the discretion to vary the period
during which the holder has the right to exercise options and, in certain
circumstances, may accelerate the right of the holder to exercise options,
but in no case shall the exercise period exceed ten years.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Options granted under the 2000 Plan and 1986 Plan may be granted with or
without a stock appreciation right (SAR). A SAR entitles the holder to
receive payment of an amount equivalent to the excess of the market value of
a common share at the time of exercise of the SAR over the subscription price
of the common share to which the option relates. Options with SARs may be
granted on a cancellation basis, in which case the exercise of one causes the
cancellation of the other, or on a simultaneous basis, in which case the
exercise of one causes the exercise of the other.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | In January 1995, a key contributor stock option program (the Key Contributor
Program) was established. Under the terms of the Key Contributor Program,
participants are granted an equal number of initial options and replacement
options. The initial options generally vest after five years and expire
after ten years. The replacement options are granted concurrently with the
initial options and also expire after ten years. The replacement options
generally have an exercise price equal to the market value of the common
shares of Nortel Networks Corporation on the day the initial options are
fully exercised, and are generally exercisable commencing thirty-six months
thereafter, provided certain other conditions for exercise, including share
ownership, are met. In 2002 and 2001, there were no options granted pursuant
to the Key Contributor Program.                                                                                                                                                                                                                                                                                                           
|
| |  | On June 20, 2001, Nortel Networks commenced a voluntary stock option exchange
program (the Exchange Program) for Nortel Networks employees, whereby
employees could exchange certain then outstanding stock options for new stock
options, based on a prescribed formula. The terms of the Exchange Program
were such that new grants of options would be made at least six months and a
day from the cancellation date of the options tendered for exchange, which
was July 27, 2001. Approximately 93,416,000 stock options were tendered for
exchange and cancelled. Nortel Networks then Board of Directors and its then
board appointed officers were not eligible to participate in the Exchange
Program. On January 29, 2002, Nortel Networks Corporation granted
approximately 52,700,000 new stock options in connection with the Exchange
Program with exercise prices of $7.16 in United States dollars and $11.39 in
Canadian dollars per common share, which was the fair market value of Nortel
Networks Corporation common shares on the date of the grant.                                                                                                                      
|
| |  | Nortel Networks has, in connection with the acquisition of various companies,
assumed the stock option plans of each acquired company. The vesting periods
for these assumed plans may differ from the 2000 Plan and 1986 Plan, but are
not considered to be significant to Nortel Networks overall use of
stock-based compensation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | As of July 1, 2000, Nortel Networks began recording deferred compensation
related to unvested options held by employees of companies acquired in a
purchase acquisition, in accordance with FIN 44 Accounting for Certain
Transactions involving Stock Compensation  an Interpretation of APB No. 25
(FIN 44). Deferred compensation is amortized based on the graded vesting
schedule of the awards. For the years ended December 31, 2002, 2001, and
2000, Nortel Networks recorded stock option compensation expense of nil, nil
and $99, respectively. The expense for 2000 primarily related to the impact
of the Arrangement on stock options held by former employees of Nortel
Networks who had transferred to BCE or a BCE affiliated company as a result
of the Arrangement.                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Employee stock purchase plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Nortel Networks has a stock purchase plan for eligible employees in eligible
countries and a stock purchase plan for eligible unionized employees in
Canada (the Employee Stock Purchase Plans). The Employee Stock Purchase
Plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

F-46



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| |  | facilitate the acquisition of common shares of Nortel Networks
Corporation at a discount, and the retention of such common shares, by
eligible employees. The Employee Stock Purchase Plans have four offering
periods each year, with each offering period beginning on the first day of
each calendar quarter. Eligible employees may have up to 10 percent of their
eligible compensation deducted from their pay during each offering period to
contribute towards the purchase of Nortel Networks Corporation common shares.
For North American eligible employees, common shares are purchased at a
purchase price of 85 percent of the market price of the common shares on the
last trading day of the offering period.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|    |  | Nortel Networks contributes an amount equal to the difference between the market price and the purchase
price. For non-North American eligible employees common shares are purchased
at a purchase price equal to the greater of (i) 85 percent of the average of
the high and low prices of common shares on the first trading day of the
offering period and (ii) 71.5 percent of the market price of the common
shares on the last trading day of the offering period, except that if the
market price on the last trading day is equal to or less than the average of
the high and low on the first trading day, the purchase price shall be 85
percent of the market price on the last trading day of the offering period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|17. |  | Discontinued operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|    |  | During the year ended December 31, 2002, Nortel Networks continued to wind
down its access solutions operations and there has been no change to the
initial disposal strategy or intent to exit the business which was approved
by the Board of Directors on June 14, 2001. However, the continued
deterioration in industry and market conditions has delayed certain disposal
activities beyond the original planned timeframe of one year. In particular,
actions involving negotiations with customers, who have also been affected by
industry conditions, are taking longer than expected. Although disposal
activities continue beyond the one-year period generally contemplated under
APB 30, Nortel Networks continues to present the access solutions operations
as discontinued operations in the accompanying consolidated financial
statements. Nortel Networks has disposed of or transitioned the ownership of
certain operations, and operations not disposed of or so transitioned are
expected to be closed. Nortel Networks now expects to complete this plan by
mid 2003, subject to the closing of specific transactions, the timing of
which may continue to be impacted by customer and business issues and any
applicable regulatory requirements.
|   
|    |  | Pursuant to APB 30, the revenues, costs and expenses, assets and liabilities
and cash flows of Nortel Networks access solutions operations have been
segregated in the accompanying consolidated statements of operations,
consolidated balance sheets and consolidated statements of cash flows, and
are reported as discontinued operations. The following consolidated
financial results for discontinued operations are presented as at December 31
for the consolidated balance sheets and for the period ended December 31 for
the consolidated statements of operations and consolidated statements of cash
flows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|    |  | Consolidated statements of operations:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

|                                                      |  |      |     |      |  |      |        |   |  |   |       |  
|----------------------------------------------------- |  | ---- | --- | ---- |  | ---- | ------ | - |  | - | ----- | -
|                                                     
|                                                      |  | 2002 |     | 2001 |  | 2000
|                                                     
|Revenues                                              |  | $    | 141 |      |  | $    | 994    |   |  | $ | 2,325 |  
|                                                     
|Net loss from discontinued operations  net of tax(a) |  | $    |    |      |  | $    | (354   | ) |  | $ | (414  | )
|Net loss on disposal of operations  net of tax(b)    |  |      |    |      |  |      | (2,184 | ) |  |   |      |  
|                                                     
|Net loss from discontinued operations  net of tax    |  | $    |    |      |  | $    | (2,538 | ) |  | $ | (414  | )
|                                                     

| | (a) |  | Loss from discontinued operations was net of applicable income tax
benefits of nil, $122, and $96 for the years ended December 31, 2002,
2001 and 2000, respectively.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (b) |  | Loss on disposal of operations was net of an applicable income tax
benefit of $596 for the year ended December 31, 2001.                                             

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

|                                                |  |      |     |      |  |   |     | 
|----------------------------------------------- |  | ---- | --- | ---- |  | - | --- | 
|                                               
|                                                |  | 2002 |     | 2001
|                                               
|Accounts receivable  net                       |  | $    | 20  |      |  | $ | 109 | 
|Inventories  net                               |  |      |    |      |  |   | 66  | 
|Deferred income taxes                           |  |      | 147 |      |  |   | 348 | 
|Other current assets                            |  |      | 45  |      |  |   | 175 | 
|                                               
|Total current assets of discontinued operations |  | $    | 212 |      |  | $ | 698 | 
|Intangible assets  net                         |  |      |    |      |  |   | 17  | 
|Other long-term assets(a)                       |  |      | 49  |      |  |   | 266 | 
|                                               
|Total assets of discontinued operations         |  | $    | 261 |      |  | $ | 981 | 
|                                               
|Current liabilities(a)                          |  | $    | 46  |      |  | $ | 384 | 
|Long-term liabilities(a)                        |  |      | 2   |      |  |   | 11  | 
|                                               
|Total liabilities of discontinued operations    |  | $    | 48  |      |  | $ | 395 | 
|                                               

| | (a) |  | Other long-term assets, current liabilities and long-term liabilities
of discontinued operations are included in other assets, other accrued
liabilities and other liabilities, respectively, of Nortel Networks
consolidated balance sheets.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

|                                                  |                      |   |      |     |      |   |      |      |   |   |        |      |  
|------------------------------------------------- | -------------------- | - | ---- | --- | ---- | - | ---- | ---- | - | - | ------ | ---- | -
|                                                 
|                                                  |                      |   | 2002 |     | 2001 |   | 2000
|                                                 
|Cash flows from (used in) discontinued operations |                      |   |      |     |      |   |      |      |   |   |        |     
|                                                  | Operating activities |   | $    | 275 |      |   | $    | (708 | ) |   | $      | (701 | )
|                                                  | Investing activities |   |      | 96  |      |   |      | 30   |   |   |        | (356 | )
|                                                 
|Net cash from (used in) discontinued operations   |                      | $ | 371  |     |      | $ | (678 | )    |   | $ | (1,057 | )   
|                                                 



| |  | 2002 Activity                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | During the three months ended June 30, 2002, Arris Group Inc. (Arris Group)
completed a secondary public offering of 15 million common shares held by
Nortel Networks. Following the closing of the offering on June 25, 2002,
Nortel Networks owned 22 million shares, or approximately 27 percent of Arris
Groups common shares. The cash proceeds received were $67 and a gain of
approximately $15 was recorded as a result of this transaction, which is
included in the estimated remaining provisions required for discontinued
operations. During the three months ended March 31, 2002, Nortel Networks
recorded a gain of approximately $13 due to the reduction of Nortel Networks
ownership interest in Arris Group, received for Nortel Networks original
interest in Arris Interactive LLC (Arris), from approximately 49 percent to
approximately 46 percent as a result of Arris Groups issuance of common
shares in connection with its acquisition of another company, which is
included in the estimated remaining provisions required for discontinued
operations.
|
| |  | On April 21, 2002, Nortel Networks entered into an agreement with Aastra
Technologies Limited to sell certain assets, which were included in
discontinued operations, associated with Nortel Networks prior acquisition of
Aptis. The transaction was completed during the three months ended June 30,
2002. The consideration primarily consisted of approximately $16 in cash, as
well as contingent cash consideration of up to $60 over four years based on
the achievement of certain revenue targets by the business. Nortel Networks
recorded a loss of approximately $43 on the transaction, which reduced the
estimated remaining provisions for discontinued operations.                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | On March 5, 2002, Nortel Networks divested its approximately 46 percent
ownership interest in Elastic Networks Inc. (Elastic Networks) to Paradyne
Networks, Inc. (Paradyne) in exchange for an approximately 8 percent
ownership interest in Paradyne. Nortel Networks recorded a gain of
approximately $7 on the transaction, which is included in the estimated
remaining provisions required for discontinued operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

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|    |  | At December 31, 2002, Nortel Networks has customer financing receivables of
$66 (net of provision of $507) for customers included as part of discontinued
operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | At December 31, 2002, the remaining accruals of $44 related to the future
contractual obligations and estimated liabilities, and estimated operating
losses during the planned period of disposition, were included in current
liabilities of discontinued operations. The remaining accruals are expected
to be substantially drawn down by cash payments over the period of
disposition, the impact of which is expected to be partially offset by
proceeds from the disposal of certain remaining assets.                                                                                                                                                                                                                                                     
|   
|    |  | 2001 Activity                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|    |  | On June 14, 2001, Nortel Networks Board of Directors approved a plan to
discontinue Nortel Networks access solutions operations consisting of all of
Nortel Networks narrowband and broadband solutions, including copper, cable,
and fixed wireless solutions, as well as Nortel Networks then consolidated
membership interest in Arris and equity investment in Elastic Networks. Also
affected by the decision were Nortel Networks prior acquisitions of Promatory
Communications, Inc. (Promatory), Aptis Communications, Inc. (Aptis) and
Broadband Networks Inc.                                                                                                                                                                                     
|   
|    |  | In connection with the decision to discontinue the access solutions
operations on June 14, 2001, Nortel Networks recorded a pre-tax loss on
disposal of the access solutions operations of $2,780 in the three months
ended June 30, 2001, which reflected the estimated costs directly associated
with Nortel Networks plan of disposition. The loss reflected: the write-off
of goodwill associated with the acquisitions of Promatory in the amount of
$417; provisions for both short-term and long-term receivables of $600; a provision for inventories of $381; other
asset write-offs totaling $151; future contractual obligations and estimated
liabilities of $1,059; and estimated operating losses during the planned
period of disposition of $172.
|   
|    |  | On August 24, 2001, Nortel Networks completed a transaction with Zhone
Technologies, Inc. to sell the AccessNode ABM and CDS shelf products and the
Universal Edge 9000 digital loop carrier shelf and remote access shelf
products.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|    |  | On August 3, 2001, Nortel Networks completed the transfer of its ownership
interest in Arris to Arris Group. As a result, at December 31, 2001, Nortel
Networks owned a 49.2 percent non-controlling interest in Arris Group,
compared to the previous 81.25 percent controlling interest in Arris.                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|    |  | On July 25, 2001, Nortel Networks completed a transaction with GE Industrial
Systems Technology Management Inc., a division of General Electric Company,
to sell the Lentronics JungleMUX SONET multiplexer and TN-1U SDH multiplexer
products.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|    |  | At December 31, 2001, the remaining accruals of $329 related to the above
noted future contractual obligations and estimated liabilities, and estimated
operating losses during the planned period of disposition were included in
current liabilities of discontinued operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|18. |  | Related party transactions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|    |  | In the ordinary course of business, Nortel Networks engages in transactions
with certain of its equity-owned investees that are under or are subject to
Nortel Networks significant influence and with joint ventures of Nortel
Networks Corporation and with Nortel Networks Corporation and directly owned
subsidiaries of Nortel Networks Corporation. These transactions are sales
and purchases of goods and services under usual trade terms and are measured
at their exchange amounts.                                                                                                                                                                                                                                                                   

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| |  | Transactions with related parties for the years ended December 31 are
summarized as follows:
| |  | --------------------------------------------------------------------------------------------

|                            |                                   |                                                          |   |      |     |      |   |      |      |   |   |     |      |  
|--------------------------- | --------------------------------- | -------------------------------------------------------- | - | ---- | --- | ---- | - | ---- | ---- | - | - | --- | ---- | -
|                           
|                            |                                   |                                                          |   | 2002 |     | 2001 |   | 2000
|                           
|Income Statement            |                                   |                                                          |   |      |     |      |   |      |      |   |   |    
|                            | Revenues                          |                                                          | $ | 15   |     |      | $ | 7    |      |   | $ | 673 |     
|                            | Purchases                         |                                                          | $ | 52   |     |      | $ | 76   |      |   | $ | 369 |     
|                            | Research and development expense  |                                                          | $ | 19   |     |      | $ | 141  |      |   | $ | 52  |     
|                           
|Retained earnings (deficit) |                                   |                                                          |   |      |     |      |   |      |      |   |   |    
|                            | Stock option fair value increment |                                                          | $ | 525  |     |      | $ |     |      |   | $ |    |     
|                           
|Balance Sheet               |                                   |                                                          |   |      |     |      |   |      |      |   |   |    
|                            | Trade and other payables          |                                                          |   |      |     |      |   |      |      |   |   |     |     
|                            |                                   | Owing to Nortel Networks Corporation                     |   | $    | (17 | )    |   | $    | (134 | ) |   | $   | (101 | )
|                            |                                   | Owing from (to) Nortel Networks Corporation subsidiaries |   | $    | 99  |      |   | $    | (116 | ) |   | $   | (252 | )
|                           



|    |  | On August 29, 2002, a payment was made by a subsidiary of Nortel Networks to
Nortel Networks Corporation equal to $525 representing the difference between
the market value of Nortel Networks Corporation common shares issued on
option exercises and the exercise price of Nortel Networks Corporation stock
options held and exercised by employees of the subsidiary. This payment is
referred to as stock option fair value increment in the accompanying
consolidated statement of shareholders equity and consolidated statement of
cash flows.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | In 2001, Nortel Networks completed the sale of substantially all of the
assets in the Cogent Defence Systems business (CDS) to EADS Defence &
Security Networks S.A.S. (EDSN). At that time, Nortel Networks held a 41
percent ownership interest in EDSN and European Aeronautics, Defense and
Space Company (EADS) held the remaining 59 percent. Under the terms of the
agreement, Nortel Networks sold substantially all of its assets in the CDS
business including: fixed assets; accounts receivable; inventory;
intellectual property; and licenses, and excluding cash on hand, as at the
closing date, for consideration of approximately $143, comprised of a loan
note due in 2002 and a call option to acquire an additional approximate 7 percent ownership interest in Nortel
Networks France SAS beginning in 2004. Nortel Networks recorded a gain on
the sale of approximately $37, included in loss (gain) on sale of business.
During the year ended December 31, 2002, Nortel Networks collected the loan
note in the amount of approximately $119. In addition, the call option was
terminated and replaced by a subsequent agreement to satisfy the remaining
consideration owing during 2003.
|   
|    |  | On August 15, 2001, Nortel Networks Corporation completed a private offering
of $1,800 of 4.25 percent convertible senior notes (the Senior Notes), due
on September 1, 2008. Nortel Networks, as the guarantor of the Senior Notes,
will make payment of the principal, or interest, or premium, if any, or other
amounts, if any, should Nortel Networks Corporation not make such payments as
they are due. The guarantee of the Senior Notes is a direct, unconditional
and unsubordinated obligation of Nortel Networks. Nortel Networks
Corporation loaned the full proceeds from the offering to Nortel Networks for
its general corporate purposes. On September 30, 2001, Nortel Networks
Corporation converted the entire loan into one common share of Nortel
Networks (see note 14).                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|    |  | Effective May 1, 2000, in conjunction with the Arrangement, BCEs ownership
interest in Nortel Networks was reduced from approximately 36 percent to a
nominal amount. As a result, BCE and entities that are owned by BCE were no
longer considered related parties immediately after the Arrangement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|19. |  | Contingencies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|    |  | Subsequent to the February 15, 2001 announcement in which Nortel Networks
Corporation provided revised guidance for financial performance for the 2001
fiscal year and the first quarter of 2001, Nortel Networks Corporation and
certain of its then current officers and directors were named as defendants
in more than twenty-five purported class action lawsuits. These lawsuits in
the United States District Courts for the Eastern District of New York, for
the Southern District of New York and for the District of New Jersey, and the
provinces of Ontario, Quebec and British Columbia in Canada, on behalf of
shareholders who acquired Nortel Networks Corporation securities as early as
October 24, 2000                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

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| |  | and as late as February 15, 2001, allege, among other
things, violations of United States federal and Canadian provincial
securities laws. These matters also have been the subject of review by
Canadian and U.S. securities regulatory authorities. On May 11, 2001, Nortel
Networks Corporation filed motions to dismiss and/or stay in connection with
the three proceedings in Quebec primarily based on the factual allegations
lacking substantial connection to Quebec and the inclusion of shareholders resident in Quebec in the class claimed in the
Ontario lawsuit. The plaintiffs in two of these proceedings in Quebec
obtained court approval for discontinuances of their proceedings on January
17, 2002. The motion to dismiss and/or stay the third proceeding was heard
on November 6, 2001 and the court deferred any determination on the motion to
the judge who will hear the application for authorization to commence a class
proceeding. On December 6, 2001, Nortel Networks Corporation filed a motion
seeking leave to appeal that decision. The motion for leave to appeal was
dismissed on March 11, 2002. On October 16, 2001, an order in the Southern
District of New York was filed consolidating twenty-five of the related
United States class action lawsuits into a single case, appointing class
plaintiffs and counsel for such plaintiffs. The plaintiffs served a
consolidated amended complaint on January 18, 2002. On December 17, 2001,
the defendants in the British Columbia action served notice of a motion
requesting the court to decline jurisdiction and to stay all proceedings on
the ground that British Columbia is an inappropriate forum. The motion has
been adjourned at the plaintiffs request to a future date to be set by the
parties.                                                                                                                                        
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | A class action lawsuit against Nortel Networks Corporation was also filed in
the United States District Court for the Southern District of New York on
behalf of shareholders who acquired the securities of JDS Uniphase
Corporation (JDS) between January 18, 2001 and February 15, 2001, alleging
violations of the same United States federal securities laws as the
above-noted lawsuits.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | On July 17, 2002, a new purported class action lawsuit (the Ontario Claim)
was filed in the Ontario Superior Court of Justice, Commercial List, naming
Nortel Networks Corporation, certain of its current and former officers and
directors, and its auditor as defendants. The factual allegations in the
Ontario Claim are substantially similar to the allegations in the
consolidated amended complaint filed in the United States District Court
described above. The Ontario Claim is on behalf of all Canadian residents
who purchased Nortel Networks Corporation securities (including options on
Nortel Networks Corporation securities) between October 24, 2000 and February
15, 2001. The plaintiffs claim damages of Canadian $5,000, plus punitive
damages in the amount of Canadian $1,000, prejudgment and postjudgment
interest, and costs of the action.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | On April 1, 2002, Nortel Networks Corporation filed a motion to dismiss both
the above consolidated United States shareholder class action and the above
JDS shareholder class action complaints on the grounds that they failed to
state a cause of action under United States federal securities laws. With
respect to the JDS shareholder class action complaint, Nortel Networks
Corporation also moved to dismiss on the separate basis that JDS shareholders
lacked standing to sue Nortel Networks Corporation. On January 3, 2003, the
District Court granted the motion to dismiss the JDS shareholder class action
complaint and denied the motion to dismiss the consolidated United States
class action complaint.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | A purported class action lawsuit was filed in the United States District
Court for the Middle District of Tennessee on December 21, 2001, on behalf of
participants and beneficiaries of the Nortel Networks Long-Term Investment
Plan (the Plan) at any time during the period of March 7, 2000 through the
filing date and who made or maintained Plan investments in Nortel Networks
Corporation common shares, under the Employee Retirement Income Security Act
for Plan-wide relief and alleging, among other things, material
misrepresentations and omissions to induce Plan participants to continue to
invest in and maintain investments in Nortel Networks Corporation common
shares in the Plan. A second purported class action lawsuit, on behalf of
the Plan and Plan participants for whose individual accounts the Plan
purchased Nortel Networks Corporation common shares during the period for
October 27, 2000 to February 15, 2001, and making similar allegations was
filed in the same court on March 12, 2002. A third purported class action
lawsuit, on behalf of persons who are or were Plan participants or
beneficiaries at any time since March 1, 1999 to the filing date, and making
similar allegations, was filed in the same court on March 21, 2002. The
first and second purported class action lawsuits were consolidated by a new
purported class action complaint, filed on May 15, 2002 in the same court and
making similar allegations, on behalf of Plan participants and beneficiaries
who directed the Plan to purchase or hold shares of certain funds, which held
primarily Nortel Networks Corporation common shares, during the period of
March 7, 2000 through December 21, 2000. On September 24, 2002, plaintiffs
in the consolidated action filed a motion to consolidate all the actions and
to transfer them to the United States District Court for the Southern
District of New York.

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| |  | The Plaintiff then filed a motion to withdraw the
pending motion to consolidate and transfer. The withdrawal was granted by
the District Court on December 30, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | On February 12, 2001, Nortel Networks Inc., a subsidiary of Nortel Networks,
was served with a consolidated amended class action complaint (the First
Complaint) that purported to add Nortel Networks Corporation as a defendant
to a lawsuit commenced in July 2000 against Entrust, Inc. (formerly Entrust
Technologies, Inc.) (Entrust) and two of its then current officers in the
United States District Court for the Eastern District of Texas (Marshall
Division) (the District Court). The First Complaint alleges that Entrust,
two officers of Entrust, and Nortel Networks Corporation violated the
Securities Exchange Act of 1934 with respect to certain statements made by
Entrust. Nortel Networks Corporation is alleged to be a controlling person
of Entrust. On April 6, 2001, Nortel Networks Corporation filed a motion to
dismiss the First Complaint. On July 31, 2001, the First Complaint was
dismissed without prejudice. On August 31, 2001, the plaintiffs filed a
second amended class action complaint (the Second Complaint) against the
same defendants asserting claims substantively similar to those in the First
Complaint. On September 21, 2001, Nortel Networks Corporation filed a motion
to dismiss the Second Complaint. The motion was granted by the District
Court on September 30, 2002, and the Second Complaint was dismissed without
leave to amend. Plaintiffs have not appealed the decision of the District
Court.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | On March 4, 1997, Bay Networks, Inc. (Bay Networks), a company acquired on
August 31, 1998, announced that shareholders had filed two separate lawsuits
in the United States District Court for the Northern District of California
(the Federal Court) and the California Superior Court, County of Santa
Clara (the California Court), against Bay Networks and ten of Bay Networks
then current and former officers and directors purportedly on behalf of a
class of shareholders who purchased Bay Networks common shares during the
period of May 1, 1995 through October 14, 1996. On August 17, 2000, the
Federal Court granted the defendants motion to dismiss the federal
complaint. On August 1, 2001, the United States Court of Appeals for the
Ninth Circuit denied the plaintiffs appeal of that decision. On April 18,
1997, a second lawsuit was filed in the California Court, purportedly on
behalf of a class of shareholders who acquired Bay Networks common shares
pursuant to the registration statement and prospectus that became effective
on November 15, 1995. The two actions in the California Court were
consolidated in April 1998; however, the California Court denied the
plaintiffs motion for class certification. In January 2000, the California
Court of Appeal rejected the plaintiffs appeal of the decision. A petition
for review was filed with the California Supreme Court by the plaintiffs and
was denied. In February 2000, new plaintiffs who allege to have been
shareholders of Bay Networks during the relevant periods, filed a motion for
intervention in the California Court seeking to become the representatives of
a class of shareholders. The motion was granted on June 8, 2001 and the new
plaintiffs filed their complaint-in-intervention on an individual and
purported class representative basis alleging misrepresentations made in
connection with the purchase and sale of securities of Bay Networks in
violation of California statutory and common law. On March 11, 2002, the
California Court granted the defendants motion to strike the class
allegations. The plaintiffs were permitted to proceed on their individual
claims. The intervenor-plaintiffs are appealing the dismissal of their class
allegations.
|
| |  | Except as otherwise described herein, in each of the matters described above,
plaintiffs are seeking an unspecified amount of monetary damages.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Nortel Networks is also a defendant in various other suits, claims,
proceedings and investigations which arise in the normal course of business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Nortel Networks is unable to ascertain the ultimate aggregate amount of
monetary liability or financial impact of the above matters which, unless
specified, seek damages of material or indeterminate amounts. Nortel
Networks cannot determine whether these actions, suits, claims and
proceedings, will, individually or collectively, have a material adverse
effect on the business, results of operations and financial condition of
Nortel Networks. Nortel Networks and any named directors and officers of
Nortel Networks intend to vigorously defend these actions, suits, claims and
proceedings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Environmental matters                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Nortel Networks manufacturing and research operations are subject to a wide
range of environmental protection laws in various jurisdictions around the
world. Nortel Networks seeks to operate its business in compliance with such
laws, and has a corporate environmental management system standard to promote
such compliance. Moreover, Nortel Networks has a periodic, risk-based,
integrated environment, health and safety audit program.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

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|    |  | Nortel Networks environmental program focuses its activities on design for
the environment, supply chain and packaging reduction issues. Nortel
Networks works with its suppliers and other external groups to encourage the
sharing of non-proprietary information on environmental research.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Nortel Networks is exposed to liabilities and compliance costs arising from
its past and current generation, management and disposal of hazardous
substances and wastes. At December 31, 2002, the accruals on the
accompanying consolidated balance sheets for environmental matters were $30.
Based on information available as at December 31, 2002, management believes
that the existing accruals are sufficient to satisfy probable and reasonably
estimable environmental liabilities related to known environmental matters.
Any additional liability that may result from these matters, and any
additional liabilities that may result in connection with other locations
currently under investigation, are not expected to have a material adverse
effect on the business, results of operations and financial condition of
Nortel Networks.
|   
|    |  | Nortel Networks has remedial activities under way at 12 sites which are
either currently or previously owned or occupied facilities. An estimate of
Nortel Networks anticipated remediation costs associated with all such sites,
to the extent probable and reasonably estimable, is included in the
environmental accruals referred to above in an approximate amount of $29.                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|    |  | Nortel Networks is also listed as a potentially responsible party (PRP)
under the United States Comprehensive Environmental Response, Compensation
and Liability Act (CERCLA) at five Superfund sites in the United States.
An estimate of Nortel Networks share of the anticipated remediation costs
associated with such Superfund sites is expected to be de minimis and is
included in the environmental accruals of $30 referred to above.                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|    |  | Liability under CERCLA may be imposed on a joint and several basis, without
regard to the extent of Nortel Networks involvement. In addition, the
accuracy of Nortel Networks estimate of environmental liability is affected
by several uncertainties such as additional requirements which may be
identified in connection with remedial activities, the complexity and
evolution of environmental laws and regulations, and the identification of
presently unknown remediation requirements. Consequently, Nortel Networks
liability could be greater than its current estimate.                                                                                                                                                                                                                                                                    
|   
|20. |  | Subsequent events                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|    |  | On February 14, 2003, Nortel Networks announced that it entered into an
agreement with Export Development Canada (EDC) regarding arrangements to
provide for support, on a secured basis, of certain Nortel Networks
obligations arising out of normal course business activities, including
letters of credit, letters of guarantee, indemnity arrangements, performance
bonds, surety bonds, receivables sales, securitizations and similar
instruments issued or entered into for the benefit of Nortel Networks (the
EDC Support Facility).                                                                                                                                                                                                                                                                                                     
|   
|    |  | The EDC Support Facility provides for up to $750 in support and is comprised
of (i) up to $300 of committed support for performance bonds or similar
instruments (within certain parameters); (ii) up to $150 of uncommitted
support for receivables sales and/or securitizations; and (iii) up to $300 of
additional uncommitted support for performance bonds and receivable sales
and/or securitizations.                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|    |  | Nortel Networks obligations under the EDC Support Facility are secured on an
equal basis under the existing security agreements entered into by Nortel
Networks and various of its subsidiaries that pledge substantially all of the
assets of Nortel Networks in favor of the lenders under Nortel Networks and
NNIs $750 April 2000 five year syndicated credit facilities and the holders
of Nortel Networks Corporations and Nortel Networks public debt (see note 21).                                                                                                                                                                                                                                                                                                                                                                           
|   
|21. |  | Supplemental consolidating financial information                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|    |  | As a result of Nortel Networks current credit ratings, various liens,
pledges, and guarantees are effective under certain credit and security
agreements entered into by Nortel Networks and various of its subsidiaries
and will remain effective, notwithstanding the expiration of the $1,510
December 2001 364-day syndicated credit facilities. In addition, in
accordance with the covenants in the trust indentures for all Nortel Networks
current consolidated public debt securities, which represent primarily all of
Nortel Networks consolidated long-term debt at December 31, 2002, all such
public debt                                                                                                                                                                                                                                 

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| |  | securities are also secured equally and ratably with the
obligations under Nortel Networks and NNIs credit facilities by liens on
substantially all of the assets of Nortel Networks and those of most of its
United States and Canadian subsidiaries and by pledges of shares in certain
of Nortel Networks other subsidiaries. In addition, certain of Nortel
Networks wholly owned subsidiaries have guaranteed Nortel Networks
obligations under the credit facilities and outstanding public debt
securities (the Guarantor Subsidiaries). Non-guarantor subsidiaries (the
Non-Guarantor Subsidiaries) represent either wholly owned subsidiaries of
Nortel Networks whose shares have been pledged, or are the remaining
subsidiaries of Nortel Networks which are not providing liens, pledges or
guarantees. Nortel Networks obligations under the EDC Support Facility are
also secured on an equal basis under the security agreements (see
note 20).
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The liens, pledges, and guarantees described above also apply equally and
ratably to Nortel Networks guarantee of the obligations under Nortel Networks
Corporations Senior Notes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 



| |  | If Nortel Networks senior long-term debt rating by Moodys returns to Baa2
(with a stable outlook) and its rating by Standard & Poors returns to BBB
(with a stable outlook), the security will be released in full. If both the
$750 April 2000 five year syndicated credit facilities and the EDC Support
Facility are terminated or expire, the security will also be released in
full. Nortel Networks may provide EDC with cash collateral (or any other
alternative collateral acceptable to EDC), in an amount equal to the total
amount of our outstanding obligations and undrawn commitments and expenses
under the EDC Support Facility, in lieu of the security provided under the
security agreements.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The following supplemental consolidating financial data illustrates, in
separate columns, the composition of Nortel Networks, the Guarantor
Subsidiaries, the Non-Guarantor Subsidiaries, eliminations and the
consolidated total as at, and for the years ending, December 31, 2002, 2001
and 2000.                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Investments in subsidiaries are accounted for by the equity method for
purposes of the supplemental consolidating financial data. Net earnings
(loss) of subsidiaries are, therefore reflected in the investment account and
net loss. The principal elimination entries eliminate investments in
subsidiaries and intercompany balances and transactions. The financial data
may not necessarily be indicative of the results of operations or financial
position had the subsidiaries been operated as independent entities.                                                                                                                                                                                      

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Supplemental Consolidating Statements of Operations for the year ended December
31, 2002:

|                                                                                  |                       |         |          |              |           |              |           |             |      |       |       |     |   |   |        |   |  |   |        |       |  
|--------------------------------------------------------------------------------- | --------------------- | ------- | -------- | ------------ | --------- | ------------ | --------- | ----------- | ---- | ----- | ----- | --- | - | - | ------ | - |  | - | ------ | ----- | -
|                                                                                 
|                                                                                  |                       |         | Nortel   |              |           |              |           |             | Non- |       |       |     |   |   |        |   | 
|                                                                                  |                       |         | Networks |              | Guarantor |              | guarantor |             |      |       |       |     |   |   |       
|(millions of U.S. dollars)                                                        |                       | Limited |          | subsidiaries |           | subsidiaries |           | Elimination |      | Total
|                                                                                 
|Revenues                                                                          |                       | $       | 3,050    |              |           | $            | 7,842     |             |      | $     | 2,868 |     |   | $ | (3,214 | ) |  | $ | 10,546 |      
|Cost of revenues                                                                  |                       |         | 2,678    |              |           |              | 5,184     |             |      |       | 2,497 |     |   |   | (3,214 | ) |  |   | 7,145  |      
|                                                                                 
|Gross profit                                                                      |                       |         | 372      |              |           |              | 2,658     |             |      |       | 371   |     |   |   |       |   |  |   | 3,401  |      
|                                                                                 
|Selling, general and administrative expense
(excluding stock option compensation) |                       |         | 573      |              |           |              | 1,858     |             |      |       | 231   |     |   |   |       |   |  |   | 2,662  |      
|Research and development expense                                                  |                       |         | 903      |              |           |              | 1,013     |             |      |       | 312   |     |   |   |       |   |  |   | 2,228  |      
|Amortization of intangibles                                                       |                       |         |          |              |           |              |           |             |      |       |       |     |   |   |        |   |  |   |        |      
|                                                                                  | Acquired technology   |         |          |             |           |              |           | 20          |      |       |       |    |   |   |        |  |  |   |        | 20    |  
|                                                                                  | Goodwill              |         |          |             |           |              |           |            |      |       |       |    |   |   |        |  |  |   |        |      |  
|Special charges                                                                   |                       |         |          |              |           |              |           |             |      |       |       |     |   |   |        |   |  |   |        |      
|                                                                                  | Goodwill impairment   |         |          | 121          |           |              |           | 60          |      |       |       | 83  |   |   |        |  |  |   |        | 264   |  
|                                                                                  | Other special charges |         |          | 253          |           |              |           | 1,091       |      |       |       | 208 |   |   |        |  |  |   |        | 1,552 |  
|Loss (gain) on sale of businesses                                                 |                       |         | (2       | )            |           |              | (21       | )           |      |       | 1     |     |   |   |       |   |  |   | (22    | )    
|                                                                                 
|Operating loss                                                                    |                       |         | (1,476   | )            |           |              | (1,363    | )           |      |       | (464  | )   |   |   |       |   |  |   | (3,303 | )    
|                                                                                 
|Equity in net loss of associated companies                                        |                       |         | (2,166   | )            |           |              | (373      | )           |      |       | (12   | )   |   |   | 2,542  |   |  |   | (9     | )    
|Other income (expense)  net                                                      |                       |         | (30      | )            |           |              | 54        |             |      |       | (26   | )   |   |   |       |   |  |   | (2     | )    
|Interest expense                                                                  |                       |         |          |              |           |              |           |             |      |       |       |     |   |   |        |   |  |   |        |      
|                                                                                  | Long-term debt        |         |          | (104         | )         |              |           |            |      |       |       | (27 | ) |   |        |  |  |   |        | (131  | )
|                                                                                  | Other                 |         |          |             |           |              |           | (23         | )    |       |       | (18 | ) |   |        |  |  |   |        | (41   | )
|                                                                                 
|Loss from continuing operations before income taxes                               |                       |         | (3,776   | )            |           |              | (1,705    | )           |      |       | (547  | )   |   |   | 2,542  |   |  |   | (3,486 | )    
|Income tax benefit                                                                |                       |         | 212      |              |           |              | 106       |             |      |       | 129   |     |   |   |       |   |  |   | 447    |      
|                                                                                 
|Net loss from continuing operations                                               |                       |         | (3,564   | )            |           |              | (1,599    | )           |      |       | (418  | )   |   |   | 2,542  |   |  |   | (3,039 | )    
|Net loss from discontinued operations  net of tax                                |                       |         |         |              |           |              |          |             |      |       |      |     |   |   |       |   |  |   |       |      
|                                                                                 
|Net loss before cumulative effect of accounting
change                            |                       |         | (3,564   | )            |           |              | (1,599    | )           |      |       | (418  | )   |   |   | 2,542  |   |  |   | (3,039 | )    
|Cumulative effect of accounting change  net of tax                               |                       |         |         |              |           |              |          |             |      |       |      |     |   |   |       |   |  |   |       |      
|                                                                                 
|Net loss                                                                          |                       |         | (3,564   | )            |           |              | (1,599    | )           |      |       | (418  | )   |   |   | 2,542  |   |  |   | (3,039 | )    
|Dividends on preferred shares                                                     |                       |         | 22       |              |           |              |          |             |      |       |      |     |   |   |       |   |  |   | 22     |      
|                                                                                 
|Net loss applicable to common shares                                              |                       | $       | (3,586   | )            |           | $            | (1,599    | )           |      | $     | (418  | )   |   | $ | 2,542  |   |  | $ | (3,061 | )    
|                                                                                 

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Supplemental Consolidating Statements of Operations for the year ended December 31, 2001:

|                                                                                  |                       |         |          |              |           |              |           |             |      |       |        |       |   |   |        |   |  |   |         |       |  
|--------------------------------------------------------------------------------- | --------------------- | ------- | -------- | ------------ | --------- | ------------ | --------- | ----------- | ---- | ----- | ------ | ----- | - | - | ------ | - |  | - | ------- | ----- | -
|                                                                                 
|                                                                                  |                       |         | Nortel   |              |           |              |           |             | Non- |       |        |       |   |   |        |   | 
|                                                                                  |                       |         | Networks |              | Guarantor |              | guarantor |             |      |       |        |       |   |   |       
|(millions of U.S. dollars)                                                        |                       | Limited |          | subsidiaries |           | subsidiaries |           | Elimination |      | Total
|                                                                                 
|Revenues                                                                          |                       | $       | 5,072    |              |           | $            | 12,813    |             |      | $     | 4,816  |       |   | $ | (5,326 | ) |  | $ | 17,375  |      
|Cost of revenues                                                                  |                       |         | 4,625    |              |           |              | 10,669    |             |      |       | 4,273  |       |   |   | (5,326 | ) |  |   | 14,241  |      
|                                                                                 
|Gross profit                                                                      |                       |         | 447      |              |           |              | 2,144     |             |      |       | 543    |       |   |   |       |   |  |   | 3,134   |      
|                                                                                 
|Selling,
general and administrative expense
(excluding stock option compensation) |                       |         | 775      |              |           |              | 4,137     |             |      |       | 903    |       |   |   |       |   |  |   | 5,815   |      
|Research and development expense                                                  |                       |         | 1,152    |              |           |              | 1,651     |             |      |       | 427    |       |   |   |       |   |  |   | 3,230   |      
|Amortization of intangibles                                                       |                       |         |          |              |           |              |           |             |      |       |        |       |   |   |        |   |  |   |         |      
|                                                                                  | Acquired technology   |         |          |             |           |              |           | 574         |      |       |        |      |   |   |        |  |  |   |         | 574   |  
|                                                                                  | Goodwill              |         |          | 22           |           |              |           | 1,561       |      |       |        | 499   |   |   |        |  |  |   |         | 2,082 |  
|Special charges                                                                   |                       |         |          |              |           |              |           |             |      |       |        |       |   |   |        |   |  |   |         |      
|                                                                                  | Goodwill impairment   |         |          |             |           |              |           | 1,008       |      |       |        | 1,231 |   |   |        |  |  |   |         | 2,239 |  
|                                                                                  | Other special charges |         |          | 595          |           |              |           | 2,056       |      |       |        | 553   |   |   |        |  |  |   |         | 3,204 |  
|Gain on sale of businesses                                                        |                       |         | (10      | )            |           |              | (109      | )           |      |       | (6     | )     |   |   |       |   |  |   | (125    | )    
|                                                                                 
|Operating loss                                                                    |                       |         | (2,087   | )            |           |              | (8,734    | )           |      |       | (3,064 | )     |   |   |       |   |  |   | (13,885 | )    
|                                                                                 
|Equity in net earnings (loss) of associated companies                             |                       |         | (11,595  | )            |           |              | (4,861    | )           |      |       | 3      |       |   |   | 16,319 |   |  |   | (134    | )    
|Other income (expense)  net                                                      |                       |         | 429      |              |           |              | (369      | )           |      |       | (5     | )     |   |   | (380   | ) |  |   | (325    | )    
|Interest expense                                                                  |                       |         |          |              |           |              |           |             |      |       |        |       |   |   |        |   |  |   |         |      
|                                                                                  | Long-term debt        |         |          | (136         | )         |              |           | 3           |      |       |        | (32   | ) |   |        |  |  |   |         | (165  | )
|                                                                                  | Other                 |         |          | (34          | )         |              |           | (71         | )    |       |        | (14   | ) |   |        |  |  |   |         | (119  | )
|                                                                                 
|Loss from continuing operations before income taxes                               |                       |         | (13,423  | )            |           |              | (14,032   | )           |      |       | (3,112 | )     |   |   | 15,939 |   |  |   | (14,628 | )    
|Income tax benefit                                                                |                       |         | 1,868    |              |           |              | 712       |             |      |       | 493    |       |   |   |       |   |  |   | 3,073   |      
|                                                                                 
|Net loss from continuing operations                                               |                       |         | (11,555  | )            |           |              | (13,320   | )           |      |       | (2,619 | )     |   |   | 15,939 |   |  |   | (11,555 | )    
|Net loss from discontinued operations  net of tax                                |                       |         | (2,538   | )            |           |              | (1,650    | )           |      |       |       |       |   |   | 1,650  |   |  |   | (2,538  | )    
|                                                                                 
|Net loss before cumulative effect of accounting change                            |                       |         | (14,093  | )            |           |              | (14,970   | )           |      |       | (2,619 | )     |   |   | 17,589 |   |  |   | (14,093 | )    
|Cumulative effect of accounting change  net of tax of $9                         |                       |         | 15       |              |           |              |          |             |      |       |       |       |   |   |       |   |  |   | 15      |      
|                                                                                 
|Net loss                                                                          |                       |         | (14,078  | )            |           |              | (14,970   | )           |      |       | (2,619 | )     |   |   | 17,589 |   |  |   | (14,078 | )    
|Dividends on preferred shares                                                     |                       |         | 27       |              |           |              |          |             |      |       |       |       |   |   |       |   |  |   | 27      |      
|                                                                                 
|Net loss applicable to common shares                                              |                       | $       | (14,105  | )            |           | $            | (14,970   | )           |      | $     | (2,619 | )     |   | $ | 17,589 |   |  | $ | (14,105 | )    
|                                                                                 

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Supplemental Consolidating Statements of Operations for the year ended December 31, 2000:

|                                                                                   |                       |         |          |              |           |              |           |             |      |       |        |     |   |   |        |   |  |   |        |       |  
|---------------------------------------------------------------------------------- | --------------------- | ------- | -------- | ------------ | --------- | ------------ | --------- | ----------- | ---- | ----- | ------ | --- | - | - | ------ | - |  | - | ------ | ----- | -
|                                                                                  
|                                                                                   |                       |         | Nortel   |              |           |              |           |             | Non- |       |        |     |   |   |        |   | 
|                                                                                   |                       |         | Networks |              | Guarantor |              | guarantor |             |      |       |        |     |   |   |       
|(millions of U.S. dollars)                                                         |                       | Limited |          | subsidiaries |           | subsidiaries |           | Elimination |      | Total
|                                                                                  
|Revenues                                                                           |                       | $       | 8,976    |              |           | $            | 22,672    |             |      | $     | 6,201  |     |   | $ | (9,996 | ) |  | $ | 27,853 |      
|Cost of revenues                                                                   |                       |         | 7,738    |              |           |              | 12,879    |             |      |       | 4,448  |     |   |   | (9,996 | ) |  |   | 15,069 |      
|                                                                                  
|Gross profit                                                                       |                       |         | 1,238    |              |           |              | 9,793     |             |      |       | 1,753  |     |   |   |       |   |  |   | 12,784 |      
|                                                                                  
|Selling, general and administrative expense

(excluding stock option compensation) |                       |         | 802      |              |           |              | 3,791     |             |      |       | 778    |     |   |   |       |   |  |   | 5,371  |      
|Research and development expense                                                   |                       |         | 329      |              |           |              | 3,036     |             |      |       | 261    |     |   |   |       |   |  |   | 3,626  |      
|In-process research and development expense                                        |                       |         |         |              |           |              | 64        |             |      |       | 559    |     |   |   |       |   |  |   | 623    |      
|Amortization of intangibles                                                        |                       |         |          |              |           |              |           |             |      |       |        |     |   |   |        |   |  |   |        |      
|                                                                                   | Acquired technology   |         |          |             |           |              |           | 789         |      |       |        |    |   |   |        |  |  |   |        | 789   |  
|                                                                                   | Goodwill              |         |          | 19           |           |              |           | 1,716       |      |       |        | 757 |   |   |        |  |  |   |        | 2,492 |  
|Stock option compensation                                                          |                       |         | 96       |              |           |              | 3         |             |      |       |       |     |   |   |       |   |  |   | 99     |      
|Special charges                                                                    |                       |         |          |              |           |              |           |             |      |       |        |     |   |   |        |   |  |   |        |      
|                                                                                   | Goodwill impairment   |         |          |             |           |              |           |            |      |       |        | 133 |   |   |        |  |  |   |        | 133   |  
|                                                                                   | Other special charges |         |          | 9            |           |              |           | 116         |      |       |        | 9   |   |   |        |  |  |   |        | 134   |  
|Loss (gain) on sale of businesses                                                  |                       |         | (228     | )            |           |              | 42        |             |      |       | 12     |     |   |   |       |   |  |   | (174   | )    
|                                                                                  
|Operating
income (loss)                                                            |                       |         | 211      |              |           |              | 236       |             |      |       | (756   | )   |   |   |       |   |  |   | (309   | )    
|                                                                                  
|Equity in net loss of associated companies                                         |                       |         | (1,278   | )            |           |              | (95       | )           |      |       | (63    | )   |   |   | 1,407  |   |  |   | (29    | )    
|Other income (expense)  net                                                       |                       |         | 470      |              |           |              | 293       |             |      |       | 72     |     |   |   |       |   |  |   | 835    |      
|Interest expense                                                                   |                       |         |          |              |           |              |           |             |      |       |        |     |   |   |        |   |  |   |        |      
|                                                                                   | Long-term debt        |         |          | (54          | )         |              |           | 2           |      |       |        | (34 | ) |   |        |  |  |   |        | (86   | )
|                                                                                   | Other                 |         |          | 6            |           |              |           | (39         | )    |       |        | (49 | ) |   |        |  |  |   |        | (82   | )
|                                                                                  
|Earnings (loss) from continuing operations
before income taxes                     |                       |         | (645     | )            |           |              | 397       |             |      |       | (830   | )   |   |   | 1,407  |   |  |   | 329    |      
|Income tax provision                                                               |                       |         | (226     | )            |           |              | (741      | )           |      |       | (233   | )   |   |   |       |   |  |   | (1,200 | )    
|                                                                                  
|Net loss from continuing operations                                                |                       |         | (871     | )            |           |              | (344      | )           |      |       | (1,063 | )   |   |   | 1,407  |   |  |   | (871   | )    
|Net loss from discontinued operations  net of tax                                 |                       |         | (414     | )            |           |              | (269      | )           |      |       |       |     |   |   | 269    |   |  |   | (414   | )    
|                                                                                  
|Net loss                                                                           |                       |         | (1,285   | )            |           |              | (613      | )           |      |       | (1,063 | )   |   |   | 1,676  |   |  |   | (1,285 | )    
|Dividends on preferred shares                                                      |                       |         | 31       |              |           |              |          |             |      |       |       |     |   |   |       |   |  |   | 31     |      
|                                                                                  
|Net loss applicable to common shares                                               |                       | $       | (1,316   | )            |           | $            | (613      | )           |      | $     | (1,063 | )   |   | $ | 1,676  |   |  | $ | (1,316 | )    
|                                                                                  

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Supplemental Consolidating Balance Sheets as at December 31, 2002:

|                                                       |                                                |         |          |              |           |              |           |             |      |       |        |       |  |   |        |        |   |   |         |       | 
|------------------------------------------------------ | ---------------------------------------------- | ------- | -------- | ------------ | --------- | ------------ | --------- | ----------- | ---- | ----- | ------ | ----- |  | - | ------ | ------ | - | - | ------- | ----- | 
|                                                      
|                                                       |                                                |         | Nortel   |              |           |              |           |             | Non- |       |        |       |  |   |        |        |  
|                                                       |                                                |         | Networks |              | Guarantor |              | guarantor |             |      |       |        |       |  |   |       
|(millions of U.S. dollars)                             |                                                | Limited |          | subsidiaries |           | subsidiaries |           | Elimination |      | Total
|                                                      
|ASSETS                                                 |                                                |         |          |              |           |              |           |             |      |       |        |       |  |   |        |        |   |   |         |      
|Current assets                                         |                                                |         |          |              |           |              |           |             |      |       |        |       |  |   |        |        |   |   |         |      
|                                                       | Cash and cash equivalents                      |         | $        | 251          |           |              | $         | 2,452       |      |       | $      | 1,110 |  |   | $      |       |   |   | $       | 3,813 | 
|                                                       | Restricted cash and cash equivalents           |         |          | 6            |           |              |           | 176         |      |       |        | 67    |  |   |        |       |   |   |         | 249   | 
|                                                       | Accounts receivable  net                      |         |          | 316          |           |              |           | 1,189       |      |       |        | 405   |  |   |        |       |   |   |         | 1,910 | 
|                                                       | Intercompany/related party accounts receivable |         |          | 4,200        |           |              |           | 976         |      |       |        | 459   |  |   |        | (5,552 | ) |   |         | 83    | 
|                                                       | Inventories  net                              |         |          | 515          |           |              |           | 211         |      |       |        | 163   |  |   |        |       |   |   |         | 889   | 
|                                                       | Income taxes recoverable                       |         |          | 3            |           |              |           | 46          |      |       |        | 9     |  |   |        |       |   |   |         | 58    | 
|                                                       | Deferred income taxes  net                    |         |          | 178          |           |              |           | 615         |      |       |        |      |  |   |        |       |   |   |         | 793   | 
|                                                       | Other current assets                           |         |          | 108          |           |              |           | 289         |      |       |        | 97    |  |   |        |       |   |   |         | 494   | 
|                                                       | Current assets of discontinued operations      |         |          | 74           |           |              |           | 138         |      |       |        |      |  |   |        |       |   |   |         | 212   | 
|                                                      
|Total current assets                                   |                                                |         | 5,651    |              |           |              | 6,092     |             |      |       | 2,310  |       |  |   | (5,552 | )      |   |   | 8,501   |      
|                                                      
|Investments at cost and associated companies at equity |                                                |         | 707      |              |           |              | (7,679    | )           |      |       | 118    |       |  |   | 7,100  |        |   |   | 246     |      
|Plant and equipment  net                              |                                                |         | 399      |              |           |              | 741       |             |      |       | 301    |       |  |   |       |        |   |   | 1,441   |      
|Goodwill                                               |                                                |         |         |              |           |              | 1,956     |             |      |       | 65     |       |  |   |       |        |   |   | 2,021   |      
|Intangible assets  net                                |                                                |         |         |              |           |              |          |             |      |       |       |       |  |   |       |        |   |   |        |      
|Deferred income taxes  net                            |                                                |         | 1,143    |              |           |              | 1,582     |             |      |       | 72     |       |  |   |       |        |   |   | 2,797   |      
|Other assets                                           |                                                |         | 472      |              |           |              | 1,271     |             |      |       | 916    |       |  |   | (1,912 | )      |   |   | 747     |      
|                                                      
|Total assets                                           |                                                | $       | 8,372    |              |           | $            | 3,963     |             |      | $     | 3,782  |       |  | $ | (364   | )      |   | $ | 15,753  |      
|                                                      
|LIABILITIES AND SHAREHOLDERS EQUITY                   |                                                |         |          |              |           |              |           |             |      |       |        |       |  |   |        |        |   |   |         |      
|Current liabilities                                    |                                                |         |          |              |           |              |           |             |      |       |        |       |  |   |        |        |   |   |         |      
|                                                       | Notes payable                                  |         | $        | 2            |           |              | $         | 3           |      |       | $      | 95    |  |   | $      |       |   |   | $       | 100   | 
|                                                       | Trade and other accounts payable               |         |          | 400          |           |              |           | 429         |      |       |        | 102   |  |   |        |       |   |   |         | 931   | 
|                                                       | Intercompany/related party accounts payable    |         |          |             |           |              |           | 3,336       |      |       |        | 2,216 |  |   |        | (5,552 | ) |   |         |      | 
|                                                       | Payroll and benefit-related liabilities        |         |          | 32           |           |              |           | 397         |      |       |        | 84    |  |   |        |       |   |   |         | 513   | 
|                                                       | Contractual liabilities                        |         |          | 107          |           |              |           | 932         |      |       |        | 507   |  |   |        |       |   |   |         | 1,546 | 
|                                                       | Restructuring                                  |         |          | 183          |           |              |           | 415         |      |       |        | 163   |  |   |        |       |   |   |         | 761   | 
|                                                       | Other accrued liabilities                      |         |          | 641          |           |              |           | 1,768       |      |       |        | 394   |  |   |        |       |   |   |         | 2,803 | 
|                                                       | Long-term debt due within one year             |         |          | 174          |           |              |           | 8           |      |       |        | 51    |  |   |        |       |   |   |         | 233   | 
|                                                      
|Total current liabilities                              |                                                |         | 1,539    |              |           |              | 7,288     |             |      |       | 3,612  |       |  |   | (5,552 | )      |   |   | 6,887   |      
|                                                      
|Long-term debt                                         |                                                |         | 1,603    |              |           |              | 3         |             |      |       | 313    |       |  |   |       |        |   |   | 1,919   |      
|Deferred income taxes  net                            |                                                |         | 263      |              |           |              | 95        |             |      |       | 8      |       |  |   |       |        |   |   | 366     |      
|Other liabilities                                      |                                                |         | 814      |              |           |              | 1,761     |             |      |       | 1,688  |       |  |   | (1,912 | )      |   |   | 2,351   |      
|Minority interest in subsidiary companies              |                                                |         |         |              |           |              |          |             |      |       | 78     |       |  |   |       |        |   |   | 78      |      
|                                                      
|                                                       |                                                |         | 4,219    |              |           |              | 9,147     |             |      |       | 5,699  |       |  |   | (7,464 | )      |   |   | 11,601  |      
|                                                      
|SHAREHOLDERS EQUITY                                   |                                                |         |          |              |           |              |           |             |      |       |        |       |  |   |        |        |   |   |         |      
|Preferred shares                                       |                                                |         | 536      |              |           |              | 342       |             |      |       |       |       |  |   | (342   | )      |   |   | 536     |      
|Common shares                                          |                                                |         | 1,211    |              |           |              | 6,061     |             |      |       | 982    |       |  |   | (7,043 | )      |   |   | 1,211   |      
|Additional paid-in capital                             |                                                |         | 21,991   |              |           |              | 1,551     |             |      |       | 4,051  |       |  |   | (5,602 | )      |   |   | 21,991  |      
|Deficit                                                |                                                |         | (18,092  | )            |           |              | (13,753   | )           |      |       | (6,825 | )     |  |   | 20,577 |        |   |   | (18,093 | )    
|Accumulated other comprehensive income (loss)          |                                                |         | (1,493   | )            |           |              | 615       |             |      |       | (125   | )     |  |   | (490   | )      |   |   | (1,493  | )    
|                                                      
|Total shareholders equity                             |                                                |         | 4,153    |              |           |              | (5,184    | )           |      |       | (1,917 | )     |  |   | 7,100  |        |   |   | 4,152   |      
|                                                      
|Total liabilities and shareholders equity             |                                                | $       | 8,372    |              |           | $            | 3,963     |             |      | $     | 3,782  |       |  | $ | (364   | )      |   | $ | 15,753  |      
|                                                      

F-58



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##### Table of Contents



Supplemental Consolidating Balance Sheets as at December 31, 2001:

|                                                       |                                                |         |          |              |           |              |           |             |      |       |        |       |  |   |         |        |   |   |         |       | 
|------------------------------------------------------ | ---------------------------------------------- | ------- | -------- | ------------ | --------- | ------------ | --------- | ----------- | ---- | ----- | ------ | ----- |  | - | ------- | ------ | - | - | ------- | ----- | 
|                                                      
|                                                       |                                                |         | Nortel   |              |           |              |           |             | Non- |       |        |       |  |   |         |        |  
|                                                       |                                                |         | Networks |              | Guarantor |              | guarantor |             |      |       |        |       |  |   |        
|(millions of U.S. dollars)                             |                                                | Limited |          | subsidiaries |           | subsidiaries |           | Elimination |      | Total
|                                                      
|ASSETS                                                 |                                                |         |          |              |           |              |           |             |      |       |        |       |  |   |         |        |   |   |         |      
|Current assets                                         |                                                |         |          |              |           |              |           |             |      |       |        |       |  |   |         |        |   |   |         |      
|                                                       | Cash and cash equivalents                      |         | $        | (41          | )         |              | $         | 2,340       |      |       | $      | 1,158 |  |   | $       |       |   |   | $       | 3,457 | 
|                                                       | Restricted cash and cash equivalents           |         |          |             |           |              |           |            |      |       |        |      |  |   |         |       |   |   |         |      | 
|                                                       | Accounts receivable  net                      |         |          | 409          |           |              |           | 2,032       |      |       |        | 480   |  |   |         |       |   |   |         | 2,921 | 
|                                                       | Intercompany/related party accounts receivable |         |          | 4,952        |           |              |           | 1,054       |      |       |        | 588   |  |   |         | (6,592 | ) |   |         | 2     | 
|                                                       | Inventories  net                              |         |          | 810          |           |              |           | 511         |      |       |        | 242   |  |   |         |       |   |   |         | 1,563 | 
|                                                       | Income taxes recoverable                       |         |          | 343          |           |              |           | 442         |      |       |        | 5     |  |   |         |       |   |   |         | 790   | 
|                                                       | Deferred income taxes  net                    |         |          | 287          |           |              |           | 1,080       |      |       |        | 34    |  |   |         |       |   |   |         | 1,401 | 
|                                                       | Other current assets                           |         |          | 107          |           |              |           | 563         |      |       |        | 177   |  |   |         |       |   |   |         | 847   | 
|                                                       | Current assets of discontinued operations      |         |          | 244          |           |              |           | 454         |      |       |        |      |  |   |         |       |   |   |         | 698   | 
|                                                      
|Total current assets                                   |                                                |         | 7,111    |              |           |              | 8,476     |             |      |       | 2,684  |       |  |   | (6,592  | )      |   |   | 11,679  |      
|                                                      
|Investments at cost and associated companies at equity |                                                |         | 2,543    |              |           |              | (8,097    | )           |      |       | 516    |       |  |   | 5,301   |        |   |   | 263     |      
|Plant and equipment  net                              |                                                |         | 705      |              |           |              | 1,353     |             |      |       | 401    |       |  |   |        |        |   |   | 2,459   |      
|Goodwill                                               |                                                |         | 31       |              |           |              | 2,117     |             |      |       | 135    |       |  |   |        |        |   |   | 2,283   |      
|Acquired technology  net                              |                                                |         |         |              |           |              | 20        |             |      |       |       |       |  |   |        |        |   |   | 20      |      
|Deferred income taxes  net                            |                                                |         | 436      |              |           |              | 1,578     |             |      |       | 92     |       |  |   |        |        |   |   | 2,106   |      
|Other assets                                           |                                                |         | 456      |              |           |              | 1,575     |             |      |       | 799    |       |  |   | (1,647  | )      |   |   | 1,183   |      
|                                                      
|Total assets                                           |                                                | $       | 11,282   |              |           | $            | 7,022     |             |      | $     | 4,627  |       |  | $ | (2,938  | )      |   | $ | 19,993  |      
|                                                      
|LIABILITIES AND SHAREHOLDERS EQUITY                   |                                                |         |          |              |           |              |           |             |      |       |        |       |  |   |         |        |   |   |         |      
|Current liabilities                                    |                                                |         |          |              |           |              |           |             |      |       |        |       |  |   |         |        |   |   |         |      
|                                                       | Notes payable                                  |         | $        | 2            |           |              | $         | 168         |      |       | $      | 256   |  |   | $       |       |   |   | $       | 426   | 
|                                                       | Trade and other accounts payable               |         |          | 332          |           |              |           | 782         |      |       |        | 274   |  |   |         |       |   |   |         | 1,388 | 
|                                                       | Intercompany/related party accounts payable    |         |          | 163          |           |              |           | 3,471       |      |       |        | 3,208 |  |   |         | (6,592 | ) |   |         | 250   | 
|                                                       | Payroll and benefit-related liabilities        |         |          | 63           |           |              |           | 449         |      |       |        | 101   |  |   |         |       |   |   |         | 613   | 
|                                                       | Contractual liabilities                        |         |          | 177          |           |              |           | 1,178       |      |       |        | 486   |  |   |         |       |   |   |         | 1,841 | 
|                                                       | Restructuring                                  |         |          | 235          |           |              |           | 546         |      |       |        | 90    |  |   |         |       |   |   |         | 871   | 
|                                                       | Other accrued liabilities                      |         |          | 1,117        |           |              |           | 2,317       |      |       |        | 338   |  |   |         |       |   |   |         | 3,772 | 
|                                                       | Long-term debt due within one year             |         |          | 313          |           |              |           | 63          |      |       |        | 8     |  |   |         |       |   |   |         | 384   | 
|                                                      
|Total current liabilities                              |                                                |         | 2,402    |              |           |              | 8,974     |             |      |       | 4,761  |       |  |   | (6,592  | )      |   |   | 9,545   |      
|                                                      
|Long-term debt                                         |                                                |         | 1,928    |              |           |              | 8         |             |      |       | 357    |       |  |   |        |        |   |   | 2,293   |      
|Deferred income taxes  net                            |                                                |         | 360      |              |           |              | 100       |             |      |       | 17     |       |  |   |        |        |   |   | 477     |      
|Other liabilities                                      |                                                |         | 619      |              |           |              | 1,235     |             |      |       | 1,398  |       |  |   | (1,647  | )      |   |   | 1,605   |      
|Minority interest in subsidiary companies              |                                                |         |         |              |           |              |          |             |      |       | 100    |       |  |   |        |        |   |   | 100     |      
|                                                      
|                                                       |                                                |         | 5,309    |              |           |              | 10,317    |             |      |       | 6,633  |       |  |   | (8,239  | )      |   |   | 14,020  |      
|                                                      
|SHAREHOLDERS EQUITY                                   |                                                |         |          |              |           |              |           |             |      |       |        |       |  |   |         |        |   |   |         |      
|Preferred shares                                       |                                                |         | 536      |              |           |              | 365       |             |      |       |       |       |  |   | (365    | )      |   |   | 536     |      
|Common shares                                          |                                                |         | 2,111    |              |           |              | 950       |             |      |       | 386    |       |  |   | (1,336  | )      |   |   | 2,111   |      
|Additional paid-in capital                             |                                                |         | 18,797   |              |           |              | 6,043     |             |      |       | 4,204  |       |  |   | (10,247 | )      |   |   | 18,797  |      
|Deficit                                                |                                                |         | (14,507  | )            |           |              | (11,605   | )           |      |       | (6,509 | )     |  |   | 18,114  |        |   |   | (14,507 | )    
|Accumulated other comprehensive income (loss)          |                                                |         | (964     | )            |           |              | 952       |             |      |       | (87    | )     |  |   | (865    | )      |   |   | (964    | )    
|                                                      
|Total shareholders equity                             |                                                |         | 5,973    |              |           |              | (3,295    | )           |      |       | (2,006 | )     |  |   | 5,301   |        |   |   | 5,973   |      
|                                                      
|Total liabilities and shareholders equity             |                                                | $       | 11,282   |              |           | $            | 7,022     |             |      | $     | 4,627  |       |  | $ | (2,938  | )      |   | $ | 19,993  |      
|                                                      

F-59



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##### Table of Contents



Supplemental Consolidating Statements of Cash Flows for the year ended December 31, 2002:

|                                                                     |                                                                                                                                                                                |                                                                   |                                                   |              |          |              |           |             |           |        |       |      |     |     |   |       |        |   |       |        |     |        |  
|-------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------- | ------------------------------------------------- | ------------ | -------- | ------------ | --------- | ----------- | --------- | ------ | ----- | ---- | --- | --- | - | ----- | ------ | - | ----- | ------ | --- | ------ | -
|                                                                    
|                                                                     |                                                                                                                                                                                |                                                                   |                                                   |              | Nortel   |              |           |             |           |        | Non-  |      |     |     |   |       |        |   |      
|                                                                     |                                                                                                                                                                                |                                                                   |                                                   |              | Networks |              | Guarantor |             | guarantor |        |       |      |     |     |   |       |       
|(millions of U.S. dollars)                                           |                                                                                                                                                                                | Limited                                                           |                                                   | subsidiaries |          | subsidiaries |           | Elimination |           | Total 
|                                                                    
|Cash flows from (used in) operating activities                       |                                                                                                                                                                                |                                                                   |                                                   |              |          |              |           |             |           |        |       |      |     |     |   |       |        |   |       |       
|                                                                     | Net loss from continuing operations                                                                                                                                            |                                                                   | $                                                 | (3,564       | )        |              | $         | (1,599      | )         |        | $     | (418 | )   |     | $ | 2,542 |        |   | $     | (3,039 | )  
|                                                                     | Adjustments to reconcile net loss from
continuing operations to net cash from (used in)
operating activities, net of effects from
acquisitions and divestitures of businesses: |                                                                   |                                                   |              |          |              |           |             |           |        |       |      |     |     |   |       |        |   |       |        |    
|                                                                     |                                                                                                                                                                                | Amortization and depreciation                                     |                                                   |              | 86       |              |           |             | 406       |        |       |      | 65  |     |   |       |       |   |       |        | 557 |       
|                                                                     |                                                                                                                                                                                | Non-cash portion of special charges
and related asset write downs |                                                   |              | 214      |              |           |             | 541       |        |       |      | 38  |     |   |       |       |   |       |        | 793 |       
|                                                                     |                                                                                                                                                                                | Equity in net loss of associated companies                        |                                                   |              | 2,166    |              |           |             | 373       |        |       |      | 12  |     |   |       | (2,542 | ) |       |        | 9   |       
|                                                                     |                                                                                                                                                                                | Stock option compensation                                         |                                                   |              |         |              |           |             |          |        |       |      |    |     |   |       |       |   |       |        |    |       
|                                                                     |                                                                                                                                                                                | Deferred income taxes                                             |                                                   |              | (692     | )            |           |             | 596       |        |       |      | 45  |     |   |       |       |   |       |        | (51 | )     
|                                                                     |                                                                                                                                                                                | Other liabilities                                                 |                                                   |              | (1       | )            |           |             | 30        |        |       |      | (14 | )   |   |       |       |   |       |        | 15  |       
|                                                                     |                                                                                                                                                                                | Gain on repurchase of outstanding debt securities                 |                                                   |              | (60      | )            |           |             |          |        |       |      |    |     |   |       |       |   |       |        | (60 | )     
|                                                                     |                                                                                                                                                                                | Gain on sale of investments and businesses                        |                                                   |              | (2       | )            |           |             | 8         |        |       |      | 1   |     |   |       |       |   |       |        | 7   |       
|                                                                     |                                                                                                                                                                                | Other  net                                                       |                                                   |              | 250      |              |           |             | 110       |        |       |      | 173 |     |   |       |       |   |       |        | 533 |       
|                                                                     |                                                                                                                                                                                | Change in operating assets and liabilities                        |                                                   |              |          |              |           |             |           |        |       |      |     |     |   |       |        |   |       |        |     |       
|                                                                     |                                                                                                                                                                                |                                                                   | Accounts receivable                               |              |          | 67           |           |             |           | 759    |       |      |     | 182 |   |       |        |  |       |        |     | 1,008  |  
|                                                                     |                                                                                                                                                                                |                                                                   | Inventories                                       |              |          | 286          |           |             |           | 308    |       |      |     | 78  |   |       |        |  |       |        |     | 672    |  
|                                                                     |                                                                                                                                                                                |                                                                   | Income taxes                                      |              |          | 343          |           |             |           | 404    |       |      |     | (60 | ) |       |        |  |       |        |     | 687    |  
|                                                                     |                                                                                                                                                                                |                                                                   | Accounts payable and accrued liabilities          |              |          | (579         | )         |             |           | (1,253 | )     |      |     | (42 | ) |       |        |  |       |        |     | (1,874 | )
|                                                                     |                                                                                                                                                                                |                                                                   | Other changes in operating assets and liabilities |              |          | (136         | )         |             |           | 32     |       |      |     | 53  |   |       |        |  |       |        |     | (51    | )
|                                                                     |                                                                                                                                                                                | Intercompany/related party activity                               |                                                   |              | (66      | )            |           |             | (27       | )      |       |      | 93  |     |   |       |       |   |       |        |    |       
|                                                                    
|Net cash from (used in) operating activities                         |                                                                                                                                                                                |                                                                   | (1,688                                            | )            |          |              | 688       |             |           |        | 206   |      |     |     |  |       |        |   | (794  | )     
|                                                                    
|Cash flows from (used in) investing activities                       |                                                                                                                                                                                |                                                                   |                                                   |              |          |              |           |             |           |        |       |      |     |     |   |       |        |   |       |       
|                                                                     | Expenditures for plant and equipment                                                                                                                                           |                                                                   |                                                   | (52          | )        |              |           | (239        | )         |        |       | (44  | )   |     |   |      |        |   |       | (335   | )  
|                                                                     | Proceeds on disposals of plant and equipment                                                                                                                                   |                                                                   |                                                   | 16           |          |              |           | 220         |           |        |       |     |     |     |   |      |        |   |       | 236    |    
|                                                                     | Increase in restricted cash and cash equivalents                                                                                                                               |                                                                   |                                                   | (17          | )        |              |           | (148        | )         |        |       | (66  | )   |     |   |      |        |   |       | (231   | )  
|                                                                     | Increase in long-term receivables                                                                                                                                              |                                                                   |                                                   | 45           |          |              |           | (190        | )         |        |       | (122 | )   |     |   |      |        |   |       | (267   | )  
|                                                                     | Decrease in long-term receivables                                                                                                                                              |                                                                   |                                                   | 25           |          |              |           | 180         |           |        |       | 97   |     |     |   |      |        |   |       | 302    |    
|                                                                     | Acquisitions of investments and businesses
 net of cash acquired                                                                                                              |                                                                   |                                                   | (5           | )        |              |           | (24         | )         |        |       |     |     |     |   |      |        |   |       | (29    | )  
|                                                                     | Proceeds on sale of investments and businesses                                                                                                                                 |                                                                   |                                                   | 23           |          |              |           | 33          |           |        |       | 5    |     |     |   |      |        |   |       | 61     |    
|                                                                    
|Net cash from (used in) investing activities                         |                                                                                                                                                                                |                                                                   | 35                                                |              |          |              | (168      | )           |           |        | (130  | )    |     |     |  |       |        |   | (263  | )     
|                                                                    
|Cash flows from (used in) financing activities                       |                                                                                                                                                                                |                                                                   |                                                   |              |          |              |           |             |           |        |       |      |     |     |   |       |        |   |       |       
|                                                                     | Dividends on common and preferred shares                                                                                                                                       |                                                                   |                                                   | (22          | )        |              |           |            |           |        |       |     |     |     |   |      |        |   |       | (22    | )  
|                                                                     | Increase (decrease) in notes payable  net                                                                                                                                     |                                                                   |                                                   |             |          |              |           | (159        | )         |        |       | (159 | )   |     |   |      |        |   |       | (318   | )  
|                                                                     | Proceeds from long-term debt                                                                                                                                                   |                                                                   |                                                   |             |          |              |           | 1           |           |        |       | 32   |     |     |   |      |        |   |       | 33     |    
|                                                                     | Repayments of long-term debt                                                                                                                                                   |                                                                   |                                                   | (460         | )        |              |           | (5          | )         |        |       | (13  | )   |     |   |      |        |   |       | (478   | )  
|                                                                     | Decrease in capital leases payable                                                                                                                                             |                                                                   |                                                   | (3           | )        |              |           | (6          | )         |        |       |     |     |     |   |      |        |   |       | (9     | )  
|                                                                     | Issuance of common shares                                                                                                                                                      |                                                                   |                                                   | 2,287        |          |              |           |            |           |        |       |     |     |     |   |      |        |   |       | 2,287  |    
|                                                                     | Stock option fair value increment                                                                                                                                              |                                                                   |                                                   |             |          |              |           | (525        | )         |        |       |     |     |     |   |      |        |   |       | (525   | )  
|                                                                    
|Net cash from (used in) financing activities                         |                                                                                                                                                                                |                                                                   | 1,802                                             |              |          |              | (694      | )           |           |        | (140  | )    |     |     |  |       |        |   | 968   |       
|                                                                    
|Effect of foreign exchange rate changes
on cash and cash equivalents |                                                                                                                                                                                |                                                                   | 13                                                |              |          |              | 45        |             |           |        | 16    |      |     |     |  |       |        |   | 74    |       
|                                                                    
|Net cash from (used in) continuing operations                        |                                                                                                                                                                                |                                                                   | 162                                               |              |          |              | (129      | )           |           |        | (48   | )    |     |     |  |       |        |   | (15   | )     
|Net cash from discontinued operations                                |                                                                                                                                                                                |                                                                   | 130                                               |              |          |              | 241       |             |           |        |      |      |     |     |  |       |        |   | 371   |       
|                                                                    
|Net increase (decrease) in cash and cash equivalents                 |                                                                                                                                                                                |                                                                   | 292                                               |              |          |              | 112       |             |           |        | (48   | )    |     |     |  |       |        |   | 356   |       
|                                                                    
|Cash and cash equivalents at beginning of
period  net               |                                                                                                                                                                                |                                                                   | (41                                               | )            |          |              | 2,340     |             |           |        | 1,158 |      |     |     |  |       |        |   | 3,457 |       
|                                                                    
|Cash and cash equivalents at end of period  net                     |                                                                                                                                                                                | $                                                                 | 251                                               |              |          | $            | 2,452     |             |           | $      | 1,110 |      |     | $   |  |       |        | $ | 3,813 |       
|                                                                    

F-60



---



##### Table of Contents



Supplemental Consolidating Statements of Cash Flows for the year ended December 31, 2001:

|                                                                     |                                                                                                                                                                      |                                                                   |                                                   |              |          |              |           |             |           |       |       |        |       |       |   |        |         |   |       |         |        |       |  
|-------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------- | ------------------------------------------------- | ------------ | -------- | ------------ | --------- | ----------- | --------- | ----- | ----- | ------ | ----- | ----- | - | ------ | ------- | - | ----- | ------- | ------ | ----- | -
|                                                                    
|                                                                     |                                                                                                                                                                      |                                                                   |                                                   |              | Nortel   |              |           |             |           |       | Non-  |        |       |       |   |        |         |   |      
|                                                                     |                                                                                                                                                                      |                                                                   |                                                   |              | Networks |              | Guarantor |             | guarantor |       |       |        |       |       |   |        |        
|(millions of U.S. dollars)                                           |                                                                                                                                                                      | Limited                                                           |                                                   | subsidiaries |          | subsidiaries |           | Elimination |           | Total
|                                                                    
|Cash flows from (used in) operating activities                       |                                                                                                                                                                      |                                                                   |                                                   |              |          |              |           |             |           |       |       |        |       |       |   |        |         |   |       |        
|                                                                     | Net loss from continuing operations                                                                                                                                  |                                                                   | $                                                 | (11,555      | )        |              | $         | (13,320     | )         |       | $     | (2,619 | )     |       | $ | 15,939 |         |   | $     | (11,555 | )     
|                                                                     | Adjustments to reconcile net loss from
continuing operations to net cash from
operating activities, net of effects from
acquisitions and divestitures of businesses: |                                                                   |                                                   |              |          |              |           |             |           |       |       |        |       |       |   |        |         |   |       |         |       
|                                                                     |                                                                                                                                                                      | Amortization and depreciation                                     |                                                   |              | 186      |              |           |             | 2,608     |       |       |        | 576   |       |   |        |        |   |       |         | 3,370  |      
|                                                                     |                                                                                                                                                                      | Non-cash portion of special charges
and related asset write downs |                                                   |              | 96       |              |           |             | 1,475     |       |       |        | 1,593 |       |   |        |        |   |       |         | 3,164  |      
|                                                                     |                                                                                                                                                                      | Equity in net loss of associated companies                        |                                                   |              | 11,595   |              |           |             | 4,861     |       |       |        | (3    | )     |   |        | (16,319 | ) |       |         | 134    |      
|                                                                     |                                                                                                                                                                      | Deferred income taxes                                             |                                                   |              | (1,055   | )            |           |             | (1,684    | )     |       |        | (19   | )     |   |        |        |   |       |         | (2,758 | )    
|                                                                     |                                                                                                                                                                      | Other liabilities                                                 |                                                   |              | (4       | )            |           |             | 105       |       |       |        | (23   | )     |   |        |        |   |       |         | 78     |      
|                                                                     |                                                                                                                                                                      | Loss (gain) on sale of investments and
businesses                 |                                                   |              | 69       |              |           |             | 214       |       |       |        | (54   | )     |   |        |        |   |       |         | 229    |      
|                                                                     |                                                                                                                                                                      | Other  net                                                       |                                                   |              | 72       |              |           |             | 410       |       |       |        | (442  | )     |   |        |        |   |       |         | 40     |      
|                                                                     |                                                                                                                                                                      | Change in operating assets and liabilities:                       |                                                   |              |          |              |           |             |           |       |       |        |       |       |   |        |         |   |       |         |        |      
|                                                                     |                                                                                                                                                                      |                                                                   | Accounts receivable                               |              |          | 883          |           |             |           | 3,492 |       |        |       | 1,146 |   |        |         |  |       |         |        | 5,521 |  
|                                                                     |                                                                                                                                                                      |                                                                   | Inventories                                       |              |          | 252          |           |             |           | 1,422 |       |        |       | 353   |   |        |         |  |       |         |        | 2,027 |  
|                                                                     |                                                                                                                                                                      |                                                                   | Income taxes                                      |              |          | (446         | )         |             |           | (494  | )     |        |       | (13   | ) |        |         |  |       |         |        | (953  | )
|                                                                     |                                                                                                                                                                      |                                                                   | Accounts payable and accrued liabilities          |              |          | 142          |           |             |           | 615   |       |        |       | (160  | ) |        |         |  |       |         |        | 597   |  
|                                                                     |                                                                                                                                                                      |                                                                   | Other changes in operating assets and
liabilities |              |          | (84          | )         |             |           | 406   |       |        |       | 189   |   |        |         |  |       |         |        | 511   |  
|                                                                     |                                                                                                                                                                      | Intercompany/related party activity                               |                                                   |              | (2,539   | )            |           |             | 1,788     |       |       |        | 371   |       |   |        | 380     |   |       |         |       |      
|                                                                    
|Net cash from (used in) operating activities                         |                                                                                                                                                                      |                                                                   | (2,388                                            | )            |          |              | 1,898     |             |           |       | 895   |        |       |       |  |        |         |   | 405   |        
|                                                                    
|Cash flows from (used in) investing activities                       |                                                                                                                                                                      |                                                                   |                                                   |              |          |              |           |             |           |       |       |        |       |       |   |        |         |   |       |        
|                                                                     | Expenditures for plant and equipment                                                                                                                                 |                                                                   |                                                   | (315         | )        |              |           | (833        | )         |       |       | (119   | )     |       |   |       |         |   |       | (1,267  | )     
|                                                                     | Proceeds on disposals of plant and equipment                                                                                                                         |                                                                   |                                                   | 23           |          |              |           | 185         |           |       |       |       |       |       |   |       |         |   |       | 208     |       
|                                                                     | Increase in long-term receivables                                                                                                                                    |                                                                   |                                                   | (174         | )        |              |           | (88         | )         |       |       | (444   | )     |       |   |       |         |   |       | (706    | )     
|                                                                     | Decrease in long-term receivables                                                                                                                                    |                                                                   |                                                   | 97           |          |              |           | 207         |           |       |       | 168    |       |       |   |       |         |   |       | 472     |       
|                                                                     | Acquisitions of investments and businesses
 net of cash acquired                                                                                                    |                                                                   |                                                   | (13          | )        |              |           | (76         | )         |       |       |       |       |       |   |       |         |   |       | (89     | )     
|                                                                     | Proceeds on sale of investments and businesses                                                                                                                       |                                                                   |                                                   | 6            |          |              |           | 403         |           |       |       | 195    |       |       |   |       |         |   |       | 604     |       
|                                                                    
|Net cash used in investing activities                                |                                                                                                                                                                      |                                                                   | (376                                              | )            |          |              | (202      | )           |           |       | (200  | )      |       |       |  |        |         |   | (778  | )      
|                                                                    
|Cash flows from (used in) financing activities                       |                                                                                                                                                                      |                                                                   |                                                   |              |          |              |           |             |           |       |       |        |       |       |   |        |         |   |       |        
|                                                                     | Dividends on common and preferred shares                                                                                                                             |                                                                   |                                                   | (27          | )        |              |           |            |           |       |       |       |       |       |   |       |         |   |       | (27     | )     
|                                                                     | Increase in notes payable  net                                                                                                                                      |                                                                   |                                                   | 12           |          |              |           | 89          |           |       |       | 39     |       |       |   |       |         |   |       | 140     |       
|                                                                     | Proceeds from long-term debt                                                                                                                                         |                                                                   |                                                   | 1,500        |          |              |           | 10          |           |       |       | 20     |       |       |   |       |         |   |       | 1,530   |       
|                                                                     | Repayments of long-term debt                                                                                                                                         |                                                                   |                                                   | (250         | )        |              |           | (12         | )         |       |       | (207   | )     |       |   |       |         |   |       | (469    | )     
|                                                                     | Decrease in capital leases payable                                                                                                                                   |                                                                   |                                                   | (3           | )        |              |           | (15         | )         |       |       | (5     | )     |       |   |       |         |   |       | (23     | )     
|                                                                     | Issuance of common shares                                                                                                                                            |                                                                   |                                                   | 1,800        |          |              |           |            |           |       |       |       |       |       |   |       |         |   |       | 1,800   |       
|                                                                    
|Net cash from (used in) financing activities                         |                                                                                                                                                                      |                                                                   | 3,032                                             |              |          |              | 72        |             |           |       | (153  | )      |       |       |  |        |         |   | 2,951 |        
|                                                                    
|Effect of foreign exchange rate changes
on cash and cash equivalents |                                                                                                                                                                      |                                                                   | 1                                                 |              |          |              | (7        | )           |           |       | (4    | )      |       |       |  |        |         |   | (10   | )      
|                                                                    
|Net cash from continuing operations                                  |                                                                                                                                                                      |                                                                   | 269                                               |              |          |              | 1,761     |             |           |       | 538   |        |       |       |  |        |         |   | 2,568 |        
|Net cash used in discontinued operations                             |                                                                                                                                                                      |                                                                   | (237                                              | )            |          |              | (441      | )           |           |       |      |        |       |       |  |        |         |   | (678  | )      
|                                                                    
|Net increase in cash and cash equivalents                            |                                                                                                                                                                      |                                                                   | 32                                                |              |          |              | 1,320     |             |           |       | 538   |        |       |       |  |        |         |   | 1,890 |        
|                                                                    
|Cash and cash equivalents at beginning of
period  net               |                                                                                                                                                                      |                                                                   | (73                                               | )            |          |              | 1,020     |             |           |       | 620   |        |       |       |  |        |         |   | 1,567 |        
|                                                                    
|Cash and cash equivalents at end of period  net                     |                                                                                                                                                                      | $                                                                 | (41                                               | )            |          | $            | 2,340     |             |           | $     | 1,158 |        |       | $     |  |        |         | $ | 3,457 |        
|                                                                    

F-61



---



##### Table of Contents



Supplemental Consolidating Statements of Cash Flows for the year ended December 31, 2000:

|                                                                     |                                                                                                                                                                      |                                                                   |                                                   |              |          |              |           |             |           |        |      |        |      |      |   |       |        |   |        |      |        |        |  
|-------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------- | ------------------------------------------------- | ------------ | -------- | ------------ | --------- | ----------- | --------- | ------ | ---- | ------ | ---- | ---- | - | ----- | ------ | - | ------ | ---- | ------ | ------ | -
|                                                                    
|                                                                     |                                                                                                                                                                      |                                                                   |                                                   |              | Nortel   |              |           |             |           |        | Non- |        |      |      |   |       |        |   |       
|                                                                     |                                                                                                                                                                      |                                                                   |                                                   |              | Networks |              | Guarantor |             | Guarantor |        |      |        |      |      |   |       |       
|(millions of U.S. dollars)                                           |                                                                                                                                                                      | Limited                                                           |                                                   | subsidiaries |          | subsidiaries |           | Elimination |           | Total 
|                                                                    
|Cash flows from (used in) operating activities                       |                                                                                                                                                                      |                                                                   |                                                   |              |          |              |           |             |           |        |      |        |      |      |   |       |        |   |        |     
|                                                                     | Net loss from continuing operations                                                                                                                                  |                                                                   | $                                                 | (871         | )        |              | $         | (344        | )         |        | $    | (1,063 | )    |      | $ | 1,407 |        |   | $      | (871 | )     
|                                                                     | Adjustments to reconcile net loss from
continuing operations to net cash from
operating activities, net of effects from
acquisitions and divestitures of businesses: |                                                                   |                                                   |              |          |              |           |             |           |        |      |        |      |      |   |       |        |   |        |      |       
|                                                                     |                                                                                                                                                                      | Amortization and depreciation                                     |                                                   |              | 227      |              |           |             | 2,869     |        |      |        | 950  |      |   |       |       |   |        |      | 4,046  |       
|                                                                     |                                                                                                                                                                      | In-process research and
development expense                       |                                                   |              |         |              |           |             | 64        |        |      |        | 559  |      |   |       |       |   |        |      | 623    |       
|                                                                     |                                                                                                                                                                      | Non-cash portion of special charges
and related asset write downs |                                                   |              | 48       |              |           |             | 89        |        |      |        |     |      |   |       |       |   |        |      | 137    |       
|                                                                     |                                                                                                                                                                      | Equity in net loss of associated companies                        |                                                   |              | 1,278    |              |           |             | 95        |        |      |        | 63   |      |   |       | (1,407 | ) |        |      | 29     |       
|                                                                     |                                                                                                                                                                      | Stock option compensation                                         |                                                   |              | 96       |              |           |             | 3         |        |      |        |     |      |   |       |       |   |        |      | 99     |       
|                                                                     |                                                                                                                                                                      | Deferred income taxes                                             |                                                   |              | (287     | )            |           |             | 359       |        |      |        | (10  | )    |   |       |       |   |        |      | 62     |       
|                                                                     |                                                                                                                                                                      | Other liabilities                                                 |                                                   |              | 16       |              |           |             | 94        |        |      |        | (5   | )    |   |       |       |   |        |      | 105    |       
|                                                                     |                                                                                                                                                                      | Gain on sale of investments and businesses                        |                                                   |              | (19      | )            |           |             | (1,039    | )      |      |        |     |      |   |       |       |   |        |      | (1,058 | )     
|                                                                     |                                                                                                                                                                      | Other  net                                                       |                                                   |              | 485      |              |           |             | 184       |        |      |        | (95  | )    |   |       |       |   |        |      | 574    |       
|                                                                     |                                                                                                                                                                      | Change in operating assets and liabilities:                       |                                                   |              |          |              |           |             |           |        |      |        |      |      |   |       |        |   |        |      |        |       
|                                                                     |                                                                                                                                                                      |                                                                   | Accounts receivable                               |              |          | (514         | )         |             |           | (288   | )    |        |      | 173  |   |       |        |  |        |      |        | (629   | )
|                                                                     |                                                                                                                                                                      |                                                                   | Inventories                                       |              |          | (239         | )         |             |           | (1,159 | )    |        |      | (183 | ) |       |        |  |        |      |        | (1,581 | )
|                                                                     |                                                                                                                                                                      |                                                                   | Income taxes                                      |              |          | 25           |           |             |           | (229   | )    |        |      | 24   |   |       |        |  |        |      |        | (180   | )
|                                                                     |                                                                                                                                                                      |                                                                   | Accounts payable and accrued liabilities          |              |          | 646          |           |             |           | 507    |      |        |      | (541 | ) |       |        |  |        |      |        | 612    |  
|                                                                     |                                                                                                                                                                      |                                                                   | Other changes in operating assets and liabilities |              |          | (417         | )         |             |           | (442   | )    |        |      | (39  | ) |       |        |  |        |      |        | (898   | )
|                                                                     |                                                                                                                                                                      | Intercompany/related party activity                               |                                                   |              | 393      |              |           |             | (1,231    | )      |      |        | 838  |      |   |       |       |   |        |      |       |       
|                                                                    
|Net cash from (used in) operating activities                         |                                                                                                                                                                      |                                                                   | 867                                               |              |          |              | (468      | )           |           |        | 671  |        |      |      |  |       |        |   | 1,070  |     
|                                                                    
|Cash flows from (used in) investing activities                       |                                                                                                                                                                      |                                                                   |                                                   |              |          |              |           |             |           |        |      |        |      |      |   |       |        |   |        |     
|                                                                     |                                                                                                                                                                      | Expenditures for plant and equipment                              |                                                   |              | (426     | )            |           |             | (982      | )      |      |        | (430 | )    |   |       |       |   |        |      | (1,838 | )     
|                                                                     |                                                                                                                                                                      | Proceeds on disposals of plant and equipment                      |                                                   |              | 30       |              |           |             | 3         |        |      |        |     |      |   |       |       |   |        |      | 33     |       
|                                                                     |                                                                                                                                                                      | Increase in long-term receivables                                 |                                                   |              | (645     | )            |           |             | (905      | )      |      |        | (108 | )    |   |       |       |   |        |      | (1,658 | )     
|                                                                     |                                                                                                                                                                      | Decrease in long-term receivables                                 |                                                   |              | 469      |              |           |             | 746       |        |      |        | 85   |      |   |       |       |   |        |      | 1,300  |       
|                                                                     |                                                                                                                                                                      | Acquisitions of investments and businesses
 net of cash acquired |                                                   |              | (95      | )            |           |             | (244      | )      |      |        | 23   |      |   |       |       |   |        |      | (316   | )     
|                                                                     |                                                                                                                                                                      | Proceeds on sale of investments and businesses                    |                                                   |              | 242      |              |           |             | 1,317     |        |      |        | 74   |      |   |       |       |   |        |      | 1,633  |       
|                                                                    
|Net cash used in investing activities                                |                                                                                                                                                                      |                                                                   | (425                                              | )            |          |              | (65       | )           |           |        | (356 | )      |      |      |  |       |        |   | (846   | )   
|                                                                    
|Cash flows from (used in) financing activities                       |                                                                                                                                                                      |                                                                   |                                                   |              |          |              |           |             |           |        |      |        |      |      |   |       |        |   |        |     
|                                                                     |                                                                                                                                                                      | Dividends on common and preferred shares                          |                                                   |              | (84      | )            |           |             |          |        |      |        |     |      |   |       |       |   |        |      | (84    | )     
|                                                                     |                                                                                                                                                                      | Increase in notes payable  net                                   |                                                   |              | 3        |              |           |             | 26        |        |      |        | 85   |      |   |       |       |   |        |      | 114    |       
|                                                                     |                                                                                                                                                                      | Proceeds from long-term debt                                      |                                                   |              | 3        |              |           |             | 82        |        |      |        | 22   |      |   |       |       |   |        |      | 107    |       
|                                                                     |                                                                                                                                                                      | Repayments of long-term debt                                      |                                                   |              | (3       | )            |           |             | (24       | )      |      |        | (42  | )    |   |       |       |   |        |      | (69    | )     
|                                                                     |                                                                                                                                                                      | Increase (decrease) in capital leases payable                     |                                                   |              | (4       | )            |           |             | 14        |        |      |        | (12  | )    |   |       |       |   |        |      | (2     | )     
|                                                                     |                                                                                                                                                                      | Issuance of common shares                                         |                                                   |              | 206      |              |           |             |          |        |      |        |     |      |   |       |       |   |        |      | 206    |       
|                                                                    
|Net cash from financing activities                                   |                                                                                                                                                                      |                                                                   | 121                                               |              |          |              | 98        |             |           |        | 53   |        |      |      |  |       |        |   | 272    |     
|                                                                    
|Effect of foreign exchange rate changes
on cash and cash equivalents |                                                                                                                                                                      |                                                                   | 1                                                 |              |          |              | (16       | )           |           |        | (10  | )      |      |      |  |       |        |   | (25    | )   
|                                                                    
|Net cash from (used in) continuing operations                        |                                                                                                                                                                      |                                                                   | 564                                               |              |          |              | (451      | )           |           |        | 358  |        |      |      |  |       |        |   | 471    |     
|Net cash used in discontinued operations                             |                                                                                                                                                                      |                                                                   | (617                                              | )            |          |              | (440      | )           |           |        |     |        |      |      |  |       |        |   | (1,057 | )   
|                                                                    
|Net increase (decrease) in cash and cash equivalents                 |                                                                                                                                                                      |                                                                   | (53                                               | )            |          |              | (891      | )           |           |        | 358  |        |      |      |  |       |        |   | (586   | )   
|                                                                    
|Cash and cash equivalents at beginning of
period  net               |                                                                                                                                                                      |                                                                   | (20                                               | )            |          |              | 1,911     |             |           |        | 262  |        |      |      |  |       |        |   | 2,153  |     
|                                                                    
|Cash and cash equivalents at end of period  net                     |                                                                                                                                                                      | $                                                                 |                                                   | (73)         |          | $            | 1,020     |             |           | $      | 620  |        |      | $    |  |       |        | $ | 1,567  |     
|                                                                    

F-62



---



##### Table of Contents



Quarterly Financial Data (Unaudited)

|                                                       |  |             |       |             |  |             |        |             |  |      |        |      |  |      |        |      |  |   |       |   |  |   |        |   |  |   |       |   |  |   |        |  
|------------------------------------------------------ |  | ----------- | ----- | ----------- |  | ----------- | ------ | ----------- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | - | ----- | - |  | - | ------ | - |  | - | ----- | - |  | - | ------ | -
|                                                      
|                                                       |  | 4th Quarter |       | 3rd Quarter |  | 2nd Quarter |        | 1st Quarter
|                                                       |  |             |       |             |  |             |        |            
|(millions of U.S. dollars)                             |  | 2002        |       | 2001        |  | 2002        |        | 2001        |  | 2002 |        | 2001 |  | 2002 |        | 2001
|                                                      
|Revenues                                               |  | $           | 2,513 |             |  | $           | 3,442  |             |  | $    | 2,353  |      |  | $    | 3,673  |      |  | $ | 2,770 |   |  | $ | 4,571  |   |  | $ | 2,910 |   |  | $ | 5,689  |  
|Gross profit                                           |  |             | 980   |             |  |             | 965    |             |  |      | 840    |      |  |      | (10    | )    |  |   | 900   |   |  |   | 365    |   |  |   | 681   |   |  |   | 1,814  |  
|Net loss from continuing operations                    |  |             | (254  | )           |  |             | (1,553 | )           |  |      | (1,431 | )    |  |      | (3,270 | )    |  |   | (569  | ) |  |   | (5,381 | ) |  |   | (785  | ) |  |   | (1,351 | )
|Net loss from discontinued operations  net of tax     |  |             |      |             |  |             |       |             |  |      |       |      |  |      |       |      |  |   |      |   |  |   | (2,351 | ) |  |   |      |   |  |   | (187   | )
|                                                      
|Net loss before cumulative effect of
accounting change |  |             | (254  | )           |  |             | (1,553 | )           |  |      | (1,431 | )    |  |      | (3,270 | )    |  |   | (569  | ) |  |   | (7,732 | ) |  |   | (785  | ) |  |   | (1,538 | )
|Cumulative effect of accounting change 
net of tax    |  |             |      |             |  |             |       |             |  |      |       |      |  |      |       |      |  |   |      |   |  |   |       |   |  |   |      |   |  |   | 15     |  
|                                                      
|Net loss                                               |  |             | (254  | )           |  |             | (1,553 | )           |  |      | (1,431 | )    |  |      | (3,270 | )    |  |   | (569  | ) |  |   | (7,732 | ) |  |   | (785  | ) |  |   | (1,523 | )
|Dividends on preferred shares                          |  |             | (6    | )           |  |             | (6     | )           |  |      | (6     | )    |  |      | (6     | )    |  |   | (5    | ) |  |   | (7     | ) |  |   | (5    | ) |  |   | (8     | )
|                                                      
|Net loss applicable to common shares                   |  |             | (260  | )           |  |             | (1,559 | )           |  |      | (1,437 | )    |  |      | (3,276 | )    |  |   | (574  | ) |  |   | (7,739 | ) |  |   | (790  | ) |  |   | (1,531 | )
|                                                      

F-63



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ITEM 9.     Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.




PART III




ITEM 10.     Directors and Executive Officers of the Registrant




Directors of the registrant

The name, age and position of each of the directors of Nortel Networks
Limited (the Company) as of February 28, 2003 are set out below. Each person
who is appointed or elected to the board of directors will hold that position
until the earliest of: (i) the close of the next annual meeting of
shareholders; (ii) the date he or she ceases to be a director by operation of
law; or (iii) the date he or she resigns.

|                            |  |     |    |                       |  |                                      
|--------------------------- |  | --- | -- | --------------------- |  | -------------------------------------
|Name                        |  | Age |    | Position with Company
|                            |  |     |    |                      
|James Johnston Blanchard    |  |     | 60 |                       |  | Director                             
|                           
|Robert Ellis Brown          |  |     | 58 |                       |  | Director                             
|                           
|John Edward Cleghorn        |  |     | 61 |                       |  | Director                             
|                           
|Frank Andrew Dunn           |  |     | 49 |                       |  | President and Chief Executive Officer
|                           
|L. Yves Fortier             |  |     | 67 |                       |  | Director                             
|                           
|Robert Alexander Ingram     |  |     | 60 |                       |  | Director                             
|                           
|William Arthur Owens        |  |     | 62 |                       |  | Director                             
|                           
|Guylaine Saucier            |  |     | 56 |                       |  | Director                             
|                           
|Sherwood Hubbard Smith, Jr. |  |     | 68 |                       |  | Director                             
|                           
|Lynton Ronald Wilson        |  |     | 62 |                       |  | Chairman (non-executive)             

|          |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(PICTURE) |  | THE HON. JAMES JOHNSTON BLANCHARD, 60, Beverly Hills, Michigan, has been a
director of the Company since May 1, 1997 and of Nortel Networks Corporation
since March 7, 2000. Mr. Blanchard has been a partner in the law firm of Piper
Rudnick since October 2002 and prior thereto was a shareholder in the law firm
of Verner, Liipfert, Bernhard, McPherson and Hand, Chartered since April 1996.
He was previously United States Ambassador to Canada, Governor of the State of
Michigan, and a member of the United States House of Representatives. Mr.
Blanchard is also a director of Brascan Corporation, Enbridge Inc., Kasten
Chase Applied Research Limited, Long Distance of Michigan, Inc., Minacs
Worldwide Inc., Teknion Corporation, and The John F. Kennedy Memorial Library
Foundation.

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|          |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(PICTURE) |  | ROBERT ELLIS BROWN, 58, Westmount, Québec, has been a director of the Company
since April 27, 2000 and of Nortel Networks Corporation since March 7, 2000.
Mr. Brown was the President and Chief Executive Officer of Bombardier Inc., a
corporation involved in the manufacturing of aircraft and transportation
equipment, from February 1999 to December 2002. Mr. Brown was President and
Chief Operating Officer of Bombardier Aerospace prior thereto.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|          |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(PICTURE) |  | JOHN EDWARD CLEGHORN, O.C., F.C.A., 61, Toronto, Ontario, has been a director
of the Company and of Nortel Networks Corporation since May 24, 2001. Mr.
Cleghorn was Chairman and Chief Executive Officer of the Royal Bank of Canada
from January 1995 to July 2001. He is also Chairman of the Board of
SNCLavalin Group Inc., an engineering and construction company, and a
director of Canadian Pacific Railway Company, Canadian Pacific Railway Limited,
and Finning International Inc. He is Chancellor of Wilfrid Laurier University,
Governor and Chairman of the Faculty of Management International Advisory
Board, McGill University, and Chairman of Historica Foundation of Canada.                                                                                                                                                                                                                                                                                                                                                                            
|          |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(PICTURE) |  | FRANK ANDREW DUNN, 49, Oakville, Ontario, has been a director of the Company
since April 30, 2000 and of Nortel Networks Corporation since March 7, 2000.
Mr. Dunn has been the President and Chief Executive Officer of the Company and
Nortel Networks Corporation since November 2001. He also served as the Chief
Financial Officer of the Company and of Nortel Networks Corporation from
February 2002 to July 2002. Mr. Dunn was Chief Financial Officer of the
Company from January 2000 to November 2001 and of Nortel Networks Corporation
from March 2000 to November 2001, Senior Vice-President and Chief Financial
Officer of the Company from February 1999 to January 2000, and Senior
Vice-President, Finance and Planning of the Company prior thereto.                                                                                                                                                                                                                                                                                                      
|          |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(PICTURE) |  | L. YVES FORTIER, C.C., Q.C., 67, Westmount, Québec, has been a director of the
Company since April 30, 1992 and of Nortel Networks Corporation since March 7,
2000. Mr. Fortier is a senior partner and Chairman of the law firm of Ogilvy
Renault. He is also Chairman of the Board of Alcan Inc., an aluminum and
packaging company, Governor (Chairman of the Board) of Hudsons Bay Company, a
department store retailer, and a director of DuPont Canada Inc., Groupe TVA
Inc., NOVA Chemicals Corporation, and Royal Bank of Canada.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|          |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(PICTURE) |  | ROBERT ALEXANDER INGRAM, 60, Durham, North Carolina, has been a director of the
Company since April 29, 1999 and of Nortel Networks Corporation since March 7,
2000. Mr. Ingram has been Vice Chairman Pharmaceuticals of GlaxoSmithKline
plc, a corporation involved in the research, development, manufacturing and
sale of pharmaceuticals, since January 2003. Mr. Ingram was the Chief
Operating Officer and President, Pharmaceutical Operations of GlaxoSmithKline
plc from January 2001 to January 2003. He was Chief Executive of Glaxo
Wellcome plc from October 1997 to December 2000 and Chairman of Glaxo Wellcome
Inc., Glaxo Wellcome plcs United States subsidiary, from January 1999 to
December 2000. Mr. Ingram was Chairman, President and Chief Executive Officer
of Glaxo Wellcome plc from October 1997 to January 1999. Mr. Ingram is also
non-executive Chairman of OSI Pharmaceuticals, Inc., a biotechnology company,
and a director of Edwards Lifesciences Corporation, Lowes Companies, Inc., Misys plc, Molson Inc., and Wachovia
Corporation.
|          |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|(PICTURE) |  | WILLIAM ARTHUR OWENS, 62, Kirkland, Washington, has been a director of the
Company and of Nortel Networks Corporation since February 28, 2002. Mr. Owens
has been Vice-Chairman and Co-Chief Executive Officer of Teledesic LLC, a
satellite communications company, since August 1998. He was President, Chief
Operating Officer and Vice-Chairman of the Board of Directors of Science

Applications International Corporation, a research and engineering firm, prior
thereto. Mr. Owens is also Vice-Chairman of ICO-Global Corp. and a director of
BioLase Technology, Inc., British American Tobacco plc, Cray Inc., Extend
America Inc., Lumera Corporation, Metal Storm Limited, Microvision, Inc.,
Polycom, Inc., Symantec Corporation, TIBCO Software Inc., Telstra Corporation
Limited, and ViaSat, Inc.                                                                                                                                                                                                                                                            

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|          |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(PICTURE) |  | GUYLAINE SAUCIER, C.M., F.C.A., 56, Montréal, Québec, has been a director of
the Company since May 1, 1997 and of Nortel Networks Corporation since March 7,
2000. She was Chair of the Joint Committee on Corporate Governance, which was
established by the Canadian Institute of Chartered Accountants, the Canadian
Venture Exchange, and the Toronto Stock Exchange in 2000 to review the state of
corporate governance in Canada and make recommendations thereon. She was also
Chair of The Canadian Institute of Chartered Accountants from June 1999 to June
2000. Mrs. Saucier was Chairman of the Board and a director of the Canadian
Broadcasting Corporation, a public broadcaster, from April 1995 to December
2000. She is also a director of AXA Assurances Inc., Bank of Montreal,
Petro-Canada, Tembec Inc., and International Federation of Accountants.                                                                                                  
|          |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(PICTURE) |  | SHERWOOD HUBBARD SMITH, JR., 68, Raleigh, North Carolina, has been a director
of the Company since April 28, 1994 and of Nortel Networks Corporation since
March 7, 2000. Mr. Smith has been Chairman Emeritus of the Board of Directors
of CP&L, an electric utility company, since December 2000. He was Chairman
Emeritus of the Board of Directors of Carolina Power & Light Company from May
1999 to November 2000. Mr. Smith was non-executive Chairman of the Board of
Carolina Power & Light Company prior thereto. He is also a trustee of The
Northwestern Mutual Life Insurance Company, a director and Chairman of the
Triangle Universities Center for Advanced Studies, Inc., and Vice Chairman of
the Research Triangle Foundation.                                                                                                                                                                                                                            
|          |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(PICTURE) |  | LYNTON RONALD WILSON, O.C., 62, Oakville, Ontario, has been a director of the
Company since April 25, 1991 and of Nortel Networks Corporation since March 7,
2000 and non-executive Chairman of the Board of the Company and of Nortel
Networks Corporation since February 2002. He was executive Chairman of the
Board of the Company and of Nortel Networks Corporation from November 2001 to
February 2002. He was non-executive Chairman of the Board of the Company and
of Nortel Networks Corporation from April 2001 to November 2001. Mr. Wilson
was Chairman of the Board of Directors of BCE Inc., a telecommunications
company, from May 1998 to April 2000, serving in a non-executive capacity from
January 1999. Mr. Wilson was Chairman and Chief Executive Officer of BCE Inc.
prior thereto. He is Chairman of the Board of CAE Inc., a flight training,
services and equipment company, and a director of DaimlerChrysler AG and
DaimlerChrysler Canada Inc.

The Companys directors are also directors of Nortel Networks Corporation.
All of the current directors have been nominated for election as directors of
the Company, and have also been nominated for election as directors of Nortel
Networks Corporation at its annual and special shareholders meeting on April
24, 2003.




Executive officers and certain other non-executive board appointed officers of
the registrant

The executive officers and certain other non-executive board appointed
officers of the Company are appointed, and may be removed, by the board of
directors of the Company. As of February 28, 2003, the names of the executive
officers and non-executive board appointed officers of the Company, their ages,
offices currently held and year of appointment were as follows:

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|                                  |  |                                                      |  |             |      | 
|--------------------------------- |  | ---------------------------------------------------- |  | ----------- | ---- | 
|                                  |  |                                                      |  | Year of    
|Name and age                      |  | Office currently held                                |  | Appointment
|                                  |  |                                                      |  |            
|Douglas Charles Beatty (48)       |  | Chief Financial Officer                              |  |             | 2002 | 
|Chahram Bolouri (48)              |  | President, Global Operations                         |  |             | 2000 | 
|Malcolm Kevin Collins (42)        |  | President, Enterprise Networks                       |  |             | 2002 | 
|Gordon Allan Davies (40) *        |  | Assistant Secretary                                  |  |             | 2003 | 
|Pascal Debon (56)                 |  | President, Wireless Networks                         |  |             | 2001 | 
|Nicholas John DeRoma (56)         |  | Chief Legal Officer                                  |  |             | 1998 | 
|Gary Richard Donahee (56)         |  | President, Americas                                  |  |             | 2000 | 
|Adrian Joseph Donoghue (53)*      |  | General Auditor                                      |  |             | 2002 | 
|William John Donovan (45)         |  | Senior Vice-President, Human Resources               |  |             | 2000 | 
|John Marshall Doolittle (39)*     |  | Vice-President, Tax                                  |  |             | 2002 | 
|Frank Andrew Dunn (49)            |  | President and Chief Executive Officer                |  |             | 2001 | 
|John Joseph Giamatteo (36)        |  | President, Asia Pacific                              |  |             | 2003 | 
|Michael Jerard Gollogly (44)      |  | Controller                                           |  |             | 2002 | 
|Albert Roger Hitchcock (38)*      |  | Chief Information Officer                            |  |             | 2002 | 
|Dion Constandino Joannou (37)     |  | President, CALA                                      |  |             | 2003 | 
|Robert Yu Lang Mao (59)           |  | President and Chief Executive Officer, Greater China |  |             | 2003 | 
|Brian William McFadden (49)       |  | President, Optical Networks                          |  |             | 2002 | 
|Linda Faye Mezon (49)*            |  | Assistant Controller                                 |  |             | 2001 | 
|Blair Fraser Morrison (38)*       |  | Assistant Secretary                                  |  |             | 1998 | 
|Donald Gregory Mumford (56)       |  | Chief Technology Officer                             |  |             | 2001 | 
|Deborah Jean Noble (42)*          |  | Corporate Secretary                                  |  |             | 1997 | 
|MaryAnne Elisabeth Pahapill (42)* |  | Assistant Treasurer                                  |  |             | 2002 | 
|Stephen Charles Pusey (41)        |  | President, Europe, Middle East and Africa            |  |             | 2001 | 
|Steven Leo Schilling (46)         |  | President, Enterprise Accounts                       |  |             | 2002 | 
|Susan Louise Spradley (41)        |  | President, Wireline Networks                         |  |             | 2002 | 
|Katharine Berghuis Stevenson (40) |  | Treasurer                                            |  |             | 1999 | 
|Masood Ahmad Tariq (52)           |  | President, Global Alliances                          |  |             | 2003 | 

*Non-executive board appointed officers

All the above-named executive officers and non-executive board appointed
officers of the Company have been employed in their current position or other
senior positions with the Company during the past five years, except as
follows:



| |  |  | D.C. Beatty was, prior to returning to Nortel Networks in March 1999,
Vice President, Finance of Sprint Canada Inc., a telecommunications
company, from December 1995;                                                                                                                                                                                                                                                                                                                                                                                                
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | J.M. Doolittle was, prior to returning to Nortel Networks in
September 1999, Vice President, Finance of The Bank of Montreal, a
Canadian chartered bank, from August 1997 and Director, Treasury, Europe
and Asia, Nortel Networks, prior thereto;                                                                                                                                                                                                                                                                                                                    
|
| |  |  | R.Y.L. Mao was, prior to returning to Nortel Networks in January
2003, Chairman and Chief Executive Officer of Foxconn (Beijing)
Precision Component Industries, Ltd., a manufacturer of mobile
communication terminal devices, from November, 2002 to December, 2002,
and Chief Executive Officer, Nortel China, Nortel Networks, prior
thereto; and                                                                                                                                                                                                                 
|
| |  |  | L.F. Mezon was, prior to joining Nortel Networks in May 2001,
Vice-President & Corporate Controller of Geac Computer Corporation
Limited, a software application provider, from October 1999,
Vice-President, Finance and Chief Financial Officer from March 1999 to
October 1999 of Beamscope Canada Inc., a computer distributor that was
placed into receivership over a year later in March 2001 after having
filed for protection under the Companies Creditors Arrangement Act
(Canada) in November 2000, Vice-President, Business Optimization of Bell
Mobility

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##### Table of Contents





| |   |  | Inc., a wireless service provider, from March 1998 and
Vice-President & Comptroller of Bell Mobility prior thereto.                                                                                             
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | M.E. Pahapill was, prior to
joining Nortel Networks in April 1998, Vice-President, Finance and
Administration of Seymour Epstein Enterprises Inc., a private
investment management company, from September 1995.

The executive officers and non-executive board appointed officers of the
Company are the same as the executive officers and non-executive board
appointed officers of Nortel Networks Corporation, the Companys parent
company.




Section 16(a) beneficial ownership reporting compliance

Section 16(a) of the United States Securities Exchange Act of 1934
requires persons who beneficially own more than 10 percent of the Companys
equity securities and certain other persons to file reports concerning their
ownership of Company equity securities with the United States Securities and
Exchange Commission, the New York Stock Exchange, and the Company. Nortel
Networks Corporation, the sole owner of the Companys common shares, filed its
required reports on a timely basis during 2002.

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##### Table of Contents






ITEM 11.     Executive Compensation

The following tables are presented in accordance with the rules of the
United States Securities and Exchange Commission.




Summary compensation table

The following table sets forth the compensation awarded to, earned by, or
paid to each of the Companys named executive officers for services rendered by
them to the Company, Nortel Networks Corporation, the Companys parent company,
and the Companys subsidiaries for the fiscal years indicated.

|                              |  |      |      |     |  |                     |         |              |  |              |           |           |  |              |         |              |  |            |           |           |  |  |        |  |  |  |           |          
|----------------------------- |  | ---- | ---- | --- |  | ------------------- | ------- | ------------ |  | ------------ | --------- | --------- |  | ------------ | ------- | ------------ |  | ---------- | --------- | --------- |  |  | ------ |  |  |  | --------- | ---------
|                             
|                              |  |      |      |     |  |                     |         |              |  |              |           |           |  |              |         |              |  | Long Term  |           |           |  | 
|                              |  |      |      |     |  |                     |         | Compensation |  |              |           |          
|                              |  |      |      |     |  |                     |         |              |  |              |           |          
|                              |  |      |      |     |  | Annual Compensation |         | Awards       |  | Payouts      |           |           |  |             
|                              |  |      |      |     |  |                     |         |              |  |              |          
|                              |  |      |      |     |  |                     |         |              |  |              |           |           |  |              |         |              |  | Securities |           |           |  |  |        |  |  | 
|Name                          |  |      |      |     |  |                     |         |              |  |              |           |           |  | Other Annual |         | Underlying   |  | LTIP       |           | All Other
|And Principal                 |  |      |      |     |  | Salary              |         | Bonus        |  | Compensation |           | Options   |  | Payouts      |         | Compensation
|Position                      |  | Year |      | ($) |  | ($)(1)              |         | ($)          |  | (#)(2)       |           | (#)(2)(3) |  | ($)         
|                             
|F.A. Dunn                     |  |      | 2002 |     |  |                     | 825,000 |              |  |              |          |           |  |              |        |              |  |            | 750,000   |           |  |  |       |  |  |  | 24,747    | (4)(5)   
|President and Chief Executive |  |      | 2001 |     |  |                     | 564,833 |              |  |              |          |           |  |              |        |              |  |            | 1,750,000 |           |  |  |       |  |  |  | 16,806    | (4)(5)   
|Officer                       |  |      | 2000 |     |  |                     | 440,909 |              |  |              | 1,014,515 |           |  |              |        |              |  |            | 450,000   |           |  |  | 12,480 |  |  |  | 13,121    | (4)(5)   
|                             
|P. Debon                      |  |      | 2002 |     |  |                     | 537,143 |              |  |              |          |           |  |              |        |              |  |            | 250,000   |           |  |  |       |  |  |  | 125,875   | (6)(8)(9)
|President, Wireless Networks  |  |      | 2001 |     |  |                     | 440,417 |              |  |              |          |           |  |              | 68,713  | (6)(7)       |  |            | 650,000   |           |  |  |       |  |  |  | 332,020   | (6)(9)   
|                              |  |      | 2000 |     |  |                     | 351,611 |              |  |              | 717,375   |           |  |              |        |              |  |            | 150,000   |           |  |  | 14,400 |  |  |  | 364,641   | (6)(9)   
|                             
|G.R. Donahee                  |  |      | 2002 |     |  |                     | 528,000 |              |  |              |          |           |  |              |        |              |  |            | 250,000   |           |  |  |       |  |  |  | 6,600     | (11)     
|President, Americas           |  |      | 2001 |     |  |                     | 513,333 |              |  |              |          |           |  |              | 29,223  | (10)         |  |            | 680,000   |           |  |  |       |  |  |  | 6,120     | (11)     
|                              |  |      | 2000 |     |  |                     | 444,091 |              |  |              | 1,059,840 |           |  |              | 153,591 | (10)         |  |            | 300,000   |           |  |  | 19,200 |  |  |  | 6,120     | (11)     
|                             
|N.J. DeRoma                   |  |      | 2002 |     |  |                     | 526,000 |              |  |              |          |           |  |              | 24,038  | (5)(12)      |  |            | 250,000   |           |  |  |       |  |  |  | 17,885    | (4)(5)   
|Chief Legal Officer           |  |      | 2001 |     |  |                     | 493,750 |              |  |              |          |           |  |              | 62,921  | (5)(12)      |  |            | 650,000   |           |  |  |       |  |  |  | 27,642    | (4)(5)   
|                              |  |      | 2000 |     |  |                     | 425,000 |              |  |              | 715,307   |           |  |              | 106,221 | (5)(12)      |  |            | 180,000   |           |  |  | 12,480 |  |  |  | 46,407    | (4)(5)   
|                             
|C. Bolouri                    |  |      | 2002 |     |  |                     | 510,000 |              |  |              |          |           |  |              |        |              |  |            | 250,000   |           |  |  |       |  |  |  | 18,358    | (4)(5)   
|President, Global Operations  |  |      | 2001 |     |  |                     | 459,000 |              |  |              |          |           |  |              |        |              |  |            | 700,000   |           |  |  |       |  |  |  | 27,440    | (4)(5)   
|                              |  |      | 2000 |     |  |                     | 340,909 |              |  |              | 807,836   |           |  |              |        |              |  |            | 400,000   |           |  |  |       |  |  |  | 41,374    | (4)(5)   
|                             
|F. Plastina(13)               |  |      | 2002 |     |  |                     | 568,558 |              |  |              |          |           |  |              |        |              |  |            | 150,000   |           |  |  |       |  |  |  | 2,546,495 | (14)     
|Former President, Metro &     |  |      | 2001 |     |  |                     | 534,917 |              |  |              |          |           |  |              |        |              |  |            | 1,200,000 |           |  |  |       |  |  |  | 9,596     | (14)     
|Enterprise Networks           |  |      | 2000 |     |  |                     | 354,545 |              |  |              | 880,800   |           |  |              |        |              |  |            | 450,000   |           |  |  |       |  |  |  | 11,863    | (14)     
|                             



|(1) |  | Incentive cash awards earned in each fiscal year under the Nortel
Networks Limited SUCCESS Incentive Plan, whether or not deferred by the
named executive officer, in respect of each of the fiscal years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | As adjusted to reflect the stock dividend of one common share on each
issued and outstanding common share of the Company effective at the close
of business on August 17, 1999, and the two-for-one stock split of Nortel
Networks Corporations common shares effective at the close of business on
May 5, 2000, where applicable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|(3) |  | Restricted stock units allocated in 1998 under the Nortel Networks
Limited Restricted Stock Unit Plan and earned in 2000. If specified
performance criteria were achieved, each unit entitled the holder to
receive one common share of Nortel Networks Corporation or, subject to
certain conditions, a cash payment based on the value of one common share
over a specified 20-day trading period. The restricted stock units
allocated in 1998 had a return on asset performance criteria over a
three-year performance period, ending December 31, 2000. The value (based
on the specified 20-day trading period) of the pay-out for the restricted
stock units earned in 2000 would be equal to Cdn$490,589 ($331,054) for
Mr. Dunn, UK£181,621 ($276,735) for Mr. Debon, $511,680 for Mr. Donahee,
and Cdn$490,589 ($331,054) for Mr. DeRoma if each of them had chosen their
award in cash. Messrs. Debon, Donahee

78



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|     |  | and DeRoma chose to receive their 2000 restricted stock unit awards in cash.
Amounts have been converted for Messrs. Dunns, Debons and DeRomas pay-outs
in 2000 using the exchange rates listed in footnotes (5) and (6) below, as
applicable.                                                                                                                                                                                                                         
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(4)  |  | Represents contributions made under the Nortel Networks Limited
Investment Plan for Employees  Canada.                                                                                                                                                                                                                                                                                                                                                                   
|    
|(5)  |  | Represents the United States dollar equivalent of payments actually
earned or paid in Canadian dollars. Amounts have been converted using the
average of the exchange rates in effect during each year equal to US$1.00
= Cdn$1.5708 for 2002, US$1.00 = Cdn$1.5489 for 2001, and US$1.00 =
Cdn$1.4819 for 2000.                                                                                                                                                          
|    
|(6)  |  | Represents the United States dollar equivalent of payments actually
earned or paid in United Kingdom pounds. Amounts have been converted
using the average of the exchange rates in effect during each year equal
to US$1.00 = UK£0.6661 for 2002, US$1.00 = UK£0.6909 for 2001, and US$1.00
= UK£0.6563 for 2000.                                                                                                                                                        
|    
|(7)  |  | Mr. Debons responsibilities during 2001 as President, Wireless Networks
were global in nature and his offices and personal residences spanned
several geographies. As a result, transportation services and benefits
(automobile benefits, commercial air travel, train, and car services) for
Mr. Debon totaled $48,010 in 2001.                                                                                                                                        
|    
|(8)  |  | Represents the United States dollar equivalent of payments actually
earned or paid in euros. Amounts have been converted using the average of
the exchange rates in effect during each year equal to US$1.00 = 1.0615
euros for 2002, US$1.00 = 1.1157 euros for 2001, and US$1.00 = 1.0755
euros for 2000.                                                                                                                                                               
|    
|(9)  |  | Includes contributions under the Nortel Networks Long-Term Investment
Plan or Nortel Networks (UK) Pension Plan, as applicable ($8,467 in 2002;
$6,068 in 2001; and $6,120 in 2000), and expatriate, permanent transfer
and other similar expenses related to Mr. Debons global responsibilities
as President, Wireless Networks ($117,408 in 2002; $325,952 in 2001; and
$358,521 in 2000).                                                                             
|    
|(10) |  | Amounts paid to reimburse Mr. Donahee for income taxes payable by him in
accordance with Nortel Networks Limiteds long-term international
assignment policy.                                                                                                                                                                                                                                                                                                             
|    
|(11) |  | Represents contributions made under the Nortel Networks Long-Term
Investment Plan.                                                                                                                                                                                                                                                                                                                                                                                        
|    
|(12) |  | Amounts paid to reimburse Mr. DeRoma for income taxes payable by him in
accordance with his employment agreement. Mr. DeRomas employment
agreement is described below under Certain Employment Arrangements.                                                                                                                                                                                                                                                           
|    
|(13) |  | Mr. Plastina ceased to be an executive officer of the Company effective
as of October 3, 2002 and his employment terminated effective as of
November 1, 2002. As a result, Mr. Plastina was employed by the Company
or its subsidiaries for ten months in 2002.                                                                                                                                                                                                           
|    
|(14) |  | Includes: (i) contributions made under the Nortel Networks Long-Term
Investment Plan ($6,600 in 2002; $6,120 in 2001; and $6,120 in 2000); (ii)
housing relocation assistance ($395 in 2002; $3,476 in 2001; and $5,743 in
2000); and (iii) certain payments pursuant to the Nortel Networks
Corporation Special Retention Plan of $2,539,500 in
2002 (the Nortel Networks Corporation Special Retention Plan is described
below under Certain Employment Arrangements).

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Option grants in 2002

The following table sets forth certain information concerning grants of
stock options to purchase common shares of Nortel Networks Corporation to the
named executive officers during the fiscal year ended December 31, 2002.

|                  |  |                      |                     |     |            |            |                |  |            |  |            |  |            |     |                        |                                   |           |       |  |  |                 |  |  | 
|----------------- |  | -------------------- | ------------------- | --- | ---------- | ---------- | -------------- |  | ---------- |  | ---------- |  | ---------- | --- | ---------------------- | --------------------------------- | --------- | ----- |  |  | --------------- |  |  | 
|                 
|Individual Grants |  |                     
|                  |  | Potential Realizable
|                  |  |                      |                     |     |            | % of Total |                |  |            |  |            |  |            |     |                        | Value at Assumed Annual          
|                  |  |                      |                     |     |            | Options    |                |  |            |  |            |  |            |     |                        | Rates of Stock Price Appreciation
|                  |  |                      | Number of           |     | Granted to |            |                |  |            |  |            |  |            |     | For Option Term (2)(3)
|                  |  |                      | Securities          |     | Employees  |            |                |  |            |  |            |  |            |     |                       
|                  |  |                      | Underlying          |     | In Fiscal  |            | Exercise Price |  | Expiration |  |            |  |            |     |                        |                                   |          
|Name              |  |                      | Options Granted (#) |     | Year (1)   |            | ($/Sh)         |  | Date       |  | 5% ($)     |  | 10% ($)   
|                 
|F.A. Dunn         |  |                      | 750,000             | (4) |            |            | 0.62           |  |            |  | 8.27 (Cdn) |  | 02/27/2012 |     |                        |                                   | 3,900,719 | (Cdn) |  |  | 9,885,188 (Cdn)
|                 
|P. Debon          |  |                      | 250,000             | (4) |            |            | 0.21           |  |            |  | 5.15       |  | 02/27/2012 |     |                        |                                   | 809,702   |       |  |  | 2,051,943      
|                 
|G.R. Donahee      |  |                      | 250,000             | (4) |            |            | 0.21           |  |            |  | 5.15       |  | 02/27/2012 |     |                        |                                   | 809,702   |       |  |  | 2,051,943      
|                 
|N.J. DeRoma       |  |                      | 250,000             | (4) |            |            | 0.21           |  |            |  | 8.27 (Cdn) |  | 02/27/2012 |     |                        |                                   | 1,300,240 | (Cdn) |  |  | 3,295,063 (Cdn)
|                 
|C. Bolouri        |  |                      | 250,000             | (4) |            |            | 0.21           |  |            |  | 8.27 (Cdn) |  | 02/27/2012 |     |                        |                                   | 1,300,240 | (Cdn) |  |  | 3,295,063 (Cdn)
|                 
|F. Plastina       |  |                      | 150,000             | (4) |            |            | 0.12           |  |            |  | 5.15       |  | 02/27/2012 | (5) |                        |                                   | 485,821   |       |  |  | 1,231,166      
|                 



|(1) |  | In June 2001, Nortel Networks Corporation commenced a voluntary stock
option exchange program whereby eligible employees could exchange certain
then outstanding stock options, based on a prescribed formula. None of
the named executive officers participated in the program. In January
2002, Nortel Networks Corporation granted new stock options to eligible
employees who participated in the stock option exchange program, with
exercise prices at the fair market value of Nortel Networks Corporations
common shares on the date of grant. Mainly as a result of such January
2002 grants, the named executive officers percentages listed in the
column entitled % of Total Options Granted to Employees in Fiscal Year
are generally lower than in previous years.                                                                                                                                                                                                                                                                                                                                        
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | The dollar amounts shown represent the amount by which the market value
of Nortel Networks Corporations common shares underlying each stock
option grant would exceed the exercise price of the stock option upon the
expiration of the stock option if the market value of Nortel Networks
Corporations common shares appreciates from the market value on the date
of grant at an annual rate of five percent and ten percent, respectively,
during the stock option term. These rates of appreciation are prescribed
by the United States Securities and Exchange Commission. On February 28,
2003, the closing price of a common share of Nortel Networks Corporation
on the New York Stock Exchange and on the Toronto Stock Exchange was
$2.15
and Cdn$3.22, respectively. As the actual value received by a named
executive officer on the exercise of a stock option is determined by the
market value of Nortel Networks Corporations common shares on the date of
exercise, the actual value received by a named executive officer may bear
no relation to the potential realization shown under these columns.
|   
|(3) |  | At February 28, 2002, there were 3,204,652,807 common shares of Nortel
Networks Corporation outstanding. Assuming all stock options were granted
on February 28, 2002 and assuming five percent and ten percent annual
share price appreciation rates for ten years (the term of the options)
from $5.15 per share, the potential incremental aggregate realizable value
for all of Nortel Networks Corporations shareholders would be
$10,379,252,995 and $26,303,064,929, respectively. Assuming all stock
options were granted on February 28, 2002 with an exercise price of $5.15
per share, the potential incremental realizable value of the stock options
granted to the named executive officers in 2002 would be less than 0.06
percent of the potential incremental aggregate realizable value for all of
Nortel Networks Corporations shareholders, assuming either rate of
appreciation.                                                                                                                                                                                                                     
|   
|(4) |  | The options have ten-year terms and become exercisable in three equal
annual installments beginning on the first anniversary of the date of
grant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|(5) |  | The vesting schedules for
substantially all of Mr. Plastinas stock options were accelerated
upon termination of his employment on November 1, 2002 in accordance with
the Nortel Networks Corporation Special Retention Plan. As a result of
his termination of employment, the expiration date of this grant of
options is now January 29, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

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Aggregate option exercises in 2002 and year-end option values

The following table sets forth certain information concerning exercises of
stock options by the named executive officers during the fiscal year ended
December 31, 2002 and the value of unexercised options at December 31, 2002.

|             |  |                 |   |              |  |                       |   |                                      |  |                      |                 |               |  |                 |  |  |   |  |  |  |   |  |  | 
|------------ |  | --------------- | - | ------------ |  | --------------------- | - | ------------------------------------ |  | -------------------- | --------------- | ------------- |  | --------------- |  |  | - |  |  |  | - |  |  | 
|            
|             |  |                 |   |              |  |                       |   |                                      |  | Number of Securities |                 |               |  |                 |  |  |   | 
|             |  |                 |   |              |  |                       |   | Underlying                           |  | Value of Unexercised
|             |  | Common          |   |              |  |                       |   | Unexercised Options at Fiscal        |  | In-the-Money        
|             |  | Shares Acquired |   |              |  | Year-End (#)(1)(2)(3) |   | Options at Fiscal Year-End ($)(3)(4)
|             |  | On Exercise     |   | Value        |  |                       |   |                                     
|Name         |  | (#)             |   | Realized ($) |  | Exercisable           |   | Unexercisable                        |  | Exercisable          |                 | Unexercisable
|            
|F.A. Dunn    |  |                 |  |              |  |                       |  |                                      |  |                      | 331,334 (Cdn)   |               |  | 2,853,334 (Cdn) |  |  |  |  |  |  |  | 
|             |  |                 |  |              |  |                       |  |                                      |  |                      |                |               |  | 200,000         |  |  |  |  |  |  |  | 
|            
|P. Debon     |  |                 |  |              |  |                       |  |                                      |  |                      | 541,999         |               |  | 1,060,001       |  |  |  |  |  |  |  | 
|            
|G.R. Donahee |  |                 |  |              |  |                       |  |                                      |  |                      | 486,669         |               |  | 1,196,667       |  |  |  |  |  |  |  | 
|            
|N.J. DeRoma  |  |                 |  |              |  |                       |  |                                      |  |                      | 303,334 (Cdn)   |               |  | 1,230,000 (Cdn) |  |  |  |  |  |  |  | 
|             |  |                 |  |              |  |                       |  |                                      |  |                      | 80,000          |               |  |                |  |  |  |  |  |  |  | 
|            
|C. Bolouri   |  |                 |  |              |  |                       |  |                                      |  |                      | 347,999 (Cdn)   |               |  | 1,270,001 (Cdn) |  |  |  |  |  |  |  | 
|            
|F. Plastina  |  |                 |  |              |  |                       |  |                                      |  |                      | 72,000 (Cdn)(5) |               |  | 60,000 (Cdn)(5) |  |  |  |  |  |  |  | 
|             |  |                 |  |              |  |                       |  |                                      |  |                      | 1,923,000(5)    |               |  |                |  |  |  |  |  |  |  | 
|            



|(1) |  | As adjusted to reflect the two-for-one stock split of the Companys
common shares effective at the close of business on January 7, 1998, the
stock dividend of one common share on each issued and outstanding common
share of the Company effective at the close of business on August 17,
1999, and the two-for-one stock split of Nortel Networks Corporations
common shares effective at the close of business on May 5, 2000, where
applicable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Includes the following number of replacement options: 120,000 for Mr.
Dunn; 160,000 for Mr. Debon; 160,000 for Mr. Donahee; 160,000 for Mr.
DeRoma; 120,000 for Mr. Bolouri; and 60,000 for Mr. Plastina. Replacement
options are granted pursuant to Nortel Networks Corporations key
contributor stock option program. Under that program, a participant is
granted concurrently an equal number of initial options and replacement
options. The initial options and the replacement options expire ten years
from the date of grant. The initial options have an exercise price equal
to the market value of common shares on the date of grant and the
replacement options have an exercise price equal to the market value of
common shares on the date all of the initial options are fully exercised,
provided that in no event will the exercise price be less than the
exercise price of the initial options. Replacement options are generally
exercisable commencing 36 months after the date all of the initial options
are fully exercised, provided that the participant beneficially owns a
number of common shares at least equal to the number of common shares
subject to the initial options less any common shares sold to pay for
options costs, applicable taxes, and brokerage costs associated with the
exercise of the initial options.
|   
|(3) |  | As Nortel Networks Corporation grants both U.S. dollar and Canadian
dollar stock options, the options are listed separately for each currency.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(4) |  | These amounts represent the difference between the exercise price of the
stock options and the closing price of Nortel Networks Corporations
common shares on the last trading day of the year on the New York Stock
Exchange
for U.S. stock options and on the Toronto Stock Exchange for Canadian
stock options. On December 31, 2002, the closing price of Nortel Networks
Corporations common shares on the New York Stock Exchange and the Toronto
Stock Exchange was $1.61 and Cdn$2.52, respectively (and the exercise
prices of all the stock options were greater than the closing price of
Nortel Networks Corporations common shares).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|(5) |  | The vesting schedules for Mr. Plastinas stock options (excluding his
replacement options) were accelerated upon termination of his employment
on November 1, 2002 in accordance with the Nortel Networks Corporation
Special Retention Plan. See footnote (5) to the Option Grants in 2002
table above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

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Long-term incentive plans  awards in last fiscal year

The following table sets forth certain information concerning the
allocation of restricted stock units to the named executive officers during the
fiscal year ended December 31, 2002.

|             |  |                       |         |                      |  |                                          |   |            |   |             |   |  |         |  |   |  |         |  |   | 
|------------ |  | --------------------- | ------- | -------------------- |  | ---------------------------------------- | - | ---------- | - | ----------- | - |  | ------- |  | - |  | ------- |  | - | 
|            
|             |  |                       |         |                      |  | Estimated Future Payouts Under Non-Share
|             |  |                       |         |                      |  | Price Based Plans                       
|             |  |                       |         |                      |  |                                         
|             |  |                       |         |                      |  | Performance or Other                     |   |            |   |             |   |  |         |  |   |  |         | 
|             |  | Number of Shares,     |         | Period Until         |  |                                         
|             |  | Units or Other Rights |         | Maturation or Payout |  |                                         
|Name         |  | (#)(1)                |         | (2)                  |  | Threshold(#)                             |   | Target (#) |   | Maximum (#)
|            
|F.A. Dunn    |  |                       | 150,000 |                      |  | 2001 to 2003                             |   |            | 0 |             |   |  | 100,000 |  |   |  | 150,000 | 
|            
|P. Debon     |  |                       |        |                      |  |                                          |  |            |   |             |  |  |         |  |  |  |         |  |  | 
|            
|G.R. Donahee |  |                       |        |                      |  |                                          |  |            |   |             |  |  |         |  |  |  |         |  |  | 
|            
|N.J. DeRoma  |  |                       |        |                      |  |                                          |  |            |   |             |  |  |         |  |  |  |         |  |  | 
|            
|C. Bolouri   |  |                       |        |                      |  |                                          |  |            |   |             |  |  |         |  |  |  |         |  |  | 
|            
|F. Plastina  |  |                       |        |                      |  |                                          |  |            |   |             |  |  |         |  |  |  |         |  |  | 
|            



|(1) |  | Restricted stock units were allocated to certain executive officers in
2001, and the above additional allocation was made to Mr. Dunn in April
2002 pursuant to the Nortel Networks Limited Restricted Stock Unit Plan to
make his aggregate allocation commensurate with his position as president
and chief executive officer. When issued, a restricted stock unit
entitles the holder to receive one common share of Nortel Networks
Corporation. The number of restricted stock units allocated to a
participant represents the maximum number of restricted stock units that
may actually be issued at the end of the performance period assuming all
performance criteria have been achieved at maximum levels. The number of
restricted stock units issued to a participant at the end of a performance
period will be determined by the extent to which the associated terms and
conditions have been satisfied (including whether the related performance
criteria was achieved during the performance period). The threshold
represents the minimum number of restricted stock units that may actually
be issued at the end of the performance period assuming none of the
performance criteria has been achieved.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Restricted stock units allocated in 2002 have a two-year performance
period which is divided into five shorter performance segments. The
performance criteria include resizing activity targets for the first
segment, and corporate performance objectives under the incentive plan for
the remaining four segments. In addition, the Joint Leadership Resources
Committee of the boards of directors of the Company and Nortel Networks
Corporation may consider Nortel Networks Corporations performance
relative to key competitors on financial and strategic business
indicators. The committee will assess performance over the five segments
and determine the actual number of restricted stock units to be issued at
the end of the performance period.                                                                                                                                                                                                                                                                                                                                                                                                                                                           




Pension plans

Certain executive officers participate in non-contributory defined benefit
pension plans in Canada and in the United States. The current Canadian plan
provides for a benefit based on pension credits and the average annual earnings
for the highest three consecutive years in the last ten years prior to
retirement or other termination of employment. Employees who were participants
of the Canadian plan as at December 31, 1998 could continue to participate in
the old defined benefit provisions. The United States plan currently provides
for a benefit based on pension credits and average earnings for the highest 1,095 consecutive calendar days of compensation not in excess of
certain limits specified in the United States Internal Revenue Code ($200,000
in 2002) out of the last 3,650 calendar days prior to retirement or other
termination of employment. Compensation for the current Canadian plan and the
United States plan includes base salary and incentive cash awards. Under both
plans, the benefit can be paid in a lump sum or as an actuarially equivalent
annuity. Certain grandfathering rules exist for executive officers participating in the plans as at December 31,
1998. The pension benefit formulae described above were closed to new
participants under the Canadian and United States defined benefit pension plans
after April 30, 2000.

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Eligible executive officers also participate in the Nortel Networks
Supplementary Executive Retirement Plan, or SERP. Effective January 1, 2000,
SERP was closed to new participants. The old SERP formula is a final average
pay formula with a pension accrual of 1.3 percent of eligible earnings. An
early retirement reduction of seven percent a year prior to age 60 applies in
the case of retirement prior to this age. The maximum total annual retirement
benefit cannot exceed 60 percent of an executive officers eligible earnings at
retirement. The new SERP, which became effective January 1, 1999 and was
optional for executive officers then participating in the Canadian plan,
provides a benefit based on pension credits, to a maximum of 550 percent of
eligible earnings. Eligible earnings for the old and new SERP includes base
salary and any eligible incentive awards paid up to 60 percent of a
participants base salary. All participating executive officers at December
31, 1998 have their benefits protected under the pre-1999 SERP formula.

Pension credits are earned during each year of participation based on the
participants age attained in the year and on years of service. Pension
benefits payable under these plans at normal retirement age of 65 are not
subject to any deduction or offsets. Under the Canadian plans annual income
option, there are reductions for retirement prior to normal retirement age.

The following tables show the aggregate approximate annual retirement
benefits for an eligible executive officer determined using the SERP formulae
(payable as a life annuity with a 60 percent survivor pension) under the plans,
and the SERP. These tables provide estimates for certain compensation and
years of service categories assuming retirement at age 65, and assuming
grandfathering provisions do not apply. The approximate benefits for Messrs.
Dunns, Donahees and Plastinas Canadian service are shown in Table I (which
provides estimates under the old SERP). The approximate benefits for Messrs.
Debons, Donahees and Plastinas United States service and Messrs. DeRomas
and Bolouris Canadian service are shown in Table II (which provides estimates
under the new SERP).

Pension Plan Table I

|                   |  |                      |         |    |  |    |         |    |  |    |         |  |  |   |         |  |  |   |         | 
|------------------ |  | -------------------- | ------- | -- |  | -- | ------- | -- |  | -- | ------- |  |  | - | ------- |  |  | - | ------- | 
|                  
|                   |  | Years of Service (1)
|                   |  |                     
|Total Earnings (1) |  | 15                   |         | 20 |  | 25 |         | 30 |  | 35
|                  
|$400,000           |  | $                    | 78,000  |    |  | $  | 104,000 |    |  | $  | 130,000 |  |  | $ | 156,000 |  |  | $ | 182,000 | 
|450,000            |  |                      | 87,750  |    |  |    | 117,000 |    |  |    | 146,250 |  |  |   | 175,500 |  |  |   | 204,750 | 
|500,000            |  |                      | 97,500  |    |  |    | 130,000 |    |  |    | 162,500 |  |  |   | 195,000 |  |  |   | 227,500 | 
|600,000            |  |                      | 117,000 |    |  |    | 156,000 |    |  |    | 195,000 |  |  |   | 234,000 |  |  |   | 273,000 | 
|700,000            |  |                      | 136,500 |    |  |    | 182,000 |    |  |    | 227,500 |  |  |   | 273,000 |  |  |   | 318,500 | 
|800,000            |  |                      | 156,000 |    |  |    | 208,000 |    |  |    | 260,000 |  |  |   | 312,000 |  |  |   | 364,000 | 
|900,000            |  |                      | 175,500 |    |  |    | 234,000 |    |  |    | 292,500 |  |  |   | 351,000 |  |  |   | 409,500 | 
|1,000,000          |  |                      | 195,000 |    |  |    | 260,000 |    |  |    | 325,000 |  |  |   | 390,000 |  |  |   | 455,000 | 
|                  

Pension Plan Table II

|                   |  |                      |         |    |  |    |         |    |  |    |         |  |  |   |         |  |  |   |         | 
|------------------ |  | -------------------- | ------- | -- |  | -- | ------- | -- |  | -- | ------- |  |  | - | ------- |  |  | - | ------- | 
|                  
|                   |  | Years of Service (1)
|                   |  |                     
|Total Earnings (1) |  | 15                   |         | 20 |  | 25 |         | 30 |  | 35
|                  
|$400,000           |  | $                    | 92,385  |    |  | $  | 112,689 |    |  | $  | 138,408 |  |  | $ | 156,682 |  |  | $ | 182,401 | 
|450,000            |  |                      | 103,933 |    |  |    | 126,776 |    |  |    | 155,709 |  |  |   | 176,268 |  |  |   | 205,201 | 
|500,000            |  |                      | 115,481 |    |  |    | 140,862 |    |  |    | 173,010 |  |  |   | 195,853 |  |  |   | 228,001 | 
|600,000            |  |                      | 138,578 |    |  |    | 169,034 |    |  |    | 207,612 |  |  |   | 235,023 |  |  |   | 273,602 | 
|700,000            |  |                      | 161,674 |    |  |    | 197,206 |    |  |    | 242,215 |  |  |   | 274,194 |  |  |   | 319,202 | 
|800,000            |  |                      | 184,770 |    |  |    | 225,379 |    |  |    | 276,817 |  |  |   | 313,365 |  |  |   | 364,802 | 
|900,000            |  |                      | 207,866 |    |  |    | 253,551 |    |  |    | 311,419 |  |  |   | 352,535 |  |  |   | 410,403 | 
|1,000,000          |  |                      | 230,963 |    |  |    | 281,724 |    |  |    | 346,021 |  |  |   | 391,706 |  |  |   | 456,003 | 
|                  

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|(1) |  | The following table sets forth the approximate total eligible earnings
and years of credited pensionable service at December 31, 2002 of the
named executive officers:
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|               |  |                    |         |                        |  |                             |         |  |  |  |       | 
|-------------- |  | ------------------ | ------- | ---------------------- |  | --------------------------- | ------- |  |  |  | ----- | 
|              
|Name           |  | Total Earnings ($) |         | Canadian Service (yrs) |  | United States Service (yrs)
|              
|F.A. Dunn      |  |                    | 836,863 |                        |  |                             | 26.58   |  |  |  |      | 
|              
|P. Debon       |  |                    | 613,181 |                        |  |                             |        |  |  |  | 2.92  | 
|              
|G.R. Donahee   |  |                    | 728,449 |                        |  |                             | 7.00    |  |  |  | 19.08 | 
|              
|N.J. DeRoma    |  |                    | 680,814 |                        |  |                             | 3.58(1) |  |  |  |      | 
|              
|C. Bolouri     |  |                    | 613,645 |                        |  |                             | 21.00   |  |  |  |      | 
|              
|F. Plastina(2) |  |                    | 729,896 |                        |  |                             | 6.08    |  |  |  | 7.25  | 
|              

|(1) |  | Mr. DeRoma is eligible to receive additional credited pensionable
service, up to a maximum of 8.125 years, under the terms of his employment
agreement. See Certain Employment Arrangements below.                                                                                                                                                                                           
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Mr. Plastinas employment terminated effective as of November 1, 2002.
At the time, he was not eligible for SERP benefits and no such benefits
will be paid to him in the future. In connection with the termination of
his employment, Mr. Plastina received $187,488 representing a commuted
value payout pursuant to the Nortel Networks Limited Managerial and
Non-Negotiated Pension Plan.




Certain employment arrangements

Mr. DeRoma entered into an employment agreement in April 1997, prior to
commencing employment as Vice-President and Deputy General Counsel, with an
initial base salary of $300,000. Pursuant to the agreement, the Company agreed
to make a gross-up payment to Mr. DeRoma for calendar years 1997 through 2000.
The gross-up payment was intended to place Mr. DeRoma in the same after-tax
position with respect to his base salary and any annual incentive award as if
he were a resident of the State of Connecticut and a taxpayer in the United
States to an annual maximum of 27 percent of Mr. DeRomas base salary and any
annual incentive award. The gross-up, which was reduced to nine percent of Mr.
DeRomas base salary and any annual incentive award, was extended effective
June 2000 to March 2002 with annual review by the Joint Leadership Resources
Committee of the boards of directors of the Company and Nortel Networks
Corporation. The gross-up was not renewed subsequent to March 2002. Under the
terms of the agreement, Mr. DeRoma is also eligible for the Nortel Networks
Limited Special Pension Credit Program which covered new executive hires older
than age 35. Mr. DeRoma will be credited, for pension purposes, with
additional years and months equal to one half of the years between the age of
35 and Mr. DeRomas age at the time of hire, if he retires after the age of 60,
to a maximum of 8.125 years.

Each of the named executive officers (other than Mr. Plastina) and certain
other executive officers of the Company currently participate in the Nortel
Networks Corporation Executive Retention and Termination Plan, or ERTP. The
ERTP provides that if a participants employment is terminated without cause
within a period commencing 30 days prior to the date of a change in control of Nortel Networks Corporation and ending 24 months
after the date of a change in control of Nortel Networks Corporation, or the
participant resigns for good reason (including, among other things, a reduction
in overall compensation, geographic relocation or reduction in responsibility,
in each case without the consent of the participant) within 24 months following
the date of a change in control of Nortel Networks Corporation, the participant
will be entitled to certain payments and benefits, including (i) the payment of
an amount equal to three times (in the case of the chief executive officer) and
two times (in the case of the other named executive officers) of the
participants annual base salary; (ii) the payment of an amount equal to 300
percent (in the case of the chief executive officer) and 200 percent (in the
case of the other named executive officers) of the participants target annual
incentive bonus; (iii) accelerated vesting of all or substantially all stock
options; and (iv) the pay-out at target of any restricted stock units under
the Nortel Networks Limited Restricted Stock Unit Plan.



| | For purposes of the ERTP, a change in control is deemed to occur if:
| | --------------------------------------------------------------------

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| | (i)   |  | any party or group acquires beneficial ownership of securities
of Nortel Networks Corporation representing more than 20 percent of
the outstanding securities entitled to vote in the election of
directors of Nortel Networks Corporation;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (ii)  |  | Nortel Networks Corporation participates in a business
combination, including, among other things, a merger, amalgamation,
reorganization, sale of all or substantially all of its assets, or
plan of arrangement, unless the business combination only involves
Nortel Networks Corporation and/or its affiliates or, following the
completion of the business combination, Nortel Networks Corporations
common shareholders beneficially own, directly or indirectly, more
than 50 percent of the then-outstanding voting shares of the entity
resulting from the business combination (or of an entity which
ultimately controls such entity) and a majority of the members of the
board of directors of the entity resulting from the business
combination (or the entity ultimately controlling such entity) were
members of the board of directors of Nortel Networks Corporation when
the business combination was approved or the initial agreement in
connection with the business combination was executed;
|
| | (iii) |  | the persons who were directors of Nortel Networks Corporation
on the effective date of the ERTP cease (for reasons other than death
or disability) to constitute at least a majority of Nortel Networks
Corporations board of directors; provided, that any person who was
not a director on the effective date of the ERTP shall be deemed to
be an incumbent director if such person was elected or appointed to
Nortel Networks Corporations board of directors by, or on the
recommendation of or with the approval of, at least two-thirds of the
directors who then qualify as incumbent directors unless such

election, appointment, recommendation or approval was the result of
any actual or publicly threatened proxy contest for the election of
directors; or                                                                                                                                                                                                                                         
|
| | (iv)  |  | any other event occurs which Nortel Networks Corporations
board of directors determines in good faith could reasonably be
expected to give rise to a change in control.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

Each of the named executive officers (other than Mr. Dunn) and
certain other executive officers of the Company also participate in
the Nortel Networks Corporation Special Retention Plan. The Special
Retention Plan provides that if a participants employment is
terminated by the participant for good reason or by Nortel Networks
Corporation without cause, between November 1, 2001 and June 30,
2003, the participant will be entitled to certain payments and
benefits, including (i) the payment of an amount equal to two times
(in the case of the Messrs. Debon, Donahee, DeRoma, and Bolouri) the
participants annual base salary; (ii) the payment of an amount
equal to 100 percent of the participants target annual incentive
bonus; (iii) accelerated vesting of all or substantially all stock
options; and (iv) a pay-out at target of any restricted stock
units allocated under the Nortel Networks Limited Restricted Stock
Unit Plan.

The Company announced in November 2002 that Mr. Donahee will proceed
to retirement in the spring of 2003. Mr. Donahee is expected to be
entitled to receive the payments and benefits described above upon
the termination of his employment in 2003.

Mr. Plastina ceased to be an executive officer of the Company and
Nortel Networks Corporation effective as of October 3, 2002 and his
employment terminated effective as of November 1, 2002. Mr.
Plastina received the payments and benefits under the Special
Retention Plan described above upon termination of his employment,
including the payments indicated in footnote (14) to the Summary
Compensation Table above.




Compensation of directors

Effective January 1, 2002, each non-employee director of the Company and
Nortel Networks Corporation elected to receive all compensation for services
rendered as a member of the board of directors of the Company and Nortel
Networks Corporation, any committees thereof, and as board or committee
chairperson, in the form of share units, instead of cash, under the Directors
Deferred Share Compensation Plans maintained by the Company and Nortel Networks
Corporation. The share units are settled a specified number of trading days
following the release of Nortel Networks Corporations financial results after
the director ceases to be a member of the applicable board, and each share unit
entitles the holder to receive one common share of Nortel Networks Corporation.

85



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Directors of the Company and Nortel Networks Corporation, who are not
salaried employees of Nortel Networks Corporation or any of its subsidiaries,
receive the compensation described in the table below for their services as
directors. Mr. Roth, in his capacity as a director and non-executive
vice-chairman of the board of the Company and of Nortel Networks Corporation
until February 28, 2002, also received the compensation described in the table
below. The compensation of directors is considered on a combined basis in
light of the overall governance structure of the Company and Nortel Networks
Corporation. Director compensation is set solely on an annual fee basis and
fees are not paid for board or committee meeting attendance.

|                                           |  |                                      |  |                                                                                                                                                                                                                                                                                                                                                                                                              
|------------------------------------------ |  | ------------------------------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                          
|Payor                                      |  | Fee Type                             |  | Fee Amount Paid in Share Units                                                                                                                                                                                                                                                                                                                                                                               
|                                           |  |                                      |  | (effective January 1, 2002 unless otherwise specified)                                                                                                                                                                                                                                                                                                                                                       
|                                          
|Company                                    |  | Annual Board Retainer                |  | $50,000                                                                                                                                                                                                                                                                                                                                                                                                      
|                                          
|Company and/or
Nortel Networks Corporation |  | Annual Committee Membership
Retainer |  | $12,500, or $6,250 each for membership on the same committee of the boards of the Company and Nortel
Networks Corporation.                                                                                                                                                                                                                                                                                   
|                                          
|Company and/or
Nortel Networks Corporation |  | Annual Committee Chairman Fee        |  | $7,500, or $3,750 each for chairmanship of the same
committee of the boards of the Company and Nortel
Networks Corporation. Effective July 25, 2002, the
fee for the chairman of the audit committee of the
Company and Nortel Networks Corporation was increased
to $17,500, or $8,750 for each audit committee, in
recognition of the significant responsibilities
assumed by the audit committee chairman.
|                                          
|Company                                    |  | Special Assignments                  |  | $3,000 per day, up to $50,000 annually. No director
received any fees for special assignments in 2002.
Eliminated effective February 14, 2003.                                                                                                                                                                                                                                                               
|                                          
|Nortel Networks Corporation                |  | Life Insurance                       |  | Cdn$100,000 while a director and Cdn$75,000 following
retirement at or after age 65 or after ten years of
board membership (including Company board
membership).                                                                                                                                                                                                                                             
|                                          

Directors entitled to the above remuneration are also reimbursed for
reasonable travel and living expenses properly incurred by them in attending
any meetings of the boards of directors of the Company and Nortel Networks
Corporation or their committees.

Share ownership guidelines adopted by the boards of directors of the
Company and Nortel Networks Corporation require each director to own, directly
or indirectly, 8,000 common shares of Nortel Networks Corporation within two
years from the earlier of the date he or she was first elected or appointed to
the boards of directors of the Company or Nortel Networks Corporation. Share
units credited under the Nortel Networks Corporation Directors Deferred Share
Compensation Plan and the Nortel Networks Limited Directors Deferred Share
Compensation Plan are included in the calculation of the number of common
shares of Nortel Networks Corporation owned by a director for this purpose.

Retirement benefits are not paid to non-employee directors of Nortel
Networks Corporation or to non-employee directors of the Company elected after
January 1, 1996. Non-employee directors of the Company elected prior to
January 1, 1996 are entitled to receive retirement benefits equal to 75 percent
of the greater of $27,500 and the annual retainer paid to each director at
retirement, indexed to reflect approximately half of the increase in directors
retainers after retirement. The benefits are payable for a maximum of ten
years.

Effective January 1, 2002, L.R. Wilson elected to receive his additional
compensation for serving as chairman of the board of the Company and of Nortel
Networks Corporation of $15,000 per month from each of the Company and Nortel
Networks Corporation in share units. Mr. Wilsons compensation did not change
when he assumed the position of executive chairman of the board of the Company
and of Nortel Networks Corporation for the period from November 2001 to
February 2002.




Compensation committee interlocks and insider participation

The Joint Leadership Resources Committee of the boards of directors of the
Company and Nortel Networks Corporation is comprised of members from the boards
of directors of the Company and Nortel Networks Corporation. The current
members of the joint committee are Messrs. R.E. Brown (chairman), W.A. Owens,
S.H. Smith, Jr., and L.R. Wilson.

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Messrs. L.Y. Fortier and R.A. Ingram were
members of the committee until their resignations from the committee in April
2002. No member of this joint committee was an officer (within the meaning of
applicable United States securities rules) or employee of the Company or any of
its subsidiaries at any time during the year 2002.

The law firm of Ogilvy Renault, of which Mr. Fortier is a senior partner
and Chairman, provided legal services to each of the Company and Nortel
Networks Corporation on several matters in 2002 and is expected to provide
legal services in 2003.

No executive officer of the Company serves on the board of directors or
compensation committee of any other entity that has or has had one or more of
its executive officers serving as a member of the Companys board of directors.




ITEM 12.     Security Ownership of Certain Beneficial Owners and Management




Security ownership of certain beneficial owners

The following table shows the number of common shares of the Company
beneficially owned by persons who are known to the Company to be beneficial
owners of more than five percent of the Companys common shares as of February
28, 2003.

|                                                                                         |  |                              |  |                      |  |                 
|---------------------------------------------------------------------------------------- |  | ---------------------------- |  | -------------------- |  | ----------------
|                                                                                        
|Name and Address of                                                                      |  | Title of Class               |  | Amount and Nature of |  |                 
|Beneficial Owner                                                                         |  | of Security                  |  | Beneficial Ownership |  | Percent of Class
|                                                                                        
|Nortel Networks Corporation
8200 Dixie Road, Suite 100
Brampton, Ontario,
Canada L6T 5P6 |  | Common shares of the Company |  | 1,460,978,638        |  | 100             
|                                                                                        




Security ownership of directors and management

The following table shows the number of common shares of Nortel Networks
Corporation, Arris Group, Inc., Bookham Technology plc, and Entrust, Inc.
beneficially owned, as of February 28, 2003, by each of the Companys directors
and the individuals named in the Summary Compensation Table set forth above,
as well as by the directors and executive officers as a group. Arris Group,
Inc., Bookham Technology plc, and Entrust, Inc. were affiliates of the Company
as of February 28, 2003. None of the directors, nominees for election as
director, or executive officers of the Company beneficially own any common or
preferred shares of the Company.

A person is deemed to be a beneficial owner of a common share if that
person has, or shares, the power to direct the vote or investment of the common
share. Under applicable United States securities laws, a person is also deemed
to be a beneficial owner of a common share if such person has the right to
acquire the share within 60 days (whether or not, in the case of a stock
option, the current market price of the underlying common share is below the
stock option exercise price). More than one person may be deemed a beneficial
owner of a common share and a person need not have an economic interest in a
share to be a beneficial owner.

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|                         |  |                                              |  |                           |            |                      |  | 
|------------------------ |  | -------------------------------------------- |  | ------------------------- | ---------- | -------------------- |  | 
|                        
|                         |  |                                              |  |                           |            | Amount and Nature of
|Name of Beneficial Owner |  | Title of Class of Security                   |  | Beneficial Ownership (1)+
|                        
|J.J. Blanchard           |  | Common shares of Nortel Networks Corporation |  |                           | 15,391     | (2)                 
|                         |  | Share units                                  |  |                           | 77,945     | (3)                 
|                        
|R.E. Brown               |  | Common shares of Nortel Networks Corporation |  |                           | 413,280    | (4)                 
|                         |  | Share units                                  |  |                           | 90,205     | (3)                 
|                        
|J.E. Cleghorn            |  | Common shares of Nortel Networks Corporation |  |                           | 26,333     | (5)                 
|                         |  | Share units                                  |  |                           | 86,106     | (3)                 
|                        
|F.A. Dunn                |  | Common shares of Nortel Networks Corporation |  |                           | 1,102,704  | (6)                 
|                        
|L.Y. Fortier             |  | Common shares of Nortel Networks Corporation |  |                           | 18,583     | (7)                 
|                         |  | Share units                                  |  |                           | 89,451     | (3)                 
|                        
|R.A. Ingram              |  | Common shares of Nortel Networks Corporation |  |                           | 6,755      | (8)                 
|                         |  | Share units                                  |  |                           | 87,283     | (3)                 
|                        
|W.A. Owens               |  | Common shares of Nortel Networks Corporation |  |                           |           |                     
|                         |  | Share units                                  |  |                           | 72,769     | (3)                 
|                        
|G. Saucier               |  | Common shares of Nortel Networks Corporation |  |                           | 24,671     | (9)                 
|                         |  | Share units                                  |  |                           | 85,910     | (3)                 
|                        
|S.H. Smith, Jr.          |  | Common shares of Nortel Networks Corporation |  |                           | 127,190    | (10)                
|                         |  | Share units                                  |  |                           | 100,370    | (3)                 
|                        
|L.R. Wilson              |  | Common shares of Nortel Networks Corporation |  |                           | 1,177,869  | (11)                
|                         |  | Share units                                  |  |                           | 397,748    | (3)                 
|                        
|C. Bolouri               |  | Common shares of Nortel Networks Corporation |  |                           | 644,950    | (12)                
|                        
|P. Debon                 |  | Common shares of Nortel Networks Corporation |  |                           | 842,967    | (13)                
|                        
|N.J. DeRoma              |  | Common shares of Nortel Networks Corporation |  |                           | 746,204    | (14)                
|                        
|G.R. Donahee             |  | Common shares of Nortel Networks Corporation |  |                           | 733,044    | (15)                
|                        
|F. Plastina*             |  | Common shares of Nortel Networks Corporation |  |                           | 2,029,626  | (16)                
|                        
|Directors and executive  |  | Common shares of Nortel Networks Corporation |  |                           | 11,238,258 | (17)                
|officers as a group      |  | Share units                                  |  |                           | 1,087,787  | (3)                 
|(consisting of 28        |  | Common shares
of Arris Group, Inc.           |  |                           |           |                     
|persons, including       |  | Common shares of Bookham Technology plc      |  |                           |           |                     
|those named above)       |  | Common shares of
Entrust, Inc.               |  |                           | 1,000      | (18)                
|                        



|*   |  | Mr. Plastina ceased to be an executive officer of the Company and Nortel
Networks Corporation effective as of October 3, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(1) |  | Except as set forth below, each person has sole investment and voting
power with respect to the common shares beneficially owned by such person.
Includes common shares subject to stock options exercisable by February
28, 2003 or that become exercisable within 60 days from February 28, 2003
(whether or not the market price of the underlying common shares is below
the stock option exercise price). As of February 28, 2003, each director
and named executive officer individually, and the directors and executive
officers as a group, beneficially owned less than 1.0 percent of the
outstanding common shares of Nortel Networks Corporation.
|   
|(2) |  | Includes 3,999 common shares subject to stock options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(3) |  | Share units of the Company issued under the Nortel Networks Corporation
Directors Deferred Share Compensation Plan and the Nortel Networks
Limited Directors Deferred Share Compensation Plan. Each share unit
represents the right to receive one common share of Nortel Networks
Corporation. The Nortel Networks Corporation Directors Deferred Share
Compensation Plan and the Nortel Networks Limited Directors Deferred
Share Compensation Plan are described above under Compensation of
Directors.                                                                                                                                              
|   
|(4) |  | Includes 3,999 common shares subject to stock options. Excludes 473
common shares beneficially owned by Mr. Browns adult children residing
with Mr. Brown and 671 common shares beneficially owned by Mr. Browns
spouse. Mr. Brown disclaims beneficial ownership of those excluded
shares.                                                                                                                                                                                                                                                                                                                                                                 
|   
|(5) |  | Includes 1,333 common shares subject to stock options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

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|(6)  |  | Includes 851,334 common
shares subject to stock options and 5,000 common shares of Mr. Dunns son as to which Mr. Dunn shares investment
power. Excludes 10,000 common shares beneficially owned by Mr. Dunns
spouse and adult daughter residing with Mr. Dunn. Mr. Dunn disclaims
beneficial ownership of those 15,000 included and excluded shares.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(7)  |  | Includes 3,999 common shares
subject to stock options. Excludes
5,000 common shares beneficially owned by
Mr. Fortiers spouse. Mr. Fortier disclaims beneficial
ownership of those excluded shares.                                                                                                                                                  
|    
|(8)  |  | Includes 3,999 common shares subject
to stock options and 1,800 common shares as to which Mr. Ingram
shares investment and voting power with his spouse.                                                                                                                                                                                              
|    
|(9)  |  | Includes 3,999 common shares subject
to stock options and 20,672 common shares beneficially owned by a
corporation that is wholly-owned by
Mme. Saucier.                                                                                                                                                                                              
|    
|(10) |  | Includes 3,999 common shares subject
to stock options. Excludes
1,600 common shares beneficially owned by Mr. Smiths spouse.
Mr. Smith
disclaims beneficial ownership of those excluded shares.                                                                                                                                                      
|    
|(11) |  | Includes 13,999 common shares
subject to stock options and 1,157,855 common shares beneficially owned
by a corporation that is wholly-owned by
Mr. Wilson. Excludes 2,204 common shares beneficially owned
by Mr. Wilsons spouse. Mr. Wilson disclaims beneficial
ownership of those
excluded shares.                                                
|    
|(12) |  | Includes 564,666 common shares
subject to stock options. Excludes
16,067 common shares beneficially owned by Mr. Bolouris
spouse. Mr. Bolouri disclaims beneficial ownership of those excluded
shares.                                                                                                                                               
|    
|(13) |  | Includes 708,666 common shares
subject to stock options.                                                                                                                                                                                                                                                                                              
|    
|(14) |  | Includes 576,667 common shares
subject to stock options and 109,752 common shares as to which
Mr. DeRoma shares investment and voting power
with his spouse.                                                                                                                                                                                          
|    
|(15) |  | Includes 696,669 common shares
subject to stock options. Excludes
566 common shares beneficially owned by Mr. Donahees adult
children
residing with Mr. Donahee. Mr. Donahee disclaims beneficial
ownership of
those excluded shares.                                                                                                                
|    
|(16) |  | Includes 1,995,000 common shares
subject to stock options.                                                                                                                                                                                                                                                                                            
|    
|(17) |  | Includes 7,989,036 common shares
subject to stock options. Also
includes 124,802 common shares as to which investment and voting power
is shared with one or more other persons. Excludes 41,965 common shares
as to which beneficial ownership is disclaimed.                                                                                        
|    
|(18) |  | The number of common shares beneficially owned by the directors and
executive officers as a group represents less than 1.0 percent of the
outstanding common shares of Entrust, Inc.                                                                                                                                                                  




ITEM 13.     Certain Relationships and Related Transactions

The law firm of Piper Rudnick, of which Mr. Blanchard became a partner in
October 2002, provided legal services to Nortel Networks Corporation, the
Company or their subsidiaries on several matters in 2002 and is expected to
provide legal services in 2003.

Brandes Investment Partners, the beneficial owner of more than five
percent of Nortel Networks Corporations issued and outstanding common shares,
manages an international equity portfolio for the Nortel Networks Retirement
Income Plan and a global equity portfolio for the Nortel Networks Limited
Master Trust (which includes the Nortel Networks Managerial and Non-Negotiated
Pension Fund and the Nortel Networks Negotiated Pension Fund). Fees paid to
Brandes Investment Partners in respect of the United States pension plan are
paid from the United States pension fund through the plan trustee (JPMorgan),
and from the Canadian pension plans through the plan trustee (The Royal Trust
Company). Total

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fees paid to Brandes Investment Partners for such services in
respect of 2002 were approximately $0.4 million and Cdn$1.2 million,
respectively. The values at December 31, 2002 of the portfolios managed for
the United States and Canadian pension plans by Brandes Investment Partners
were approximately $88 million and Cdn$324 million, respectively.

See also Compensation Committee Interlocks and Insider Participation
above.




Indebtedness of management

The
Company provides relocation assistance to employees who are requested to relocate and is designed to minimize

the financial exposure to employees as a result of the move. In the past, the
assistance has included housing loans, advances on real estate equity, and
payments on behalf of employees of direct costs associated with the move. The
assistance offered is specific to each employee and is structured to be
competitive in the area to which the employee is relocated, subject to the
overall relocation policy. Effective July 30, 2002, and in accordance with the
United States Sarbanes-Oxley Act of 2002, the Company no longer offers its
executive officers housing loans as part of their relocation assistance. The
loans extended to the Companys executive officers prior to July 30, 2002
remained in effect in accordance with the then existing terms and
conditions. At February 28, 2003, no current director or
executive officer had an outstanding relocation loan.

Approximately
$5 million of indebetedness to the Company and its
subsidiaries by current and former officers, directors, and employees
was
outstanding on February 28, 2003. Neither the Company nor its subsidiaries have given any
guarantee, support agreement, letter of credit, or similar arrangement or
understanding, to any other entity in connection with indebtedness of these
persons since January 1, 2002. No loans have been extended by the Company or
its subsidiaries to any director of the Company since January 1, 2002. The
following table sets forth certain additional information about indebtedness
formerly owed by one of the Companys executive officers.

Table of Indebtedness of Directors and Executive Officers

|                    |  |                       |  |                       |         |                             |  |  |   |  |  | 
|------------------- |  | --------------------- |  | --------------------- | ------- | --------------------------- |  |  | - |  |  | 
|                   
|                    |  |                       |  |                       |         | Largest Amount Outstanding  |  |  |   | 
|Name and Principal  |  | Involvement of        |  | January
1, 2002      |         | Amount Outstanding         
|Position            |  | Company or Subsidiary |  | February 28, 2003 ($) |         | as at February 28, 2003 ($)
|                   
|G.R. Donahee (1)    |  |                       |  |                       |         |                             |  |  |   | 
|President, Americas |  | Lender                |  |                       | 150,000 |                             |  |  | 0 | 
|                   



|(1) |  | A subsidiary of the Company extended a housing loan to Mr. Donahee in
1994 in connection with a relocation. The loan was for a period of ten
years, interest-free, and secured against Mr. Donahees residence. Mr.
Donahee repaid the loan on October 7, 2002.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Related party transactions

The Company and its subsidiaries engage in transactions with Nortel
Networks Corporation and its subsidiaries other than the Company. These
transactions include sales, purchases, research and development services and
other financial arrangements and funding activities between such entities.

As at December 31, 2002, the balance in trade and other payables owing to
Nortel Networks Corporation was $17 million, and the balance in
trade and other payables owing from Nortel Networks Corporation and its
subsidiaries (other than the Company) was $99 million. During the
year ended December 31, 2002, Nortel Networks Corporation and its subsidiaries
(other than the Company) provided research and development services to the
Company for $19 million.

On August 29, 2002, a payment was made by a subsidiary of the Company to
Nortel Networks Corporation equal to $525 million, representing the difference
between the market value of Nortel Networks Corporation common shares issued on
option exercises and the exercise price of Nortel Networks Corporation stock

options held and exercised by employees of the subsidiary.

On each
of December 19, September 27, August 29 and
June 28, 2002, Nortel
Networks Corporation subscribed for one common share of the Company,
and the Company issued one of its common shares to Nortel Networks
Corporation on

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each such date, in exchange for cash
consideration of $290 million, $672 million,
$525 million and $800 million, respectively.




ITEM 14.     Controls and Procedures




Evaluation of disclosure controls and procedures

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




Changes in internal controls

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




PART IV




ITEM 15.     Exhibits, Financial Statement Schedules and Reports on Form 8-K



|1. |  | Financial Statements                                                  
|-- |  | ----------------------------------------------------------------------
|  
|   |  | The index to the Consolidated
Financial Statements appears on page 72.



|2. |  | Financial Statement Schedules
|-- |  | -----------------------------

|     |                                                                                                                                                                                                             |  |      |      | 
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---- | 
|     |                                                                                                                                                                                                             |  | Page
|     |                                                                                                                                                                                                             |  |     
|     | Quarterly Financial Data (Unaudited)                                                                                                                                                                        |  |      | F-63 | 
|     | Independent Auditors Report                                                                                                                                                                                |  |      | 100  | 
|II  | Valuation and Qualifying Accounts and Reserves, Provision for
Uncollectibles                                                                                                                                |  |      | 101  | 
|     | Audited Financial Statements and the notes thereto of Nortel Networks S.A.,
prepared in accordance with United States generally accepted accounting principles,
for the three years ended December 31, 2002 |  |      | 102  | 

All other schedules are omitted because they are inapplicable or not required.

Individual financial statements of entities accounted for by the equity
method have been omitted because no such entity constitutes a significant
subsidiary requiring such disclosure at December 31, 2002.

91



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|3. |  | Reports on Form 8-K
|-- |  | -------------------

Nortel Networks Limited filed a Current Report on Form 8-K dated October
3, 2002 related to a press release announcing changes to Nortel Networks
Corporations organization reflecting a more streamlined structure focused more
directly around its customers in four key businesses: Wireless Networks;
Wireline Networks; Enterprise Networks; and Optical Networks.

Nortel Networks Limited filed a Current Report on Form 8-K dated October
11, 2002 related to a press release stating that, in a letter from Nortel
Networks Corporations President and Chief Executive Officer to employees
subsequently issued on the same date, Nortel Networks Corporation updated
employees on its third quarter 2002 revenues and its progress on its drive to
achieve profitability.

Nortel Networks Limited filed a Current Report on Form 8-K dated October
22, 2002 related to Nortel Networks Corporations financial results for the
third quarter of 2002.

Nortel Networks Limited filed a Current Report on Form 8-K/A dated
November 7, 2002 related to Nortel Networks Corporations press release
revising the breakdown of its Enterprise Networks and Wireline Networks
historical segment revenues.

Nortel Networks Limited filed a Current Report on Form 8-K dated December
13, 2002 related to the amendments dated as of December 12, 2002, (i) to the
U.S. Guarantee and Security Agreement, the Canadian Guarantee and Security
Agreement among Nortel Networks Limited, Nortel Networks Inc. and the
Subsidiary Lien Guarantors party thereto and JP Morgan Chase Bank, as
Collateral Agent and, (ii) to certain Foreign Subsidiary Guarantees dated as of
April 4, 2002, among Nortel Networks (Ireland) Limited, Nortel Networks UK
Limited, Nortel Networks (Asia) and JP Morgan Chase Bank, as Collateral Agent.

Nortel Networks Limited furnished a Current Report on Form 8-K dated
January 23, 2003 related to Nortel Networks Corporations financial results for
the fourth quarter and year 2002.

Nortel Networks Limited filed a Current Report on Form 8-K dated January
24, 2003 related to Nortel Networks Corporations financial results for the
fourth quarter and year 2002.

Nortel Networks Limited filed a Current Report on Form 8-K dated February
14, 2003 related to the announcement of a US$750 million support facility
between Nortel Networks Limited and Export Development Canada, and the
announcement by Nortel Networks Corporation of special matters to be considered
at the upcoming annual and special meeting of shareholders of Nortel Networks Corporation, including a proposal
for shareholders to grant the Board of Directors of Nortel Networks Corporation
the authority to implement a consolidation of outstanding common shares, in its
sole discretion, and a proposal reconfirming and approving amendments to Nortel
Networks Corporations shareholder rights plan.

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|4. |  | Exhibit Index
|-- |  | -------------

The Items listed as Exhibits 10.2 to 10.7 and 10.27 to 10.38 relate to
management contracts or compensatory plans or arrangements.

Exhibit

|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|*2.    |  | Amended and Restated Arrangement Agreement involving BCE Inc.,
Nortel Networks Corporation, formerly known as New Nortel
Inc., and Nortel Networks Limited, formerly known as Nortel
Networks Corporation, made as of January 26, 2000, as amended
and restated March 13, 2000 (including Plan of Arrangement
under Section 192 of the Canada Business Corporations Act)
(filed as Exhibit 2.1 to Nortel Networks Limiteds Current
Report on Form 8-K dated May 1, 2000).                                                                    
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|*3.1   |  | Restated Certificate and Articles of Incorporation of Nortel
Networks Limited (filed as Exhibit 3 to Nortel Networks
Limiteds Current Report on Form 8-K dated October 18, 2000).                                                                                                                                                                                                                                                                                                                                                            
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|*3.2   |  | By-Law No. 1 of Nortel Networks Limited (filed as Exhibit 3.2
to Nortel Networks Limiteds Annual Report on Form 10-K for
the year ended December 31, 2000).                                                                                                                                                                                                                                                                                                                                                                                  
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|*4.1   |  | Indenture dated as of November 30, 1988, between Nortel
Networks Limited and The Toronto-Dominion Bank Trust Company,
as trustee, related to debt securities authenticated and
delivered thereunder, which comprised the 6% Notes due
September 1, 2003, and the 6 7/8% Notes due September 1, 2023
issued by Nortel Networks Limited (filed as Exhibit 4.1 to
Nortel Networks Corporations Annual Report on Form 10-K for
the year ended December 31, 1999).                                                                                
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|*4.2   |  | Indenture dated as of February 15, 1996, among Nortel Networks
Limited, as issuer and guarantor, Nortel Networks Capital
Corporation, formerly Northern Telecom Capital Corporation, as
issuer, and The Bank of New York, as trustee, related to debt
securities and guarantees authenticated and delivered
thereunder, which comprised the 7.40% Notes due 2006 and the
7.875% Notes due 2026 (filed as Exhibit 4.1 to Registration
Statement on Form S-3 (No. 333-1720) of Nortel Networks
Limited and Nortel Networks Capital Corporation).
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|*4.3   |  | Indenture dated as of December 15, 2000 among Nortel Networks
Limited, as issuer and guarantor, Nortel Networks Capital
Corporation, as issuer, and Citibank, N.A., as trustee,
related to debt securities authenticated and delivered
thereunder (filed as Exhibit 4.1 to Registration Statement on
Form S-3 (No. 333-51888) of Nortel Networks Limited and Nortel
Networks Capital Corporation).                                                                                                                                            
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|*4.4   |  | First Supplemental Indenture dated as of February 1, 2001 to
Indenture dated as of December 15, 2000 among Nortel Networks
Limited, as issuer and guarantor, Nortel Networks Capital
Corporation, as issuer, and Citibank, N.A., as trustee,
related to 6.125% Notes due 2006 (filed as Exhibit 4.1 to
Nortel Networks Limiteds Current Report on Form 8-K dated
February 2, 2001).                                                                                                                                                          
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|4.5    |  | Instrument of Resignation, Appointment and Acceptance entered
into as of December 19, 2002, effective as of January 2, 2003,
among Nortel Networks Limited, as issuer and guarantor, Nortel
Networks Capital Corporation, as issuer, Citibank, N.A. and
Deutsche Bank Trust Company Americas, with respect to the
Indenture dated as of December 5, 2000, as supplemented by a
First Supplemental Indenture dated as of February 1, 2001
related to debt securities.                                                                          



---

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

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|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*4.6   |  | Indenture dated as of August 15, 2001 between Nortel Networks
Corporation, Nortel Networks Limited, as guarantor, and Bankers
Trust Company, as trustee, related to convertible debt
securities and guarantees authenticated and delivered
thereunder, which comprised the 4.25% Convertible Senior Notes
due 2008 (filed as Exhibit 4 to Nortel Networks Corporations
Quarterly Report on Form 10-Q for the quarter ended September
30, 2001).             
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|10.1   |  | Third Amended and Restated Reciprocal Credit Agreement dated as
of December 19, 2002 between Nortel Networks Corporation,
Nortel Networks Limited, and the other parties who have
executed the agreement.                                                                                                                                                                                                                                                    
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|10.2   |  | Nortel Networks Supplementary Executive Retirement Plan, as
amended effective October 18, 2001 and October 23, 2002.                                                                                                                                                                                                                                                                                                                                         
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|*10.3  |  | Agreement dated April 29, 1997 related to the remuneration of
the Chief Legal Officer (filed as Exhibit 10.3 to Nortel
Networks Limiteds Annual Report on Form 10-K for the year
ended December 31, 2001).                                                                                                                                                                                                                                                  
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|*10.4  |  | Acknowledgement effective as of June 1, 2000 related to the
remuneration of the Chief Legal Officer (filed as Exhibit 10.4
to Nortel Networks Limiteds Annual Report on Form 10-K for the
year ended December 31, 2001).                                                                                                                                                                                                                                    
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|*10.5  |  | Statement describing the retirement arrangements of the former
President and Chief Executive Officer (filed as Exhibit 10.5 to
Nortel Networks Limiteds Annual Report on Form 10-K for the
year ended December 31, 2001).                                                                                                                                                                                                                                   
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|*10.6  |  | Nortel Networks Corporation Executive Retention and Termination
Plan, as amended and restated, effective from June 26, 2002
(filed as Exhibit 10.1 to Nortel Networks Corporations
Quarterly Report on Form 10-Q for the quarter ended September
30, 2002).                                                                                                                                                                                                 
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|*10.7  |  | Nortel Networks Corporation Special Retention Plan effective
August 1, 2001 (filed as Exhibit 10.3 to Nortel Networks
Corporations Quarterly Report on Form 10-Q for the quarter
ended September 30, 2001).                                                                                                                                                                                                                                                 
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|*10.8  |  | Assumption Agreement between Nortel Networks Corporation and
Nortel Networks Limited dated March 5, 2001, regarding the
assumption and agreement by Nortel Networks Corporation to
perform certain covenants and obligations of Nortel Networks
Limited under the Nortel Networks Limited Executive Retention
and Termination Plan (filed as Exhibit 10.25 to Nortel Networks
Corporations Annual Report on Form 10-K for the year ended
December 31, 2000).
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|*10.9  |  | Five Year Credit Agreement dated as of April 12, 2000, among
Nortel Networks Limited, as borrower, various banks, as
lenders, Royal Bank of Canada and Toronto Dominion Bank, as
co-syndication agents, and J.P. Morgan Canada, as
administrative agent (filed as Exhibit 10.4 to Nortel Networks
Limiteds Quarterly Report on Form 10-Q for the quarter ended
June 30, 2001).                                                                              
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|*10.10 |  | Five Year Credit Agreement dated as of April 12, 2000, among
Nortel Networks Limited, as guarantor, Nortel Networks Inc., as
borrower, various banks, as lenders, ABN AMRO Bank N.V., Bank
of America N.A. and Citibank N.A., as co-syndication agents,
and Morgan Guaranty Trust Company of New York, as
administrative agent (filed as Exhibit 10.5 to Nortel Networks
Limiteds Quarterly Report on Form 10-Q for the quarter ended
June 30, 2001).       
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|*10.11 |  | U.S. Guarantee and Security Agreement dated as of the first day
of the Collateral Period (as defined therein) among Nortel
Networks Limited, Nortel Networks Inc. and certain of their
subsidiaries and JPMorgan Chase Bank, as Collateral Agent
(filed as Exhibit 99.1 to Nortel Networks Limiteds Current
Report on Form 8-K dated January 18, 2002).                                                                                                   



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|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*10.12 |  | Amendment No. 1 dated as of December 12, 2002 to the U.S.
Guarantee and Security Agreement dated as of April 4, 2002 among
Nortel Networks Limited, Nortel Networks Inc., the Subsidiary
Lien Grantors party thereto and JPMorgan Chase Bank, as
Collateral Agent (filed as Exhibit 99.2 to Nortel Networks
Limiteds Current Report on Form 8-K dated December 13, 2002).                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|*10.13 |  | Canadian Guarantee and Security Agreement dated as of the first
day of the Collateral Period (as defined therein) among Nortel
Networks Limited and certain of its subsidiaries and JPMorgan
Chase Bank, as Collateral Agent (filed as Exhibit 99.1 to Nortel
Networks Limiteds Current Report on Form 8-K dated February 4,
2002).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|*10.14 |  | Amendment No. 1 dated as of December 12, 2002 to the Canadian
Guarantee and Security Agreement dated as of April 4, 2002 among
Nortel Networks Limited, Nortel Networks Inc., the Subsidiary
Guarantors party thereto and JP Morgan Chase Bank, as Collateral
Agent (filed as Exhibit 99.3 to Nortel Networks Limiteds Current
Report on Form 8-K dated December 13, 2002).                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|*10.15 |  | Form of Nortel Networks Limited Foreign Subsidiary Guarantee
dated as of April 4, 2002 and schedule thereto listing the
specific foreign subsidiary guarantees which are not attached as
exhibits (filed as Exhibit 10.5 to Nortel Networks Limiteds
Quarterly Report on Form 10-Q for the quarter ended March 31,
2002).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|*10.16 |  | Amendment No. 1 dated as of December 12, 2002 to certain Foreign
Subsidiary Guarantees dated as of April 4, 2002 among Nortel
Networks (Ireland) Limited, Nortel Networks UK Limited, Nortel
Networks (Asia) Limited and JPMorgan Chase Bank, as Collateral
Agent (filed as Exhibit 99.4 to Nortel Networks Limiteds Current
Report on Form 8-K dated December 13, 2002).                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|*10.17 |  | Foreign Pledge Agreement dated as of April 4, 2002 among Nortel
Networks Limited, the Subsidiary Guarantors party thereto and
JPMorgan Chase Bank, as Collateral Agent (filed as Exhibit 10.6
to Nortel Networks Limiteds Quarterly Report on Form 10-Q for
the quarter ended March 31, 2002).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|*10.18 |  | Foreign Pledge Agreement dated as of April 4, 2002 among Nortel
Networks Limited, Nortel Networks International Corporation and
JPMorgan Chase Bank, as Collateral Agent (filed as Exhibit 10.7
to Nortel Networks Limiteds Quarterly Report on Form 10-Q for
the quarter ended March 31, 2002).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|*10.19 |  | Foreign Pledge Agreement dated as of April 4, 2002 among Nortel
Networks Inc. and JP Morgan Chase Bank, as Collateral Agent
(filed as Exhibit 10.8 to Nortel Networks Limiteds Quarterly
Report on Form 10-Q for the quarter ended March 31, 2002).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|*10.20 |  | Pledge Agreement dated as of April 4, 2002 among Nortel Networks
Limited, Nortel Networks International Finance & Holding B.V.,
Nortel Networks S.A., and JPMorgan Chase Bank, as Collateral
Agent (filed as Exhibit 10.9 to Nortel Networks Limiteds
Quarterly Report on Form 10-Q for the quarter ended March 31,
2002).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|*10.21 |  | Foreign Pledge Agreement dated as of April 4, 2002 among Nortel
Networks International Finance & Holding B.V., Nortel
Communications Holdings (1997) Limited, Nortel Networks AB and
JPMorgan Chase Bank, as Collateral Agent, together with (a) the
Supplementing Pledge Agreement dated as of April 4, 2002 among
Nortel Networks International Finance & Holding, B.V. and
JPMorgan Chase Bank, as Collateral Agent, (b) the Pledge
Agreement Supplement dated as of April 4, 2002 between Nortel
Networks Limited and JPMorgan Chase Bank, as Collateral Agent,
and (c) the Pledge Agreement Supplement dated as of April 4, 2002
between Nortel Networks U.K. Limited and JPMorgan Chase Bank, as
Collateral Agent (filed as Exhibit 10.10 to Nortel Networks
Limiteds Quarterly Report on Form 10-Q for the quarter ended
March 31, 2002).



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|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*10.22 |  | Foreign Pledge Agreement dated as of April 4, 2002 between Nortel
Networks International Finance & Holding B.V. and JPMorgan Chase
Bank, as Collateral Agent, together with (a) the Pledge Agreement
Supplement, dated as of April 4, 2002 between Nortel Networks
Optical Components Limited and JPMorgan Chase Bank, as Collateral
Agent, and (b) the Pledge Agreement Supplement dated as of April
4, 2002 between Nortel Networks International Finance & Holding
B.V., Nortel Networks Optical Components Limited and JPMorgan
Chase Bank, as Collateral Agent (filed as Exhibit 10.11 to Nortel
Networks Limiteds Quarterly Report on Form 10-Q for the quarter
ended March 31, 2002).
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|*10.23 |  | Pledge Agreement Supplement dated as of May 20, 2002 between
Nortel Networks Mauritius Ltd and JPMorgan Chase Bank, as
Collateral Agent supplementing the Foreign Pledge Agreement dated
as of April 4, 2002 among Nortel Networks International
Finance &Holding B.V., Nortel Communications Holdings (1997) Limited,
Nortel Networks AB and JPMorgan Chase Bank, as Collateral Agent
(filed as Exhibit 10.2 to Nortel Networks Limiteds Quarterly
Report on Form 10-Q for the quarter ended June 30, 2002).                                                                                                                                                                               
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|*10.24 |  | Pledge Agreement Supplement dated as of May 15, 2002 between
Nortel Networks International Finance & Holding B.V. and JPMorgan
Chase Bank, as Collateral Agent, supplementing the Foreign Pledge
Agreement dated as of April 4, 2002 among Nortel Networks
International Finance & Holding B.V., Nortel Communications
Holdings (1997) Limited, Nortel Networks AB and JPMorgan Chase
Bank, as Collateral Agent (filed as Exhibit 10.3 to Nortel
Networks Limiteds Quarterly Report on Form 10-Q for the quarter
ended June 30, 2002).                                                                                                                                                      
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|*10.25 |  | Pledge Agreement Supplement dated as of June 4, 2002 between
Nortel Networks Singapore Pte Ltd, and JPMorgan Chase Bank, as
Collateral Agent, supplementing the Foreign Pledge Agreement
dated as of April 4, 2002 among Nortel Networks International
Finance & Holding B.V., Nortel Communications Holdings (1997)
Limited, Nortel Networks AB and JPMorgan Chase Bank, as
Collateral Agent (filed as Exhibit 10.4 to Nortel Networks
Limiteds Quarterly Report on Form 10-Q for the quarter ended
June 30, 2002).                                                                                                                                                                        
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|*10.26 |  | Pledge Agreement Supplement dated as of May 15, 2002 between
Nortel Networks Limited and JPMorgan Chase Bank, as Collateral
Agent, supplementing the Foreign Pledge Agreement dated as of
April 4, 2002 among Nortel Networks Limited, the Subsidiary
Guarantors party thereto and JP Morgan Chase Bank, as Collateral
Agent (filed as Exhibit 10.5 to Nortel Networks Limiteds
Quarterly Report on Form 10-Q for the quarter ended June 30,
2002).                                                                                                                                                                                                                                         
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|*10.27 |  | Nortel Networks Limited SUCCESS Plan effective July 25, 2002
(filed as Exhibit 10.4 to Nortel Networks Limiteds Quarterly
Report on Form 10-Q for the quarter ended September 30, 2002).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|*10.28 |  | Supplementary Pension Credits Arrangement (filed as Exhibit 10.14
to Nortel Networks Corporations Registration Statement on Form
S-1 (No. 2-71087)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|*10.29 |  | Statements describing the right of certain executives in Canada
to defer all or part of their short-term and long-term incentive
awards (filed as Exhibit 10.4 to Nortel Networks Limiteds
Quarterly Report on Form 10-Q for the quarter ended June 30,
2000).                                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|10.30  |  | Statement describing eligibility for the Group Life Insurance
Plan for directors who are not salaried employees of Nortel
Networks Corporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|*10.31 |  | Resolutions of the Board of Directors of Nortel Networks Limited
dated January 24, 2002, related to the payment of directors fees
(filed as Exhibit 10.1 to Nortel Networks Limiteds Quarterly
Report on Form 10-Q for the quarter ended June 30, 2002).                                                                                                                                                                                                                                                                                                                                                                                                                                    
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|10.32  |  | Resolutions of the Board of Directors of Nortel Networks Limited
dated December 17, 1993, as amended by resolutions of the Board
of Directors of Nortel Networks Limited dated February 29, 1996,
providing for retirement compensation of directors who are not
salaried employees of Nortel Networks Limited or its subsidiaries.                                                                                                                                                                                                                                                                                                                                                          



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|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*10.33 |  | Agreement between a director of Nortel Networks Corporation and
Nortel Networks Limited and the respective companies dated June
22, 2001, setting forth the arrangements with respect to serving
as non-executive chairman of each of the board of directors of
Nortel Networks Corporation and Nortel Networks Limited (filed as
Exhibit 10.1 to Nortel Networks Limiteds Quarterly Report on
Form 10-Q for the quarter ended June 30, 2001).
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                
|*10.34 |  | Resolution of the Board of Directors of Nortel Networks Limited
dated July 25, 2002 related to payment of audit committee
chairman fees (filed as Exhibit 10.1 to Nortel Networks Limiteds
Quarterly Report on Form 10-Q for the quarter ended September 30,
2002).                                                                                                                                                                           
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                
|*10.35 |  | General description of cash bonus for employees and executives of
Nortel Networks Corporation and Nortel Networks Limited (filed as
Exhibit 10.3 to Nortel Networks Limiteds Quarterly Report on
Form 10-Q for the quarter ended September 30, 2002).                                                                                                                                                                                         
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                
|*10.36 |  | Nortel Networks Limited Restricted Stock Unit Plan dated as of
January 30, 1997, as amended effective April 29, 1999, September
1, 1999, February 15, 2000, May 1, 2000, and November 15, 2000
(filed as Exhibit 10.17 to Nortel Networks Corporations Annual
Report on Form 10-K for the year ended December 31, 2000).                                                                                                                      
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                
|*10.37 |  | Nortel Networks Limited Directors Deferred Share Compensation
Plan effective June 30, 1998 and amended and restated as of May
1, 2000 as further amended effective January 1, 2002 (filed as
Exhibit 10.1 to Nortel Networks Limiteds Quarterly Report on
Form 10-Q for the quarter ended March 31, 2002).                                                                                                                                   
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                
|*10.38 |  | Nortel Networks U.S. Deferred Compensation Plan (filed as Exhibit
4.3 to Post-Effective Amendment No. 1 to Nortel Networks
Corporations Registration Statement on Form S-8 (No.
333-11558)).                                                                                                                                                                                                                                                  
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                
|12.    |  | Computation of Ratios.                                                                                                                                                                                                                                                                                                                                                                                                                         
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                
|21.    |  | Subsidiaries of the Registrant (see page 130).                                                                                                                                                                                                                                                                                                                                                                                                 
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                
|23.1   |  | Consent of Deloitte & Touche LLP.                                                                                                                                                                                                                                                                                                                                                                                                              
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                
|23.2   |  | Consent of Deloitte Touche Tohmatsu.                                                                                                                                                                                                                                                                                                                                                                                                           
|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                
|24.    |  | Power of Attorney of certain directors and officers.                                                                                                                                                                                                                                                                                                                                                                                           



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ITEM 16.     Principal Accountant Fees and Services

Deloitte & Touche LLP, the member firms of Deloitte Touche Tohmatsu, and
their respective affiliates (collectively, Deloitte & Touche), are the
principal independent accountants of the Company and Nortel Networks
Corporation.

In April 2002, the audit committees of the Company and Nortel Networks
Corporation recommended for approval, and the boards of directors of the
Company and Nortel Networks Corporation approved, a policy that thereafter the
Companys auditors would be retained solely to provide audit and audit-related
services and advice with respect to tax matters, and that the auditors would
not be retained to provide consulting services, such as information technology
services. The policy applies to new engagements and does not affect limited
term engagements in effect at the time the policy was approved. The Company
also resolved that any decision to retain Deloitte Consulting in the future for
any consulting services would be made only after the completion of the
announced plan to separate Deloitte Consulting (now Braxton Consulting) from
Deloitte & Touche. The announced separation has not yet occurred.

Deloitte & Touche provided certain consulting and other non-audit services
to Nortel Networks Corporation and its subsidiaries, including the Company, in
2002 in connection with engagements entered into before the above policy was
adopted, and as a result of the acquisition of a portion of the tax consulting
and other non-tax businesses of Arthur Andersen LLP by Deloitte & Touche. For
part of 2002, Deloitte & Touche also provided certain immigration services,
following the discontinuation of such services by an affiliate of Arthur
Andersen in May 2002, and the subsequent employment by Deloitte & Touche of the
key personnel who had performed such services for the Company and its
subsidiaries while in the employment of such Arthur Andersen affiliate. The
audit committee of the Company subsequently determined that these immigration
services are not permitted by the above policy and, as a result, no new
immigration services are being performed by Deloitte & Touche and all
in-process immigration services will be transferred to a new service provider
or completed by Deloitte & Touche in due course. The audit committee of the
Company has considered whether the provision of the non-audit services is
compatible with maintaining Deloitte & Touches independence.




Audit fees

Deloitte & Touche billed Nortel Networks Corporation, the Company and
their subsidiaries $8.1 million and $9.9 million for 2002 and 2001,
respectively, for the following audit services: (i) audit of the annual
consolidated financial statements of the Company and Nortel Networks
Corporation for the fiscal years ended December 31, 2002 and 2001; (ii) review
of the interim financial statements of the Company and Nortel Networks
Corporation included in quarterly reports on Form 10-Q and quarterly reports to
shareholders for the periods ended March 31, June 30 and September 30, 2002 and
2001; (iii) audits of individual statutory financial statements; (iv) attest
services and the provision of comfort letters; (v) the provision of consent
letters; and (vi) review and advice in respect of accounting matters in
connection with the Companys and its subsidiaries credit facilities, the shelf
registration statement and prospectus filings of the Company and Nortel
Networks Corporation and related public offerings by Nortel Networks
Corporation of equity units and common shares.




Audit-related fees

Deloitte & Touche billed Nortel Networks Corporation, the Company and
their subsidiaries $1.1 million and $2.7 million for 2002 and 2001,
respectively, for the following audit-related services: (i) due diligence
services; (ii) audit of pension plan financial statements; (iii) accounting
consultations and audits in connection with dispositions; (iv) internal control
reviews; (v) accounting consultations regarding financial accounting standards
for various local business-related transactions; and (vi) accounting
consultations and review of regulatory filings in connection with Nortel
Networks Corporations June 2001 stock option exchange program.




Tax fees

Deloitte & Touche billed Nortel Networks Corporation, the Company and
their subsidiaries $13.7 million and $5.9 million for 2002 and 2001,
respectively, for the following tax services: (i) tax compliance; (ii) tax
planning; and (iii) tax advice, including preparation of revised United
States-related tax filings for 1995 through 1999, tax return preparation and/or

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review services for senior executives and expatriate employees, and advice in
respect of Canadian tax compliance for foreign affiliates.




All other fees

Deloitte & Touche billed Nortel Networks Corporation, the Company and
their subsidiaries $1.7 million and $8.2 million for 2002 and 2001,
respectively, for the following services: (i) non-financial information
systems design and implementation; (ii) financial information systems design
and implementation; (iii) immigration services; and (iv) review of
import/export and social security requirements/reports. Approximately $1.0
million and $6.7 million in 2002 and 2001, respectively, of the above services
billed by Deloitte & Touche were for services provided by Deloitte Consulting.

In addition to the April 2002 policy limiting the scope of future services
Deloitte & Touche may provide to the Company described above, the audit
committees of the Company and Nortel Networks Corporation continue to monitor
legislative and regulatory developments concerning auditor independence and
services that may be provided by independent auditors to an audit client,
including those developments under the United States Sarbanes-Oxley Act of 2002
and related rules issued by the United States Securities and Exchange
Commission. In January 2003, the audit committees of the Company and Nortel
Networks Corporation began implementing a process for the pre-approval of
engagements of Deloitte & Touche for services in anticipation of the
implementation of the new pre-approval requirements under the United States

Sarbanes-Oxley Act of 2002 and related rules issued by the United States
Securities and Exchange Commission.

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INDEPENDENT AUDITORS REPORT

To the Shareholders of Nortel Networks Limited

We have audited the consolidated financial statements of Nortel Networks
Limited and its subsidiaries (Nortel Networks) as at December 31, 2002 and
2001, and for each of the three years in the period ended December 31, 2002,
and have issued our report thereon dated February 10, 2003, except for note 20,
which is as of February 14, 2003, which report includes an explanatory
paragraph as to the change in method of accounting for goodwill; such report is included elsewhere in this Form 10-K. Our audits
also included the consolidated financial statement schedule of Nortel Networks
listed in Item 15. This financial statement schedule is the responsibility of
Nortel Networks management. Our responsibility is to express an opinion based
on our audits. In our opinion, such financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.



/s/ Deloitte & Touche LLP
Chartered Accountants

Toronto, Canada
February 10, 2003

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Schedule IIConsolidated

NORTEL NETWORKS LIMITEDValuation and Qualifying Accounts and Reserves
Provision For Uncollectibles *
(millions of U.S. dollars)

|          |  |              |       |              |  |               |       |      |  |            |     |  |  |   |       | 
|--------- |  | ------------ | ----- | ------------ |  | ------------- | ----- | ---- |  | ---------- | --- |  |  | - | ----- | 
|         
|          |  |              |       |              |  | Additions     |       |      |  |            |     |  |  |  
|          |  | Balance at   |       | charged      |  |               |       |      |  | Balance at
|          |  | beginning of |       | to costs     |  |               |       |      |  | end of    
|US GAAP   |  | year         |       | and expenses |  | Deductions ** |       | year
|         
|Year 2002 |  | $            | 1,483 |              |  | $             | 694   |      |  | $          | 919 |  |  | $ | 1,258 | 
|Year 2001 |  | $            | 746   |              |  | $             | 1,498 |      |  | $          | 761 |  |  | $ | 1,483 | 
|Year 2000 |  | $            | 581   |              |  | $             | 253   |      |  | $          | 88  |  |  | $ | 746   | 
|         

|*  |  | Excludes Discontinued Operations                                                                                                                        
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|** |  | Includes acquisitions and disposals of subsidiaries and divisions and amounts written off, less recoveries and foreign exchange
translation adjustments.

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INDEPENDENT AUDITORS REPORT

To the Shareholders of Nortel Networks S.A.

We have audited the accompanying balance sheets of Nortel Networks S.A., a
subsidiary of Nortel Networks Limited, as at December 31, 2002 and 2001 and the
related statements of operations, shareholders equity (deficiency) and cash
flows for each of the years in the three-year period ended December 31, 2002
(all expressed in Euros). These financial statements are the responsibility of
Nortel Networks S.A. management. Our responsibility is to express an opinion on
these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material
respects, the financial position of Nortel Networks S.A. as at December 31,
2002 and 2001 and the results of its operations and its cash flows for each of
the years in the three-year period ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States of America.

/s/ Nicholas L.E. ROLT
/s/ Deloitte Touche Tohmatsu

Neuilly, France
February 25, 2003

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NORTEL NETWORKS S.A.
(a Subsidiary of Nortel Networks Limited)
Statements of Operations for the years ended December 31

|                                            |                   |      |          |         |  |      |          |         |  |   |           |         | 
|------------------------------------------- | ----------------- | ---- | -------- | ------- |  | ---- | -------- | ------- |  | - | --------- | ------- | 
|                                           
|(thousands of Euros)                        |                   | 2002 |          | 2001    |  | 2000
|                                           
|Revenues   external                        |                   |     | 216,442  |         |  |     | 276,295  |         |  |  | 633,274   |        
|                                            |  related parties |      |          | 473,223 |  |      |          | 429,643 |  |   |           | 671,965 | 
|                                           
|                                            |                   |      | 689,665  |         |  |      | 705,938  |         |  |   | 1,305,239 |        
|Cost of revenues                            |                   |      | 605,867  |         |  |      | 813,165  |         |  |   | 1,019,125 |        
|                                           
|Gross profit (loss)                         |                   |      | 83,798   |         |  |      | (107,227 | )       |  |   | 286,114   |        
|                                           
|Selling, general and administrative expense |                   |      | 31,998   |         |  |      | 74,617   |         |  |   | 133,148   |        
|Research and development expense            |                   |      | 266,388  |         |  |      | 255,924  |         |  |   | 88,724    |        
|Special charges                             |                   |      | 63,154   |         |  |      | 76,550   |         |  |   | 2,046     |        
|                                           
|Operating income (loss)                     |                   |      | (277,742 | )       |  |      | (514,318 | )       |  |   | 62,196    |        
|Other income  net                          |                   |      | 18,962   |         |  |      | 46,240   |         |  |   | 128,333   |        
|Foreign exchange gain (loss)                |                   |      | (1,557   | )       |  |      | 4,442    |         |  |   | (9,882    | )      
|Interest expense                            |                   |      | (6,524   | )       |  |      | (5,033   | )       |  |   | (6,423    | )      
|                                           
|Earnings (loss) before income taxes         |                   |      | (266,861 | )       |  |      | (468,669 | )       |  |   | 174,224   |        
|Income tax benefit (provision)              |                   |      | 1,680    |         |  |      | 26,198   |         |  |   | (47,340   | )      
|                                           
|Net earnings (loss)                         |                   |     | (265,181 | )       |  |     | (442,471 | )       |  |  | 126,884   |        
|                                           

The accompanying notes are an integral part of these financial statements

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NORTEL NETWORKS S.A.
(a Subsidiary of Nortel Networks Limited)
Balance Sheets as at December 31

|                                                        |                                                                  |                                                                             |                                                                           |          |         |         |          |          |         |        | 
|------------------------------------------------------- | ---------------------------------------------------------------- | --------------------------------------------------------------------------- | ------------------------------------------------------------------------- | -------- | ------- | ------- | -------- | -------- | ------- | ------ | 
|                                                       
|(thousands of Euros)                                    |                                                                  | 2002                                                                        |                                                                           | 2001    
|                                                       
|ASSETS                                                  |                                                                  |                                                                             |                                                                           |          |         |         |          |         
|Current assets                                          |                                                                  |                                                                             |                                                                           |          |         |         |          |         
|                                                        |                                                                  | Cash and cash equivalents                                                   |                                                                           |         | 66,687  |         |          |         | 49,304  |       
|                                                        |                                                                  | Accounts receivable (less provisions of 10,589 for 2002, 17,950 for 2001) |                                                                           |          | 45,665  |         |          |          | 42,187  |       
|                                                        |                                                                  | Inventories  net                                                           |                                                                           |          | 58,385  |         |          |          | 94,065  |       
|                                                        |                                                                  | Receivables from related parties                                            |                                                                           |          | 123,272 |         |          |          | 442,459 |       
|                                                        |                                                                  | Income taxes recoverable                                                    |                                                                           |          |        |         |          |          | 91      |       
|                                                        |                                                                  | Other current assets                                                        |                                                                           |          | 99,490  |         |          |          | 48,665  |       
|                                                       
|Total current assets                                    |                                                                  |                                                                             | 393,499                                                                   |          |         |         | 676,771  |         
|                                                       
|                                                       
|Plant and equipment  net                               |                                                                  |                                                                             | 125,292                                                                   |          |         |         | 125,425  |         
|Investments at cost                                     |                                                                  |                                                                             | 5,632                                                                     |          |         |         | 10,494   |         
|Deferred income taxes  net                             |                                                                  |                                                                             | 35,304                                                                    |          |         |         | 31,305   |         
|Other assets                                            |                                                                  |                                                                             | 6                                                                         |          |         |         | 12       |         
|Long-term receivable from related party                 |                                                                  |                                                                             | 140,010                                                                   |          |         |         |         |         
|                                                       
|Total assets                                            |                                                                  |                                                                            | 699,743                                                                   |          |         |        | 844,007  |         
|                                                       
|LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIENCY)       |                                                                  |                                                                             |                                                                           |          |         |         |          |         
|Current liabilities                                     |                                                                  |                                                                             |                                                                           |          |         |         |          |         
|                                                        |                                                                  | Notes payable                                                               |                                                                           |         |        |         |          |         | 20,533  |       
|                                                        |                                                                  | Note payable to related party                                               |                                                                           |          |        |         |          |          | 106,048 |       
|                                                        |                                                                  | Trade and other accounts payable                                            |                                                                           |          | 157,982 |         |          |          | 187,230 |       
|                                                        |                                                                  | Payables to related parties                                                 |                                                                           |          | 43,528  |         |          |          | 295,211 |       
|                                                        |                                                                  | Other accrued liabilities                                                   |                                                                           |          | 211,506 |         |          |          | 186,823 |       
|                                                       
|Total current liabilities                               |                                                                  |                                                                             | 413,016                                                                   |          |         |         | 795,845  |         
|                                                       
|                                                       
|Other liabilities                                       |                                                                  |                                                                             | 1,837                                                                     |          |         |         | 2,454    |         
|Long-term note payable to related party                 |                                                                  |                                                                             | 200,000                                                                   |          |         |         | 181,000  |         
|                                                       
|                                                        |                                                                  |                                                                             | 614,853                                                                   |          |         |         | 979,299  |         
|                                                       
|Guarantees and commitments (note 9)                     |                                                                  |                                                                             |                                                                           |          |         |         |          |         
|                                                       
|SHAREHOLDERS EQUITY (DEFICIENCY)                       |                                                                  |                                                                             |                                                                           |          |         |         |          |         
|                                                        | Common shares, without par value  Authorized shares: unlimited; |                                                                             |                                                                           |          |         |         |          |          |        
|                                                        |                                                                  |                                                                             | Issued and outstanding shares: 61,308,951 for 2002 and 2,307,286 for 2001 |          |         | 306,544 |          |          |         | 35,762 | 
|                                                        | Additional paid-in capital                                       |                                                                             |                                                                           |         |         |         |          | 158,174  |        
|                                                        | Retained earnings (deficit)                                      |                                                                             |                                                                           | (221,654 | )       |         |          | (329,228 | )      
|                                                       
|Total shareholders equity (deficiency)                 |                                                                  |                                                                             | 84,890                                                                    |          |         |         | (135,292 | )       
|                                                       
|Total liabilities and shareholders equity (deficiency) |                                                                  |                                                                            | 699,743                                                                   |          |         |        | 844,007  |         
|                                                       

The accompanying notes are an integral part of these financial statements

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NORTEL NETWORKS S.A.
(a Subsidiary of Nortel Networks Limited)
Statements of Shareholders Equity (Deficiency)

|                             |  |        |          |         |  |            |          |              |  |               |          |   |  |       |          |  
|---------------------------- |  | ------ | -------- | ------- |  | ---------- | -------- | ------------ |  | ------------- | -------- | - |  | ----- | -------- | -
|                            
|                             |  |        |          |         |  |            |          |              |  |               |          |   |  | Total
|                             |  |        |          |         |  | Additional |          | Retained     |  | shareholders
|                             |  | Common |          | paid-in |  | earnings   |          | equity      
|(thousands of Euros)         |  | shares |          | capital |  | (deficit)  |          | (deficiency)
|                            
|Balance at December 31, 1999 |  |       | 33,244   |         |  |           | 111,847  |              |  |              | 35,204   |   |  |      | 180,295  |  
|Capital restructuring        |  |        | 2,518    |         |  |            | 46,327   |              |  |               | (48,845  | ) |  |       |         |  
|Net earnings                 |  |        |         |         |  |            |         |              |  |               | 126,884  |   |  |       | 126,884  |  
|                            
|Balance at December 31, 2000 |  |       | 35,762   |         |  |           | 158,174  |              |  |              | 113,243  |   |  |      | 307,179  |  
|Net loss                     |  |        |         |         |  |            |         |              |  |               | (442,471 | ) |  |       | (442,471 | )
|                            
|Balance at December 31, 2001 |  |       | 35,762   |         |  |           | 158,174  |              |  |              | (329,228 | ) |  |      | (135,292 | )
|Common shares issued  net   |  |        | 485,363  |         |  |            |         |              |  |               |         |   |  |       | 485,363  |  
|Capital restructuring        |  |        | (214,581 | )       |  |            | (158,174 | )            |  |               | 372,755  |   |  |       |         |  
|Net loss                     |  |        |         |         |  |            |         |              |  |               | (265,181 | ) |  |       | (265,181 | )
|                            
|Balance at December 31, 2002 |  |       | 306,544  |         |  |           |         |              |  |              | (221,654 | ) |  |      | 84,890   |  
|                            

The accompanying notes are an integral part of these financial statements

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NORTEL NETWORKS S.A.
(a Subsidiary of Nortel Networks Limited)
Statements of Cash Flows for the years ended December 31

|                                                     |                                                                                               |                                              |                                          |          |        |          |          |          |         |         |         |         |         |          |   | 
|---------------------------------------------------- | --------------------------------------------------------------------------------------------- | -------------------------------------------- | ---------------------------------------- | -------- | ------ | -------- | -------- | -------- | ------- | ------- | ------- | ------- | ------- | -------- | - | 
|                                                    
|(thousands of Euros)                                 |                                                                                               | 2002                                         |                                          | 2001     |        | 2000    
|                                                    
|Cash flows from (used in) operating activities       |                                                                                               |                                              |                                          |          |        |          |          |          |         |         |         |        
|                                                     | Net earnings (loss)                                                                           |                                              |                                         | (265,181 | )      |          |         | (442,471 | )       |         |        | 126,884 |        
|                                                     | Adjustments to reconcile net earnings (loss) to net cash from (used in) operating activities: |                                              |                                          |          |        |          |          |          |         |         |         |         |        
|                                                     |                                                                                               | Amortization and depreciation                |                                          |          | 39,192 |          |          |          | 36,117  |         |         |         | 43,122  |         
|                                                     |                                                                                               | Deferred income taxes                        |                                          |          | 2,099  |          |          |          | (29,627 | )       |         |         | 19,025  |         
|                                                     |                                                                                               | Write down of investments                    |                                          |          | 4,862  |          |          |          |        |         |         |         |        |         
|                                                     |                                                                                               | Gain (loss) on disposal of assets            |                                          |          | 6,042  |          |          |          | (3,589  | )       |         |         | (17,880 | )       
|                                                     |                                                                                               | Changes in operating assets and liabilities: |                                          |          |        |          |          |          |         |         |         |         |         |         
|                                                     |                                                                                               |                                              | Accounts receivable                      |          |        | (3,478   | )        |          |         | 41,307  |         |         |         | (3,721   | )
|                                                     |                                                                                               |                                              | Receivables from related parties         |          |        | 319,187  |          |          |         | 13,358  |         |         |         | (269,027 | )
|                                                     |                                                                                               |                                              | Inventories                              |          |        | 35,680   |          |          |         | (8,428  | )       |         |         | 15,474   |  
|                                                     |                                                                                               |                                              | Accounts payable and accrued liabilities |          |        | (4,564   | )        |          |         | (42,294 | )       |         |         | 84,112   |  
|                                                     |                                                                                               |                                              | Payables to related parties              |          |        | (251,683 | )        |          |         | 193,284 |         |         |         | 44,342   |  
|                                                     |                                                                                               |                                              | Income taxes                             |          |        | 91       |          |          |         | (27,360 | )       |         |         | 26,688   |  
|                                                     |                                                                                               |                                              | Other operating assets and liabilities   |          |        | (57,535  | )        |          |         | 69,958  |         |         |         | (93,619  | )
|                                                    
|Net cash used in operating activities                |                                                                                               |                                              | (175,288                                 | )        |        |          | (199,745 | )        |         |         | (24,600 | )      
|                                                    
|Cash flows from (used in) investing activities       |                                                                                               |                                              |                                          |          |        |          |          |          |         |         |         |        
|                                                     | Expenditures for plant and equipment                                                          |                                              |                                          | (45,520  | )      |          |          | (72,382  | )       |         |         | (74,922 | )      
|                                                     | Proceeds on disposal of plant and equipment                                                   |                                              |                                          | 419      |        |          |          | 6,990    |         |         |         | 18,736  |        
|                                                    
|Net cash used in investing activities                |                                                                                               |                                              | (45,101                                  | )        |        |          | (65,392  | )        |         |         | (56,186 | )      
|                                                    
|Cash flows from (used in) financing activities       |                                                                                               |                                              |                                          |          |        |          |          |          |         |         |         |        
|                                                     | Issuance of common shares                                                                     |                                              |                                          | 204,363  |        |          |          |         |         |         |         |        |        
|                                                     | Increase (decrease) in notes payable and receivable to related parties  net                  |                                              |                                          | 53,942   |        |          |          | 287,048  |         |         |         | (23,866 | )      
|                                                     | Increase (decrease) in notes payable  net                                                    |                                              |                                          | (20,533  | )      |          |          | 9,822    |         |         |         | 10,516  |        
|                                                    
|                                                     | Net cash from (used in) financing activities                                                  |                                              |                                          | 237,772  |        |          |          | 296,870  |         |         |         | (13,350 | )      
|                                                    
|Net increase (decrease) in cash and cash equivalents |                                                                                               |                                              | 17,383                                   |          |        |          | 31,733   |          |         |         | (94,136 | )      
|                                                    
|Cash and cash equivalents, beginning of year  net   |                                                                                               |                                              | 49,304                                   |          |        |          | 17,571   |          |         |         | 111,707 |        
|                                                    
|Cash and cash equivalents, end of year  net         |                                                                                               |                                             | 66,687                                   |          |        |         | 49,304   |          |         |        | 17,571  |        
|                                                    

The accompanying notes are an
integral part of these financial statements

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NORTEL NETWORKS S.A.
(a Subsidiary of Nortel Networks Limited)
Notes to Financial Statements(thousands of Euros, unless otherwise stated)



|1. |  | Nortel Networks S.A.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | All of the shares of Nortel Networks S.A. are owned by Nortel Networks
Limited (Nortel Networks) and Nortel Networks International Finance &
Holding B.V., which is an indirect wholly owned subsidiary of Nortel
Networks. Nortel Networks S.A. (formerly known as Nortel Matra Cellular
SCA) is a French société anonyme (limited liability company) established in
1992.                                                                                                                                                                                                                                                                                              
|  
|   |  | Nortel Networks S.A. develops wireless network equipment for Nortel
Networks customers. This includes the engineering, configuration and
implementation of various Nortel Networks products for wireless network
applications.                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|   |  | Nortel Networks EMEA S.A. was merged into Nortel Networks Europe S.A., an
indirect subsidiary of Nortel Networks, on June 30, 2000. Nortel Networks
Europe S.A. was subsequently merged into Nortel Networks S.A. on November
30, 2000. Nortel Networks Europe S.A. was comprised of sales organizations
which marketed Nortel Networks products across Europe, the Middle East and
Africa region (EMEA), and enterprise products marketing support groups
for the EMEA region.                                                                                                                                                                                          
|  
|   |  | Both of these mergers have been accounted for in these financial statements
as if the entities had been combined on December 31, 1998 and, accordingly,
Nortel Networks S.A.s financial statements have been presented for all

periods prior to the mergers to include the results of operations,
financial position and cash flows of the former Nortel Networks Europe S.A.
and the former Nortel Networks EMEA S.A. as though they had always been a
part of Nortel Networks S.A. All transactions between the companies prior
to the merger have been eliminated and there were no material adjustments
to conform the accounting policies of the combined companies.
|  
|2. |  | Significant accounting policies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|   |  | Basis of presentation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  
|   |  | The accompanying financial statements of Nortel Networks S.A. have been
prepared in accordance with accounting principles generally accepted in the
United States of America.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|   |  | These financial statements have been prepared on the basis that Nortel
Networks S.A. is a going concern as a result of a pledge of support from
Nortel Networks.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           



| | (a) |  | Use of estimates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | Nortel Networks S.A. makes estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities as at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting
period. Actual results may differ from those estimates. Estimates are
used when accounting for items and matters such as long-term contracts,
allowance for uncollectible accounts receivable and customer
financings, receivables sales, inventory obsolescence, product
warranty, amortization, asset valuations, impairment assessments,
employee benefits, taxes, restructuring and other provisions and
contingencies.
|
| | (b) |  | Translation of foreign currencies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |     |  | The functional currency of Nortel Networks S.A. is the Euro for 2002
and 2001 and the French Franc for 2000 (translated into Euros at the
defined rate of 6.55957 French Francs per Euro).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

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| |     |  | Transactions and financial statement items denominated in a currency
other than Nortel Networks S.A.s functional currency are translated
into the Euro at the exchange rates in effect at the balance sheet date
for monetary assets and liabilities, and at historical exchange rates
for non-monetary assets and liabilities. Revenues and expenses are
translated at average rates for the period, except for amortization and
depreciation which is translated on the same basis as the related
assets. Resulting gains or losses are reflected in net earnings
(loss).                                                                                          
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (c) |  | Revenue recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |     |  | Nortel Networks S.A.s revenues are primarily derived from two sources:
the sale of wireless products and the provision of related services.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |     |  | Nortel Networks S.A. products and services are generally sold as part
of a contract and the terms of the contract, taken as a whole,
determine the appropriate revenue recognition method.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |     |  | Nortel Networks S.A. recognizes revenue under Statement of Position
(SOP) 81-1 Accounting for Performance of Construction-Type and
Certain Production-Type Contracts (SOP 81-1), SOP 97-2 Software
Revenue Recognition (SOP 97-2), and Staff Accounting Bulletin
(SAB) 101 Revenue Recognition in Financial Statements (SAB 101)
depending upon the terms of the contract.                                                                                                                                                                                                                                                                            
|
| |     |  | Revenue for hardware sold separately that does not require
significant customization is recognized under SAB 101. Hardware
revenue, net of trade discounts and allowances, is recognized upon
shipment and when all significant contractual obligations have been
satisfied and collection is reasonably assured.                                                                                                                                                                                                                                                                                                                                                     
|
| |     |  | Software revenue is generally recognized under SOP 97-2. Software
revenue under SOP 97-2 is recognized when persuasive evidence of an
arrangement exists, when the software is delivered in accordance with
all terms and conditions of the customer contracts, when the fee is
fixed or determinable and when collection is reasonably assured. For
software arrangements involving multiple elements, Nortel Networks S.A.
allocates revenue to each element based on vendor specific objective
evidence of relative fair values, which are derived by allocating a
value to each element that is based upon the prices charged when the
element is sold separately.
|
| |     |  | For contracts involving multiple elements, Nortel Networks S.A.
allocates revenue to each element based on relative fair values.
Provided none of the undelivered elements are essential to the
functionality of the delivered elements, revenue related to the
software element is recognized under SOP 97-2 and revenue related to
the hardware element is recognized under SOP 81-1 or SAB 101.
Engineering, installation and other services are recognized as the
services are performed.                                                                                                                                                                         
|
| |     |  | For long-term contracts, primarily those related to customized network
solutions and network build outs, revenues are recognized under SOP
81-1 using the percentage-of-completion method on the basis of
percentage of costs incurred to date on a contract, relative to the
estimated total contract costs. Profit estimates on long-term
contracts are revised periodically based on changes in circumstances
and any losses on contracts are recognized in the period that such
losses become known. Generally, the terms of long-term contracts
provide for progress billing based on completion of certain phases of
work.                                      
|
| |     |  | Nortel Networks S.A. makes certain sales through multiple distribution
channels, primarily resellers and distributors. These customers are
generally given certain rights of return. For products sold through
these distribution channels, revenue is recognized from product sales
at the time of shipment to the distribution channel. Accruals for
estimated sales returns and other allowances are recorded at the time
of shipment and are based on contract terms and prior claims
experience.                                                                                                                                                                 
|
| | (d) |  | Research and development                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |     |  | Research and development costs are charged to net earnings (loss) in
the periods in which they are incurred. Related tax credits are
deducted from the income tax provision.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

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| | (e) |  | Income taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | Nortel Networks S.A. provides for income taxes using the asset and
liability method. This approach recognizes the amount of taxes payable
or refundable for the current year, as well as deferred tax assets and
liabilities for the future tax consequences of events recognized in the
financial statements and tax returns. Deferred income taxes are
adjusted to reflect the effects of changes in tax laws or enacted tax
rates.                                                                                                                                                                                                                                                                              
|
| |     |  | In establishing the appropriate income tax valuation allowances, Nortel
Networks S.A. assesses the realizability of its net deferred tax
assets, and based on all available evidence, both positive and
negative, determines whether it is more likely than not that the
deferred tax assets or a portion thereof will be realized.                                                                                                                                                                                                                                                                                                                                                                                
|
| | (f) |  | Cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |     |  | Cash and cash equivalents consist of cash on hand, balances with banks
and short-term investments. All highly liquid investments with
original maturities of three months or less are classified as cash and
cash equivalents. The fair value of cash and cash equivalents
approximates the amounts shown in the financial statements.                                                                                                                                                                                                                                                                                                                                                                             
|
| | (g) |  | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |     |  | Inventories are valued at the lower of cost (calculated generally on a
first-in, first-out basis) and market. The cost of finished goods and
work in process is comprised of material, labour and manufacturing
overhead.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | (h) |  | State sponsored pension plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |     |  | All employees are covered for pension entitlements under state
sponsored pension plans, funded by regular contributions that are
reflected in net earnings (loss).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | (i) |  | Warranty costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |     |  | Nortel Networks S.A.s products are covered by standard product
warranty plans generally for 18 months. A liability for the expected
cost of warranty-related claims is established when product is sold and
the related revenue is recognized. The amount of the warranty liability
accrued reflects an estimate of the expected future costs of honoring
certain obligations under the warranty plan. In estimating the
warranty liability, historical material replacement costs and
associated labour to correct the product failure are considered.
Should future product failure rates and/or replacement costs differ
from historical levels, revisions to the estimated warranty liability
may be required.
|
| | (j) |  | Plant and equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |     |  | Plant and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated generally using the straight-line method
over the estimated useful lives of the related assets based on the
following rates:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

|                                                                            
|----------------------------------------------------------------------------
|Buildings  30 years;                                                       
|Leasehold improvements  the lesser of lease term and estimated useful life;
|Machinery and equipment  5 to 10 years;                                    
|Furniture and fixtures  10 years; and                                      
|Computers  5 years.                                                        



| | (k) |  | Impairment or disposal of long-lived assets (plant and equipment)
| | --- |  | -----------------------------------------------------------------



| |  |  | Long-lived assets held and used                                                                                                                                                                              
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Nortel Networks S.A. tests long-lived assets or asset groups for
recoverability when events or changes in circumstances indicate that
their carrying amount may not be recoverable. Circumstances which
could

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| |  |  | trigger a review include, but are not limited to: significant
decreases in the market price of the asset; significant adverse
changes in the business climate or legal factors; accumulation of
costs significantly in excess of the amount originally expected for
the acquisition or construction of the asset; current period cash
flow or operating losses combined with a history of losses or a
forecast of continuing losses associated with the use of the asset;
and current expectation that the asset will more likely than not be
sold or disposed significantly before the end of its estimated
useful life.                                               
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Recoverability is assessed based on the carrying amount of the asset
and its fair value which is generally determined based on the sum of
the undiscounted cash flows expected to result from the use and the
eventual disposal of the asset. An impairment loss is recognized
when the carrying amount is not recoverable and exceeds fair value.                                                                                                                                                                                                                                                                                                                      
|
| |  |  | Long-lived assets held for sale                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  |  | Long-lived assets are classified as held for sale when certain
criteria are met, which include: management commitment to a plan to
sell the assets; the availability of the assets for immediate sale
in their present condition; whether an active program to locate buyers
and other actions to sell the assets has been initiated; whether the
sale of the assets is probable and their transfer is expected to
qualify for recognition as a completed sale within one year; whether
the assets are being marketed at reasonable prices in relation to
their fair value; and how unlikely it is that significant changes
will be made to the plan to sell the assets.
|
| |  |  | Nortel Networks S.A. measures long-lived assets to be disposed of by
sale at the lower of carrying amount and fair value less cost to
sell. Fair value is determined using quoted market prices or the
anticipated cash flows discounted at a rate commensurate with the
risk involved.                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  |  | Long-lived assets to be disposed of other than by sale                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  |  | Nortel Networks S.A. classifies an asset or asset group that will be
disposed of other than by sale as held and used until the disposal
transaction occurs. The asset or asset group continues to be
depreciated based on revisions to its estimated useful life until
the date of disposal or abandonment.                                                                                                                                                                                                                                                                                                                                                             
|
| |  |  | Recoverability is assessed based on the carrying amount of the asset
and the sum of the undiscounted cash flows expected to result from
the remaining period of use and the eventual disposal of the asset.
An impairment loss is recognized when the carrying amount is not
recoverable and exceeds the fair value of the asset.                                                                                                                                                                                                                                                                                                                                       



| | (l) |  | Financial instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | The financial instruments that may subject Nortel Networks S.A. to
concentrations of credit risk are principally comprised of cash and
cash equivalents and trade accounts receivable. The carrying values of
monetary assets and liabilities approximate their fair value. Cash and
cash equivalents are, for the most part, held by three major financial
institutions. Deposits held with banks may exceed the amount of
insurance provided on such deposits. These deposits may generally be
redeemed upon demand. Nortel Networks S.A.s customer base is
dispersed across the main Western European countries. Nortel Networks
S.A. performs ongoing credit evaluations of its customers and maintains
an allowance for potential credit losses for sales in high-risk
countries.
|
| | (m) |  | Receivables sales                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |     |  | A gain or loss is recorded at the date of the receivables sale and is
based upon, in part, the previous carrying amount of the receivables
involved in the transfer allocated between the assets sold and the
retained interests based on their relative fair value at the date of
the transfer. Fair value is generally estimated based on the present
value of the estimated future cash flows expected under managements
assumptions, including discount rates assigned commensurate with risks.                                                                                                                                                                                                                                                                                   

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| |     |  | Nortel Networks S.A. reviews the fair value assigned to retained
interests at each reporting date subsequent to the date of the
transfer. Fair value is reviewed using similar valuation techniques as
those used to initially measure the retained interest and, if a change
in events or circumstances warrants, the fair value is adjusted and any
adjustments are recorded in other income  net.                                                                                                                                                                                               
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (n) |  | Stock-based compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |     |  | Under various stock option programs of Nortel Networks Corporation, the
parent company of Nortel Networks, options may be granted to various
eligible employees and directors of Nortel Networks S.A. to purchase
common shares of Nortel Networks Corporation.                                                                                                                                                                                                                                                                                                                                     
|
| |     |  | Nortel Networks S.A., as permitted under Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-based
Compensation (SFAS 123), applies Accounting Principles Board Opinion
(APB) No. 25, Accounting for Stock Issued to Employees (APB 25)
and related interpretations in accounting for its stock-based
compensation plans. SFAS 123 requires disclosure of pro formaamounts
to reflect the impact if Nortel Networks S.A. had elected to adopt the
optional recognition provisions of SFAS 123 for its stock option plans
and employee stock purchase plans.
|
| |     |  | Had Nortel Networks S.A. applied the fair value based method in prior
years, regarding the participation of its eligible employees and
directors in the stock option programs of Nortel Networks Corporation,
Nortel Networks S.A.s reported net earnings (loss) would have been
adjusted to the pro formaamounts as indicated below for each of the
three years ended December 31:                                                                                                                                                                                                                



|                                |  |      |          |      |  |      |          |   |  |   |         |  
|------------------------------- |  | ---- | -------- | ---- |  | ---- | -------- | - |  | - | ------- | -
|                               
|                                |  | 2002 |          | 2001 |  | 2000
|                               
|Net earnings (loss)  reported  |  |     | (265,181 | )    |  |     | (442,471 | ) |  |  | 126,884 |  
|Pro forma stock option expense  |  |      | (30,307  | )    |  |      | (42,999  | ) |  |   | (35,213 | )
|                               
|Net earnings (loss)  pro forma |  |     | (295,488 | )    |  |     | (485,470 | ) |  |  | 91,671  |  
|                               



| |  |  | The fair value of Nortel Networks S.A.s stock options used to
compute pro formanet earnings (loss) is the estimated fair value at
grant date, applicable to Nortel Networks S.A., using the Black-Scholes
option-pricing model with the following weighted average assumptions,
related to Nortel Networks Corporation for each of the three years
ended December 31:
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                              |  |      |       |      |  |      |       |   |  |  |       |  
|----------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | -
|                             
|Weighted average assumptions  |  | 2002 |       | 2001 |  | 2000
|                             
|Expected dividend             |  |      | 0.00  | %    |  |      | 0.00  | % |  |  | 0.13  | %
|Expected volatility           |  |      | 71.25 | %    |  |      | 70.36 | % |  |  | 54.01 | %
|Risk-free interest rate       |  |      | 4.43  | %    |  |      | 4.49  | % |  |  | 4.94  | %
|Expected option life in years |  |      | 4     |      |  |      | 4     |   |  |  | 4     |  
|                             



| |  |  | The weighted average fair values of Nortel Networks Corporations stock
options, calculated using the Black-Scholes option-pricing model,
granted during the three years ended December 31, 2002, 2001, and 2000
were U.S. $3.50, U.S. $8.38 and U.S. $27.25 per option, respectively.                                                                                                                                                                                                                                                                                                                                                                                              
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The Black-Scholes option-pricing model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option-pricing
models require the input of highly subjective assumptions including the
expected price volatility. Nortel Networks S.A. uses expected
volatility rates, which are based on historical volatility rates
trended into future years. Changes in the subjective input assumptions
can materially affect the fair value estimate, and therefore the
existing models do not necessarily provide a reliable single measure of
the fair value of Nortel Networks S.A.s stock options.
|
| |  |  | In December 2002, the Financial Accounting Standards Board (the FASB)
issued SFAS No. 148 Accounting for Stock-Based Compensation -
Transition and Disclosure (SFAS 148) which amended the transitional
provisions of SFAS 123 for entities choosing to recognize stock-based
compensation under the fair value based method of SFAS 123, rather than
electing to continue to follow the intrinsic value method of APB 25.
Under SFAS 148, Nortel Networks S.A. may adopt the recommendations of
SFAS 123 either (1) prospectively to                                                                                                                                         

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| |  |  | awards granted or modified after
the beginning of the year of adoption, (2) retroactively with
restatement for awards granted or modified since January 1, 1995, or
(3) prospectively to awards granted or modified since January 1, 1995.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Nortel Networks S.A. will commence expensing employee stock-based
compensation using the fair value based method prospectively, as per
SFAS 123, for all awards granted or modified after January 1, 2003, as
permitted under SFAS 148. Stock-based compensation will be measured
using the Black-Scholes option pricing model. The impact of adopting
the fair value based method will depend on various factors including,
but not limited to, the extent to which Nortel Networks S.A. will use
stock-based compensation in the future and the fair value of the
awards, which is dependent on a number of variables including Nortel
Networks Corporations common share price and its historical
volatility. Because there is uncertainty within each of these factors,
the expense to be recognized by Nortel Networks S.A. will vary as a
result of the adoption of the fair value based method.



| |                      
| | ---------------------
| | Recent pronouncements



| | (a) |  | In January 2003, the FASB issued Interpretation No. (FIN) 46 -
Consolidation of Variable Interest Entities (FIN 46). FIN 46
clarifies the application of Accounting Research Bulletin No. 51 -
Consolidated Financial Statements to those entities defined as
Variable Interest Entities (more commonly referred to as special
purpose entities) in which equity investors do not have the
characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties.
FIN 46 applies immediately to all Variable Interest Entities created
after January 31, 2003, and by the beginning of the first interim or
annual reporting period commencing after June 15, 2003 for Variable
Interest Entities created prior to February 1, 2003.                                                                                                                                                                                                                                                                                     
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | Nortel Networks S.A. currently conducts certain lease financing
transactions through special purpose entities and is in the process of
assessing the structure of these transactions against the criteria set
out in FIN 46. Certain lease financing transactions are structured
through single transaction special purpose entities that currently do
not have sufficient equity at risk as defined in FIN 46. In addition,
Nortel Networks retains certain risks associated with guaranteeing
recovery of approximately 88 percent of the unamortized principal which
is expected to represent the majority of the risks associated with the
special purpose entities activities. This percentage is adjusted over
time as the underlying debt matures. Therefore, it is expected that
unless the existing arrangements are modified prior to July 1, 2003,
Nortel Networks will be required to consolidate the assets, liabilities
and any non-controlling interests of these special purpose entities
effective July 1, 2003. The total assets and total liabilities held by
these entities at December 31, 2002 are approximately
79,000 and
79,000
respectively.
|
| | (b) |  | In December 2002, the FASB issued SFAS 148 which is effective for
years ending after December 15, 2002 (see note 2(n)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | (c) |  | In November 2002, the FASB issued FIN 45, Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45), which requires
elaborating on the disclosures that must be made by a guarantor in its
financial statements about its obligations under certain guarantees.
It also requires that a guarantor recognize, at the inception of
certain types of guarantees, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The disclosure
requirements of FIN 45 are effective for financial statements issued
after December 15, 2002, and have been applied in the presentation of
the accompanying consolidated financial statements. The recognition
requirements of FIN 45 are applicable for guarantees issued or
modified after December 31, 2002. Nortel Networks S.A. has not yet
determined the effect, if any, the recognition requirement will have
on its business, results of operations and financial condition.                                                                                                                                  
|
| | (d) |  | In June 2002, the FASB issued SFAS No. 146 Accounting for Costs
Associated with Exit or Disposal Activities (SFAS 146), which is
effective for exit or disposal activities initiated after December 31,
2002. SFAS 146 supercedes Emerging Issues Task Force (EITF) Issue
No. 94-3 Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs
Incurred in Restructuring) (EITF 94-3). SFAS 146 requires that
costs associated with an exit or disposal activity be                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

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| |     |  | recognized when the liability is incurred, whereas EITF 94-3 required recognition of a
liability when an entity committed to an exit plan. Therefore the
effect of SFAS 146 will be to change the timing of recognizing certain
liabilities with no expected material valuation differences. Plans
initiated before December 31, 2002 continue to be accounted for under
EITF 94-3. Nortel Networks S.A. does not expect the adoption of SFAS
146 to have a material impact on its business, results of operations
and financial condition.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (e) |  | In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations (SFAS 143), which is effective for financial
statements issued for fiscal years beginning after June 15, 2002.
SFAS 143 addresses the recognition and measurement of obligations
associated with the retirement of tangible long-lived assets. Nortel
Networks S.A. does not expect the adoption of SFAS 143 to have a
material impact on its business, results of operations and financial
condition.                                         



| |  | Comparative figures                                                                                                                                  
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Certain of the prior years figures in the accompanying consolidated
financial statements have been reclassified to conform to the 2002
presentation.
|



|3. |  | Financial statement details                                          
|-- |  | ---------------------------------------------------------------------
|  
|   |  | Statements of operations                                             
|  
|   |  | The following table provides details for the years ended December 31:
|  
|   |  | Other income  net:                                                  

|                                  |  |      |        |      |  |      |        |   |  |   |         |  
|--------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------- | -
|                                 
|                                  |  | 2002 |        | 2001 |  | 2000
|                                 
|Royalties (a)                     |  |     | 26,556 |      |  |     | 49,201 |   |  |  | 114,987 |  
|Gain (loss) on disposal of assets |  |      | (6,042 | )    |  |      | 3,589  |   |  |   | 17,880  |  
|Other  net                       |  |      | (1,552 | )    |  |      | (6,550 | ) |  |   | (4,534  | )
|                                 
|Other income  net                |  |     | 18,962 |      |  |     | 46,240 |   |  |  | 128,333 |  
|                                 



|(a) |  | Affiliated entities pay royalty fees to Nortel Networks S.A. on
their total Global System for Mobile communications (GSM) technology
sales (5 percent of total GSM sales in 2002, 10 percent in 2001, and
15 percent in 2000).
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Balance sheets                                         
| |  | -------------------------------------------------------
|
| |  | The following tables provide details as at December 31:
|
| |  | Inventories  net:                                     

|                      |  |      |        |      |  |   |        | 
|--------------------- |  | ---- | ------ | ---- |  | - | ------ | 
|                     
|                      |  | 2002 |        | 2001
|                     
|Raw materials         |  |     | 21,155 |      |  |  | 60,302 | 
|Work in process       |  |      | 30,527 |      |  |   | 32,004 | 
|Finished goods        |  |      | 6,703  |      |  |   | 1,759  | 
|                     
|Inventories  net (a) |  |     | 58,385 |      |  |  | 94,065 | 
|                     



|(a) |  | Net of inventory provisions of 30,312 and 39,504 as at December
31, 2002 and 2001, respectively. Included in trade and other accounts
payable are accruals of 8,791 at December 31, 2002 for cancellation
charges, for inventory in excess of future demand and for the
settlement of certain other claims related to its contract
manufacturers or suppliers.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | Other current assets:
| |  | ---------------------

|                       |  |      |        |      |  |   |        | 
|---------------------- |  | ---- | ------ | ---- |  | - | ------ | 
|                      
|                       |  | 2002 |        | 2001
|                      
|Employee receivables   |  |     | 811    |      |  |  | 1,855  | 
|Put option (a)         |  |      | 77,500 |      |  |   |       | 
|Prepaid rent and other |  |      | 17,650 |      |  |   | 31,440 | 
|Other receivables      |  |      | 3,529  |      |  |   | 15,370 | 
|                      
|Other current assets   |  |     | 99,490 |      |  |  | 48,665 | 
|                      



|(a) |  | See Note 9 for a description of the put option.
|--- |  | -----------------------------------------------



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

|                               |                         |   |          |          |      |   |          |         |  
|------------------------------ | ----------------------- | - | -------- | -------- | ---- | - | -------- | ------- | -
|                              
|                               |                         |   | 2002     |          | 2001
|                              
|Cost:                          |                         |   |          |          |      |   |          |        
|                               | Land and buildings      |   |         | 13,726   |      |   |         | 13,726  |  
|                               | Leasehold improvements  |   |          | 22,611   |      |   |          | 22,630  |  
|                               | Machinery and equipment |   |          | 201,817  |      |   |          | 167,514 |  
|                               | Furniture and fixtures  |   |          | 34,771   |      |   |          | 32,879  |  
|                               | Computers               |   |          | 20,119   |      |   |          | 26,955  |  
|                               | Other                   |   |          | 5,419    |      |   |          | 5,346   |  
|                              
|                               |                         |   | 298,463  |          |      |   | 269,050  |        
|                              
|Less accumulated depreciation: |                         |   |          |          |      |   |          |        
|                               | Buildings               |   |          | (5,404   | )    |   |          | (4,981  | )
|                               | Leasehold improvements  |   |          | (15,979  | )    |   |          | (15,350 | )
|                               | Machinery and equipment |   |          | (105,300 | )    |   |          | (83,063 | )
|                               | Furniture and fixtures  |   |          | (27,611  | )    |   |          | (16,886 | )
|                               | Computers               |   |          | (18,487  | )    |   |          | (21,361 | )
|                               | Other                   |   |          | (390     | )    |   |          | (1,984  | )
|                              
|                               |                         |   | (173,171 | )        |      |   | (143,625 | )      
|                              
|Plant and equipment  net      |                         |  | 125,292  |          |      |  | 125,425  |        
|                              



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

|                                                                                    |  |      |         |      |  |   |         | 
|----------------------------------------------------------------------------------- |  | ---- | ------- | ---- |  | - | ------- | 
|                                                                                   
|                                                                                    |  | 2002 |         | 2001
|                                                                                   
|Put option (a)                                                                      |  |     | 77,500  |      |  |  |        | 
|Contract related                                                                    |  |      | 37,942  |      |  |   | 64,537  | 
|Outsourcing, selling, general and administration and research & development related |  |      | 36,211  |      |  |   | 47,875  | 
|Product related                                                                     |  |      | 25,876  |      |  |   | 29,486  | 
|Warranty                                                                            |  |      | 7,544   |      |  |   | 9,270   | 
|Miscellaneous taxes                                                                 |  |      | (2,169  | )    |  |   | 6,120   | 
|Deferred income                                                                     |  |      | 2,144   |      |  |   | 660     | 
|Other                                                                               |  |      | 26,458  |      |  |   | 28,875  | 
|                                                                                   
|Other accrued liabilities                                                           |  |     | 211,506 |      |  |  | 186,823 | 
|                                                                                   



|(a) |  | See Note 9 for a description of the put option.
|--- |  | -----------------------------------------------

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| |  | Statements of cash flows                                             
| |  | ---------------------------------------------------------------------
|
| |  | The following tables provide details for the years ended December 31:
|
| |  | Interest and income taxes paid:                                      

|                  |  |      |       |      |  |      |        |  |  |   |       | 
|----------------- |  | ---- | ----- | ---- |  | ---- | ------ |  |  | - | ----- | 
|                 
|                  |  | 2002 |       | 2001 |  | 2000
|                 
|Interest paid     |  |     | 6,524 |      |  |     | 5,033  |  |  |  | 6,423 | 
|Income taxes paid |  |     | 121   |      |  |     | 30,271 |  |  |  | 2,503 | 
|                 



| |  | Receivables sales:
| |  | ------------------

|                                                                         |  |      |        |      |  |      |         |  |  |   |         | 
|------------------------------------------------------------------------ |  | ---- | ------ | ---- |  | ---- | ------- |  |  | - | ------- | 
|                                                                        
|                                                                         |  | 2002 |        | 2001 |  | 2000
|                                                                        
|Proceeds from new securitizations                                        |  |     |       |      |  |     |        |  |  |  | 2,015   | 
|Proceeds from collections reinvested in revolving period securitizations |  |     | 12,086 |      |  |     | 235,060 |  |  |  | 534,397 | 
|                                                                        



|4. |  | Segmented information                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | In accordance with SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, Nortel Networks S.A. is required to
disclose information about its products, services, the geographic area in
which it operates and major customers. Nortel Networks S.A. operates in
one reportable segment, Wireless Networks, which includes the wireless mobility
switching and access products for voice and data communications
that span most major global standards for mobile networks.
|  
|   |  | Geographic information                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|   |  | The following table sets forth external revenues by geographic regions
based on the location of the customer for each of the three years ended
December 31:                                                                                                                                                                                                                                                                                                                                             

|                        |  |      |         |      |  |      |         |  |  |   |         | 
|----------------------- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|                       
|                        |  | 2002 |         | 2001 |  | 2000
|                       
|External revenues       |  |      |         |      |  |      |         |  |  |   |         | 
|France                  |  |     | 120,675 |      |  |     | 147,309 |  |  |  | 454,960 | 
|EMEA  excluding France |  |      | 95,168  |      |  |      | 127,179 |  |  |   | 177,007 | 
|Other                   |  |      | 599     |      |  |      | 1,807   |  |  |   | 1,307   | 
|                       
|Total                   |  |     | 216,442 |      |  |     | 276,295 |  |  |  | 633,274 | 
|                       



|   |  | Major customers                                                                                                                                                                                                                                                                                                                                                                      
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | External revenues include amounts from two separate customers located in
France in the amounts of 56,543 and 54,015 in 2002, 56,501 and 83,563
in 2001, and 250,918 and 189,873 in 2000.                                                                                                                                                                                       
|  
|   |  | Long-lived assets                                                                                                                                                                                                                                                                                                                                                                    
|  
|   |  | All long-lived assets are located in France.                                                                                                                                                                                                                                                                                                                                         
|  
|5. |  | Special charges                                                                                                                                                                                                                                                                                                                                                                      
|  
|   |  | During 2002, in light of the continued downturn in both the
telecommunications industry and the economic environment and capital market
trends impacting Nortel Networks S.A.s operations and expected future
growth rates, Nortel Networks S.A. continued to implement its work plan to
streamline its operations and activities around its core markets and
leadership strategies.

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| |  | Special charges recorded
January 1, 2000 to December 31, 2002 were as
follows:
| |  | ------------------------------------------------------------------------------

|                                          |                                |   |           |         |           |   |             |         |           |   |       |         |   |   |       |        |   |   |        |         |  
|----------------------------------------- | ------------------------------ | - | --------- | ------- | --------- | - | ----------- | ------- | --------- | - | ----- | ------- | - | - | ----- | ------ | - | - | ------ | ------- | -
|                                         
|                                          |                                |   |           |         |           |   | Contract    |         |           |   |       |         |   |   |       |        |   |   |       
|                                          |                                |   |           |         |           |   | settlement  |         | Plant and |   |       |         |   |   |       |        |  
|                                          |                                |   | Workforce |         | and lease |   | equipment   |         |           |   |       |         |   |   |      
|                                          |                                |   | reduction |         | costs     |   | write downs |         | Other     |   | Total
|                                         
|Provision balance as at January 1, 2000   |                                |  |          |         |           |  |            |         |           |  |      |         |   |  |      |        |   |  |       |        
|                                          | Special charges                |   |           | 2,046   |           |   |             |        |           |   |       |        |   |   |       |       |   |   |        | 2,046   |  
|                                          | Cash drawdowns                 |   |           | (2,046  | )         |   |             |        |           |   |       |        |   |   |       |       |   |   |        | (2,046  | )
|                                          | Non-cash drawdowns             |   |           |        |           |   |             |        |           |   |       |        |   |   |       |       |   |   |        |        |  
|                                         
|Provision balance as at December 31, 2000 |                                |  |          |         |           |  |            |         |           |  |      |         |   |  |      |        |   |  |       |        
|                                         
|                                          | Special charges                |   |           | 28,970  |           |   |             | 17,123  |           |   |       | 21,306  |   |   |       | 9,151  |   |   |        | 76,550  |  
|                                          | Cash drawdowns                 |   |           | (26,346 | )         |   |             | (176    | )         |   |       |        |   |   |       | (340   | ) |   |        | (26,862 | )
|                                          | Non-cash drawdowns             |   |           |        |           |   |             |        |           |   |       | (21,306 | ) |   |       |       |   |   |        | (21,306 | )
|                                         
|Provision balance as at December 31, 2001 |                                |  | 2,624     |         |           |  | 16,947      |         |           |  |      |         |   |  | 8,811 |        |   |  | 28,382 |        
|                                         
|                                          | Special charges                |   |           | 60,228  |           |   |             |        |           |   |       | 10,020  |   |   |       | 1,722  |   |   |        | 71,970  |  
|                                          | Reversal of prior year amounts |   |           |        |           |   |             | (161    | )         |   |       |        |   |   |       | (8,655 | ) |   |        | (8,816  | )
|                                          | Cash drawdowns                 |   |           | (48,629 | )         |   |             | (11,511 | )         |   |       |        |   |   |       | (1,414 | ) |   |        | (61,554 | )
|                                          | Non-cash drawdowns             |   |           |        |           |   |             |        |           |   |       | (10,020 | ) |   |       |       |   |   |        | (10,020 | )
|                                         
|Provision balance as at December 31, 2002 |                                |  | 14,223    |         |           |  | 5,275       |         |           |  |      |         |   |  | 464   |        |   |  | 19,962 |        
|                                         



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

|                                                   |             |  |                           |     |              |  |       |     |  |  |     |     | 
|-------------------------------------------------- | ----------- |  | ------------------------- | --- | ------------ |  | ----- | --- |  |  | --- | --- | 
|                                                  
|                                                   |             |  | Employees (approximately) |     |              |  |      
|                                                   |             |  |                           |     |              |  |      
|                                                   |             |  | Direct (a)                |     | Indirect (b) |  | Total
|                                                  
|RFT employee notifications by period:              |             |  |                           |     |              |  |       |     |  |  |     |    
|                                                   | During 2000 |  |                           |    |              |  |       | 35  |  |  |     | 35  | 
|                                                   | During 2001 |  |                           | 140 |              |  |       | 170 |  |  |     | 310 | 
|                                                   | During 2002 |  |                           | 21  |              |  |       | 468 |  |  |     | 489 | 
|                                                  
|RFT employee notifications as at December 31, 2002 |             |  | 161                       |     |              |  | 673   |     |  |  | 834 |    
|                                                  



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



| |  | Year ended December 31, 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | For the year ended December 31, 2002, Nortel Networks S.A. recorded special
charges of 63,154.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Workforce reduction charges of 60,228 were related to the cost of
severance and benefits associated with the approximately 489 employees
notified of termination. As at December 31, 2002, the workforce reduction
provision balance has been drawn down by cash payments of 48,629,
resulting in an ending provision balance for workforce reduction of
14,223. The remaining provision is expected to be substantially drawn
down by the end of 2003.                                                                                                                                                                                                                                                     
|
| |  | During 2002, Nortel Networks S.A. recorded a reversal of contract
settlement and lease costs of approximately (161). For certain properties
during 2002, Nortel Networks S.A. modified the original disposition plan
and is pursuing lease terminations instead of subleasing due to current
market conditions. This change reduced sublease income expectations from
945, disclosed at the end of 2001, to nil as at December 31, 2002. Nortel
Networks S.A. expects to have disposed substantially all of these
properties by the end of the first quarter of 2004. As at December 31,
2002, the provision balance for contract settlement and lease costs has
been drawn down by cash payments of 11,511,

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| |  | resulting in an ending
provision balance of 5,275. The remaining provision is expected to be
substantially drawn down by the end of 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Plant and equipment write downs of approximately 10,020 consisted mainly
of the write down to net realizable value of leasehold improvements and
manufacturing equipment.                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Other consists primarily of contract settlement costs to either cancel or
renegotiate existing supply contracts net of a reversal of 8,655 related
to 2001 charges due to favourable negotiations.                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Year ended December 31, 2001                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | For the year ended December 31, 2001, Nortel Networks S.A. recorded charges
of 76,550 related to streamlining its operations and activities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Workforce reduction charges of 28,970 were related to the cost of
severance and benefits associated with the approximately 310 employees
notified of termination. As at December 31, 2001, the workforce reduction
provision balance has been drawn down by cash payments of 26,346,
resulting in an ending provision balance for workforce reduction of 2,624.                                                                                                                                                                                                                                                                  
|
| |  | Contract settlement and lease costs of 17,123 included 2,009 of
negotiated settlements to cancel or renegotiate contracts and 15,114 of
net lease charges related to a number of operating leases no longer
required. Lease costs represent Nortel Networks S.A.s future contractual
obligations under its applicable operating leases net of approximately 945
in expected sublease revenue on leases that Nortel Networks S.A. cannot
terminate. As at December 31, 2001, the provision balance for contract
settlement and lease costs was drawn down by cash payments of 176,
resulting in a provision balance of 16,947.
|
| |  | Plant and equipment write downs of approximately 21,306 consisted mainly
of the write down to net realizable value of leasehold improvements and
manufacturing equipment in the Châteaudun facility.                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Other consists primarily of contract settlement costs to either cancel or
renegotiate existing supply contracts.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | Year ended December 31, 2000                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | For the year ended December 31, 2000, Nortel Networks S.A. recorded special
charges in the aggregate of 2,046, representing workforce reduction costs
related to approximately 35 employees in connection with the outsourcing of
certain functions.                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | The provision balance was fully drawn down in 2000 through cash payments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|

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|6. |  | Income taxes                                                                                                                                                                                                             
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The following is a reconciliation of income taxes, calculated at the French
income tax rate, to the income tax benefit (provision) included in the
accompanying statements of operations for the years ended December 31:

|                                           |  |      |         |      |  |      |          |   |  |   |         |  
|------------------------------------------ |  | ---- | ------- | ---- |  | ---- | -------- | - |  | - | ------- | -
|                                          
|                                           |  | 2002 |         | 2001 |  | 2000
|                                          
|Income taxes at French rates               |  |      |         |      |  |      |          |   |  |   |         |  
|(2002 - 35.4%, 2001 - 36.4%, 2000 - 37.8%) |  |     | 94,086  |      |  |     | 170,783  |   |  |  | (65,804 | )
|Research and development credit            |  |      | 6,098   |      |  |      | 6,098    |   |  |   | 6,098   |  
|Foreign tax                                |  |      | (2,198  | )    |  |      | (2,948   | ) |  |   | (6,357  | )
|Change in valuation allowance              |  |      | (90,904 | )    |  |      | (147,675 | ) |  |   | (1,205  | )
|Utilization of losses                      |  |      |        |      |  |      |         |   |  |   | 20,828  |  
|Other (a)                                  |  |      | (5,402  | )    |  |      | (60      | ) |  |   | (900    | )
|                                          
|Income tax benefit (provision)             |  |     | 1,680   |      |  |     | 26,198   |   |  |  | (47,340 | )
|                                          
|Income tax benefit (provision):            |  |      |         |      |  |      |          |   |  |   |         |  
|Current                                    |  |     | (2,319  | )    |  |     | (3,460   | ) |  |  | (49,284 | )
|Deferred                                   |  |      | 3,999   |      |  |      | 29,658   |   |  |   | 1,944   |  
|                                          
|                                           |  |     | 1,680   |      |  |     | 26,198   |   |  |  | (47,340 | )
|                                          

|(a) |  | Other includes rate differential as well as permanent differences
|--- |  | -----------------------------------------------------------------
|   

| |  |                                                                                                          
| |  | ---------------------------------------------------------------------------------------------------------
| |  | The following table shows the significant components included in deferred
income taxes as at December 31:

|                               |                            |   |          |         |      |   |          |         | 
|------------------------------ | -------------------------- | - | -------- | ------- | ---- | - | -------- | ------- | 
|                              
|                               |                            |   | 2002     |         | 2001
|                              
|Deferred income taxes:         |                            |   |          |         |      |   |          |        
|Assets:                        |                            |   |          |         |      |   |          |        
|                               | Tax benefit of tax credits |   |         | 12,196  |      |   |         | 6,098   | 
|                               | Tax benefit of losses      |   |          | 264,394 |      |   |          | 155,748 | 
|                               | Provisions and reserves    |   |          | 14,213  |      |   |          | 26,318  | 
|                               | Other                      |   |          |        |      |   |          | 624     | 
|                              
|                               |                            |   | 290,803  |         |      |   | 188,788  |        
|Valuation allowance            |                            |   | (238,579 | )       |      |   | (147,675 | )      
|                              
|                               |                            |   | 52,224   |         |      |   | 41,113   |        
|Liabilities:                   |                            |   |          |         |      |   |          |        
|Plant and equipment            |                            |   | 16,920   |         |      |   | 9,808    |        
|                              
|Net deferred income tax assets |                            |  | 35,304   |         |      |  | 31,305   |        
|                              



|   |  | At December 31, 2002, Nortel Networks S.A. had net operating loss
carry-forwards of approximately 682,000 of which approximately 310,000
will expire in 2006, 261,000 will expire in 2007 and 110,000 will carry
forward indefinitely. Nortel Networks S.A. has provided a valuation
allowance on these tax loss carry-forwards and certain deferred income tax
assets of approximately 239,000 as at December 31, 2002.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|7. |  | Related party transactions                                                                                                                                                                                                                                                                                                                                                                                                   
|  
|   |  | In the ordinary course of business, Nortel Networks S.A. engages in
transactions with Nortel Networks and certain of Nortel Networks
affiliates. These transactions are measured at their exchange amounts.                                                                                                                                                                                                                  
|  

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| |  | Transactions with related parties for the years ended December 31 are
summarized as follows:
| |  | --------------------------------------------------------------------------------------------

|                            |                                             |   |         |         |      |   |      |         |  |   |   |         |  
|--------------------------- | ------------------------------------------- | - | ------- | ------- | ---- | - | ---- | ------- |  | - | - | ------- | -
|                           
|                            |                                             |   | 2002    |         | 2001 |   | 2000
|                           
|Billed
to related parties   |                                             |   |         |         |      |   |      |         |  |   |   |        
|                            | Intercompany revenues                       |   |        | 473,223 |      |   |     | 429,643 |  |   |  | 671,965 |  
|                            | Other income  net                          |   |        | 26,556  |      |   |     | 49,201  |  |   |  | 114,987 |  
|                           
|Billed from related parties |                                             |   |         |         |      |   |      |         |  |   |   |        
|                            | Cost of revenues                            |   |        | 99,039  |      |   |     | 296,605 |  |   |  | 257,063 |  
|                            | Selling, general and administrative expense |   |        | 38,704  |      |   |     | 36,230  |  |   |  | 83,060  |  
|                            | Research and development expense            |   |        |        |      |   |     |        |  |   |  | (68,334 | )
|                            | Interest expense                            |   |        | 5,063   |      |   |     | 626     |  |   |  |        |  
|                           
|Issuance of common shares   |                                             |  | 485,363 |         |      |  |     |         |  |  |  |        
|                           
|                           

| |  | The following table shows the balance sheet position in respect of related
parties as at December 31:
| |  | -----------------------------------------------------------------------------------------------------

|                                                        |                                  |   |         |         |      |   |   |         | 
|------------------------------------------------------- | -------------------------------- | - | ------- | ------- | ---- | - | - | ------- | 
|                                                       
|                                                        |                                  |   | 2002    |         | 2001
|                                                       
|Receivables from related parties                        |                                  |   |         |         |      |   |   |        
|                                                        | Due from Nortel Networks Limited |   |        | 41,568  |      |   |  | 188,690 | 
|                                                        | Due from affiliates              |   |        | 81,704  |      |   |  | 253,769 | 
|Payables to related parties                             |                                  |   |         |         |      |   |   |        
|                                                        | Due to Nortel Networks Limited   |   |        | 1,929   |      |   |  | 209,647 | 
|                                                        | Due to affiliates                |   |        | 41,599  |      |   |  | 85,564  | 
|                                                       
|Long-term notes receivable from Nortel Networks Limited |                                  |  | 140,010 |         |      |  |  |        
|                                                       
|Notes payable to related parties                        |                                  |   |         |         |      |   |   |        
|                                                        | Current                          |   |        |        |      |   |  | 106,048 | 
|                                                        | Long-term                        |   |        | 200,000 |      |   |  | 181,000 | 
|                                                       



| |  | Nortel Networks S.A. is charged by Nortel Networks for its share of head
office costs incurred by Nortel Networks that are attributable to the
activities of Nortel Networks S.A. These charges, which are included in
selling, general and administrative expense, amounted to 4,017 and 1,271
in 2001, and 2000, respectively. No specific head office charges have been
received in 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Nortel Networks S.A. also participates with Nortel Networks and certain of
Nortel Networks S.A.s affiliates in various agreements with respect to
intercompany product sale and purchase transactions, including research and
development costs. Prior to 2001, the pricing of intercompany transactions
between Nortel Networks S.A. and certain of its affiliates was determined
through the application of various methodologies intended to produce arms
length results and pricing for Nortel Networks S.A. Nortel Networks S.A.
also shared in global research and development costs based on the benefits
derived from the research and development utilized in its geographic
market. Accordingly, Nortel Networks S.A. received a credit of
approximately 68,000 to its research and development expense in 2000.
Effective January 1, 2001, the global research and development cost sharing
methodology was replaced with a global profit split methodology based upon
the historical research and development costs of the participants, and
further

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|   |  | intended to produce arms length results for Nortel Networks S.A.
Under that methodology, Nortel Networks S.A. received a charge in 2001,
which was allocated to cost of revenues, of approximately 155,000.
Similarly in 2002, Nortel Networks S.A. received a credit of approximately
2,248 which was also allocated to cost of revenues.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | On December 31, 2002, Nortel Networks provided Nortel Networks S.A. with a
subordinated loan in the aggregate amount of 200,000. This loan is
classified as a long-term intercompany note payable. The repayment of the
loan, in case of bankruptcy, insolvency or liquidation, is subordinated to
the prior repayment of any of Nortel Networks S.A.s existing or future
secured and unsecured creditors. Nortel Networks S.A. may repay the whole
or any part of the outstanding amount of the loan subject to notifying
Nortel Networks in advance of its irrevocable decision to make the
repayment. The loan bears interest at a rate per annum equal to Euribor
rate plus one percent. Interest is payable at the end of each interest
period, subject to Nortel Networks S.A. having positive net earnings and
the interest payments not exceeding 40 percent of the positive net
earnings.                                                                                                                                         
|  
|   |  | On December 19, 2002, Nortel Networks S.A. provided Nortel Networks with a
revolving loan in the amount of 140,010. This loan is classified as a long
-term intercompany note receivable. The loan bears interest at a rate per
annum equal to Euribor rate plus one percent. Interest is accrued and due
unless an amount larger than the outstanding amount of advances is
outstanding under the subordinated loan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|   |  | At December 31, 2001, Nortel Networks S.A. had a revolving note payable
with an affiliated company in the amount of 106,048. This payable was
settled in full in 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  
|8. |  | Financial Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|   |  | Share pledge                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|   |  | The security agreements that were entered into in connection with the
December 2001 364-day syndicated credit facilities of Nortel Networks and
its subsidiary, Nortel Networks Inc. (NNI), provided for the granting of
security in the event that Nortel Networks debt ratings fell below
investment grade. The security included pledges by Nortel Networks and
Nortel Networks International Finance & Holding B.V. of their shares of
Nortel Networks S.A.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|   |  | The security became effective in the second quarter of 2002, following the
downgrade by Moodys Investor Services, Inc. (Moodys) of Nortel Networks
senior long-term debt to below investment grade. At that time, the
security became effective in respect of the December 2001 364-day
syndicated credit facilities, which have since expired, as well as any
other credit facilities and public debt securities of Nortel Networks
which, by their terms, required that the security also apply to them. This
included: the April 2002 364-day revolving credit facilities of Nortel
Networks and NNI, which have since been terminated; the April 2000 five
year syndicated credit facilities of Nortel Networks and NNI; Nortel
Networks consolidated outstanding public debt securities; and Nortel
Networks guarantee of Nortel Networks Corporations 4.25 percent
convertible senior notes due September 1, 2008. See note 12 for additional
facilities of Nortel Networks in respect of which the security has become
effective.
|  
|   |  | If Nortel Networks senior long-term debt rating by Moodys returns to Baa2
(with a stable outlook) and the rating by Standard & Poors Ratings Service
returns to BBB (with a stable outlook), the security will be released in
full. If both the April 2000 five year syndicated credit facilities and such
other facilities in respect of which the security has become effective (see
note 12) are terminated or expire, the security will be released in full.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|   |  | Receivables sales                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  
|   |  | In 2002, 2001 and 2000, Nortel Networks S.A. has entered into various
agreements to sell certain of its receivables. These receivables were sold
at a discount of 52, 1,939 and 6,199 from book value for the years
ended December 31, 2002, 2001 and 2000 respectively, at annualized discount
rates of approximately 3 to 4 percent, 5 percent to 6 percent and 3
percent to 5 percent for the years ended December 31, 2002, 2001 and 2000,
respectively. This program was discontinued in February 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

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|   |  | There is a possibility that the actual performance of receivables or the
cost of servicing the receivables will differ from the assumptions used to
determine fair values at the transfer date and at each reporting date.
Assuming hypothetical simultaneous unfavourable variations of up to 20
percent in credit losses, the discount rate used and the cost of servicing
the receivables, the pre-tax impact on the value of retained interests
would not be significant.                                                                                                                                                                                                                                                 
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|9. |  | Guarantees and commitments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|   |  | Guarantees                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|   |  | Nortel Networks S.A. has entered into agreements that contain features
which meet the definition of a guarantee under FIN 45. FIN 45 defines a
guarantee to be a contract that contingently requires Nortel Networks S.A
to make payments (either in cash, financial instruments, other assets,
common shares of Nortel Networks Corporation or through the provision of
services) to a third party based on changes in an underlying economic
characteristic (such as interest rates or market value) that is related to
an asset, a liability or an equity security of the other party. Nortel
Networks S.A. has the following major types of guarantees that are subject
to the disclosure requirements of FIN 45.         
|  
|   |  | Nortel Networks S.A. has entered into agreements that guarantee the lease
payments of certain sub-lessees of its facilities to lessors. Generally,
these lease agreements relate to facilities Nortel Networks S.A. vacated
prior to the end of the term of its lease. These lease agreements require
Nortel Networks S.A. to make lease payments throughout the lease term if
the sub-lessee fails to make scheduled payments. These lease agreements
have expiration dates of April 2007. The maximum amount that Nortel
Networks S.A. may be required to pay under these types of agreements is
approximately 5,000.                                                                                                      
|  
|   |  | Nortel Networks S.A. has also entered into an agreement to indemnify a
certain lessor against certain additional costs, including financing costs,
and costs incurred relating to construction problems with the building,
through the term of the lease, which expires in May 2013. The maximum
amount that Nortel Networks may be required to pay under this lease
agreement is approximately 79,000.                                                                                                                                                                                                                                                                                                                      
|  
|   |  | In addition, Nortel Networks S.A. has entered into an agreement to
indemnify a certain lessor, through the term of the lease, which expires in
May 2013, against costs incurred as a result of changes in laws and
regulations (including tax legislation) or in the interpretations of such
laws and regulations, as a result of losses from litigation that may be
suffered by them or if the transaction becomes invalid. The maximum
amount that Nortel Networks may be required to pay if the transaction
becomes invalid is approximately 79,000. The maximum potential losses
resulting from the other types of lease guarantees cannot be reasonably
estimated.                                                      
|  
|   |  | Historically, Nortel Networks S.A. has not made any significant
indemnification payments under such agreements and no amount has been
accrued in the accompanying consolidated financial statements with respect
to these indemnification guarantees.                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|   |  | Bid and performance bonds                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|  
|   |  | Nortel Networks S.A. has entered into bid and performance bonds related to
various contracts. These contracts generally have terms ranging from two
to five years. Performance related bonds generally have a term of twelve
months. Bid bonds generally have a much shorter term. Potential payments
due under these bonds are related to Nortel Networks S.A.s performance
under the applicable contract. The total amount of bid and performance
bonds that were available and undrawn was 31,650, as at December 31, 2002
and 29,374 as at December 31, 2001.                                                                                                                                                          
|  
|   |  | Joint ventures / minority interests                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|   |  | On October 19, 2002 Nortel Networks S.A. granted a put option (the Put
Option) to the minority interest partners of one of Nortel Networks
European joint ventures. The Put Option allows the minority interest
partners to sell their interest in the joint venture to Nortel Networks
S.A. at a fixed amount of approximately 124,000, consisting of a cash
component of approximately 52,000, and an in-kind component of
approximately 72,000, representing the return of a loan note currently
owed to Nortel Networks by an affiliate of the joint venture partners. The
minority interest may exercise the Put Option anytime between July 1, 2003
and September 30, 2003 subject to certain terms and conditions.
|  

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| |  | Effective the same date, Nortel Networks granted a put option (the Second
Put Option) to Nortel Networks S.A. The Second Put Option allows Nortel
Networks S.A. to sell to Nortel Networks the joint venture interest
acquired if the Put Option is exercised under the same terms and conditions
as the Put Option.                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Put Option is required to be marked to fair value through the statement
of operations at each period end until it is either exercised or expires.
In addition, Nortel Networks S.A.s accounting policy regarding purchased
options requires that the Second Put Option be marked to fair value through
the statement of operations at each period end until it is either exercised
or expires. At December 31, 2002, Nortel Networks S.A. estimated the fair
value of the Put Option and the Second Put Option (the Options) to be
approximately 77,500, (included in the balance sheets within other accrued
liabilities and other current assets). The net impact to the statements of
operations for the year ended December 31, 2002 is nil.
|
| |  | The estimated fair values of the Options were based on an estimate of the
current fair values of the respective joint venture using an option-pricing
model that is dependent on the assumptions used concerning the amount of
volatility and the discount rates that reflect varying degrees of risk.
Accordingly, the fair value estimates are not necessarily indicative of the
amounts that Nortel Networks S.A. could potentially realize in current
market exchanges.                                                                                                                                                                                                                                                                             
|
| |  | Operating leases and other commitments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | At December 31, 2002, the future minimum payments under both operating
leases and outsourcing contracts for the years ending December 31 consisted
of:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

|                              |  |           |        |             |  |   |         | 
|----------------------------- |  | --------- | ------ | ----------- |  | - | ------- | 
|                             
|                              |  | Operating |        | Outsourcing
|                              |  | leases    |        | contracts  
|                             
|2003                          |  |          | 11,848 |             |  |  | 19,664  | 
|2004                          |  |           | 9,262  |             |  |   | 18,887  | 
|2005                          |  |           | 7,396  |             |  |   | 17,483  | 
|2006                          |  |           | 7,396  |             |  |   | 17,260  | 
|2007                          |  |           | 7,396  |             |  |   | 17,049  | 
|Thereafter                    |  |           | 33,284 |             |  |   | 33,489  | 
|                             
|Total future minimum payments |  |          | 76,582 |             |  |  | 123,832 | 
|                             



| |  | All figures exclude value added taxes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Rental expense on operating leases for the years ended December 31, 2002,
2001 and 2000 amounted to 27,441, 31,960 and 21,243, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Included in the operating lease payments are annual payments of
approximately 7,000 relating to the lease of Nortel Networks S.A.s
headquarters in Châteaufort, France. The lease is for a base term of 12
years, commencing on May 3, 2001. The lease is with a special purpose
vehicle leasing company owned by a group of financial institutions. Nortel
Networks S.A. is responsible for all obligations relating to the
maintenance and operation of the property and has the option of purchasing
the property at an option price, which is the estimated market value,
commencing on the fifth anniversary of the commencement date of the lease.
At the end of the lease term, Nortel Networks S.A. may elect to purchase
the property at the option price, renew the lease on terms mutually agreed
to with the lessor, or terminate the lease. Nortel Networks has guaranteed
a portion of the residual value of the lease.
|
| |  | Expenses related to outsourcing contracts for the years ended December 31,
2002, 2001 and 2000 amounted to 23,341, 16,026 and 1,709, respectively,
and are for services provided to Nortel Networks S.A. primarily related to
information services, accounts payable and purchasing. The minimum amount
payable under Nortel
Networks S.A.s outsourcing contracts is variable to the extent that Nortel
Networks S.A.s workforce fluctuates from the baseline levels contained in
the contracts.                                                                                                                                                                                                                                                                                                                                                                                                                                  
|

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|10. |  | Shareholders equity                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | On May 21, 2002, Nortel
Networks S.A. issued 11,677,519 common shares to
Nortel Networks and 6,451,612 shares to Nortel Networks International
Finance and Holdings B.V. for net proceeds of 281,000 which was comprised
of intercompany notes payable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|    |  | On December 16, 2002 Nortel Networks S.A. issued 40,872,534 common shares
to Nortel Networks for net proceeds of 204,363 comprised of cash.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|    |  | On May 21, 2002 Nortel Networks S.A.s board of directors approved a
reorganization of Nortel Networks S.A.s capital accounts that resulted in
the reduction of accumulated deficit of 372,755, the reduction of
additional paid-in capital of 158,174, and the reduction of common shares
of 214,581.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|    |  | Capital accounts for December 31, 2000 have been reclassified to present
the reorganization of Nortel Networks S.A.s capital accounts performed
during 2000 that resulted in the reduction of retained earnings of 48,845,
the increase in additional paid-in capital of 46,327, and addition to
common shares of 2,518.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|11. |  | Stock-based compensation plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|    |  | Stock options                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|    |  | Under the Nortel Networks Corporation 2000 Stock Option Plan (the 2000
Plan), options to purchase Nortel Networks Corporation common shares may
be granted to employees and directors of Nortel Networks S.A. that entitle
the holder to purchase one common share at a subscription price of not less
than 100 percent of market value on the effective date of the grant.
Subscription prices are stated and payable in United States dollars for
United States options and in Canadian dollars for Canadian options.
Generally, options outstanding at December 31, 2002 vest 33 1/3 percent on
the anniversary date of the grant for three years. The committee of the
Nortel Networks Corporation and Nortel Networks Boards of Directors that
administers the 2000 Plan has the discretion to vary the period during
which the holder has the right to exercise options and, in certain
circumstances, may accelerate the right of the holder to exercise options,
but in no case shall the exercise period exceed ten years.                                                                                                                                                                                                
|   
|    |  | Under the Nortel Networks Corporation 1986 Stock Option Plan As Amended and
Restated (the 1986 Plan), options to purchase Nortel Networks Corporation
common shares may be granted to employees of Nortel Networks S.A. that
entitle the holder to purchase one common share at a subscription price of
not less than 100 percent of market value on the effective date of the
grant. Subscription prices are stated in United States dollars for United
States options and in Canadian dollars for Canadian options. Generally,
options may be exercised as follows: options granted in 1997 through 2002
vest 33 1/3 percent on the anniversary date of the grant for three years;
and options granted in 1991 through 1996 vest 50 percent after the first
anniversary date of grant and the remainder after the second anniversary
date of grant. The committee of the Nortel Networks Corporation and Nortel
Networks Boards of Directors that administers the 1986 Plan has the
discretion to vary the period during which the holder has the right to
exercise options and, in certain circumstances, may accelerate the right of
the holder to exercise options, but in no case shall the exercise period
exceed ten years.
|   
|    |  | Options granted under the 2000 Plan and 1986 Plan may be granted with or
without a stock appreciation right (SAR). A SAR entitles the holder to
receive payment of an amount equivalent to the excess of the market value
of a common share at the time of exercise of the SAR over the subscription
price of the common share to which the option relates. Options with SARs
may be granted on a cancellation basis, in which case the exercise of one
causes the cancellation of the other, or on a simultaneous basis, in which
case the exercise of one causes the exercise of the other.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   

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|    |  | In January 1995, a key contributor stock option program (the Key
Contributor Program) was established. Under the terms of the Key
Contributor Program, participants are granted an equal number of initial
options and replacement options. The initial options generally vest after
five years and expire after ten years. The replacement options are granted
concurrently with the initial options and also expire after ten years. The
replacement options generally have an exercise price equal to the market
value of the common shares of Nortel Networks Corporation on the day the
initial options are fully exercised, and are generally exercisable
commencing thirty-six months thereafter, provided certain other conditions
for exercise, including share ownership, are met.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | On June 20, 2001, Nortel Networks Corporation commenced a voluntary stock
option exchange program (the Exchange Program) whereby its employees,
including employees of Nortel Networks S.A., could exchange certain then
outstanding stock options for new stock options, based on a prescribed
formula. The terms of the Exchange Program were such that new grants of
options would be made at least six months and a day from the cancellation
date of the options tendered for exchange, which was July 27, 2001.
Approximately 2,400,000 of Nortel Networks S.A.s employees stock options
were tendered for exchange and cancelled. Nortel Networks Corporations
then Board of Directors and its then board appointed officers were not
eligible to participate in the Exchange Program. On January 29, 2002,
Nortel Networks Corporation granted approximately 1,600,000 new stock
options to Nortel Networks S.A.s employees in connection with the Exchange
Program with an exercise price of
$7.39 in United States dollars per common
share which price was set in accordance with the Exchange Program.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|    |  | Employee stock purchase plans                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|    |  | Nortel Networks Corporation has a stock purchase plan for eligible
employees in eligible countries (the Employee Stock Purchase Plan). The
Employee Stock Purchase Plan facilitates the acquisition of common shares
of Nortel Networks Corporation at a discount, and the retention of such
common shares, by eligible employees. The Employee Stock Purchase Plan has
four offering periods each year, with each offering period beginning on the
first day of each calendar quarter. Eligible employees may have up to 10
percent of their eligible compensation deducted from their pay during each
offering period to contribute towards the purchase of Nortel Networks
Corporation common shares. For non-North American eligible employees
common shares are purchased at a purchase price equal to the greater of (i)
85 percent of the average of the high and low prices of common shares on
the first trading day of the offering period and (ii) 71.5 percent of the
market price of the common shares on the last trading day of the offering
period, except that if the market price on the last trading day is equal to
or less than the average of the high and low on the first trading day, the
purchase price shall be 85 percent of the market price on the last trading
day of the offering period. Nortel Networks contributes an amount equal to
the difference between the market price and the purchase price. The common
shares are purchased by an independent broker through the facilities of the
Toronto and/or New York stock exchanges, and held by a custodian on behalf
of the plan participants. Compensation expense is recognized for Nortel
Networks Corporations portion of the contributions.
|   
|    |  | Nortel Networks Company Savings Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|    |  | Eligible employees of Nortel Networks S.A. and other direct or indirect
subsidiaries of Nortel Networks in France, including joint ventures in
which Nortel Networks holds an interest of greater than 50% as of October
30, 2002, may elect to participate in the Nortel Networks Company Savings
Plan (the PEE) instead of the Employee Stock Purchase Plan. Under the
PEE, which is a collective savings scheme governed by French labour law,
participants hold units of a Nortel Networks collective investment fund
which is invested mainly in common shares of Nortel Networks Corporation,
and the remainder in liquid assets. Participants may make voluntary
contributions up to 10% of their eligible gross earnings, and the employer
contributes an amount equal to 25% of each participants contributions, up
to certain maximum amounts per participant per year. The employer
contributions are subject to welfare surtaxes but exempt from social
security charges and income tax in France. The common shares are purchased
on a monthly basis by the plan custodian, through the facilities of the New
York Stock Exchange.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|12. |  | Subsequent events                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|    |  | Nortel Networks S.A. has announced further workforce restructuring for 2003
impacting 218 positions (of which 218 represented redundancies) as part of
Nortel Networks overall work plan, which is expected to result in a
restructuring charge of approximately 24 million. Affected employees will
be notified in the first quarter of 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

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| |  | On February 14, 2003, Nortel Networks entered into an agreement with Export
Development Canada (EDC) regarding arrangements to provide for support,
on a secured basis, of certain obligations arising out of normal course
business activities, including letters of credit, letters of guarantee,
indemnity arrangements, performance bonds, surety bonds, receivables sales,
securitizations and similar instruments issued or entered into for the
benefit of Nortel networks (the EDC Support Facility). The EDC Support
Facility provides for up to U.S. $750 million in support and is comprised
of (i) up to U.S. $300 million of committed support for performance bonds
or similar instruments (within certain parameters); (ii) up to
U.S. $150 million of uncommitted support for receivables sales and/or
securitizations; and (iii) up to U.S. $300 million of additional
uncommitted support for performance bonds and receivable sales and/or
securitizations.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Nortel Networks obligations under the EDC Support Facility are secured on
an equal and ratable basis under the security agreements entered into by
Nortel Networks and various of its subsidiaries, including the pledge of
shares of Nortel Networks S.A. (see note 8). Nortel Networks may provide
EDC with cash collateral (or any other alternative collateral acceptable to
EDC), in an amount equal to the total amount of its outstanding obligations
and undrawn commitments and expenses under the EDC Support Facility, in
lieu of the security provided under the security agreements.                                                                                                                                                                                                                                                                                                                                                                                 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
Brampton, Ontario, Canada on the 10th day of March, 2003.

| |                         |                                                                       
| | ----------------------- | ----------------------------------------------------------------------
| | NORTEL NETWORKS LIMITED
| |                         |                                                                       
| |                         |                                                                       
| | By:                     | FRANK A. DUNN
(Frank A. Dunn, President and Chief Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 10th day of March, 2003.

|                                            |  |                                                      
|------------------------------------------- |  | -----------------------------------------------------
|                                           
|Signature                                   |  | Title                                                
|                                           
|Principal Executive Officer                 |  |                                                      
|                                            |  |                                                      
|FRANK A. DUNN
(FRANK A. DUNN)             |  | President and Chief Executive Officer, and a Director
|                                            |  |                                                      
|Principal Financial Officer                 |  |                                                      
|                                            |  |                                                      
|DOUGLAS C. BEATTY
(DOUGLAS C. BEATTY)     |  | Chief Financial Officer                              
|                                            |  |                                                      
|Principal Accounting Officer                |  |                                                      
|                                            |  |                                                      
|MICHAEL J. GOLLOGLY
(MICHAEL J. GOLLOGLY) |  | Controller                                           

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Directors:

|                                 |  |                                   
|-------------------------------- |  | ----------------------------------
|J.J. BLANCHARD*
(J.J. BLANCHARD) |  | R.A. INGRAM*
(R.A. INGRAM)        
|                                 |  |                                   
|R.E. BROWN*
(R.E. BROWN)         |  | W.A. OWENS*
(W.A. OWENS)          
|                                 |  |                                   
|J.E. CLEGHORN*
(J.E. CLEGHORN)   |  | G. SAUCIER*
(G. SAUCIER)          
|                                 |  |                                   
|F.A. DUNN*
(F.A. DUNN)           |  | S.H. SMITH, JR.*
(S.H. SMITH, JR.)
|                                 |  |                                   
|L.Y. FORTIER*
(L.Y. FORTIER)     |  | L.R. WILSON*
(L.R. WILSON)        



| |      |                                                                          
| | ---- | -------------------------------------------------------------------------
| | By:* | DEBORAH J. NOBLE
(DEBORAH J. NOBLE, as attorney-in fact)
March 10, 2003

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CERTIFICATIONS

I, FRANK A. DUNN, certify that:

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

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

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

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

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

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

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

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

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

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

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

Date: March 10, 2003

FRANK A. DUNN

(FRANK A. DUNN)
President and Chief Executive Officer


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I, DOUGLAS C. BEATTY, certify that:

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

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

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

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

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

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

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

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

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

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

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

Date: March 10, 2003

DOUGLAS C. BEATTY

(DOUGLAS C. BEATTY)
Chief Financial Officer


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Exhibit 21

Subsidiaries of the Registrant

Significant subsidiary companies of the Registrant at December 31, 2002,
were:

|                     |  |                     |  |                |     |            |  | 
|-------------------- |  | ------------------- |  | -------------- | --- | ---------- |  | 
|                     |  |                     |  |                |     | Percentage
|                     |  |                     |  |                |     | ownership 
|                     |  |                     |  |                |     | of common 
|                     |  | Organized under the |  | shares held by
|                     |  | laws of             |  | Registrant    
|                     |  |                     |  |               
|Nortel Networks Inc. |  | State of Delaware   |  |                | 100 |           

130