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

FORM 10-K

|        |                                                                                                                                 
|------- | --------------------------------------------------------------------------------------------------------------------------------
|[X BOX] | Annual report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2001
|       
|[BOX]   | Transition report pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the transition period from to      

Commission file number 000-30758

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

|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Canada                                                         |  | 62-12-62580                         
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                              
|8200 Dixie Road, Suite 100, Brampton, Ontario, Canada          |  | L6T 5P6                             
|(Address of principal executive offices)                       |  | (Zip Code)                          

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

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 [CHECK MARK]     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. [CHECK MARK]

At February 28, 2002, 1,460,978,634 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

|        |                                                                                                                            |                       |                                    |    |      |   | 
|------- | -------------------------------------------------------------------------------------------------------------------------- | --------------------- | ---------------------------------- | -- | ---- | - | 
|        |                                                                                                                            |                       |                                    |    | PAGE
|PART I 
|       
|ITEM 1. | Business                                                                                                                   |                       |                                    | 1  |     
|        | - Overview                                                                                                                 |                       |                                    | 1  |     
|        | - Developments in 2001                                                                                                     |                       |                                    | 2  |     
|        | - Networking Solutions                                                                                                     |                       |                                    | 2  |     
|        | - Metro and Enterprise Networks Segment                                                                                    |                       |                                    | 3  |     
|        |                                                                                                                            | - Products            |                                    |    | 3    |  
|        |                                                                                                                            |                       | - Optical Ethernet                 |    |      | 3 | 
|        |                                                                                                                            |                       | - Packet Switching and Routing     |    |      | 3 | 
|        |                                                                                                                            |                       | - Circuit to Packet Voice Networks |    |      | 4 | 
|        |                                                                                                                            | - Product Development |                                    |    | 5    |  
|        |                                                                                                                            | - Markets             |                                    |    | 6    |  
|        |                                                                                                                            | - Customers           |                                    |    | 7    |  
|        |                                                                                                                            | - Competition         |                                    |    | 7    |  
|        | - Wireless Networks Segment                                                                                                |                       |                                    | 8  |     
|        |                                                                                                                            | - Products            |                                    |    | 8    |  
|        |                                                                                                                            | - Product Development |                                    |    | 9    |  
|        |                                                                                                                            | - Markets             |                                    |    | 10   |  
|        |                                                                                                                            | - Customers           |                                    |    | 11   |  
|        |                                                                                                                            | - Competition         |                                    |    | 11   |  
|        | - Optical Long-Haul Networks Segment                                                                                       |                       |                                    | 12 |     
|        |                                                                                                                            | - Products            |                                    |    | 12   |  
|        |                                                                                                                            | - Product Development |                                    |    | 13   |  
|        |                                                                                                                            | - Markets             |                                    |    | 13   |  
|        |                                                                                                                            | - Customers           |                                    |    | 14   |  
|        |                                                                                                                            | - Competition         |                                    |    | 14   |  
|        | - Sales and Distribution                                                                                                   |                       |                                    | 14 |     
|        | - Product Standards, Certification, and Regulation                                                                         |                       |                                    | 15 |     
|        | - Financial Information by Operating Segment and Product Category                                                          |                       |                                    | 15 |     
|        | - Financial Information by Geographic Area                                                                                 |                       |                                    | 15 |     
|        | - Working Capital                                                                                                          |                       |                                    | 15 |     
|        | - Sources and Availability of Materials                                                                                    |                       |                                    | 16 |     
|        | - Seasonality                                                                                                              |                       |                                    | 16 |     
|        | - Strategic Alliances, Acquisitions, and Minority Investments                                                              |                       |                                    | 16 |     
|        | - Research and Development                                                                                                 |                       |                                    | 17 |     
|        | - Intellectual Property                                                                                                    |                       |                                    | 17 |     
|        | - Employee Relations                                                                                                       |                       |                                    | 18 |     
|        | - Environmental Matters                                                                                                    |                       |                                    | 18 |     
|        | - Risk Factors                                                                                                             |                       |                                    | 19 |     
|ITEM 2. | Properties                                                                                                                 |                       |                                    | 20 |     
|ITEM 3. | Legal Proceedings                                                                                                          |                       |                                    | 20 |     
|ITEM 4. | Submission of Matters to a Vote of Security Holders                                                                        |                       |                                    | 20 |     
|       
|PART II
|       
|ITEM 5. | Market for the Registrant's Common Equity and Related Stockholder Matters                                                  |                       |                                    | 21 |     
|ITEM 6. | Selected Financial Data (Unaudited)                                                                                        |                       |                                    | 22 |     
|ITEM 7. | Management's
Discussion and Analysis of Financial Condition and Results of
Operations for the Year Ended December 31, 2001 |                       |                                    | 23 |     
|        | - Business overview                                                                                                        |                       |                                    | 23 |     
|        | - Developments in 2001                                                                                                     |                       |                                    | 24 |     

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| |                                                   |                                                    |                                                                               |                                   |                       |    |    |    | 
| | ------------------------------------------------- | -------------------------------------------------- | ----------------------------------------------------------------------------- | --------------------------------- | --------------------- | -- | -- | -- | 
| |                                                   | - Core market refocus and associated restructuring |                                                                               |                                   | 24                    |   
| |                                                   | - Intangible assets write down                     |                                                                               |                                   | 24                    |   
| |                                                   | - Legal matters                                    |                                                                               |                                   | 25                    |   
| | - Results of operations - continuing operations   |                                                    |                                                                               | 25                                |                      
| |                                                   | - Revenues                                         |                                                                               |                                   | 25                    |   
| |                                                   |                                                    | - Segment revenues                                                            |                                   |                       | 25 |   
| |                                                   |                                                    | - Geographic revenues                                                         |                                   |                       | 25 |   
| |                                                   |                                                    | - Consolidated                                                                |                                   |                       | 25 |   
| |                                                   |                                                    | - Metro and Enterprise Networks                                               |                                   |                       | 26 |   
| |                                                   |                                                    | - Wireless Networks                                                           |                                   |                       | 27 |   
| |                                                   |                                                    | - Optical Long-Haul Networks                                                  |                                   |                       | 27 |   
| |                                                   | - Gross profit and gross margin                    |                                                                               |                                   | 28                    |   
| |                                                   | - Operating expenses                               |                                                                               |                                   | 28                    |   
| |                                                   |                                                    | - Selling, general and administrative expense                                 |                                   |                       | 28 |   
| |                                                   |                                                    | - Research and development expense                                            |                                   |                       | 29 |   
| |                                                   |                                                    | - In-process research and development expense and amortization of intangibles |                                   |                       | 29 |   
| |                                                   |                                                    |                                                                               | - IPR&D expense                   |                       |    | 29 |   
| |                                                   |                                                    |                                                                               | - Amortization of intangibles     |                       |    | 30 |   
| |                                                   |                                                    |                                                                               |                                   | - Acquired technology |    |    | 30 | 
| |                                                   |                                                    |                                                                               |                                   | - Goodwill            |    |    | 30 | 
| |                                                   |                                                    | - Special charges                                                             |                                   |                       | 30 |   
| |                                                   |                                                    |                                                                               | - Restructuring activities        |                       |    | 30 |   
| |                                                   |                                                    |                                                                               | - Write down of intangible assets |                       |    | 31 |   
| |                                                   |                                                    | - Gain on sale of businesses                                                  |                                   |                       | 32 |   
| |                                                   | - Other income (expense) - net                     |                                                                               |                                   | 32                    |   
| |                                                   | - Interest expense                                 |                                                                               |                                   | 32                    |   
| |                                                   | - Income tax benefit (provision)                   |                                                                               |                                   | 32                    |   
| |                                                   | - Net loss from continuing operations              |                                                                               |                                   | 32                    |   
| | - Results of operations - discontinued operations |                                                    |                                                                               | 33                                |                      
| | - Critical accounting policies                    |                                                    |                                                                               | 33                                |                      
| |                                                   | - Revenue recognition                              |                                                                               |                                   | 33                    |   
| |                                                   | - Provisions for long-term receivables             |                                                                               |                                   | 33                    |   
| |                                                   | - Provisions for inventory                         |                                                                               |                                   | 33                    |   
| |                                                   | - Tax asset valuation                              |                                                                               |                                   | 34                    |   
| | - Liquidity and capital resources                 |                                                    |                                                                               | 34                                |                      
| |                                                   | - Cash flows                                       |                                                                               |                                   | 34                    |   
| |                                                   | - Uses of liquidity                                |                                                                               |                                   | 35                    |   
| |                                                   |                                                    | - Special charges                                                             |                                   |                       | 35 |   
| |                                                   |                                                    | - Cash obligations                                                            |                                   |                       | 35 |   
| |                                                   |                                                    | - Commitments and guarantees                                                  |                                   |                       | 35 |   
| |                                                   |                                                    | - Customer financing                                                          |                                   |                       | 36 |   
| |                                                   | - Discontinued operations                          |                                                                               |                                   | 37                    |   
| |                                                   | - Sources of liquidity                             |                                                                               |                                   | 37                    |   
| |                                                   | - Credit ratings                                   |                                                                               |                                   | 39                    |   
| | - Market risk                                     |                                                    |                                                                               | 39                                |                      
| | - Legal proceedings                               |                                                    |                                                                               | 40                                |                      
| | - Environmental matters                           |                                                    |                                                                               | 42                                |                      
| | - Employee defined benefit plans                  |                                                    |                                                                               | 42                                |                      
| | - Forward-looking statements                      |                                                    |                                                                               | 42                                |                      
| | - Recent pronouncements                           |                                                    |                                                                               | 53                                |                      

ii



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|           |                                                                                      |  |    |    | 
|---------- | ------------------------------------------------------------------------------------ |  | -- | -- | 
|ITEM 7A.   | Quantitative and Qualitative Disclosures About Market Risk                           |  |    | 53 | 
|ITEM 8.    | Consolidated Financial Statements and Supplementary Data (F-1 to F-42)               |  |    | 54 | 
|ITEM 9.    | Changes in and Disagreements
with Accountants on Accounting and Financial Disclosure |  |    | 55 | 
|          
|PART III  
|          
|ITEM 10.   | Directors and Executive Officers of the Registrant                                   |  |    | 55 | 
|ITEM 11.   | Executive Compensation                                                               |  |    | 59 | 
|ITEM 12.   | Security Ownership of Certain Beneficial Owners and Management                       |  |    | 68 | 
|ITEM 13.   | Certain Relationships and Related Transactions                                       |  |    | 70 | 
|          
|PART IV   
|          
|ITEM 14.   | Exhibits, Financial Statement Schedules and Reports on Form 8-K                      |  |    | 72 | 
|Signatures |                                                                                      |  | 82 |   

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

BAYSTACK, CONTIVITY, DMS, DMS-HLR, DMS-MSC, DMS-MTX, EPICON, MERIDIAN, MERIDIAN
1, NORSTAR, NORTEL NETWORKS, OPTERA, OPTIVITY, PASSPORT, PERIPHONICS, PRESIDE,
S/DMS TRANSPORTNODE, SHASTA, SUCCESSION, and SYMPOSIUM are trademarks of Nortel
Networks.

ACCESSNODE and UNIVERSAL EDGE are trademarks of Zhone Technologies, Inc.

CLARIFY is a trademark of Amdocs Software Systems Limited.

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

iii



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PART I



|ITEM 1. |  | BUSINESS
|------- |  | --------

Overview

Nortel Networks Limited is a leading global supplier of products and
services that support the Internet and other public and private data, voice,
and multimedia communications networks using terrestrial and wireless
technologies which we refer to as networking solutions. 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, financing,
installation, servicing, and support of networking solutions. Our networking
solutions include network equipment, software, and other technologies that
enable local and long-distance telephone companies, Internet service providers,
and other communications service providers to provide their customers with the
ability to communicate locally or globally, through the use of data, voice, and
multimedia communications. Our networking solutions also provide enterprises,
such as large and small businesses, governments, and other organizations, with
the ability to communicate locally or globally within their organization and
with other individuals and organizations through the use of data, voice, and
multimedia communications. With our networking solutions, we are focused on
providing the infrastructure and applications for high-performance networks, as
technology transforms the way we communicate and conduct business.

In the fourth quarter of 2001, we reorganized our operations and evolved
the way we manage our business to focus on providing seamless networking
products and service capabilities across three core business areas. We now
conduct business in three operating segments: Metro and Enterprise Networks,
Wireless Networks, and Optical Long-Haul Networks. Accordingly, our financial
information by operating segment and product category have been modified and
reported on a new basis commencing with the year ended December 31, 2001. We
refer you to the descriptions of our Metro and Enterprise Networks Segment,
our Wireless Networks Segment, and our Optical Long-Haul Networks Segment
below. For financial information by operating segment and product category, we
refer you to note 15 to the Consolidated Financial Statements, and to Results
of operation  continuing operations  Revenues  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;
|
| |  |  | 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
Nortel Networks Limited and its subsidiaries.

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Developments in 2001

In 2001, the telecommunications industry underwent a period of significant
adjustment. During 2001, industry demand for networking equipment slowed
significantly in response to the rapid and severe industry and economic
downturn in the United States, Europe, and other parts of the world and the
related decline in the global capital markets. As a result of this adjustment
and the difficulties in obtaining financing for capital expenditures, the
business marketplace in the telecommunications industry has changed.
Significant excess network capacity now exists as a result of the pace of new
network construction during 1999 and 2000 and also due to the financial
difficulties now being experienced by a number of communications service
providers around the world. Service provider customers are no longer investing
in new networks or equipment based primarily on potential future demand.
Customers, now focused on reducing their costs and exhausting existing network
capacity, have returned to more conservative capital spending strategies and
generally require current demand for network capacity prior to investing in new
network expansions and equipment. This resulted in a significant reduction in
2001 in the levels of capital spending by communications service providers
around the world.

In light of the significant downturn in both the telecommunications
industry and the economic environment, and capital market trends impacting our
operations and expected future growth rates, we engaged in a number of
activities in 2001 to streamline operations and activities around our core
markets and leadership strategies. Some of our activities in 2001 include:



| |  |  | substantial workforce reductions;                 
| | - |  | --------------------------------------------------
|
| |  |  | amendment of certain credit agreements;           
|
| |  |  | discontinuance of our access solutions operations;
|
| |  |  | divestitures and outsourcing transactions; and    
|
| |  |  | write down of intangible assets.                  

The primary focus of these activities in 2001 was to reposition Nortel Networks
from a financial perspective. As a result of these initiatives, we have
substantially reduced our fixed costs and have created a business organization
that we believe is better aligned to the new industry and economic environment.
For information on these and other developments in 2001, see Developments in
2001 in Managements Discussion and Analysis of Financial Condition and
Results of Operations, and notes 4, 7, and 8 to the Consolidated Financial
Statements.

Networking Solutions

Our networking solutions include network equipment, software, and other
technologies that enable communications locally or globally 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;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 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.
We do not offer network access solutions for wireline networks, also known as
terrestrial networks, or for fixed wireless networks. For

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our network access solutions for mobile communications networks, we refer you
to our Wireless Networks Segment description 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 (copper wire,
fiber optic, or coaxial), or over wireless radio signals transmitted through
the air between locations using antennas. Network transport by wireless radio
signals is also known as digital radio transport. We do not offer digital
radio transport products. The most common method for long-distance network
transport is optical networking, which uses light particles/waves to transmit
communications signals through fiber optic cables. For our long-distance
optical transport products, we refer you to our Optical Long-Haul Networks
Segment description below. For our other optical transport products, we refer
you to our Metro and Enterprise Networks Segment 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. For our general core networking products, we refer
you to our Metro and Enterprise Networks Segment description below. For our
specialized core networking products designed for wireless communications
networks, we refer you to our Wireless Networks Segment description below.

Metro and Enterprise Networks Segment

Products

Our Metro and Enterprise Networks portfolio of wireline products provide
data, voice, and multimedia communications for our customers. Our service
provider customers include local and long-distance telephone companies,
Internet service providers, and other communications service providers. Our
enterprise customers include large businesses and their branch offices, small
businesses, and home offices, as well as government, education, and utility
organizations. We refer you to Metro and Enterprise Networks Segment 
Customers below. We offer our Metro and Enterprise Networks customers a range
of Optical Ethernet solutions, packet switching and routing solutions, and
circuit to packet network solutions. 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.

Optical Ethernet

We offer our Metro and Enterprise Networks customers a broad range of
solutions for metropolitan optical, or Optical Ethernet, networks. Optical
Ethernet networks transport data, voice, and multimedia communications between
locations within a city or between cities of close range by transmitting
communications signals in the form of light particles/waves through fiber optic
cables. Our customers use optical networking solutions to deliver customized
services that include high-speed Internet access, network connections between
offices within a city and between cities of close range, and support for the
transport and storage of large amounts of data. We offer a suite of Optical
Ethernet solutions designed to reduce the congested and complex metropolitan
networking bottleneck created by the wide range of users and services that
exist within cities (such as businesses, banks, schools, and home users all
using the Internet and phone lines). Our Optical Ethernet networking products
support data, voice, video, Ethernet, and other types of protocols (such as
those used for data backup and storage), and are designed to be expandable,
contractible, and generally flexible in order to support the dynamic
communications traffic patterns that exist within cities. Our Optical Ethernet
product portfolio for metropolitan optical networks consists primarily of the
OPTera Metro 3000 series, the OPTera Metro 4000 series, and the OPTera Metro
5000 series.

Packet Switching and Routing

We offer a broad range of packet switching and routing solutions for our
customers. Packet 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, enabling large numbers of communications signals to be directed or
routed simultaneously and more efficiently than in circuit networking, which
requires a separate

3



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network circuit to be maintained for each communications signal for the
duration of the call. Our packet switching and routing systems include data
switching systems, aggregation products, virtual private network gateways, and
routers.



| |  |  | 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, Internet protocol, and frame relay services.
These products are also key components of our Succession solution,
Internet protocol virtual private network services, and third
generation, or 3G, wireless network data switching solutions. Our
Passport Ethernet Routing Switch delivers Internet protocol routing and
switching.                                      
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Our Baystack and Business Policy Switch 2000 portfolio is a series of
high performance data switches for our enterprise customers small to
large local area computer 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 Shasta Broadband Service Node aggregation products are 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 Internet service providers, or to centrally apply value
added data network services, such as Internet security, on a per
subscriber basis. These products support a wide range of data network
access technologies, including standard dial-up over copper telephone
wire, digital subscriber line, asynchronous transfer mode, wireless,
frame relay, and coaxial cable technologies.
|
| |  |  | Our Contivity portfolio of data switching platforms for
Internet-based virtual private networks is designed to enable service
providers and enterprises to offer secure Internet access for remote
users, corporate intranets and corporate extranets. These products are
also designed to enable secure enterprise site-to-site communications.                                                                                                                                                                                                                                                                   
|
| |  |  | 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 Internet protocol standard to route data
communications traffic from one corporate site to another within an
enterprises network.                                                                                                                                                                              

Circuit to Packet Voice Networks

Circuit switching systems enable communications signals to be selectively
directed or switched from one network circuit to another. Our circuit to
packet voice network solutions include our combined voice and data
communications systems, our Meridian and Norstar enterprise telephone systems,
our digital switching systems, our business solutions and applications, and our
network management software. Our business solutions and applications include
call centers, interactive voice response systems, web-response centers, and
advanced speech recognition systems, all of which are designed to enable
organizations to integrate customers into their electronic business processes.



| |  |  | Our Succession solutions are combined voice and data communications
systems for service providers and large enterprises. These solutions
are designed to give our customers 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
Succession solutions support customers building new networks, and
customers who want to transform their existing voice communications
network into a cost effective packet 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 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.                                                                                                   

4



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| |  |  | Our CentrexIP system provides a suite of business services to
residential and business customers over a packet-based network. It is
fully scalable and enables new applications such as multimedia
conferencing, unified messaging, and file sharing to be integrated with
traditional business voice services.                                                                                                                                                                                                                                                                                                                  
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Our Meridian digital telephone switching systems are designed for
small, medium, and large commercial enterprises, and government
environments. These 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 1 systems to send voice communications over the Internet with
our Internet Telephony Gateway products and our i2004 Internet
telephones.                                                               
|
| |  |  | Our Norstar digital telephone switching systems are designed for
small to medium-sized businesses, and branch offices of large
organizations. These 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 digital switching systemcalled DMS, for Digital Multiplex
Systemprovides local, toll, long-distance, operator services, and
international gateway solutions. The primary function of our DMS
systems is to 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 advanced functions such
as caller identification and call waiting, to be offered to the service
providers residential and business customers.                                                                                     
|
| |  |  | Our Periphonics interactive voice response systems 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.                                                                                                                                           
|
| |  |  | Our Directory Assistance systems incorporate an interactive voice
response system to automate the identification of a callers requested
directory listing and provide playback.                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  |  | Our Symposium call center portfolio of products provides 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.                                                                                                                                                                                                                                                                                                                                                            
|
| |  |  | Our Unified Payment products provide near real time billing data to
customers billing systems. These products enable service providers to
operate both pre-paid and post-paid subscription services. These
products also provide interfaces to e-commerce and voice recognition
platforms that allow service providers to implement end-to-end billing
solutions.                                                                                                                                                                                                                                                               
|
| |  |  | Our network management software provides management, surveillance,
and alarm reporting and networking statistical reporting to ensure a
network is operating in the manner expected by service providers and end
users. These systems are designed to give our customers the ability to
monitor the performance of their network and to make changes to the
performance of the network, including the provisioning of new services
for end users. Our network management software includes our Preside
carrier-class network management software products, and our Optivity
network management software products for enterprises.

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.



| |  |  | Our OPTera Metro 8000 Services Switch is designed to enable service
providers to offer Optical Ethernet networks cost-effectively to tens of
thousands of enterprise customers in a city. We currently expect the
OPTera Metro 8000 Services Switch to be commercially available in the
second quarter of 2002.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

5



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| |  |  | Our Passport 20000 is an extension and evolution of the Passport
multiservice series of switches targeted at the core of service provider
networks for applications that require increased capacity or increased
speeds. The Passport 20000 has been in customer trials since the fourth
quarter of 2001, and we currently expect it to become commercially
available in the second quarter of 2002.                                         
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Our Interactive Multimedia Server is a suite of application servers
that provides next generation multimedia services within both
packet-based data networks and circuit-switched voice networks, and is
an integral component of both our wireless and wireline Succession
solutions. The Interactive Multimedia Server is currently in multiple
customer trials and is expected to be commercially available in the
second quarter of 2002.

Markets

We offer our Metro and Enterprise Networks products to service providers
and 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.
This convergence of voice and data communications, and public and private
communications, began with the common use of local and long-distance fiber
optic communications networks to transport local and long-distance, public and
private, and business and residential voice and data communications. Voice and
data communications systems generally continued to use circuit-based
technologies for voice communications, and more cost-effective packet-based
technologies for data communications. 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.

Historically, voice communications and data communications have operated
on separate networks. Voice communications infrastructures transitioned from
analog circuit switching systems to digital circuit switching systems during
the 1980s and early 1990s. The demand for digital circuit-based voice
communications equipment is now mature. During the mid to late 1990s, demand
for data communications infrastructure equipment grew substantially, driven by
the growth in data communications and the growth of the Internet. Although
consumer use of existing voice communications infrastructures continues to
grow, the per-minute rates that local and long-distance telephone companies can
charge for these services have been declining due to competitive market forces.
To meet the growing demand for increased capacity at lower per-minute rates,
we anticipate that over the next five to 10 years service providers will
transition their digital circuit-based voice communications infrastructures to
more cost effective packet-based infrastructure technologies with the ability
to carry data, voice, and multimedia communications. As a result, we
anticipate growth over the same period in demand for packet 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.

The market for our Metro and Enterprise Networks products is a global one,
covering the United States and Canada, the Caribbean and Latin America region,
the Europe, Middle East and Africa region, and the Asia Pacific region.
Network security and resiliency has become a significant focus for enterprise
customers worldwide, particularly in the aftermath of the September 11th
terrorist attacks on the United States. In the United States and Canada,
although most service providers are focused on reducing their capital spending
in response to the industry and economic slowdown, many service providers
continue to modernize their networks in response to the convergence of voice
and data communications networks. Enterprise customers in the United States
and Canada continue to invest in equipment for their communications networks,
primarily for network security and resiliency, for voice communications over
the Internet, and for virtual private networks. In the Caribbean and Latin
America region, enterprises are continuing to drive demand for networking
equipment that supports the growing use of the Internet in the region. In the
Europe, Middle East, and Africa region, we continue to see market demand for
certain networking products, including metropolitan optical networking
products, equipment for voice communications over the Internet, and equipment
for virtual private networking. Service providers in Europe are also focused
on reducing their capital spending, and we anticipate that a higher proportion
of network infrastructure capital spending in Europe in 2002 will come from the
leading national public telephone companies, as opposed to alternative service
providers. In the Asia Pacific region, demand for networking equipment has
slowed, but is continuing, largely due to the significant deployments of
wireless communications services and the growing use of the Internet. In
addition, enterprise customers in the Asia Pacific region are continuing to
invest in networking equipment to improve the connections among their regional
sites and branch offices.

6



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Customers

We offer our Metro and Enterprise products and services to a wide range of
service providers and enterprises around the world. Our service provider
customers include:



| |  |  | incumbent local telephone companies and new competitive local
telephone companies (also known as incumbent local exchange carriers, or
ILECs, and competitive local exchange carriers, or CLECs);
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | long-distance telephone companies (also known as interexchange carriers);                                                                                                                        
|
| |  |  | service providers with global businesses;                                                                                                                                                        
|
| |  |  | Internet service providers;                                                                                                                                                                      
|
| |  |  | service providers that sell shared use of business software
applications (also known as application service providers);                                                                          
|
| |  |  | resellers of communications network services;                                                                                                                                                    
|
| |  |  | public utilities;                                                                                                                                                                                
|
| |  |  | cable television companies; and                                                                                                                                                                  
|
| |  |  | service providers that sell web hosting services (also known as hosting service providers).                                                                                                      

We also 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, education,
and utility organizations. Key industry sectors for our business customers
include the telecommunications, high-technology manufacturing, and financial
services sectors. We also serve business customers in the healthcare, retail,
hospitality, services, transportation, and other industry sectors. We are
currently focused on increasing our market presence with key global service
provider and enterprise customers. In particular, we intend to focus on
certain large service providers who we currently expect to account for a
substantial proportion of service provider capital spending in 2002 and beyond,
and leading enterprise customers with high performance networking needs. None
of our Metro and Enterprise Networks customers represented more than 10 percent
of Nortel Networks consolidated revenues in 2001.

Competition

Our principal competitors in the sale of our Metro and Enterprise Networks
products to service providers are large communications companies, such as
Alcatel S.A., Fujitsu Limited, Telefonaktiebolaget LM Ericsson, Lucent
Technologies Inc., and Siemens Aktiengesellschaft. In addition, we compete with
smaller companies that address specific niches within this market, such as
Ciena Corporation and ONI Systems Corp. (who recently announced their intention
to combine their companies) in metropolitan optical networking solutions, Sonus
Systems Limited in Internet-based voice communications solutions, and Redback
Networks Inc. in aggregation products. Certain competitors also are strong on
a regional basis, such as Nippon Denki Kabushiki Kaisha (also known as NEC) and
Huawei Technologies Co., Ltd. in Asia. No one competitor is dominant in this
market. We expect competition to increase in intensity given the significant
decline in 2001 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.

Our principal competitors in the sale of our Metro and Enterprise Networks
solutions to enterprises are Alcatel, Avaya Inc., Cisco Systems, Inc., Ericsson
and Siemens. Cisco Systems is our most significant competitor in the sale of
networking equipment to enterprises. We also compete with smaller companies
that address specific niches, such as Foundry Networks, Inc., Extreme Networks,
Inc., and Enterasys Networks, Inc. in Ethernet switching, 3Com Corporation in
Internet-based voice communications solutions, and Genesys Telecommunications
Laboratories, Inc. in call centers. We expect competition to remain intense as
corporate information technology spending continues to be affected by global
and regional economies and the state of the global capital markets.

The principal global factors of competition in the sale of our Metro and Enterprise 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;                                        

7



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| |  |  | price and cost of ownership;                        
| | - |  | ----------------------------------------------------
|
| |  |  | interoperability with other networking products; and
|
| |  |  | installed base of product.                          

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

Wireless Networks Segment

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 a wireless device, such as a
cellular telephone. These networks use specialized network access equipment
and specialized core networking equipment that enable an end user to be
connected and identified despite the lack of 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 networks based
on circuit switching technology with very limited data transmission
capabilities; and 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 network solutions span all generations and most major global digital
standards for mobile networks. The majority of wireless networks existing
today are based on 2G wireless technologies.

There are several international standards for wireless communications
networks. The main standards used today are Time Division Multiple Access
(TDMA) supported mainly in North and South America, Code Division Multiple
Access (CDMA) supported in both the Americas and Asia Pacific, and Global
System for Mobile communications (GSM) supported all over the world. Universal
Mobile Telecommunications System (UMTS)is the emerging standard for 3G
networks with a European focus. TDMA is a 2G wireless standard that uses
timeslots within a radio frequency channel to separate users conversations.
CDMA is a 2G wireless standard that 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 are evolving to 3G according to the CDMA 3G
(1xRTT) standard, also known as cdma2000, for voice and high-speed data
mobility.1xEV and 1xDV are also emerging CDMA 3G standards for high speed
wireless networks for data, voice, and multimedia communications. GSM is a 2G
wireless standard 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 an intermediate step between 2G and 3G wireless networks. UMTS is a
3G wireless standard that combines CDMA-based radio access with advanced
switching techniques 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, GSM, GPRS,
and UMTS standards. We also offer a range of related professional services to
our customers, including: business planning services; network design services;
site acquisition and installation services; network optimization services; and
technical operations and maintenance services.

Radio network access equipment uses radio waves to provide wireless access
to the subscribers handset, 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 (i) base station transceivers, and
(ii) 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 network 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, GSM, GPRS, and UMTS standards,

8



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supporting a wide variety of network requirements, including metropolitan and
dense urban networks, which are generally available in micro, macro, and mini
base station transceiver packages. We do not manufacture or sell cellular
phones.



| |  |  | Our TDMA radio network access portfolio supports wireless service
providers with licensed radio spectrum at 800 megahertz and/or 1900
megahertz.                                                                                                     
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Our CDMA base station transceivers support CDMA 2G (IS-95) and CDMA
3G (1xRTT) transmission standards at 800 megahertz and/or 1900
megahertz, and are expected to be upgradeable to support emerging CDMA
3G (1xEV and 1xDV) standards in the future.
|
| |  |  | Our GSM base station products support wireless service providers with
licensed radio spectrum at 900 megahertz, 1800 megahertz, and/or 1900
megahertz, and can be upgraded to support GPRS (2.5G).                                                   
|
| |  |  | Our UMTS 3G Access Network (UTRAN) radio network access equipment is
currently in customer trials.                                                                                                                                                   

Core networking equipment directs, routes, or switches communications
signals within a service providers 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: (i) mobile switching centers, and (ii)
home location registers. Mobile switching centers direct or switch data,
voice, and multimedia communications signals from one network circuit to
another. 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, and GSM
core networks. 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
currently in customer trials.

Product Development

Our wireless networking products in development include our UMTS 3G
products, the next evolution of our CDMA 3G products, and our GSM/EDGE
(Enhanced Data rates for GSM Evolution) products.



| |  |  | Our UMTS 3G radio network access and core network products are
currently in customer trials. We currently expect to launch these
products on a limited commercial basis by the third quarter of 2002,
with a commercial release launch expected to take place by the end of
2002.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Our CDMA 3G (1xRTT) products are generally available. Our other CDMA
3G (1x-EV-DO and DV) products are in development, with customer trials
of 1x-EV-DO products expected to begin by the end of 2002.                                                                           
|
| |  |  | Our GSM/EDGE products, which allow GSM operators to offer higher data
rates on existing GSM spectrum allocations, are expected to be in field
demonstration by the end of 2002, with customer trials planned for 2003.                                                           

In addition, our Adaptive MultiRate technology, which is designed to reduce the
cost of existing GSM network ownership for wireless service providers by
increasing capacity and radio spectrum efficiency of existing GSM base station
transceivers without adding new equipment, is currently expected to be in
customer trials in the second half of 2002. We also currently anticipate that
the enhanced version of our GSM base station controller, the GSM BSC e3, will
be commercially available in the first half of 2002.

9



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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. Since the beginning of 2000, many wireless service providers
have been upgrading their GSM and TDMA (2G) wireless networks to a higher speed
technology called GPRS (2.5G). In the next few years, we anticipate that new
network construction and network upgrades will focus on the evolution to UMTS
3G systems, the evolution path for GSM and GPRS networks, and to CDMA 3G
(1xRTT) systems, the evolution path for CDMA networks. Wireless service
providers operating TDMA networks are expected to choose either UMTS 3G or CDMA
3G (1xRTT) systems based on their business strategies.

The global market for wireless networking equipment increased
substantially from 1995 to 2000. However, in 2001, although our Wireless
Networks revenues grew, growth in the global wireless networking market
remained essentially flat. We believe that this was largely due to the
weakening of global economic conditions and capital markets, and the decision
of many wireless service providers to delay certain capital expenditures, given
the high costs of 3G licences, particularly in Europe, and the significant
decline in available financing. TDMA is a mature technology, and demand for
TDMA networking equipment declined in 2001. Demand for GSM networking
equipment is expected to decline over the next few years, even though GSM-based
systems continue to represent more than half of the global market for wireless
networking products. Demand for CDMA 2G (IS-95) technology is also expected to
decline over the next few years. Our customers are wireless service providers,
and their customers are the subscribers of wireless communications services.
In 2001, we believe that global economic uncertainties, as well as high
penetration rates in Europe, contributed to slower wireless subscriber growth.
In addition, we expect that wireless subscriber growth rates for 2G
technologies, including TDMA, CDMA 2G (IS-95), and GSM, to continue to slow in
the future, given existing subscriber penetration rates and user migration to
the newer 2.5G technologies (GPRS) and 3G technologies (CDMA 3G (1xRTT), and
UMTS).

There are two key aspects to the migration from 2G wireless communications
technologies to 2.5G and 3.G wireless communications technologies. The first
is that all current 3G technologies, including UMTS and CDMA (1xRTT), are based
on code division (CDMA) 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 networking technologies in
3G core networks. We believe that our extensive experience in deploying CDMA
2G (IS-95) wireless communications networks, combined with our expertise in
packet networking for wireline networks, will be a competitive strength for our
business during the expected market transition from 2G wireless communications
networks to 2.5G and 3G wireless communications networks. However, the timing
of changes in revenues in the short term from the different wireless
technologies has become increasingly difficult to predict as a result of the
continuing industry and capital markets adjustment and the complexities and
potential for delays in implementation of 3G network deployments.

Over the next two to three years, we anticipate that demand for wireless
networking equipment will be driven primarily by the growth of 2.5G and 3G
wireless networking systems. GPRS networks have already been launched in
Europe, while some North American wireless service providers are currently
building their GPRS networks. Some Korean wireless service providers have
already commercially launched CDMA 3G (1xRTT) networks. UMTS network
deployment has been delayed, generally due to economic uncertainties, capital
market constraints, delays in UMTS cellular phone availability, and the high
license fees that must be paid by UMTS wireless service providers. However, we
currently expect a number of European UMTS networks to be launched by the end
of the second half of 2002, with mass-market take-up beginning in 2003.

The market for our Wireless Networks products is a global one, covering
the United States and Canada, the Caribbean and Latin America region, the
Europe, Middle East and Africa region, and the Asia Pacific region. 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 in the United States and Canada the
transition from 2G to 2.5G and 3G technologies will be driven by CDMA 3G
(1xRTT) deployment for CDMA-based networks, and by GPRS/UMTS deployment for GSM
and TDMA-based networks. In the Caribbean and Latin America, wireless
subscriber growth continues at a high rate, largely due to the popularity and
increased affordability of wireless communications services. In Brazil,
capital spending by service providers has begun to shift from wireline
communications networks to wireless communications networks. However, we

10



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anticipate a slowdown in wireless infrastructure investments in the Caribbean
and Latin America region in 2002. Within the Europe, Middle East and Africa
region, 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. Investment decisions by wireless service
providers in western Europe are being driven by current and 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 networking technologies. However, many wireless service
providers in Europe have delayed this migration to 2.5G and 3G technologies as
a result of financing constraints, as well as the heavy debts they have
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 migration to 3G technologies in Japan, and by
continued growth in 2G technologies in China. Many countries in South and
Southeast Asia have very low wireless subscriber penetration levels, and are
expected to experience wireless subscriber growth over the next five years.

Customers

Our Wireless Networks customers are wireless service providers, and their
customers are the subscribers of wireless communications services. The top 20
global wireless service providers collectively control 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 Europe, 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 2001.

Competition

Our major competitors in the global wireless infrastructure business have
traditionally included Ericsson, Lucent, Motorola, Inc., and Nokia Corporation.
Nokia competes 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 and CDMA radio network access equipment. Ericsson competes in the sale
of equipment for all of the major wireless communications technologies. More
recently, Siemens has emerged as a competitor in the sale of GSM/UMTS systems,
and Samsung Electronics Co., Ltd. has emerged as a competitor in the sale of
CDMA systems.

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 the Europe,
Middle East and Africa region 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. Given
the significant capital expenditures required to build 3G wireless networks, we
anticipate that the ability of wireless network infrastructure suppliers to
offer customer financing will continue to be a key competitive factor.
Although we expect to see continued consolidation in our industry, newer
competitors, such as Siemens, Alcatel, Samsung, and Matsushita Electric
Industrial Co., Ltd. (also known as Panasonic), may continue to emerge.

11



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Optical Long-Haul Networks Segment

Products

Our Optical Long-Haul Networks solutions include a broad range of
long-distance optical networking products to address the needs of service
providers, including local and long-distance telephone companies, Internet
service providers, and other communications service providers. We refer you to
Optical Long-Haul Networks Segment  Customers below. Long-distance optical
networks transport data, voice, and multimedia communications between cities,
countries, or continents by transmitting communications signals in the form of
light particles/waves through fiber optic cables. Optical networking is the
most common method for long-distance transport of communications signals
between the various locations within a service providers network. We also
offer our customers a variety of related engineering, installation, and support
services.

Our optical long-haul networking solutions are designed to provide
long-distance, high-capacity transport and switching of data, voice, and
multimedia communications signals for operators of land-based and undersea
(submarine) communications networks. These solutions include Dense Wavelength
Division Multiplexing (DWDM) transmission solutions, synchronous optical
transmission solutions, optical switching solutions, and network management
software. We also offer our customers a wide range of optical components for
long-distance optical networks. Optical components are the optical networking
building blocks for our own products, and we also sell them to other network
equipment manufacturers.



| |  |  | DWDM technology allows multiple light particles/waves signals to be
transmitted on the same fiber optic strand at the same time by using
different wavelengths of light to distinguish the 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 data, voice and multimedia communications
signals through the cable using light particles/waves. Optical
transmission repeaters are used at locations along fiber optic cables
that span long distances to strengthen the signal. Our standard OPTera
long haul DWDM line systems span distances up to 600 kilometres without
the need for optical transmission repeaters, and allow the adding and
dropping of communication signals at intermediate locations along the
route. Our ultra-long-haul OPTera line systems span distances greater
than 600 kilometres without the need for optical transmission repeaters.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Our synchronous optical transmission systems use traditional optical
standards, including the Synchronous Optical Network (SONET) standard,
the most common standard in North America and some countries in Asia,
and the Synchronous Digital Hierarchy (SDH) standard, the most common
standard in European countries and many other countries. These
standards define the formats for converting electronic signals into
light signals, and light signals into electronic signals. Our
synchronous optical transmission equipment includes the SDMS
TransportNode line of SONET products, and the TN-X line of SDH products.
In addition, our Next Generation SONET/SDH product line, with extended
cross-connection, data transmission, and integrated DWDM capabilities
includes the OPTera Connect DX.                                                                                                                                                                                                                                                                           
|
| |  |  | Our optical switching solutions enable data, voice, and multimedia
communications signals in optical fibers to be selectively directed or
switched from one network circuit to another. Our optical switching
products provide grooming (the efficient re-packing of lower speed
signals into higher speed signals to maximize the use of network
capacity), aggregation, and protection of the end users communications
traffic, and focus on delivering low cost solutions to switch large
amounts of information onto the transmission systems. Our products in
this category include the OPTera Connect HDX, which is currently in
customer trials.                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  |  | Our Preside for Optical Long-Haul network management software covers
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,
performance management, and network security.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  |  | Our optical networking components include products such as optical
transmitters (that convert electrical signals into optical signals),
optical receivers (that convert optical signals into electrical
signals), lasers (that produce light suitable for transmission on
optical networks), tunable lasers (with an output frequency that can be
varied during                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

12



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| |  |  | use), amplifiers (that increase the intensity of an optical signal), and
other modules, circuits, and devices for long-haul optical networking.
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------

Product Development

We are committed to providing next-generation optical line systems,
including our OPTera Long Haul 5000 family of line systems, and next-generation
optical switching solutions, including our OPTera Connect HDX system.



| |  |  | Our OPTera Connect HDX switching system is currently in customer
trials and is expected to be commercially available in the second
quarter of 2002; and                                    
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Our new OPTera Long Haul 5000 family of line systems, which
complements the OPTera Connect HDX switching system, is currently
expected to be in customer trials in the second half of 2002.

We are also working to develop new applications for switching systems in
conjunction with ultra-long-reach transmission systems.

Markets

We are a leading provider of long-distance optical networking products to
communications service providers around the world. We are also a provider of
optical components to optical networking system and sub-system vendors around
the world. From 1998 to 2000, the telecommunications industry experienced
rapid growth in capital spending by service providers fueled by deregulation in
many countries, strong economies, readily available sources of capital, and
substantial growth in Internet and voice communications traffic. In 2001,
capital spending in the area of long-distance optical networking equipment by
service providers around the world decreased substantially. During 2001, with
the rapid and severe industry and economic downturn and the capital markets
decline, many service providers with excess capacity in their optical networks
as a result of network expansions in prior years were able to delay plans for
additional network expansions during 2001 by using their existing network
capacity. As a result of the reduction in optical network expansions, optical
system vendor demand for optical components also decreased substantially during
2001. In addition, the telecommunications industry experienced continuing
consolidation in 2001, with some service providers experiencing financial
difficulties, merger announcements by some other large service providers, and
acquisitions of other start-up service providers. This also contributed to
the reduction in service provider capital spending during 2001. We believe
that the trend towards consolidation in the global telecommunications industry
will continue in 2002.

We believe that end-user demand for network capacity from businesses and
other organizations will continue to grow in 2002 and beyond. However, in
2002, we anticipate that the declines in service provider capital spending in
the area of long-distance optical networking will continue, particularly in the
United States, before they become less severe as service providers begin to
utilize, and later exceed, their excess network capacity. Once service
providers have exhausted their current excess network capacity and begin to
engage in new network expansions, we anticipate that service provider demand
for long-distance optical networking equipment, and optical system vendor
demand for optical components, will both grow. We anticipate that the largest
optical networking system and sub-system vendors will account for a significant
proportion of all optical components purchases during 2002 and beyond, with
many start-up and smaller customers struggling or faltering. In addition,
economic stimulus measures by the United States and other countries, such as
the proposed deregulation of the Local Access Transport Area (LATA), may
provide new spending opportunities for service providers around the world.
However, the timing and impact of these initiatives is difficult to predict.

The market for our Optical Long Haul Networks products is a global one,
covering the United States and Canada, the Caribbean and Latin America region,
the Europe, Middle East and Africa region, and the Asia Pacific region. We
anticipate that pricing pressures will continue in all of these regions as
service providers exhaust their existing network capacity prior to expansion
and lease network capacity from others to a greater degree. In the United
States and Canada, where the telecommunications industries have been
deregulated for over a decade, we anticipate that network infrastructure
construction by service providers will no longer be built in advance of market
demand, as was the case before 2001. In the Caribbean and Latin America, where
a few service providers account for a significant percentage of the
telecommunications industry, the building of national optical network
infrastructures is largely complete. Within the Europe, Middle East and

13



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Africa region, government-sponsored service providers and networking equipment
suppliers enjoy favorable positions within many European countries, with
off-shore vendors such as Nortel Networks frequently limited to secondary
vendor positions with these service providers. In Europe, 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. Also, 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. The Asia Pacific region, where the telecommunications industry is
continuing to undergo deregulation, experienced substantial growth in industry
demand for long-distance optical networking equipment in 2001. As a result,
there has been an increased focus on the Asia Pacific region by virtually all
suppliers of long-distance optical networking equipment.

Customers

Our Optical Long-Haul Networks business is primarily focused on offering
our long-distance optical networking products to service providers around the
world. The service provider customers for our long-distance optical networking
products include, local and long-distance telephone companies, Internet service
providers, and other communications service providers. For a list of the types
of service providers we offer our products to, we refer you to Metro and
Enterprise Networks  Customers above. Nortel Networks is the primary
customer for our optical components products. We also sell our optical
components to other optical networking equipment suppliers in North America,
Europe and Asia, some of whom are competitors in other areas of our business.
We are currently focused on increasing our market presence with key global
service provider customers. In particular, we intend to focus on certain large
service providers, who we currently expect to account for a substantial
proportion of service provider capital spending in 2002 and beyond. None of
our Optical Long-Haul Networks customers represented more than 10 percent of
Nortel Networks consolidated revenues in 2001.

Competition

Our major competitors in the sale of long-distance optical networking
equipment include Alcatel, Ciena, Fujitsu Limited, Lucent, and Marconi. Market
position in the global market for long-distance optical networking equipment
fluctuates significantly on a quarter-by-quarter basis; however, Nortel
Networks continues to be a leading global provider of long-distance optical
networking equipment. Our major competitors in the sale of optical components
include Agere Systems Inc., and JDS Uniphase Corporation.

The primary global factors of competition for our Optical Long-Haul 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 the European,
Middle East and Africa region, and the Asia Pacific region; and
|
| |  |  | regulatory certification, particularly for incumbent local and
long-distance telephone companies.                                

Sales and Distribution

All of our three operating segments use Nortel Networks direct sales force
to market and sell to customers around the world. The Nortel Networks global
sales force is divided into regional groups. The Americas sales force,
primarily based in Richardson, Texas, supports customers all over the North and
South American continents, including the Caribbean Islands. The Europe, Middle
East and Africa sales force is based in Maidenhead, U.K., and the regional head
office for the Asia Pacific region is based in Hong Kong. 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. These enterprise sales
teams work directly with the top regional enterprises, and are also responsible
for managing regional distribution

14



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##### 



channels. Nortel Networks also has centralized marketing, product management,
and technical support teams dedicated to individual product lines that support
the global sales and support teams.

In Asian countries, 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 the Caribbean
and Latin America region, the Europe, Middle East and Africa region, and the
Asia Pacific region. In the Metro and Enterprise Networks segment, we also use
system integrators, value added resellers and stocking distributors as
non-exclusive distribution channels for our products.

Product Standards, Certification, and Regulation

Our products are subject to equipment standards 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.

Our products and operations are not subject to telecommunications
regulation. However, the operations of our service provider customers are
subject to extensive country-specific telecommunications regulations. Material
changes in these regulations at any time or from time to time may affect
capital spending by service providers around the world, and this may in turn
affect the global market for networking solutions.

Financial Information by Operating Segment and Product Category

For financial information by operating segment and product category, see
note 15 to the Consolidated Financial Statements, and Results
of operations  continuing operations  Revenues  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 Geographic information
in note 15 to the Consolidated Financial Statements, and
Results of operations  continuing operations  Revenues  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 Liquidity and capital
resources in Managements Discussion and Analysis of Financial Condition and
Results of Operations, and note 8 to the Consolidated Financial Statements.

15



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##### 



Sources and Availability of Materials

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



| |  |  | make significant purchases of electronic components and assemblies,
optical components (if applicable), original equipment manufacturer
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.                                                                    

Throughout 2001, we faced significantly different market conditions than we did
in 1999 and 2000. During periods of high industry growth, as we experienced in
1999 and 2000, our objective was to obtain sufficient materials and components
to produce enough product to meet demand. By contrast, in 2001, the industry
was no longer in a period of high growth and faced supply surpluses and excess
inventories existed in many areas. As a result, we were required to rapidly
reduce our production in a number of areas, to write-off excess inventories,
and to effectively manage our remaining inventories. From 1999 through 2001,
we implemented a program to outsource most of our in-house manufacturing to
contract manufacturers. During 2001, this initiative to outsource most of our
in-house manufacturing, combined with our focus on lowering our production
levels, assisted us in decreasing our inventory levels. At the same time that
we decreased our inventory levels, we also developed systems in 2001 to
maintain our flexibility to increase inventory levels as needed. We intend to
continue to focus on inventory management, 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.

Seasonality

Traditionally, our business results in all of our operating segments were
generally strongest in our fourth quarter, second strongest in our second
quarter, third strongest in our third quarter, and the least strong in our
first quarter, primarily due to the networking industry purchasing cycles
exhibited by our customers. However, in 2001, we experienced a rapid and
increasingly severe industry and economic downturn in the United States and
elsewhere, and our customers faced restricted capital markets, which affected
demand for our products and services, our customers traditional purchasing
patterns, and the seasonality of our business. It is unclear whether, in the
future, the timing of network expansions by 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, including, but not
limited to, the areas of non-core optical components, network computing,
wireless appliances, and certain applications. 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. For information regarding the risks associated with
strategic alliances, see Forward-looking statements in Managements
Discussion and Analysis of Financial Condition and Results of Operations.

In 1999 and 2000, we acquired companies to further the expansion of our
business and products. In 2001, with the sudden industry and economic downturn
and the related capital markets decline, Nortel Networks acquisition activity
slowed significantly. In the future, we may consider selective opportunistic
acquisitions of companies 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.

16



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We continue to hold minority investments acquired primarily in 1999 and
2000 in certain start-up businesses with technology, products, or services
that, at the time of the investment, we believed had the potential to fulfill
key existing or emerging market opportunities. This investment activity slowed
in 2001 and we do not expect an increase in our minority investments in
start-up businesses. 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 significant investments in our research and
development activities. Our research and development activitiesspecifically,
research, design and development, systems engineering, and other product
development activitiesfocus on solutions in each of our operating segments.
We refer you to the three Product Development discussions contained in the
descriptions of our Metro and Enterprise Networks segment, our Wireless
Networks segment, and our Optical Long-Haul Networks segment above. 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.

A substantial portion of Nortel Networks is dedicated to research and
development, forming a core strength and a factor differentiating us from many
of our competitors. As at December 31, 2001, we employed approximately 16,900
regular full-time research and development employees*. As at December 31,
2001, we employed approximately 7,500 regular full-time research and
development employees in Canada, approximately 6,100 regular full-time research
and development employees in the United States, and approximately 3,000 regular
full-time research and development employees in Europe. We also conduct
research and development activities through affiliated labs 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)
|                                                           
|                                                            |  | 2001                  |       | 2000 |  | 1999
|                                                           
|Research and development expense                            |  | $                     | 3,230 |      |  | $    | 3,626 |  |  | $ | 2,724 | 
|Research and development costs incurred on behalf of others |  |                       | 68    |      |  |      | 64    |  |  |   | 131   | 
|                                                           
|Total                                                       |  | $                     | 3,298 |      |  | $    | 3,690 |  |  | $ | 2,855 | 
|                                                           

Intellectual Property

Our intellectual property is fundamental to the business of each of our
operating segments. We generate, maintain, and enforce a substantial portfolio
of intellectual property rights, including trademarks, and an extensive and
growing portfolio of patents covering significant innovations arising from
research and development activities. In all of our operating 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.

On a consolidated basis, we have approximately 2,600 United States patents
and approximately 3,000 patents in other countries. In addition, we have more
than 6,000 pending patent applications worldwide. Approximately 30 percent of
our patents relate to our Metro and Enterprise Networks segment, approximately
18 percent relate to our Wireless Networks segment, approximately 12 percent
relate to our Optical Long-Haul Networks segment, and approximately 40 percent
span multiple operating segments or relate to other areas. Our patents outside
of the United States are primarily counterparts to our United States patents.
In 2001, we were granted 499 United States patents, continuing our plan of
increasing our patent holdings. 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



---

|* |  | Excluding employees on notice of termination.
|- |  | ---------------------------------------------

17



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our patents and/or technology to third parties. We also occasionally license
single patents or groups of patents from third parties.

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. On a consolidated basis, we own
approximately 140 registered trademarks in the United States, and approximately
2,000 registered trademarks in other countries. In addition, we have more than
360 pending trademark registrations worldwide.

Employee Relations

At December 31, 2001, we employed approximately 51,600 regular full-time
employees,** including approximately:



| |  |  | 18,700 regular full-time employees in the United States;
| | - |  | --------------------------------------------------------
|
| |  |  | 13,700 regular full-time employees in Canada;           
|
| |  |  | 13,700 regular full-time employees in Europe; and       
|
| |  |  | 5,500 regular full-time employees in other countries.   

We also employ individuals on a part-time basis and use the services of
independent contractors. At December 31, 2001, we employed approximately 1,000
regular part-time employees, and engaged the services of approximately 900
independent contractors. As part of our resizing activities to further reduce
our cost structure and streamline operations, we notified for termination and
provisioned for approximately 35,500 employees during 2001. See Special
charges in Managements Discussion and Analysis of Financial Condition and
Results of Operations, and note 7 to the Consolidated Financial Statements. In
addition, the divestiture of non-core businesses completed or entered into in
2001 resulted in additional employee reductions.

Labor contracts cover approximately 6 percent of our employees worldwide.
Five labor contracts cover approximately 13 percent of our employees in Canada.
Two of these five labor contracts cover approximately 74 percent of Canadian
unionized employees and will expire in 2004. Two of the remaining three
contracts expire in 2003, affecting approximately 8 percent of Canadian
unionized employees. The remaining contract expires in 2008, affecting
approximately 18 percent of Canadian unionized employees. Labor contracts
cover approximately 4 percent of our employees in Europe and all of our
employees in Brazil. The labor contracts generally have a one-year term in
Europe 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 that we announced in
2001. 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 applicable environmental 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



---

|** |  | Excluding employees on notice of termination.
|-- |  | ---------------------------------------------

18



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##### 



policy, we attempt to evaluate and assume responsibility for the environmental
impacts of our products throughout their life cycles. Our environmental
program focuses on design for the environment, and 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 regarding our environmental matters, see
ContingenciesEnvironmental matters in note 17 to the Consolidated Financial
Statements.

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.

19



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|ITEM 2. |  | PROPERTIES
|------- |  | ----------

At December 31, 2001, we operated 276 sites around the world occupying
approximately 21.8 million square feet. The following table sets forth
additional information regarding these sites:

|                                                   |  |                 |     |                           |  |                      |     |        |  |       |      |  |  |  |      |  |  |                                                                                                  
|-------------------------------------------------- |  | --------------- | --- | ------------------------- |  | -------------------- | --- | ------ |  | ----- | ---- |  |  |  | ---- |  |  | -------------------------------------------------------------------------------------------------
|                                                  
|                                                   |  |                 |     |                           |  | Square Footage       |     |       
|Type of Site*                                      |  | Number of Sites |     | (millions of square feet) |  | Geographic Locations
|                                                  
|                                                   |  |                 |     |                           |  | Owned                |     | Leased |  | Total |      | 
|                                                  
|Manufacturing and Repair                           |  |                 | 17  |                           |  |                      | 3.2 |        |  |       | 1.4  |  |  |  | 4.6  |  |  | United States, Canada, Caribbean
and Latin America,
Europe, Asia Pacific                         
|                                                  
|Distribution Centers                               |  |                 | 9   |                           |  |                      | 0.5 |        |  |       | 0.3  |  |  |  | 0.8  |  |  | United States, Canada, Caribbean
and Latin America, Europe                                       
|                                                  
|Offices (Administration,
Sales, and Field Service) |  |                 | 235 |                           |  |                      | 3.5 |        |  |       | 8.5  |  |  |  | 12.0 |  |  | United States, Canada, Caribbean
and Latin America, Europe, the Middle
East, Africa, Asia Pacific
|                                                  
|Research and Development                           |  |                 | 15  |                           |  |                      | 2.6 |        |  |       | 1.8  |  |  |  | 4.4  |  |  | United States, Canada, Europe,
Asia Pacific                                                      
|                                                  
|TOTAL                                              |  |                 | 276 |                           |  |                      | 9.8 |        |  |       | 12.0 |  |  |  | 21.8 |  |  |                                                                                                  
|                                                  

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

Seventeen percent of our facilities are primarily used by our Metro and
Enterprise Networks segment, 12 percent of our facilities are primarily used by
our Wireless Networks segment, and 8 percent of our facilities are primarily
used by our Optical Long-Haul Networks segment. The remaining 63 percent of
our facilities serve the needs of more than one of our operating segments
and/or corporate functions.

As part of our restructuring and resizing activities in 2001, we
discontinued our access solutions operations, we completed a number of
divestitures and outsourcing transactions, and we amended certain credit
agreements. See Developments in 2001 in Managements Discussion and Analysis
of Financial Condition and Results of Operations. These activities resulted in
a substantial reduction in the number of sites and square footage of our global
facilities to align ourselves with current market conditions. In addition, our
amended credit agreements provide for the granting of security over
substantially all of Nortel Networks physical assets, including real estate
assets in North America, in the event that Nortel Networks Limiteds United
States senior unsecured long-term debt rating falls below investment grade.
For additional details, see note 8 to the Consolidated Financial Statements,
and Liquidity and capital resources  Sources of liquidity in Managements
Discussion and Analysis of Financial Condition and Results of Operations. We
believe our plants and facilities are suitable and adequate, and have
sufficient productive capacity to meet our current needs.



|ITEM 3. |  | LEGAL PROCEEDINGS
|------- |  | -----------------

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



|ITEM 4. |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------- |  | ---------------------------------------------------

Not applicable.

20



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##### 



PART II



|ITEM 5. |  | MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
|------- |  | -------------------------------------------------------------------------

The common shares of Nortel Networks Limited 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
Nortel Networks Limited. 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.

The amended and restated credit agreements entered into on December 20,
2001 by Nortel Networks Limited and Nortel Networks Inc. restrict the ability
of Nortel Networks Limited and its material subsidiaries, including Nortel
Networks Inc., to pay cash dividends or make loans or advances to Nortel
Networks Corporation. Nortel Networks Limited is permitted to pay cash
dividends to Nortel Networks Corporation in certain circumstances, including to
fund interest payments due on Nortel Networks Corporations outstanding 4.25%
Convertible Senior Notes Due 2008, as long as Nortel Networks Limited is in
compliance with specified covenants contained in the credit agreements.

21



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##### 





|ITEM 6. |  | SELECTED FINANCIAL DATA (UNAUDITED)
|------- |  | -----------------------------------

|                                                                                        |                                                     |   |                                                     |       |      |   |        |       |      |   |        |       |   |   |        |       |   |   |        |      |  
|--------------------------------------------------------------------------------------- | --------------------------------------------------- | - | --------------------------------------------------- | ----- | ---- | - | ------ | ----- | ---- | - | ------ | ----- | - | - | ------ | ----- | - | - | ------ | ---- | -
|                                                                                        |                                                     |   | (millions of U.S. dollars except per share amounts)
|                                                                                       
|                                                                                        |                                                     |   | 2001                                                |       | 2000 |   | 1999   |       | 1998 |   | 1997  
|                                                                                       
|Results of Operations                                                                   |                                                     |   |                                                     |       |      |   |        |       |      |   |        |       |   |   |        |       |   |   |        |     
|                                                                                        |                                                     |  
|Revenues                                                                                |                                                     | $ | 17,375                                              |       |      | $ | 27,853 |       |      | $ | 19,628 |       |   | $ | 16,084 |       |   | $ | 13,857 |     
|Research and development expense                                                        |                                                     |   | 3,230                                               |       |      |   | 3,626  |       |      |   | 2,724  |       |   |   | 2,318  |       |   |   | 2,079  |     
|Other income (expense)  net                                                            |                                                     |   | (325                                                | )     |      |   | 835    |       |      |   | 236    |       |   |   | 201    |       |   |   | (54    | )   
|Income tax benefit (provision)                                                          |                                                     |   | 3,073                                               |       |      |   | (1,200 | )     |      |   | (576   | )     |   |   | (488   | )     |   |   | (368   | )   
|Net
earnings (loss) from continuing operations(1)                                       |                                                     |   | (11,555                                             | )     |      |   | (871   | )     |      |   | (230   | )     |   |   | (561   | )     |   |   | 683    |     
|Net earnings (loss) from discontinued
operations-net of tax                             |                                                     |   | (2,538                                              | )     |      |   | (414   | )     |      |   | (94    | )     |   |   | (689   | )     |   |   | 29     |     
|Dividends on preferred shares                                                           |                                                     |   | 27                                                  |       |      |   | 31     |       |      |   | 27     |       |   |   | 32     |       |   |   | 17     |     
|Net earnings (loss) applicable to
common shares                                         |                                                     |   | (14,105                                             | )     |      |   | (1,316 | )     |      |   | (351   | )     |   |   | (1,282 | )     |   |   | 695    |     
|                                                                                        |                                                     |  
|Financial Position at December 31                                                       |                                                     |   |                                                     |       |      |   |        |       |      |   |        |       |   |   |        |       |   |   |        |     
|                                                                                        |                                                     |  
|Total assets                                                                            |                                                     | $ | 19,993                                              |       |      | $ | 30,912 |       |      | $ | 24,007 |       |   | $ | 21,828 |       |   | $ | 12,250 |     
|Long-term debt                                                                          |                                                     |   | 2,677                                               |       |      |   | 1,622  |       |      |   | 1,426  |       |   |   | 1,529  |       |   |   | 1,635  |     
|Minority interest in subsidiary companies                                               |                                                     |   | 100                                                 |       |      |   | 161    |       |      |   | 45     |       |   |   | 91     |       |   |   | 94     |     
|Preferred shares                                                                        |                                                     |   | 536                                                 |       |      |   | 609    |       |      |   | 609    |       |   |   | 609    |       |   |   | 609    |     
|Common shareholders equity                                                             |                                                     |   | 5,437                                               |       |      |   | 17,959 |       |      |   | 13,072 |       |   |   | 12,190 |       |   |   | 4,517  |     
|Book value per common share                                                             |                                                     |   | 3.72                                                |       |      |   | 12.36  |       |      |   | 9.49   |       |   |   | 9.19   |       |   |   | 4.35   |     
|                                                                                        |                                                     |  
|(1)  Included in net earnings (loss) from
continuing operations
     are the following: |                                                     |   |                                                     |       |      |   |        |       |      |   |        |       |   |   |        |       |   |   |        |     
|                                                                                        | Acquisition-Related
Costs(2)                        |   | $                                                   | 2,614 |      |   | $      | 3,857 |      |   | $      | 2,075 |   |   | $      | 1,809 |   |   | $      |     |  
|                                                                                        | Stock option compensation                           |   |                                                     |      |      |   |        | 99    |      |   |        |      |   |   |        |      |   |   |        |     |  
|                                                                                        | Gain on sale of businesses                          |   |                                                     | (125  | )    |   |        | (174  | )    |   |        | (131  | ) |   |        | (258  | ) |   |        | (102 | )
|                                                                                        | Special charges                                     |   |                                                     | 5,443 |      |   |        | 269   |      |   |        | 174   |   |   |        | 353   |   |   |        | 95   |  
|                                                                                        | Equity in net loss of associated companies          |   |                                                     | 119   |      |   |        | 22    |      |   |        |      |   |   |        |      |   |   |        |     |  
|                                                                                        | Other income  net                                  |   |                                                     |      |      |   |        | (682  | )    |   |        | (133  | ) |   |        | (183  | ) |   |        |     |  
|                                                                                        | Net tax impact on above                             |   |                                                     | 1,041 |      |   |        | 11    |      |   |        | (222  | ) |   |        | (66   | ) |   |        | 1    |  
|                                                                                        | Cumulative effect of accounting
change  net of tax |   |                                                     | (15   | )    |   |        |      |      |   |        |      |   |   |        |      |   |   |        |     |  



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

22



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##### 





|ITEM 7. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2001
|------- |  | --------------------------------------------------------------------------------------------------------------------------

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

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

Business overview

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

We re-organized our operations during the fourth quarter of 2001 to focus
on providing seamless networking products and service capabilities across three
core business areas and three segments: Metro and Enterprise Networks; Wireless
Networks; and Optical Long-Haul Networks. These products and service solutions
are used by service provider and enterprise customers, including incumbent and
competitive local exchange carriers, interexchange carriers, service providers
with global businesses, wireless service providers, Internet service providers,
application service providers, hosting service providers, resellers, cable
television companies, other communications service providers, large businesses
and their branch offices, small businesses, and home offices, as well as
government, education, and utility organizations.

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

Nortel Networks Corporations common shares are publicly-traded on the New
York and Toronto stock exchanges under the symbol NT. Nortel Networks
Limited is the principal direct operating subsidiary of Nortel Networks
Corporation. Nortel Networks Corporation owns all of our outstanding common
shares and none of our preferred shares. Acquisitions involving any share
consideration are completed by Nortel Networks Corporation and acquisitions
involving only cash consideration are generally completed by us or one of our
direct subsidiaries.

23



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##### 



Developments in 2001

Core market refocus and associated restructuring

During 2001, in light of the significant downturn in both the
telecommunications industry and the economic environment, and capital market
trends impacting our operations and expected future growth rates, we
implemented our work plan to streamline operations and activities around our
core markets and leadership strategies. This work plan was adjusted during the
year to reflect the continued decline in the industry and economic environment,
and in the capital markets. In connection with our work plan, we took the
following actions to position and strengthen our business:



| |  |  | During 2001, through workforce reductions, the divestiture of
non-core businesses, and regular attrition we reduced our overall
workforce to approximately 51,600 employees (excluding employees on
notice of termination) from the approximately 92,900 employees at the
beginning of 2001. We will notify the additional employees impacted by
the announced workforce reductions upon compliance with certain regional
legislation in Europe, as required. As a result, we will incur a
workforce reduction and related charge in the first quarter of 2002, and
may incur further charges in the second quarter of 2002. We expect to
complete the divestiture of additional non-core businesses during the
next few quarters. Upon completion of such workforce reductions and
divestitures, we expect to have an overall workforce of approximately
48,000 employees. We have incurred charges of $3,310 during 2001 with
respect to the notification of employees, contract settlement and lease
costs, the write down of plant and equipment, and the write-off of
goodwill associated with our prior acquisitions of MICOM Communications
Corp. and Dimension Enterprises, Inc., of which the total cash cost is
expected to be approximately $2,280 (See Special charges and
Liquidity and capital resources for additional information).
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | During 2001, actions were taken in order to strengthen our liquidity
position. Effective December 20, 2001, Nortel Networks Limited and its
subsidiary, Nortel Networks Inc., amended their $2,000 364-day
syndicated credit agreements. These amended credit agreements reduced
the aggregate size of the committed facilities to $1,575, extended the
term of the credit agreements to December 13, 2002, and included
financial and other covenants and provisions for the granting of
security over certain assets in specified circumstances. On February 8,
2001, Nortel Networks Limited completed an offering of $1,500 of 6.125
percent notes due February 15, 2006 (See Liquidity and capital
resources for additional information).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  |  | On June 15, 2001, Nortel Networks Corporation announced plans to
discontinue our access solutions operations, consisting of all of our
narrowband and broadband solutions, including copper, cable, and fixed
wireless solutions, as well as our then current consolidated membership
interest in Arris Interactive LLC and equity investment in Elastic
Networks Inc. Also affected by the decision were our prior acquisitions
of Promatory Communications, Inc., Aptis Communications, Inc., and
Broadband Networks Inc. We continue to work towards disposing of or
transitioning the ownership of certain operations. Any operations not
disposed of or transitioned are expected to be closed. We expect to
complete this plan by June 2002, subject to the closing of specific
transactions, the timing of which is impacted by regulatory approval
processes and business issues (See Liquidity and capital resources,
for additional information).                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  |  | During the second half of 2001, we completed several transactions in
respect of the outsourcing of non-strategic manufacturing activities and
the sale of non-core businesses, resulting in approximately $500 in cash
inflows (See Liquidity and capital resources for additional
information).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

Intangible assets write down

In light of the significant negative industry and economic trends
impacting our operations and expected future growth rates, and the capital
markets adjustment of technology valuations, we performed an assessment of the
carrying values of intangible assets recorded in connection with our various
acquisitions as part of our review of financial results during the three months
ended June 30, 2001. As a result, we recorded a $2,133 (pre-tax) write down of
intangible assets in the three months ended June 30, 2001 (See Special
charges for additional information).

24



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##### 



Legal matters

Subsequent to the February 15, 2001 announcement in which Nortel Networks
Corporation provided revised guidance for financial performance for the fiscal
year and first quarter 2001, Nortel Networks Corporation and certain of its
then current officers and directors were named as defendants in numerous
purported class action lawsuits. These lawsuits allege, among other things,
violations of United States federal and Canadian provincial securities laws.
Securities regulatory authorities in Canada and the United States are also
reviewing these matters. In addition, a class action lawsuit was filed on
behalf of shareholders who acquired the securities of JDS Uniphase Corporation
between January 18, 2001 and February 15, 2001, alleging violation of the same
United States federal securities laws as the other lawsuits in connection with
our acquisition of certain of JDS Uniphase Corporations assets in exchange for
common shares of Nortel Networks Corporation. On December 21, 2001, a
purported class action lawsuit was filed on behalf of certain participants and
beneficiaries of the Nortel Networks Long-Term Investment Plan, who made or
maintained plan investments in Nortel Networks Corporations common shares,
under the United States Employee Retirement Income Security Act (See Legal
proceedings for additional information).

Results of operations  continuing operations

Revenues

Segment revenues

The following table sets forth revenues by segment for the years ended
December 31:

|                              |  |                                  |        |              |  |              |        |         |  |          |        |         |  |          |         |   |  |  |       |   |  |   |       |  |  |  |       | 
|----------------------------- |  | -------------------------------- | ------ | ------------ |  | ------------ | ------ | ------- |  | -------- | ------ | ------- |  | -------- | ------- | - |  |  | ----- | - |  | - | ----- |  |  |  | ----- | 
|                             
|                              |  | For the years ended December 31, |        | 2001 vs 2000 |  | 2000 vs 1999
|                              |  | 2001                             |        | 2000         |  | 1999         |        | $Change |  | % Change |        | $Change |  | % Change
|                             
|                              |  |                                 
|Metro and Enterprise Networks |  | $                                | 8,782  |              |  | $            | 13,467 |         |  | $        | 11,786 |         |  | $        | (4,685  | ) |  |  | (34.8 | ) |  | $ | 1,681 |  |  |  | 14.3  | 
|Wireless Networks             |  |                                  | 5,714  |              |  |              | 5,438  |         |  |          | 4,091  |         |  |          | 276     |   |  |  | 5.1   |   |  |   | 1,347 |  |  |  | 32.9  | 
|Optical Long-Haul Networks    |  |                                  | 2,240  |              |  |              | 7,882  |         |  |          | 3,416  |         |  |          | (5,642  | ) |  |  | (71.6 | ) |  |   | 4,466 |  |  |  | 130.7 | 
|Other                         |  |                                  | 639    |              |  |              | 1,066  |         |  |          | 335    |         |  |          | (427    | ) |  |  | (40.1 | ) |  |   | 731   |  |  |  | 218.2 | 
|                             
|Consolidated                  |  | $                                | 17,375 |              |  | $            | 27,853 |         |  | $        | 19,628 |         |  | $        | (10,478 | ) |  |  | (37.6 | ) |  | $ | 8,225 |  |  |  | 41.9  | 
|                             

Geographic
revenues

The following table sets forth revenues by geographic region for the years
ended December 31:

|                     |  |                                  |        |              |  |              |        |         |  |          |        |         |  |          |         |   |  |  |       |   |  |   |       |  |  |  |      | 
|-------------------- |  | -------------------------------- | ------ | ------------ |  | ------------ | ------ | ------- |  | -------- | ------ | ------- |  | -------- | ------- | - |  |  | ----- | - |  | - | ----- |  |  |  | ---- | 
|                    
|                     |  | For the years ended December 31, |        | 2001 vs 2000 |  | 2000 vs 1999
|                     |  | 2001                             |        | 2000         |  | 1999         |        | $Change |  | % Change |        | $Change |  | % Change
|                    
|                     |  |                                 
|External
revenues(a) |  |                                  |        |              |  |              |        |         |  |          |        |         |  |          |         |   |  |  |       |   |  |   |       |  |  |  |      | 
|United States        |  | $                                | 8,524  |              |  | $            | 16,798 |         |  | $        | 11,632 |         |  | $        | (8,274  | ) |  |  | (49.3 | ) |  | $ | 5,166 |  |  |  | 44.4 | 
|Canada               |  |                                  | 936    |              |  |              | 1,505  |         |  |          | 1,244  |         |  |          | (569    | ) |  |  | (37.8 | ) |  |   | 261   |  |  |  | 21.0 | 
|Other countries      |  |                                  | 7,915  |              |  |              | 9,550  |         |  |          | 6,752  |         |  |          | (1,635  | ) |  |  | (17.1 | ) |  |   | 2,798 |  |  |  | 41.4 | 
|                    
|Consolidated         |  | $                                | 17,375 |              |  | $            | 27,853 |         |  | $        | 19,628 |         |  | $        | (10,478 | ) |  |  | (37.6 | ) |  | $ | 8,225 |  |  |  | 41.9 | 
|                    



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

Consolidated

In 2001, the telecommunications industry underwent a significant
adjustment, particularly in the United States. Following a period of rapid
infrastructure build-out and strong economic growth in 1999 and 2000, we saw a
continued tightening in the capital markets and slowdown in the
telecommunications industry throughout 2001. This resulted in lower

25



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##### 



capital spending by industry participants and substantially less demand for our
products and services as service providers focused on maximizing their return
on invested capital. As a result, our consolidated revenues declined
substantially, primarily in the Optical Long-Haul Networks segment and the
circuit to packet voice networks portion of the Metro and Enterprise Networks
segment, due to our customers change in focus from building new networks to
conserving capital and/or increasing the capacity utilization rates and
efficiency of existing networks, and reducing costs. We expect that the severe
lack of available funding from the capital markets, high debt levels of many
service providers, bankruptcies of certain service providers, excess network
assets, excess and shared bandwidth capacity, and the compounding impact of
economic concerns will continue to constrain capital spending by service
providers. It is difficult to predict the duration or severity of this
industry adjustment, as growth in industry spending is not expected to occur
until economic concerns have subsided and the anticipated rationalization of
the telecom industry is well underway. For the year 2002, we currently expect
a gradual growth in revenues beginning in the second quarter. However, market
visibility remains limited given the uncertainty of the economic downturn and
its impact on our customers business and spending plans. We do not expect
that results of operations for any quarter will necessarily be consistent with
our quarterly historical profile or indicative of results to be expected for
future quarters.

The significant adjustment in the telecommunications industry, which was
initially felt and was most severe in the United States, also impacted Europe,
the Caribbean and Latin America region, and the Asia Pacific region during
2001. Overall revenues declined substantially across all regions, with the
exception of the Asia Pacific region, in 2001 compared to 2000. The Asia
Pacific region saw substantial growth during this period due to considerable
sequential growth in the first half of 2001, primarily as a result of growth 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. We expect that revenues from
the Peoples Republic of China will be affected by the expected break-up of a
major Chinese service provider. The decline in Europe reflects 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 the Caribbean and Latin America region reflects substantial sequential
declines in the second and third quarters of 2001. The Unites States was
essentially flat sequentially in the fourth quarter of 2001 following three
quarters of substantial sequential declines in 2001.

The substantial revenue growth in 2000 compared to 1999 was due to
substantial growth in the Optical Long-Haul Networks segment, significant
growth in the Metro and Enterprise Networks segment, and substantial growth in
the Wireless Networks segment. The substantial revenue growth was primarily
due to substantial increases in the United States and Europe. Consolidated
revenues increased as a result of increases in sales volume and new product
introductions, slightly offset by price reductions.

Metro and Enterprise Networks

The substantial decline in revenues in 2001 compared to 2000 was due to
substantial declines in sales of the circuit to packet voice networks and metro
optical portions of this segment, and a significant decline in the packet
switching and routing portion of this segment. The substantial decrease in
sales of the circuit to packet voice networks portion of this segment was
primarily the result of reduced demand in the interexchange carrier market due
to the significant adjustment in the telecom industry, industry consolidation,
tightened capital markets, and the maturing of this portion of the
segment. The
substantial decrease in sales of the metro optical portion of this segment
related to declines in sales volumes of mature optical products that have a
metro application. The significant decline in sales of the packet switching
and routing portion of this segment was primarily due to a decline in demand
for mature products in this portion of the segment, compounded by the continued
industry adjustment as customers delayed the purchase of next generation
products. The circuit to packet voice networks for the service providers and
enterprises portion of this segment continues to form a substantial portion of
the overall sales for this segment. As data, voice, and multimedia
communications technologies continue to converge, and service providers as well
as enterprises look for ways to maximize the effectiveness of their existing
networks while reducing ongoing capital expenditures and operating costs, we
anticipate that communications networks will use packet-based technologies.
However, the timing of this progression in the short term is unclear as a
result of the continuing industry adjustment. The substantial decline in
overall segment revenues was primarily due to a substantial decline in the
United States, a significant decline in Europe, and substantial declines in
Canada and the Caribbean and Latin America region.

The significant growth in revenues in 2000 compared to 1999 was due to
substantial growth in sales of the metro optical portion of this segment, an
increase in sales of the circuit to packet voice networks portion of this
segment, and

26



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##### 



significant growth in sales of the packet switching and routing portion of this
segment. The significant growth in overall segment revenues was primarily due
to significant growth in the United States and Europe.

Wireless Networks

The increase in revenues in 2001 compared to 2000 was primarily due to
substantial revenue increases during the first half of 2001, driven by growth
in the United States and the Asia Pacific region, as major customers continued
their network expansion programs. This increase was partially offset by
declines in the United States during the second half of 2001, compared to 2000,
and declines in the Caribbean and Latin America region in the second and third
quarters of 2001, compared to the same periods in 2000, as a result of
deterioration in 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. The overall growth in Wireless Networks segment revenues in the
United States was primarily generated by sales of Code Division Multiple
Access, or CDMA, and Time Division Multiple Access, or TDMA, technologies. The
overall growth in the Asia Pacific region was primarily generated by sales of
Global System for Mobile communications, or GSM, technology. Universal Mobile
Telecommunications System, or UMTS, and CDMA 3G technology sales are expected
to represent a larger proportion of our total Wireless Networks segment
revenues as third generation, or 3G, technologies gain a greater foothold in
the market and as GSM and TDMA sales slow, comparatively. However, the timing
of changes in revenues in the short term from the different wireless
technologies has become increasingly difficult to predict as a result of the
continuing industry and capital markets adjustments and the complexities and
potential for delays in implementation of 3G network deployments. The increase
in overall segment revenues was primarily due to a significant increase in the
United States and a substantial increase in the Asia Pacific region, partially
offset by substantial declines in the Caribbean and Latin America region and
Europe.

The substantial growth in revenues in 2000 compared to 1999 was due to an
increase in wireless network build-outs, primarily by our major United States
customers. The substantial increase in overall segment revenues was primarily
due to substantial growth in the United States, Europe, and the Caribbean and
Latin America region.

Optical Long-Haul Networks

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

The substantial growth in revenues in 2000 compared to 1999 was due to
substantially increased network build-out activity, primarily by our United
States customers, as industry participants competed in the deregulated
environment and

27



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##### 



positioned themselves for the then anticipated increased demand for network
capacity. The build-out activity was aided by the increased flow of funds from
capital markets to this sector during this period. The substantial increase in
segment revenues was primarily due to substantial increases in the United
States, Europe, and the Caribbean and Latin America region.

Gross profit and gross margin

The following table sets forth gross profit and gross margin for the years
ended December 31:

|             |  |                                  |       |              |  |              |        |        |  |          |       |        |  |          |        |   |  |  |       |   |  |   |       |  |  |  |      | 
|------------ |  | -------------------------------- | ----- | ------------ |  | ------------ | ------ | ------ |  | -------- | ----- | ------ |  | -------- | ------ | - |  |  | ----- | - |  | - | ----- |  |  |  | ---- | 
|            
|             |  | For the years ended December 31, |       | 2001 vs 2000 |  | 2000 vs 1999
|             |  | 2001                             |       | 2000         |  | 1999         |        | Change |  | % Change |       | Change |  | % Change
|            
|Gross profit |  | $                                | 3,134 |              |  | $            | 12,784 |        |  | $        | 8,847 |        |  | $        | (9,650 | ) |  |  | (75.5 | ) |  | $ | 3,937 |  |  |  | 44.5 | 
|Gross margin |  |                                  | 18.0% |              |  |              | 45.9%  |        |  |          | 45.1% |        |  |          | (27.9  | ) |  |  | (60.8 | ) |  |   | 0.8   |  |  |  | 1.8  | 

Gross profit decreased substantially in 2001 compared to 2000 due to
substantial declines in revenues and gross margin. The decrease in gross
margin was due to substantial decreases in gross margins across all segments.
The overall decrease in gross margin was primarily due to the following
factors: (i) approximately $1,478 of increased provisions, related to the
entire supply chain and contract and customer settlements, as a result of the
significant adjustment in the telecommunications industry; (ii) our fixed cost
structure that was not reflective of the lower sales volumes in 2001; (iii)
pricing pressures across certain products and services, primarily in the
Optical Long-Haul Networks segment, resulting from increased competition in the
current economic environment; and (iv) shifts in the geographic mix of sales
from the United States to Europe 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 to what extent pricing pressures will continue, or
whether the shift in the geographic mix of our sales will continue, we expect
that our work plan, when completed, will result in a cost structure that is
more reflective of the current industry and economic environment. In addition,
we believe that our current provision levels related to the entire supply chain
reflect both current and anticipated future market demand. As a result, we
expect that overall gross margin for the full year 2002 will be substantially
higher compared to full year 2001. See Forward-looking statements for
factors that may affect our gross margins.

Gross profit increased substantially in 2000 compared to 1999, primarily
due to a substantial increase in revenues. Overall, gross margin increased in
2000 by 0.8 percentage points compared to 1999, reflecting comparable pricing
for certain of our products and a similar product mix. Although competitive
pricing pressures existed during 2000, particularly with respect to sales in
the Wireless Networks segment, overall we were able to mitigate such pricing
pressures through increased sales of higher-margin products and manufacturing
and other cost-reduction programs.

Operating expenses

Selling, general and administrative expense

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

|                            |  |                                  |       |              |  |      |              |         |  |          |       |         |          |   |     |  |  |  |     |  |  |   |       |  |  |  |      | 
|--------------------------- |  | -------------------------------- | ----- | ------------ |  | ---- | ------------ | ------- |  | -------- | ----- | ------- | -------- | - | --- |  |  |  | --- |  |  | - | ----- |  |  |  | ---- | 
|                           
|                            |  | For the years ended December 31, |       | 2001 vs 2000 |  |      | 2000 vs 1999 |         |  |         
|                            |  | 2001                             |       | 2000         |  | 1999 |              | $Change |  | % Change |       | $Change | % Change |  
|                           
|SG&A expense                |  | $                                | 5,815 |              |  | $    | 5,371        |         |  | $        | 3,780 |         |          | $ | 444 |  |  |  | 8.3 |  |  | $ | 1,591 |  |  |  | 42.1 | 
|As a percentage of revenues |  |                                  | 33.5% |              |  |      | 19.3%        |         |  |          | 19.3% |         |          |   | N/A |  |  |  | N/A |  |  |   | N/A   |  |  |  | N/A  | 
|                           

SG&A expense increased in 2001 compared to 2000, reflecting costs incurred
during the first half of 2001 resulting from the increased investment in North
American and international markets across all segments during the second half
of

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2000 to support our revenue growth during that period and the then anticipated
revenue growth for 2001. SG&A expense increase also resulted from increased
provisions of approximately $1,067 related to various customer receivables and
financings, due to the worsening financial position of certain customers
following the significant adjustment in the telecom industry. Excluding the
impact of increased provisions recorded during 2001, SG&A expense in absolute
dollars declined significantly. SG&A expense, in absolute dollars, is expected
to decline sequentially on a quarterly basis during 2002 as the full impact of
our work plan is realized. We expect that SG&A expense, as a percentage of
revenues, will decline to our traditional quarterly levels during the second
half of 2002.

The considerable increase in SG&A expense in 2000, compared to 1999,
reflected increased investment in our sales force to support our global growth
and strategic acquisitions, and customer financing provisions as a result of
the significant increase in funded customer financings.

Research and development expense

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

|                            |  |                                  |       |              |  |              |       |         |  |          |       |         |  |          |      |   |  |  |       |   |  |   |     |  |  |  |      | 
|--------------------------- |  | -------------------------------- | ----- | ------------ |  | ------------ | ----- | ------- |  | -------- | ----- | ------- |  | -------- | ---- | - |  |  | ----- | - |  | - | --- |  |  |  | ---- | 
|                           
|                            |  | For the years ended December 31, |       | 2001 vs 2000 |  | 2000 vs 1999
|                            |  | 2001                             |       | 2000         |  | 1999         |       | $Change |  | % Change |       | $Change |  | % Change
|                           
|R&D expense                 |  | $                                | 3,230 |              |  | $            | 3,626 |         |  | $        | 2,724 |         |  | $        | (396 | ) |  |  | (10.9 | ) |  | $ | 902 |  |  |  | 33.1 | 
|As a percentage of revenues |  |                                  | 18.6% |              |  |              | 13.0% |         |  |          | 13.9% |         |  |          | N/A  |   |  |  | N/A   |   |  |   | N/A |  |  |  | N/A  | 
|                           

R&D expense decreased significantly in 2001 compared to 2000, reflecting
the impact of initiatives undertaken by us to focus our spending on key
potential growth areas. R&D expense represented our planned investment in our
next generation core products across all segments. R&D expense, in absolute
dollars, is expected to decline for full year 2002, compared to full year 2001,
based on our expected quarterly R&D expense of approximately $625, not
including any potential additional investments in R&D with respect to future
strategic opportunities and related new products.

The considerable increase in R&D expense in 2000, compared to 1999, was
due to increased investment in research and development, primarily attributable
to new equipment, process development, and advanced capabilities and services
for a broad array of applications across all segments.

In-process research and development expense and amortization of intangibles

The following table sets forth in-process research and development, or
IPR&D, expense and amortization of intangibles for the years ended December 31:

|                            |  |                                  |       |              |  |              |       |         |  |          |       |         |  |          |      |   |  |  |        |   |  |   |       |  |  |  |       | 
|--------------------------- |  | -------------------------------- | ----- | ------------ |  | ------------ | ----- | ------- |  | -------- | ----- | ------- |  | -------- | ---- | - |  |  | ------ | - |  | - | ----- |  |  |  | ----- | 
|                           
|                            |  | For the years ended December 31, |       | 2001 vs 2000 |  | 2000 vs 1999
|                            |  | 2001                             |       | 2000         |  | 1999         |       | $Change |  | % Change |       | $Change |  | % Change
|                           
|IPR&D expense               |  | $                                |      |              |  | $            | 623   |         |  | $        | 252   |         |  | $        | (623 | ) |  |  | (100.0 | ) |  | $ | 371   |  |  |  | 147.2 | 
|Amortization of intangibles |  |                                  |       |              |  |              |       |         |  |          |       |         |  |          |      |   |  |  |        |   |  |   |       |  |  |  |      
|Acquired technology         |  |                                  | 574   |              |  |              | 789   |         |  |          | 686   |         |  |          | (215 | ) |  |  | (27.2  | ) |  |   | 103   |  |  |  | 15.0  | 
|Goodwill                    |  |                                  | 2,082 |              |  |              | 2,492 |         |  |          | 1,178 |         |  |          | (410 | ) |  |  | (16.5  | ) |  |   | 1,314 |  |  |  | 111.5 | 
|                           

IPR&D expense

In 2000, IPR&D expense primarily reflected the acquisition of Qtera
Corporation. In 1999, IPR&D expense related primarily to the acquisitions of
Shasta Networks, Inc. and Periphonics Corporation.

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Amortization of intangibles

Acquired technology

The amortization of acquired technology for 2001 reflected the charge
related to the acquisitions of Bay Networks, Inc. and Clarify Inc. The
amortization of acquired technology for 2000 and 1999 primarily reflected the
charge related to the acquisition of Bay Networks. As at December 31, 2001 and
2000, the remaining capitalized amount of acquired technology  net was $20 and
$623, respectively.

Goodwill

The amortization of goodwill for 2001 primarily reflected the charges
related to the acquisitions of Bay Networks, Qtera, and Clarify. The
amortization of goodwill for 2000 primarily reflected the charges related to
the acquisitions of Bay Networks, Qtera, and Clarify. The amortization of
goodwill for 1999 primarily reflected the charges related to the acquisition of
Bay Networks. As at December 31, 2001 and 2000, the remaining capitalized
amount of goodwill  net was $2,283 and $6,724, respectively (See Special
charges for additional information).

The adoption of Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets, or SFAS 142, changes the accounting for
goodwill from an amortization method to an impairment-only approach and, as a
result, the amortization of goodwill ceased upon adoption of this Statement
effective January 1, 2002. As a result, quarterly amortization expense of
approximately $350 will no longer be incurred beginning with the first quarter
of 2002. We will be performing the first of the required impairment tests
under SFAS 142 during the first half of 2002 and have not yet determined the
effect of adoption on our business, results of operations, or financial
condition.

Special charges

For 2001, we recorded special charges of $5,443 related to both
restructuring activities and an intangible assets write down.

Restructuring activities

During 2001, in light of the significant downturn in both the
telecommunications industry and the economic environment, and capital market
trends impacting our operations and expected future growth rates, we
implemented our work plan to streamline our operations and activities around
our core markets and leadership strategies. We adjusted our work plan during
the year to reflect the continued decline in the industry and economic
environment, and in the capital markets.

Workforce reduction charges of $1,343 were related to the cost of
severance and benefits associated with the approximately 35,500 employees
notified of termination. Of the 35,500 employees notified by December 31,
2001, approximately 13,800 were direct employees performing manufacturing,
assembly, test and inspection activities associated with the production of our
products, and approximately 21,700 were indirect sales, marketing, and
administrative employees, and manufacturing managers. The workforce reduction
was primarily in North America and the United Kingdom and extended across all
of our segments. As at December 31, 2001, we have made cash payments of $964.
The remaining cash payments of $393 are expected to be substantially completed
by the end of 2002. We will incur an additional charge in the first quarter of
2002, and may incur further charges in the second quarter of 2002, related to
the completion of previously announced workforce reductions and related
charges, upon compliance with certain regional legislation in Europe, as
required.

In conjunction with the above noted workforce reduction, we identified a
number of leased and owned facilities comprised of office, warehouse, and
manufacturing space, as well as leased manufacturing equipment, that were no
longer required. As a result, we recorded net lease costs of approximately
$757. The costs primarily related to our future contractual obligations under
operating leases. Offsetting the total lease charge is approximately $506 in
expected sublease revenue on leases that we cannot terminate. We also wrote
down the net carrying value of specific owned facilities across all segments
within North America, and the United Kingdom. The write down of approximately
$95 reflects the net realizable value based on market assessments for general
purpose facilities. Contract settlement costs included negotiated settlements
of

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approximately $126 to either cancel contracts or renegotiate existing contracts
across all of our segments. As at December 31, 2001, we have made cash payments
of $110 in respect of lease and contract settlement costs. The remaining cash
payments of $773 for lease and contract settlement costs are expected to be
substantially completed by the end of 2004.

Plant and equipment write downs of approximately $440 consisted of the
write down of leasehold improvements and certain information technology
equipment associated with the exiting of the above noted leased and owned
facilities.

As a result of the significant negative industry and economic trends
impacting our operations and expected future growth rates, we performed
assessments of certain plant and equipment assets as part of our review of
financial results during 2001. The conclusion of these assessments resulted in
a write down of certain plant and equipment within global operations, a
function that supports all of our segments, and within the Optical Long-Haul
Networks segment, of approximately $404.

Within global operations, it was determined that there was excess test
equipment at a number of system houses that would no longer be required as a
result of the industry and economic environment. As a result, we recorded a
charge of approximately $66 to write down the value of this equipment to its
net realizable value based on the current fair value for this type of
specialized equipment. We expect to dispose of this equipment by the end of
the second quarter of 2002.

Within the Optical Long-Haul Networks segment, we determined that there
was excess manufacturing equipment at a number of facilities that would no
longer be required as a result of the industry and economic environment. As a
result, we recorded a charge of approximately $247 to write down the value of
this equipment to its net realizable value based on the current fair market
value for this type of specialized equipment. We expect to dispose of this
equipment by the end of the second quarter of 2002. We also wrote down the net
carrying value of a specialized manufacturing facility within the Optical
Long-Haul Networks segment for the production of optical components within
North America. The write down of approximately $91 reflects the net realizable
value based on market assessments for a general purpose facility.

The intangible asset write-off of $106 is related to the remaining net
book value of goodwill associated with our prior acquisitions of MICOM
Communications Corp. and Dimension Enterprises, Inc. As part of our work plan
to streamline our business, we have made the decision to exit all technologies
and consulting services related to these prior acquisitions. The financial
results related to these prior acquisitions were not material to our business,
results of operations, and financial condition.

Write down of intangible assets

As part of our review of financial results during the three months ended
June 30, 2001, we performed an assessment of the carrying values of intangible
assets recorded in connection with our various acquisitions. The assessment
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 that assessment
was that the decline in market conditions within our industry was significant
and other than temporary. As a result, we recorded a $2,133 write down of
intangible assets in the three months ended June 30, 2001, based on the amount
by which the carrying amount of these assets exceeded their fair
value. The
write down was primarily related to the goodwill associated with the
acquisitions of Qtera within the Optical Long-Haul Networks segment and
Clarify, within Other.

We performed further assessments for the three months ended September 30,
2001 and the three months ended December 31, 2001 of the carrying values of
intangible assets based on the intangible asset balances outstanding in each
period. The conclusion of these assessments was that no additional write down
of intangible assets was required.

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

For additional information related to these restructuring activities, see
Special charges in note 7 to the accompanying audited consolidated financial
statements and notes thereto.

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Gain on sale of businesses

Gain on sale of businesses for 2001 of $125 related primarily 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.

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

Gain on sale of businesses for 1999 of $131 related primarily to the
divestiture of certain of our manufacturing and repair operations and assets.

Other income (expense)  net

For 2001, other expense  net of $325 primarily related to the write down
of certain minority investments. This write down resulted from our review of
our investment portfolio, which occurs on a quarterly basis, during the third
quarter of 2001, 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 a continued significant downturn in both the industry
and economic environment. Public company investments were generally written
down to current market value, resulting in mark-to-market adjustments
previously recorded in accumulated other comprehensive income being recorded
against earnings. 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.

For 2000, other income  net of $835 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 percent to 27.0 percent 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.

For 1999, other income  net of $236 primarily related to sales of certain
investments.

Interest expense

The increase in interest expense of $116 in 2001, compared to 2000, was
primarily related to additional interest expense due to new debt offerings in
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 (See
Liquidity and capital resources for additional information).

Interest expense was up slightly in 2000, compared to 1999, as a result of
consistent debt levels during the two periods.

Income tax benefit (provision)

Our effective tax benefit (provision) rate fluctuates from year to year
primarily as a result of the impact of non-tax deductible goodwill amortization
and in-process research and development expense, stock option compensation,
goodwill write downs and certain non-tax deductible restructuring charges.
Excluding these impacts, our effective tax benefit (provision) rate for the
years ended December 31, 2001, 2000, and 1999 was a benefit rate of 31 percent,
a provision rate of 32 percent, and a provision rate of 34 percent,
respectively. The change in rates for 2001 compared to 2000, and 2000 compared
to 1999, primarily reflected changes in geographic pre-tax earnings (loss) mix,
as well as the impact of valuation allowances established on the 2001 losses.

Net loss from continuing operations

As a result principally of the foregoing factors, net loss from continuing
operations increased by $10,684 in 2001 compared to 2000, and increased by $641
in 2000 compared to 1999. We reported a net loss in the current year from

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continuing operations of $11,555, compared to a net loss from continuing
operations of $871 for 2000, and a net loss from continuing operations of $230
for 1999.

Results of operations  discontinued operations

We recorded a net loss of $2,538 from discontinued operations (net of tax)
during the year ended December 31, 2001, comprised of a $354 loss from
operations (net of tax) and a $2,184 loss on disposal of operations (net of
tax) ($2,780 pre-tax). The estimated loss on disposal of the access solutions
operations reflects the costs directly associated with discontinuing operations
and the net loss of the access solutions operations during the phase-out
period. Major components of the loss included future contractual obligations
and estimated liabilities of $1,059 (pre-tax); the write-off of goodwill
associated with the acquisition of Promatory Communications, Inc. of $417
(pre-tax); provisions for both short-term and long-term receivables of $600
(pre-tax); and a provision for inventories of $381 (pre-tax). We did not
revise our estimate of the net loss on disposal, recorded in the three months
ended June 30, 2001, during the second half of 2001. Revenues for access
solutions operations were $994 for the year ended December 31, 2001. The
access solutions operations also used net cash of $678 during 2001 (See
Discontinued operations in note 4 to the accompanying audited consolidated
financial statements and notes thereto for additional information).

Critical accounting policies

Revenue recognition

Nortel Networks revenue recognition accounting policies are determined in
accordance with the standards and guidance provided by United States generally
accepted accounting principles. Our revenue streams are the result of a wide
range of activities, from custom design and installation over a long period of
time to out of the box solutions, with numerous variations in between. Our
solutions also cover a broad range of technologies and are offered on a global
basis. As a result, if we are selling products based on more established
technologies, our revenue recognition policies can differ between regions
depending on the level of knowledgeable installers within the region and
whether we are installing the equipment. Newer technologies within a segment
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 standards and interpretations, not only based on solution, but also
within solutions based on technology development and geographic region. As a
result, Nortel Networks revenues may fluctuate from period to period based on
the mix of solutions sold and in which geographic region they are sold. We
refer you to note 2(d) of the accompanying audited consolidated financial
statements and notes thereto for a detailed discussion of our revenue
recognition policies related to our material revenue streams.

Provisions for long-term receivables

In establishing the appropriate provisions for long-term receivables,
management must regularly review the financial stability of individual
customers. This analysis involves a judgment of a counterpartys ability to
meet and sustain its financial commitments, and takes into account a
counterpartys current and projected financial condition and the positive or
negative effects of the current and projected industry outlook, as well as that
of the economy in general. When all of these factors are fully considered, a
determination is made as to the probability of default. An appropriate
provision is then made, taking into account the severity of loss likely on the
receivable balance in recovery. A misinterpretation or misunderstanding of
these conditions, or other failure to estimate the counterpartys projected
financial condition, or uncertainty in the future outlook of our industry or
the economy could result in bad debts in excess of the provisions determined to
be appropriate as at the balance sheet date.

Provisions for inventory

In establishing the appropriate provisions for inventory, management must
make estimates about the future customer demand for our products, taking into
account both general economic conditions and growth prospects within our
customers ultimate marketplace, 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. A misinterpretation or misunderstanding of these conditions or
uncertainty in the future outlook of our industry or the economy,

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or other failure to estimate correctly, could result in inventory losses in
excess of the provisions determined to be appropriate as at the balance sheet
date.

Tax asset valuation

In establishing the appropriate valuation reserve for tax loss
carry-forwards, which have arisen primarily in 2001, all available evidence,
both positive and negative must be considered. Historical information of
profitability is supplemented by all currently available information about
future years. In our current environment, due to the lack of visibility, there
is a greater degree of uncertainty that the level of future profitability used
to determine the appropriate valuation reserve would be achieved. As a result,
additional valuation reserves may be required.

Liquidity and capital resources

Cash flows

Cash and cash equivalents, or cash, were $3,457 at December 31, 2001, an
increase of $1,890 (including net cash used by the access solutions operations
of $678) from December 31, 2000.

Cash flows from operating activities were $405 in 2001. Cash flows from
operating activities resulted from changes in operating assets and liabilities,
almost entirely offset by a net loss of $7,298, adjusted for non-cash items.
The decline in accounts receivable was primarily the result of declining
revenues in 2001, in addition to an increase in our provisions. The decline in
inventories was due to our efforts in light of the economic environment to
reduce inventory levels by reducing our manufacturing capacity, and increased
provisions. The increase in accounts payable and accrued liabilities was due
to our special charges provisions as at December 31, 2001. Partially
offsetting these impacts was an increase in income taxes recoverable. As a
result of the losses incurred during 2001, we are amending prior year tax
returns to recover taxes previously paid.

Cash flows used in investing activities were $778 in 2001. The use of
cash was primarily due to expenditures for plant and equipment and a net
increase in long-term receivables during the period, partially offset by
proceeds on sale of investments and businesses. The expenditures of $1,267 for
plant and equipment largely reflected purchases related to general
infrastructure, incurred primarily during the first half of 2001 and due to
commitments made during the last half of 2000. We are currently focusing
expenditures for plant and equipment on our core businesses. The previously
announced investment plan to expand optical components and systems production
capacity and capability was discontinued during the second quarter of 2001 as a
result of the business environment. The net increase in long-term receivables
during the period was approximately $234, primarily attributable to increased
funding of customer financings in the first half of 2001, partially offset by
increased provisions as a result of the economic environment. Proceeds on sale
of businesses and investments of $604 resulted primarily from the outsourcing
of manufacturing activities and the divestiture of certain non-core businesses
in connection with our work plan to streamline our business around core
markets.

Cash flows generated from financing activities were $2,951 in 2001. Cash
flows from financing activities primarily resulted from Nortel Networks
Corporations loan of $1,800 to the Company, and our debt offering of $1,500 of
6.125 percent notes completed on February 8, 2001.

On August 15, 2001, Nortel Networks Corporation completed a private
offering of $1,800 of 4.25 percent convertible senior notes, due on September
1, 2008. These notes pay interest on a semi-annual basis on March 1 and
September 1, which began on March 1, 2002. Nortel Networks Corporation lent
all of the proceeds from its private convertible debt offering to Nortel
Networks Limited, which is the guarantor of the notes, for its general
corporate purposes and those of its subsidiaries. On September 30, 2001,
Nortel Networks Corporation converted the entire loan into one additional
common share of Nortel Networks Limited.

On February 8, 2001, we completed an offering of $1,500 of 6.125 percent
notes due on February 15, 2006. These notes pay interest on a semi-annual
basis on February 15 and August 15, which began on August 15, 2001. These
notes are redeemable, at any time at our option, at a redemption price equal to
the principal amount thereof plus accrued and unpaid interest and a make-whole
premium.

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Uses of liquidity

Our cash requirements through the end of 2002 are primarily to fund
operations, research and development, capital expenditures, workforce reduction
and restructuring activities, debt service, and customer financings. The
following provides additional information related to our uses of liquidity.

Special charges

The remaining cash outlays of $393 related to workforce reduction
initiatives are expected to be substantially completed by the end of 2002, and
the remaining cash payments of $773 related to contract settlement and lease
costs are expected to be substantially completed by the end of 2004. An
additional charge will be incurred in the first quarter of 2002, and further
charges may be incurred in the second quarter of 2002, related to remaining
announced workforce reductions and related charges. See Special charges for
additional information.

Cash obligations

The following table provides information related to our contractual cash
obligations under various financial and commercial agreements:

|                                 |  |              |     |      |  |      |     |      |  |            |     |                   |  |   |     |  |  |   |       |  |  |   |       | 
|-------------------------------- |  | ------------ | --- | ---- |  | ---- | --- | ---- |  | ---------- | --- | ----------------- |  | - | --- |  |  | - | ----- |  |  | - | ----- | 
|                                
|                                 |  | Payments due |     |      |  |     
|                                 |  |              |     |      |  |     
|Contractual cash
obligations (a) |  | 2002         |     | 2003 |  | 2004 |     | 2005 |  | Thereafter |     | Total obligations
|                                
|                                 | 
|Long-term debt                   |  | $            | 384 |      |  | $    | 258 |      |  | $          | 13  |                   |  | $ |    |  |  | $ | 2,022 |  |  | $ | 2,677 | 
|Outsourcing contracts            |  | $            | 380 |      |  | $    | 373 |      |  | $          | 361 |                   |  | $ | 297 |  |  | $ | 1,065 |  |  | $ | 2,476 | 
|Operating leases                 |  | $            | 235 |      |  | $    | 227 |      |  | $          | 192 |                   |  | $ | 140 |  |  | $ | 405   |  |  | $ | 1,199 | 
|                                



|(a) |  | Contractual cash obligations do not include provisioned lease costs.
|--- |  | --------------------------------------------------------------------

Commitments and guarantees

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

|                                 |  |  |           |      
|-------------------------------- |  |  | --------- | -----
|                                
|                                 |  |  | Total    
|                                 |  |  | amounts  
|Other commercial
commitments (a) |  |  | committed
|                                
|Financial guarantees             |  |  | $         | 7    
|Performance guarantees           |  |  | $         | 1,170
|                                



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

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

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penalties or liquidated damages, the termination of the related supply or
network outsourcing contract, and/or the reduction of shared revenues under a
turnkey arrangement, in certain circumstances. As is customary for the
telecommunications industry, these supply and networking outsourcing contracts
are highly customized to address each customers particular needs and concerns
and, therefore, the nature of the events triggering, as well as the actual
amounts of the penalties, vary greatly and are based on a variety of complex,
interrelated factors, and may vary significantly in amount over the life of the
contract. We have not experienced material penalty payments in any recent
reporting period.

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

Customer financing

The following table provides information related to customer financing
commitments as at the years ended December 31:

|                          |  |      |       |      |  |   |       | 
|------------------------- |  | ---- | ----- | ---- |  | - | ----- | 
|                         
|                          |  | 2001 |       | 2000
|                         
|Drawn and outstanding (a) |  | $    | 464   |      |  | $ | 1,081 | 
|Undrawn commitments       |  |      | 1,611 |      |  |   | 4,087 | 
|                         
|Total customer financing  |  | $    | 2,075 |      |  | $ | 5,168 | 
|                         



|(a) |  | Net of provisions of $887 and $433 for the years ended December 31, 2001
and 2000, respectively.
|--- |  | ------------------------------------------------------------------------------------------------

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

As a result of the competitive environment during 1999 and 2000, we
provided significant amounts of medium-term and long-term customer financing,
resulting in a significant increase in both undrawn commitments for customer
financing and drawn and outstanding balances. During this period, we continued
to fund our customer financing commitments and were also able to regularly
place both undrawn commitments and drawn and outstanding balances with
third-party lenders. However, our ability to place customer financing with
third-party lenders was significantly reduced during 2001 due to, among other
factors, recent economic downturns in various countries, capital market
conditions, adverse changes in the credit ratings of our customers and
ourselves, and reduced demand for telecommunications financings in capital and
bank markets. During the same period, several customers failed to meet the
borrowing conditions set forth in their customer financing arrangements or
reduced their commitments to purchase our products and services and, as a
result, our commitments to provide customer financing were reduced or
withdrawn. This resulted in a decline in our undrawn commitments throughout
2001. During 2001, certain of our customers, including competitive local
exchange carriers, filed for bankruptcy or experienced financial difficulties.
As a result of our reviews of our customer financing receivables during 2001,
we increased our customer financing provisions to reflect our expectation that
certain customers will be unable to meet their repayment obligations to us in
the future as a result of the current market conditions. Primarily as a result
of these increased provisions recorded during the year, the drawn and
outstanding customer financing balance decreased significantly in 2001,
compared to 2000.

We continue to regularly assess the levels of our customer financing
provisions based on a loan-by-loan review to evaluate whether they reflect
current market conditions, as well as the ability of our customers to meet
their repayment obligations. We also continue to restructure financings to
minimize losses and reduce undrawn commitments where possible. In addition to
being highly selective in providing customer financing, we have various
programs in place to monitor and

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mitigate customer credit risk, including performance milestones and other
conditions of funding. Management is focused on the strategic use of our
limited customer financing capacity, on revolving that capacity as quickly and
efficiently as possible, and on managing the absolute dollar amount of our
customer financing exposure.

We currently have customer financing commitments and balances outstanding
in connection with the turnkey construction of new networks, particularly third
generation, or 3G, wireless networks, and we may commit to provide additional
funding in the future if such financings are strategic to our core business
activities. We have traditionally been able to place a large amount of our
customer financing obligations with third-party lenders. However, we are
currently directly supporting more of such commitments and outstanding balances
of such customer financings due to capital market conditions and the financial
difficulties experienced by some customers. We anticipate that we will be
required to directly support a significantly greater amount of future customer
financings compared to our past experience. We will continue to seek to
arrange for third-party lenders to assume our customer financing obligations
and to fund customer financings from working capital and conventional sources
of external financing in the normal course. However, our customer financing
commitments and balances outstanding may increase substantially as a result of
us continuing to hold such customer financings. We may also enter into
additional customer financing arrangements, resulting in further customer
financing commitments and balances outstanding.

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

Discontinued operations

At December 31, 2001, the remaining accruals totalled $329 and were
related to certain future contractual obligations and estimated liabilities of
the discontinued access solutions operations, and estimated operating losses
during the planned period of disposition. Such accruals are expected to be
drawn down by cash payments, the impact of which is expected to be partially
offset by cash inflows generated from the sale of certain assets over the
planned period of disposition.

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

Sources of liquidity

Following our February 8, 2001 offering of $1,500 of 6.125 percent notes,
we have remaining capacity to issue from time to time up to an aggregate of
$1,000 of debt securities and warrants to purchase debt securities, pursuant to
a shelf registration statement filed with the United States Securities and
Exchange Commission. Refer to the discussion below regarding our debt ratings
and also see Forward-looking statements for factors that may affect this
program.

We also filed in each of the provinces of Canada a short form prospectus
under the Canadian shelf prospectus program qualifying it to issue up to $500
(Canadian) of debt securities and warrants to purchase debt securities. This
program expired on February 23, 2002.

On June 14, 2001, Nortel Networks Limited and its subsidiary, Nortel
Networks Inc., entered into 364-day credit agreements with certain banks to
permit borrowings in an aggregate amount up to $2,000, with a one-year term out
option to convert outstanding amounts under the credit agreements into term
loans on the termination date of the credit agreements. Effective December 20,
2001, Nortel Networks Limited and Nortel Networks Inc. amended their June 14,
2001 $2,000 364-day syndicated credit agreements. These amendments reduced the
size of the committed facilities to $1,575 and extended the term of the credit
agreements to December 13, 2002, with a one-year term out option to convert
outstanding amounts under the credit agreements into term loans on December 13,
2002.

The credit agreements contain financial covenants that require (i) the
maintenance of a minimum consolidated tangible net worth at the consolidated
Nortel Networks Limited level, and (ii) the achievement of certain minimum
consolidated earnings before interest, taxes, depreciation and amortization, or
EBITDA, thresholds at the Nortel Networks Corporation level beginning in the
first quarter of 2002. The minimum consolidated tangible net worth of Nortel
Networks Limited required is $1,880. The consolidated EBITDA covenant requires
that Nortel Networks Corporation achieve a cumulative consolidated EBITDA of
negative $500 or better for the three months ended March 31, 2002. In
addition, there

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are minimum EBITDA covenants in place for the remainder of fiscal year 2002 and
the first three quarters of 2003, tested in quarterly increments during the
period. Compliance with this covenant will require EBITDA improvements during
the fiscal year 2002, and further improvements in the year thereafter. Certain
business restructuring charges and other one-time charges and gains will be
excluded from the calculation of EBITDA. In addition, these credit agreements
contain covenants restricting additional debt, the payment of dividends,
corporate events, liens, sale and leasebacks, and investments, among others.
Payments of dividends on the outstanding preferred shares of Nortel Networks
Limited is permitted provided that compliance with certain covenants of the
credit agreements is maintained. These credit agreements also provide for the
granting of security, which may include a pledge of shares and/or a guarantee,
over substantially all of Nortel Networks Limiteds assets and those of most of
its United States and Canadian subsidiaries, and also provide for either a
pledge of shares or a guarantee by certain of Nortel Networks Limiteds other
subsidiaries. The security will be granted in the event that one of Nortel
Networks Limiteds United States senior unsecured long-term debt ratings falls
below investment grade, defined as either Baa3 or BBB-, as determined by
Moodys Investors Services, Inc. or Standard & Poors Ratings Service,
respectively. The security would be released when both of these debt ratings
return to Baa2 (with a stable outlook) and BBB (with a stable outlook), as
determined by Moodys and Standard & Poors, respectively. In the event that
such security is in fact granted as a result of such rating downgrade, certain
other financings and debt obligations, including certain future financings and
obligations, will also be secured to the extent required by the terms and
conditions of such financings and obligations during the time that the security
arrangements under the credit agreements are in effect.

On April 12, 2000, Nortel Networks Limited and its primary subsidiary,
Nortel Networks Inc., entered into five-year and 364-day syndicated credit
agreements, which permit borrowings in an aggregate amount of up to $2,000. On
April 11, 2001, Nortel Networks Limited and Nortel Networks Inc. extended and
increased the April 12, 2000, 364-day syndicated credit agreements to permit
borrowings in an aggregate amount of up to $1,750 from $1,250, with a one-year
term out option to convert outstanding amounts under the 364-day syndicated
credit agreements into term loans on the termination date of the credit
agreements. As a result, total borrowings permitted under these syndicated
five-year and 364-day credit agreements are $2,500. We had not drawn on these
syndicated credit agreements as at December 31, 2001. These agreements can be
used for borrowings for general corporate purposes, and to support borrowings under our commercial paper program. Borrowings
related to the commercial paper program have been reduced to nil at December
31, 2001 from prior levels during the year, as a result of the commercial paper
market currently being effectively closed to us due to our current debt
ratings. We anticipate that any amendment or extension of these credit
facilities will likely require our agreement to covenants similar to the
amended June 14, 2001 credit agreements due to our current debt rating.

At December 31, 2001 we were in compliance with the covenants of our
credit agreements and had not drawn on any of the credit agreements. In
addition, Nortel Networks Limiteds long-term debt ratings were within
investment grade as determined by both Moodys and Standard & Poors. Refer to
the discussion below regarding our debt ratings and see Forward-looking
statements for factors that may affect our ability to comply with covenants
and conditions in our credit agreements.

The total debt to total capitalization ratio of Nortel Networks was 34
percent at December 31, 2001, compared to 9 percent at December 31, 2000. The
increase in the total debt to total capitalization ratio at December 31, 2001,
compared to December 31, 2000, was due to the reduction in retained earnings as
a result of the net losses for 2001, and the increase in total debt primarily
due to the issuance of $1,500 of 6.125 percent notes on February 8, 2001.

Subsequent to the second quarter of 2001, we completed or announced
several transactions to divest portions of our business, primarily related to
the continuing transformation of our supply chain from a vertically integrated
manufacturing model to a virtually integrated model, and in conjunction with
our work plan to divest non-core businesses. Net cash proceeds from these
transactions are expected to be approximately $700, of which approximately $500
has been received as at December 31, 2001 and $200 is expected to be realized
during the next several quarters. Transactions completed during 2001 included
the following:



| |  |  | We completed a transaction with C-MAC Industries Inc. to divest the
majority of our manufacturing activities related to the systems
integration, configuration, and testing of our DMS circuit-switching
products, previously performed in our system house in Research Triangle
Park, North Carolina. We also completed the divestiture of similar
manufacturing activities performed in our system house in Monkstown,
Northern Ireland. C-MAC will also supply us with systems integration,
configuration, and testing services for DMS products, and will assume
most of
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |   |  | the management functions related to the associated supply chain. The
transactions included the sale of associated equipment and inventory.                                                                                                                                                                                                                                                                                          
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | We completed a transaction with Amdocs Limited to sell substantially
all assets used in our Clarify portfolio, including patents,
intellectual property, and trademarks. Under the terms of the
agreement, Amdocs also assumed existing customer contracts, as well as
certain leased office space.                                                                                                                                 
|
| |  |  | We completed a transaction with SCI Systems, Inc. to outsource the
remaining printed circuit board assembly activities performed in our
system houses in St. Laurent, Quebec and Monkstown, Northern Ireland,
including the sale of associated equipment and inventory. In addition,
we extended the master supply agreement with SCI, which covers existing
printed circuit board assembly manufacturing services performed for us.

Credit ratings

Our credit ratings as at December 31, 2001 were as follows:

|                                  |  |                     |  |                     |  |                     |     |             |  |                 |  |  |  |  |  | 
|--------------------------------- |  | ------------------- |  | ------------------- |  | ------------------- | --- | ----------- |  | --------------- |  |  |  |  |  | 
|                                 
|                                  |  | Rating on long-term |  |                     |  | Rating on           |    
|                                  |  | unsecured debt      |  |                     |  | commercial paper    |    
|                                  |  | issued or           |  | Rating on preferred |  | issued or           |     |             |  |                
|                                  |  | guaranteed by       |  | shares issued by    |  | guaranteed by       |     |             |  |                
|                                  |  | Nortel Networks     |  | Nortel Networks     |  | Nortel Networks     |     |             |  |                
|Rating agency                     |  | Limited             |  | Limited             |  | Limited             |     | Last update
|                                 
|                                 
|Standard & Poors Ratings Service |  | BBB-                |  | Global scale  BB    |  |                     | A-3 |             |  | October 3, 2001
|                                  |  |                     |  |                     |  | Canadian scale  P-3 |     |             |  |                 |  |  |  | 
|Moodys Investor Services, Inc.   |  | Baa2                |  | Ba1                 |  |                     | P-2 |             |  | October 3, 2001
|                                 

Despite the lowered ratings, our ratings from Standard & Poors and
Moodys remain within investment grade levels. The ratings remain on review
for possible future downgrade (Moodys) and negative outlook (Standard &
Poors). There can be no assurance that our credit ratings will not be lowered
further, to below investment grade, or that such ratings agencies will not
issue adverse commentaries, resulting in higher financing costs under our
credit facilities and for other financings generally, and reduced access to the
capital markets or our credit agreements. In addition, if our credit ratings
are reduced, we will be required to deliver the prescribed security to the
lenders in order to access the $1,575 credit facilities under the December 20,
2001 amended credit agreements. Our credit ratings also affect our ability,
and the cost, to securitize receivables. See Forward-looking statements for
effects of changes in respect of our debt ratings.

During 2001, we took actions to strengthen our cash and liquidity
positions and as of December 31, 2001, our primary source of liquidity was our
current cash and cash equivalents. We believe this cash, together with cash
flows from operations, will be sufficient to meet our working capital, capital
expenditure, and investment requirements through the end of fiscal 2002, with
potential fundings under our credit facilities to address cash flow
fluctuations within quarters. If our revenues and cash flows are materially
lower than we expect, we may be required to further reduce capital expenditures
and investments in order to meet our cash requirements. We may seek additional
funds from liquidity-generating transactions and other conventional sources of
external financing (which may include a variety of debt, convertible debt,
and/or equity financings).We cannot provide any assurance that our net cash
requirements will be as we currently expect, that we will continue to have
access to our credit facilities when and as needed, or that
liquidity-generating transactions or financings will be available to us on
acceptable terms or at all. See Forward-looking statements for factors that
may affect our revenues, cash flows and debt levels.

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

39



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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(l) to the
accompanying audited consolidated financial statements and notes thereto.
Additional disclosure of our financial instruments is included in Financial
instruments and hedging activities in note 14 to the accompanying audited
consolidated financial statements and notes thereto.

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 continue to expand our business globally and, as such, 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 endeavour 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 foreign exchange
exposure based upon, among other factors, the excess or deficiency of foreign
currency receipts over foreign currency expenditures in each of our significant
foreign currencies. Our significant currency flows for the year ended December
31, 2001 were in United States dollars, Canadian dollars, United Kingdom
pounds, and the Euro. For 2001, the net impact of foreign exchange
fluctuations was a loss of $25, compared to a gain of $10 for 2000 and a loss
of $93 for 1999. Given the devaluation of the Euro in 2001, and our exposure
to other international markets, we continuously 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.

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 aggregate interest expense. We book 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 unfavourable variance in foreign exchange rates of
10 percent 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, 2001 and 2000,
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. As at December 31, 2001 and 2000,
based on a one-year time horizon, a 10 percent adverse change in the exchange
rates would result in a potential decrease in after-tax cash flows of
approximately $91 and $86, respectively. 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 at
December 31, 2001, 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

In connection with the January 28, 2000 acquisition of Qtera, Qtera and
two of its employees were named as defendants in a lawsuit filed by Siemens ICN
in the 15th Judicial Circuit for Palm Beach County, Florida. The lawsuit

40



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alleged various claims, including purported misappropriation of trade secrets.
This dispute has been resolved to the satisfaction of the parties and without
material adverse effect to Nortel Networks.

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, which
have been served through September 24, 2001, in the United States District
Courts for the Eastern District of New York, for the Southern District of New
York and for the District of New Jersey, and in the provinces of Ontario,
Quebec, and British Columbia in Canada, on behalf of shareholders who acquired
Nortel Networks Corporations securities as early as October 24, 2000 and as
late as February 15, 2001, allege, among other things, violations of United
States federal and Canadian provincial securities laws. Securities regulatory
authorities in Canada and the United States are also reviewing these matters.
A class action lawsuit was also filed in the United States District Court for
the Southern District of New York on behalf of shareholders who acquired the
securities of JDS Uniphase Corporation between January 18, 2001 and February
15, 2001, alleging violations of the same United States federal securities laws
as the other lawsuits. 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 announced their decision on November 6, 2001 to
discontinue their proceedings and obtained court approval for such
discontinuances 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. 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. In addition, 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 at any time during the period of March 7, 2000
through the filing date and who made or maintained plan investments in Nortel
Networks Corporations common shares, under the Employee Retirement Income
Security Act for plan-wide relief and alleging, among other things, material
misrepresentations and omissions to induce plan participants to continue to
invest in and maintain investments in Nortel Networks Corporations common
shares in the plan.

On February 12, 2001, Nortel Networks Inc., a subsidiary of Nortel
Networks Limited, was served with a consolidated amended class action complaint
that purported to add Nortel Networks Corporation as a defendant to a lawsuit
commenced in July 2000 against Entrust and two of its then current officers in
the United States District Court for the Eastern District of Texas (Marshall
Division), or the District Court. This complaint alleges that Nortel Networks
Corporation, Entrust, and two officers of Entrust violated the Securities
Exchange Act of 1934 with respect to certain statements made by Entrust.
Nortel Networks Corporation is alleged to be a controlling person of Entrust.
On April 6, 2001, Nortel Networks Corporation filed a motion to dismiss the
first complaint. On July 31, 2001, the first complaint was dismissed without
prejudice. On August 31, 2001, the plaintiffs filed a second amended class
action complaint against the same defendants asserting claims substantively
similar to those in the first complaint. On September 21, 2001, Nortel
Networks Corporation filed a motion to dismiss this second complaint. The
motion is currently under consideration by the District Court.

On March 4, 1997, Bay Networks, Inc., a company acquired on August 31,
1998, announced that shareholders had filed two separate lawsuits in the United
States District Court for the Northern District of California, or the Federal
Court, and the California Superior Court, County of Santa Clara, or the
California Court, against Bay Networks and ten of Bay Networks then current
and former officers and directors, purportedly on behalf of a class of
shareholders who purchased Bay Networks common shares during the period of May
1, 1995 through October 14, 1996. On August 17, 2000, the Federal Court
granted the defendants motion to dismiss the federal complaint and on
September 8, 2000, a notice of appeal of that order and judgment was filed by
the plaintiffs. On August 1, 2001, the United States Court of Appeals for the
Ninth Circuit, or the Ninth Circuit, denied the plaintiffs appeal. On April
18, 1997, a second lawsuit was filed in the California Court, purportedly on
behalf of a class of shareholders who acquired Bay Networks common shares
pursuant to the registration statement and prospectus that became effective on
November 15, 1995. The two actions in the California Court were consolidated
in April 1998; however, the California Court denied the plaintiffs motion for
class certification. In January

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2000, the California Court of Appeal rejected the plaintiffs appeal of the
decision. A petition for review was filed with the California Supreme Court by
the plaintiffs and was denied. In February 2000, new plaintiffs who allege to
have been shareholders of Bay Networks during the relevant periods, filed a
motion for intervention in the California Court seeking to become the
representatives of a class of shareholders. The motion was granted on June 8,
2001 and the new plaintiffs filed their complaint-in-intervention on an
individual and purported class representative basis alleging misrepresentations
made in connection with the purchase and sale of securities of Bay Networks in
violation of California statutory and common law. On June 18, 2001, the
defendants removed the consolidated state court actions to the Federal Court.
On September 19, 2001, the defendants motion to dismiss the complaint was
rejected and the plaintiffs motion to remand the case to the California Court
was granted. The defendants filed an appeal in the Ninth Circuit on October 2,
2001 with respect to the decisions in such motions, and the Ninth Circuit
dismissed the appeal on December 26, 2001.

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

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

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

Environmental matters

For a discussion of Environmental matters, see Contingencies in note 17
to the accompanying audited consolidated financial statements and notes
thereto.

Employee defined benefit plans

We maintain various defined benefit plans for our employees in North
America and the United Kingdom. As a result of the worldwide economic downturn
during 2001 and the September 11, 2001 terrorist attacks in the United States,
the fair market value of the defined benefit plan assets declined significantly
from the comparable period in the prior year. While the fair market value of
the plan assets has appreciated since September 30, 2001 (the annual
measurement date for pension expense purposes), the plan assets remain
significantly devalued compared to the previous measurement year. As a result,
the three largest plans have changed from a fully funded position to an
unfunded position for accounting purposes. However, based on our latest
actuarial valuations, and utilizing long-term assumptions consistent with those
in prior years, our cash funding requirements for 2002 are expected to be
moderate and substantially consistent with 2001. 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 $23 in 2001 ($66 in 2000). See note 12 to the
accompanying audited consolidated financial statements and notes thereto for
additional details.

Forward-looking statements

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

42



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

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

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

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

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

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

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

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



| |  |  | our ability to successfully complete programs on a timely basis to
reduce our cost structure, including fixed costs, and to streamline our
operations;        
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | our ability to focus our business on what we believe to be
potentially higher growth, higher margin businesses, and to dispose of
or exit non-core businesses;
|
| |  |  | the inherent uncertainties of using estimates and assumptions for
asset valuations and the impact of changes in accounting principles used
to value assets;   

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| |  |  | our ability to implement our work plan without negatively impacting
our relationships with our customers, the delivery of products based on
new and developing technologies, the delivery of high quality robust
products at competitive prices, the maintenance of technological
leadership, and the retention of qualified personnel;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | fluctuations in our gross margins;                                                                                                                                                                                                                                                                                                     
|
| |  |  | the impact of acquired businesses and technologies;                                                                                                                                                                                                                                                                                    
|
| |  |  | increased price and product competition in the networking industry;                                                                                                                                                                                                                                                                    
|
| |  |  | the development, introduction and market acceptance of new
technologies, and integrated networking solutions, as well as the
adoption of new networking standards;                                                                                                                                                                     
|
| |  |  | variations in sales channels, product costs, and the mix of products sold;                                                                                                                                                                                                                                                             
|
| |  |  | the size and timing of customer orders and shipments;                                                                                                                                                                                                                                                                                  
|
| |  |  | our ability to maintain appropriate inventory levels; and                                                                                                                                                                                                                                                                              
|
| |  |  | the impact of our product development schedules, manufacturing
capacity, and lead times required to produce our products.                                                                                                                                                                                                              

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

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

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



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

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

44



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

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



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

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

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

Competition for certain key positions and specialized technical personnel
in the high-technology industry is intense, despite current economic
conditions. We believe that our future success depends in part on our
continued ability to hire, assimilate, and retain qualified personnel in a
timely manner, particularly key members of senior management and in our key
areas of potential growth. A key factor in attracting and retaining qualified
employees is our ability to provide employees with the opportunity to
participate in the potential growth of our business through programs such as
stock option plans and employee investment plans. The value of these
opportunities may be adversely affected by the volatility or negative
performance of the market price for Nortel Networks Corporations common
shares. We may also find it more difficult to attract or retain qualified
employees because of our recent significant workforce reductions and our
business performance in 2001. In addition, if we have not properly sized our
workforce and retained those employees with the appropriate skills, our ability
to compete effectively may be adversely affected. If we are not successful in
attracting, retaining or recruiting qualified employees, including members of
senior management, in the future, we may not have the necessary personnel to

45



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effectively compete in the highly dynamic, specialized and volatile industry in
which we operate or to achieve our business objectives.

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

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

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

In order to finance our business we have incurred, or have entered into
credit facilities allowing for drawdowns of, significant levels of debt
compared to historical levels, and we may need to secure additional sources of
funding, including 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, poor business performance or lower than
expected cash inflows could have adverse consequences on the operation of our
business.

In particular, certain of such credit agreements have been recently
amended and now contain financial covenants that require the maintenance of a
minimum consolidated tangible net worth and the achievement of certain minimum
consolidated earnings before interest, taxes, depreciation and amortization
(EBITDA) thresholds. The minimum required consolidated tangible net worth of
Nortel Networks Limited is $1,880. The consolidated EBITDA covenant requires
that Nortel Networks Corporation achieve a cumulative consolidated EBITDA of
negative $500 or better for the three months ended March 31, 2002. In
addition, there are minimum EBITDA covenants in place for the remainder of
fiscal year 2002 and the first three quarters of 2003, tested in quarterly
increments during the period. Compliance with this covenant will require
EBITDA improvements during the fiscal year 2002, and further improvements in
the year thereafter. Certain business restructuring charges and other one-time
charges and gains will be excluded from the calculation of EBITDA. These
credit agreements also provide for the granting of security, which may include
a pledge of shares and/or a guarantee, over substantially all of Nortel
Networks Limiteds assets and those of most of its United States and Canadian
subsidiaries and also provide for either a pledge of shares or a guarantee by
certain of Nortel Networks Limiteds other subsidiaries. The security will be
granted in the event that one of Nortel Networks Limiteds United States senior
unsecured long-term debt ratings falls below investment grade, defined as Baa3
or BBB-, as determined by Moodys Investors Services, Inc. and Standard &
Poors Ratings Service, respectively. The security would be released when both
of these debt ratings return to Baa2 (stable outlook) and BBB (stable outlook),
as determined by Moodys and Standard & Poors, respectively. In the event
that such security is in fact granted as a result of such rating downgrade,
certain other financings and debt obligations, including certain future
financings and obligations, will also be secured to the extent required by the
terms and conditions of such financings and obligations during the time that
the security arrangements under the credit agreements are in effect.

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



| |  |  | we may have difficulty borrowing money in the future, or accessing
sources of funding, including our credit facilities;                                                                                                        
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | we may need to use a large portion of our cash flow from operations
to pay principal and interest on our indebtedness, which would reduce
the amount of cash available to finance our operations and other
business activities;
|
| |  |  | a high debt level, arduous or restrictive terms and conditions, or
lower than expected cash flows would make us more vulnerable to economic
downturns and adverse developments in our business; and                            

46



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| |  |  | if operating cash flows are not sufficient to meet our operating
expenses, capital expenditures and debt service requirements as they
become due, we may be required, in order to meet our debt service
obligations, to delay or reduce capital expenditures or the introduction
of new products, sell assets, and/or forego business opportunities
including acquisitions, research and development projects, or product
design enhancements.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

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

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

47



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

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

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

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



| |  |  | the risk that the industry may develop in a different direction than
anticipated and that the technologies we acquire do not prove to be
those we need to be successful in the industry;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the risk that future valuations of acquired businesses may decrease
from the market price we paid for these acquisitions;                                                               
|
| |  |  | the generation of insufficient revenues by acquired businesses to
offset increased operating expenses associated with these acquisitions;                                               
|
| |  |  | the potential difficulties in completing in-process research and
development projects and delivering high quality robust products to our
customers;                                     
|
| |  |  | the potential difficulties in integrating new products, businesses
and operations in an efficient and effective manner;                                                                 
|
| |  |  | the risk that our customers or customers of the acquired businesses
may defer purchase decisions as they evaluate the impact of the
acquisitions on our future product strategy;        
|
| |  |  | the potential loss of key employees of the acquired businesses;                                                                                                                         
|
| |  |  | 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.
48

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

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

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

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

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

Our principal competitors in the sale of our Metro and Enterprise Networks
products to service providers are large communications companies such as
Alcatel S.A., Fujitsu Limited, Telefonaktiebolagat LM Ericsson, Lucent
Technologies Inc., and Siemens Aktiengesellschaft. In addition, we compete
with smaller companies that address specific niches within this market, such as
Ciena Corporation and ONI Systems Corp (who recently announced their intention
to combine their companies), Sonus Systems Limited, and Redback Networks Inc.
Our principal competitors in the sale of our Metro and Enterprise Networks
solutions to enterprises are Alcatel, Avaya Inc., Cisco Systems, Inc.,
Ericsson, and Siemens. We also compete with smaller companies that address
specific niches, such as Foundry Networks, Inc., Extreme Networks, Inc.,
Enterasys Networks, Inc., 3Com Corporation, and Genesys Telecommunications
Laboratories, Inc. Our major competitors in the global wireless infrastructure
business have traditionally included Ericsson, Lucent, Motorola, Inc., and
Nokia Corporation. More recently, Siemens and Samsung Electronics Co., Ltd.
have emerged as competitors. Our major competitors in the sale of
long-distance optical networking equipment include Alcatel, Ciena, Fujitsu,
Lucent, and Marconi plc. Our major competitors in the sale of optical
components includes Agere Systems Inc. and JDS Uniphase Corporation. Since
some of the markets in which we compete are characterized by the potential for
rapid growth and, in certain cases, low barriers to entry and rapid
technological changes, smaller, specialized companies and start-up ventures are
now or may become principal competitors in the future. We may also face
competition from the resale of used telecommunications equipment, including our
own on occasion, by failed, downsized or consolidated high technology
enterprises and telecommunications service providers. In addition, one way to
maximize market growth, enhance existing products and introduce new products is
through acquisitions of companies, where advisable. Our acquisitions of other
companies may

49



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##### 



cause certain of our competitors to enter into additional business
combinations, to accelerate product development, or to engage in aggressive
price reductions or other competitive practices, creating even more powerful or
aggressive competitors.

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

We face certain barriers in our efforts to expand internationally.

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



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

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

50



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as, for example, the Chinese renminbi. These currencies may be affected by
internal factors, and external developments in other countries, all of which can have an adverse impact on a countrys
currency. We cannot predict whether foreign exchange losses will be incurred
in the future, and significant foreign exchange fluctuations may have a
material adverse effect on our results of operations.

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

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

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

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

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

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

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

The competitive environment in which we operate has required us in the
past, and we expect may continue to require us in the future, to provide
significant amounts of medium-term and long-term customer financing. Customer

51



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financing arrangements may include financing in connection with the sale of our
products and services, funding for certain non-product and service costs associated with network installation and
integration of our products and services, financing for working capital and
equity financing. We may provide customer financing in the future for such
customer requirements as turnkey construction of new networks, particularly for
3G wireless operators. If we do, we may be required to directly support 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, capital market conditions, adverse changes in the credit
ratings of our customers or ourselves, and reduced demand for
telecommunications financing in capital and bank markets. In addition, risks
generally associated with customer financing, including the risks associated
with new technologies, new network construction, market demand and competition,
customer business plan viability and funding risks, may require us to hold
certain customer financing obligations over a longer term. We may not be able
to place any of our current or future customer financing obligations with
third-party lenders on acceptable terms.

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

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

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

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

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

52



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##### 



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

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

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

We are currently a defendant in numerous class actions and other lawsuits,
including lawsuits initiated 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(p) to the accompanying audited consolidated financial
statements and notes thereto.



|ITEM 7A. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- |  | ----------------------------------------------------------

Refer to Market risk in Item 7 Managements Discussion and Analysis of
Financial Condition and Results of Operations.

53



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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-42 | 

54



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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,
2001 and 2000 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, 2001. 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, 2001 and 2000 and the results of its operations and its cash flows for each
of the years in the three-year period ended December 31, 2001 in conformity
with accounting principles generally accepted in the United States of America.

We also reported separately on February 1, 2002, to the shareholders of
Nortel Networks, on our audits, conducted in accordance with Canadian generally
accepted auditing standards, where we expressed an opinion without reservation
on the December 31, 2001 and 2000 consolidated financial statements, prepared
in accordance with Canadian generally accepted accounting principles.



/s/ Deloitte & Touche LLP

Deloitte & Touche LLP
Chartered Accountants

Toronto, Canada
February 1, 2002

F-1



---



##### 



NORTEL NETWORKS LIMITED
Consolidated Statements of Operations
Years Ended December 31
(millions of U.S. dollars)

|                                                                                  |                     |   |         |       |      |   |        |       |   |   |        |       |  
|--------------------------------------------------------------------------------- | ------------------- | - | ------- | ----- | ---- | - | ------ | ----- | - | - | ------ | ----- | -
|                                                                                 
|                                                                                  |                     |   | 2001    |       | 2000 |   | 1999  
|                                                                                 
|Revenues                                                                          |                     | $ | 17,375  |       |      | $ | 27,853 |       |   | $ | 19,628 |      
|Cost of revenues                                                                  |                     |   | 14,241  |       |      |   | 15,069 |       |   |   | 10,781 |      
|                                                                                 
|Gross profit                                                                      |                     |   | 3,134   |       |      |   | 12,784 |       |   |   | 8,847  |      
|                                                                                  |                     |   |         |       |      |   |        |       |   |   |        |      
|Selling, general and administrative expense (excluding
stock option compensation) |                     |   | 5,815   |       |      |   | 5,371  |       |   |   | 3,780  |      
|Research and development expense                                                  |                     |   | 3,230   |       |      |   | 3,626  |       |   |   | 2,724  |      
|In-process research and development expense                                       |                     |   |        |       |      |   | 623    |       |   |   | 252    |      
|Amortization of intangibles                                                       |                     |   |         |       |      |   |        |       |   |   |        |      
|                                                                                  | Acquired technology |   |         | 574   |      |   |        | 789   |   |   |        | 686   |  
|
|                                                                                  | Goodwill            |   |         | 2,082 |      |   |        | 2,492 |   |   |        | 1,178 |  
|
|Special charges                                                                   |                     |   | 5,443   |       |      |   | 267    |       |   |   | 125    |      
|                                                                                 
|
|Operating income (loss)                                                           |                     |   | (13,885 | )     |      |   | (309   | )     |   |   | 233    |      
|                                                                                  |                     |   |         |       |      |   |        |       |   |   |        |      
|Equity in net earnings (loss) of associated companies                             |                     |   | (134    | )     |      |   | (29    | )     |   |   | 41     |      
|
|Other income (expense)  net                                                      |                     |   | (325    | )     |      |   | 835    |       |   |   | 236    |      
|
|                                                                                  | Long-term debt      |   |         | (165  | )    |   |        | (86   | ) |   |        | (93   | )
|                                                                                 
|
|Earnings (loss) from continuing operations before income taxes                    |                     |   | (14,628 | )     |      |   | 329    |       |   |   | 346    |      
|                                                                                 
|
|Net loss from continuing operations                                               |                     |   | (11,555 | )     |      |   | (871   | )     |   |   | (230   | )    
|                                                                                 
|
|Net loss before cumulative effect of accounting change                            |                     |   | (14,093 | )     |      |   | (1,285 | )     |   |   | (324   | )    
|                                                                                 
|
|Net loss                                                                          |                     |   | (14,078 | )     |      |   | (1,285 | )     |   |   | (324   | )    
|                                                                                 
|
|Net loss applicable to common shares                                              |                     | $ | (14,105 | )     |      | $ | (1,316 | )     |   | $ | (351   | )    
|                                                                                 

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

F-2



---



##### 



NORTEL NETWORKS LIMITED
Consolidated Balance Sheets
As at December 31
(millions of U.S. dollars)

|                                                                                                                                                  |                                                                            |   |         |       |      |   |        |       |  |  |  |  | 
|------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------- | - | ------- | ----- | ---- | - | ------ | ----- |  |  |  |  | 
|                                                                                                                                                 
|                                                                                                                                                  |                                                                            |   | 2001    |       | 2000
|                                                                                                                                                 
|ASSETS                                                                                                                                            |                                                                            |   |         |       |      |   |        |      
|Current assets                                                                                                                                    |                                                                            |   |         |       |      |   |        |      
|                                                                                                                                                  | Cash and cash equivalents                                                  |   | $       | 3,457 |      |   | $      | 1,567 | 
|                                                                                                                                                  | Accounts receivable (less provisions of $655 for 2001, $363 for 2000)      |   |         | 2,923 |      |   |        | 7,234 | 
|                                                                                                                                                  | Inventories  net                                                          |   |         | 1,563 |      |   |        | 3,811 | 
|                                                                                                                                                  | Income taxes recoverable                                                   |   |         | 790   |      |   |        |      | 
|                                                                                                                                                  | Deferred income taxes  net                                                |   |         | 1,401 |      |   |        | 653   | 
|                                                                                                                                                  | Other current assets                                                       |   |         | 847   |      |   |        | 1,588 | 
|                                                                                                                                                  | Current assets of discontinued operations                                  |   |         | 698   |      |   |        | 1,511 | 
|                                                                                                                                                 
|Total current assets                                                                                                                              |                                                                            |   | 11,679  |       |      |   | 16,364 |      
|                                                                                                                                                 
|Long-term receivables (less provisions of $828 for 2001, $383 for 2000)                                                                           |                                                                            |   | 203     |       |      |   | 1,116  |      
|Investments at cost and associated companies at equity                                                                                            |                                                                            |   | 263     |       |      |   | 767    |      
|Plant and equipment  net                                                                                                                         |                                                                            |   | 2,459   |       |      |   | 3,292  |      
|Intangible assets  net                                                                                                                           |                                                                            |   | 2,303   |       |      |   | 7,347  |      
|Deferred income taxes  net                                                                                                                       |                                                                            |   | 2,106   |       |      |   | 280    |      
|Other assets                                                                                                                                      |                                                                            |   | 697     |       |      |   | 556    |      
|Long-term assets of discontinued operations                                                                                                       |                                                                            |   | 283     |       |      |   | 1,190  |      
|                                                                                                                                                 
|Total assets                                                                                                                                      |                                                                            | $ | 19,993  |       |      | $ | 30,912 |      
|                                                                                                                                                 
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                              |                                                                            |   |         |       |      |   |        |      
|Current liabilities                                                                                                                               |                                                                            |   |         |       |      |   |        |      
|                                                                                                                                                  | Notes payable                                                              |   | $       | 426   |      |   | $      | 315   | 
|                                                                                                                                                  | Trade and other accounts payable                                           |   |         | 2,248 |      |   |        | 3,389 | 
|                                                                                                                                                  | Payroll and benefit-related liabilities                                    |   |         | 613   |      |   |        | 911   | 
|                                                                                                                                                  | Other accrued liabilities                                                  |   |         | 5,347 |      |   |        | 3,588 | 
|                                                                                                                                                  | Income taxes payable                                                       |   |         | 143   |      |   |        | 306   | 
|                                                                                                                                                  | Long-term debt due within one year                                         |   |         | 384   |      |   |        | 445   | 
|                                                                                                                                                  | Current liabilities of discontinued operations                             |   |         | 384   |      |   |        | 181   | 
|                                                                                                                                                 
|Total current liabilities                                                                                                                         |                                                                            |   | 9,545   |       |      |   | 9,135  |      
|                                                                                                                                                 
|Deferred income                                                                                                                                   |                                                                            |   | 153     |       |      |   | 93     |      
|Long-term debt                                                                                                                                    |                                                                            |   | 2,293   |       |      |   | 1,177  |      
|Deferred income taxes  net                                                                                                                       |                                                                            |   | 477     |       |      |   | 680    |      
|Other liabilities                                                                                                                                 |                                                                            |   | 1,441   |       |      |   | 1,024  |      
|Minority interest in subsidiary companies                                                                                                         |                                                                            |   | 100     |       |      |   | 161    |      
|Long-term liabilities of discontinued operations                                                                                                  |                                                                            |   | 11      |       |      |   | 74     |      
|                                                                                                                                                 
|                                                                                                                                                  |                                                                            |   | 14,020  |       |      |   | 12,344 |      
|                                                                                                                                                 
|Commitments and contingencies (notes 16 and 17)                                                                                                   |                                                                            |   |         |       |      |   |        |      
|
|                                                                                                                                                 
|SHAREHOLDERS EQUITY                                                                                                                              |                                                                            |   |         |       |      |   |        |      
|Preferred shares, without par value  Authorized shares: unlimited;                                                                               |                                                                            |   |         |       |      |   |        |      
|                                                                                                                                                  | Issued and outstanding shares: 30,000,000 for 2001 and 30,000,200 for 2000 |   |         | 536   |      |   |        | 609   | 
|Common shares, without par value  Authorized shares: unlimited; Issued and
outstanding shares: 1,460,978,634 for 2001 and 1,453,437,535 for 2000 |                                                                            |   | 2,111   |       |      |   | 17,024 |      
|Additional paid-in capital                                                                                                                        |                                                                            |   | 18,797  |       |      |   | 1,878  |      
|Deficit                                                                                                                                           |                                                                            |   | (14,507 | )     |      |   | (402   | )    
|Accumulated other comprehensive loss                                                                                                              |                                                                            |   | (964    | )     |      |   | (541   | )    
|                                                                                                                                                 
|Total shareholders equity                                                                                                                        |                                                                            |   | 5,973   |       |      |   | 18,568 |      
|                                                                                                                                                 
|Total liabilities and shareholders equity                                                                                                        |                                                                            | $ | 19,993  |       |      | $ | 30,912 |      
|                                                                                                                                                 

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

F-3



---



##### 



NORTEL NETWORKS LIMITED
Consolidated Statements of Shareholders Equity
(millions of U.S. dollars)

|                                                                             |                          |   |           |   |        |   |         |   |           |   |                |   |               |   |             |   |       |   |      |   |  |   |         |         |  
|---------------------------------------------------------------------------- | ------------------------ | - | --------- | - | ------ | - | ------- | - | --------- | - | -------------- | - | ------------- | - | ----------- | - | ----- | - | ---- | - |  | - | ------- | ------- | -
|                                                                            
|                                                                             |                          |   |           |   |        |   |         |   |           |   | Additional     |   | Retained      |   | Accumulated |   | Total
|                                                                             |                          |   | Preferred |   | Common |   | paid-in |   | earnings  |   | other comp-    |   | shareholders'
|                                                                             |                          |   | shares    |   | shares |   | capital |   | (deficit) |   | rehensive loss |   | equity       
|                                                                            
|Balance at December 31, 1998                                                 |                          | $ | 609       |   |        | $ | 10,109  |   |           | $ | 896            |   |               | $ | 1,533       |   |       | $ | (348 | ) |  | $ | 12,799 
|                                                                             |                          |   |           |   |        |   |         |   |           |   |                |   |               |   |             |   |       |   |      |   |  |   |        
|Net loss                                                                     |                          |   |           |   |        |   |         |   |           |   |                |   |               |   | (324        | ) |       |   |      |   |  |   | (324    | )      
|Foreign currency translation adjustment                                      |                          |   |           |   |        |   |         |   |           |   |                |   |               |   |             |   |       |   | (99  | ) |  |   | (99     | )      
|Unrealized gain on investments  net                                         |                          |   |           |   |        |   |         |   |           |   |                |   |               |   |             |   |       |   | 13   |   |  |   | 13      |        
|                                                                             |                          |   |           |   |        |   |         |   |           |   |                |   |               |   |             |   |       |   |      |   |  |   |        
|                                                                             | Total comprehensive loss |   |           |   |        |   |         |   |           |   |                |   |               |   |             |   |       |   |      |   |  |   |         | (410    | )
|                                                                             |                          |   |           |   |        |   |         |   |           |   |                |   |               |   |             |   |       |   |      |   |  |   |        
|Issuance of common shares  net                                              |                          |   |           |   |        |   | 559     |   |           |   |                |   |               |   | (11         | ) |       |   |      |   |  |   | 548     |        
|Acquisitions                                                                 |                          |   |           |   |        |   | 715     |   |           |   | 30             |   |               |   |             |   |       |   |      |   |  |   | 745     |        
|Fair value and costs associated with assumed
options and stock purchase plan |                          |   |           |   |        |   | 362     |   |           |   | (375           | ) |               |   |             |   |       |   |      |   |  |   | (13     | )      
|Tax benefit associated with stock options                                    |                          |   |           |   |        |   |         |   |           |   | 243            |   |               |   |             |   |       |   |      |   |  |   | 243     |        
|Dividends on common shares                                                   |                          |   |           |   |        |   |         |   |           |   |                |   |               |   | (204        | ) |       |   |      |   |  |   | (204    | )      
|Dividends on preferred shares                                                |                          |   |           |   |        |   |         |   |           |   |                |   |               |   | (27         | ) |       |   |      |   |  |   | (27     | )      
|                                                                            
|Balance at December 31, 1999                                                 |                          | $ | 609       |   |        | $ | 11,745  |   |           | $ | 794            |   |               | $ | 967         |   |       | $ | (434 | ) |  | $ | 13,681  |        
|                                                                             |                          |   |           |   |        |   |         |   |           |   |                |   |               |   |             |   |       |   |      |   |  |   |        
|Net loss                                                                     |                          |   |           |   |        |   |         |   |           |   |                |   |               |   | (1,285      | ) |       |   |      |   |  |   | (1,285  | )      
|Foreign currency translation adjustment                                      |                          |   |           |   |        |   |         |   |           |   |                |   |               |   |             |   |       |   | (129 | ) |  |   | (129    | )      
|Unrealized gain on investments  net                                         |                          |   |           |   |        |   |         |   |           |   |                |   |               |   |             |   |       |   | 22   |   |  |   | 22      |        
|                                                                             |                          |   |           |   |        |   |         |   |           |   |                |   |               |   |             |   |       |   |      |   |  |   |        
|                                                                             | Total comprehensive loss |   |           |   |        |   |         |   |           |   |                |   |               |   |             |   |       |   |      |   |  |   |         | (1,392  | )
|                                                                             |                          |   |           |   |        |   |         |   |           |   |                |   |               |   |             |   |       |   |      |   |  |   |        
|Issuance of common shares  net                                              |                          |   |           |   |        |   | 206     |   |           |   |                |   |               |   |             |   |       |   |      |   |  |   | 206     |        
|Acquisitions                                                                 |                          |   |           |   |        |   | 4,922   |   |           |   | 805            |   |               |   |             |   |       |   |      |   |  |   | 5,727   |        
|Fair value and costs associated with assumed
options and stock purchase plan |                          |   |           |   |        |   | 151     |   |           |   | (168           | ) |               |   |             |   |       |   |      |   |  |   | (17     | )      
|Tax benefit associated with stock options                                    |                          |   |           |   |        |   |         |   |           |   | 447            |   |               |   |             |   |       |   |      |   |  |   | 447     |        
|Dividends on common shares                                                   |                          |   |           |   |        |   |         |   |           |   |                |   |               |   | (53         | ) |       |   |      |   |  |   | (53     | )      
|Dividends on preferred shares                                                |                          |   |           |   |        |   |         |   |           |   |                |   |               |   | (31         | ) |       |   |      |   |  |   | (31     | )      
|                                                                            
|Balance at December 31, 2000                                                 |                          | $ | 609       |   |        | $ | 17,024  |   |           | $ | 1,878          |   |               | $ | (402        | ) |       | $ | (541 | ) |  | $ | 18,568  |        
|                                                                             |                          |   |           |   |        |   |         |   |           |   |                |   |               |   |             |   |       |   |      |   |  |   |        
|Net loss                                                                     |                          |   |           |   |        |   |         |   |           |   |                |   |               |   | (14,078     | ) |       |   |      |   |  |   | (14,078 | )      
|Foreign currency translation adjustment                                      |                          |   |           |   |        |   |         |   |           |   |                |   |               |   |             |   |       |   | (288 | ) |  |   | (288    | )      
|Unrealized loss on investments  net                                         |                          |   |           |   |        |   |         |   |           |   |                |   |               |   |             |   |       |   | (40  | ) |  |   | (40     | )      
|Unrealized derivative losses on cash flow
hedges  net                       |                          |   |           |   |        |   |         |   |           |   |                |   |               |   |             |   |       |   | (7   | ) |  |   | (7      | )      
|Minimum pension liability
adjustment  net                                   |                          |   |           |   |        |   |         |   |           |   |                |   |               |   |             |   |       |   | (81  | ) |  |   | (81     | )      
|Cumulative effect of accounting change                                       |                          |   |           |   |        |   |         |   |           |   |                |   |               |   |             |   |       |   | (7   | ) |  |   | (7      | )      
|                                                                             |                          |   |           |   |        |   |         |   |           |   |                |   |               |   |             |   |       |   |      |   |  |   |        
|                                                                             | Total comprehensive loss |   |           |   |        |   |         |   |           |   |                |   |               |   |             |   |       |   |      |   |  |   |         | (14,501 | )
|                                                                             |                          |   |           |   |        |   |         |   |           |   |                |   |               |   |             |   |       |   |      |   |  |   |        
|Acquisitions                                                                 |                          |   |           |   |        |   | 26      |   |           |   |                |   |               |   |             |   |       |   |      |   |  |   | 26      |        
|Tax benefit associated with stock options                                    |                          |   |           |   |        |   |         |   |           |   | 105            |   |               |   |             |   |       |   |      |   |  |   | 105     |        
|Conversion of debt due to parent                                             |                          |   |           |   |        |   | 1,800   |   |           |   |                |   |               |   |             |   |       |   |      |   |  |   | 1,800   |        
|Conversion of series 4 preferred shares                                      |                          |   | (73       | ) |        |   | 61      |   |           |   | 12             |   |               |   |             |   |       |   |      |   |  |   |        |        
|Reduction of legal stated capital                                            |                          |   |           |   |        |   | (16,800 | ) |           |   | 16,800         |   |               |   |             |   |       |   |      |   |  |   |        |        
|Dividends on preferred shares                                                |                          |   |           |   |        |   |         |   |           |   |                |   |               |   | (27         | ) |       |   |      |   |  |   | (27     | )      
|Other                                                                        |                          |   |           |   |        |   |         |   |           |   | 2              |   |               |   |             |   |       |   |      |   |  |   | 2       |        
|                                                                            
|Balance at December 31, 2001                                                 |                          | $ | 536       |   |        | $ | 2,111   |   |           | $ | 18,797         |   |               | $ | (14,507     | ) |       | $ | (964 | ) |  | $ | 5,973   |        
|                                                                            

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

F-4



---



##### 



NORTEL NETWORKS LIMITED
Consolidated Statements of Cash Flows
Years Ended December 31
(millions of U.S. dollars)

|                                                     |                                                                                                                                                                     |                                                                   |                                          |         |        |       |       |        |        |        |       |        |       |        |  
|---------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------- | ---------------------------------------- | ------- | ------ | ----- | ----- | ------ | ------ | ------ | ----- | ------ | ----- | ------ | -
|                                                    
|                                                     |                                                                                                                                                                     |                                                                   |                                          |         | 2001   |       | 2000  |        | 1999  
|                                                    
|Cash flows from (used in) operating activities       |                                                                                                                                                                     |                                                                   |                                          |         |        |       |       |        |        |        |       |       
|                                                     | Net loss from continuing operations                                                                                                                                 |                                                                   | $                                        | (11,555 | )      |       | $     | (871   | )      |        | $     | (230   | )    
|                                                     | Adjustments to reconcile net loss from continuing operations to net cashfrom
operating activities, net of effects from acquisitions and divestitures of businesses: |                                                                   |                                          |         |        |       |       |        |        |        |       |        |      
|                                                     |                                                                                                                                                                     | Amortization and depreciation                                     |                                          |         | 3,370  |       |       |        | 4,046  |        |       |        | 2,407 |       
|                                                     |                                                                                                                                                                     | In-process research and development expense                       |                                          |         |       |       |       |        | 623    |        |       |        | 252   |       
|                                                     |                                                                                                                                                                     | Non-cash portion of special charges and related asset write downs |                                          |         | 3,164  |       |       |        | 137    |        |       |        | 14    |       
|                                                     |                                                                                                                                                                     | Equity in net earnings (loss) of associated companies             |                                          |         | 134    |       |       |        | 29     |        |       |        | (41   | )     
|                                                     |                                                                                                                                                                     | Stock option compensation                                         |                                          |         |       |       |       |        | 99     |        |       |        |      |       
|                                                     |                                                                                                                                                                     | Tax benefit from stock options                                    |                                          |         | 105    |       |       |        | 447    |        |       |        | 243   |       
|                                                     |                                                                                                                                                                     | Deferred income taxes                                             |                                          |         | (2,758 | )     |       |        | 62     |        |       |        | (313  | )     
|                                                     |                                                                                                                                                                     | Other liabilities                                                 |                                          |         | 78     |       |       |        | 105    |        |       |        | 46    |       
|                                                     |                                                                                                                                                                     | Loss (gain) on sale of investments and businesses                 |                                          |         | 229    |       |       |        | (1,058 | )      |       |        | (324  | )     
|                                                     |                                                                                                                                                                     | Other  net                                                       |                                          |         | (65    | )     |       |        | 127    |        |       |        | (160  | )     
|                                                     |                                                                                                                                                                     | Change in operating assets and liabilities:                       |                                          |         |        |       |       |        |        |        |       |        |       |       
|                                                     |                                                                                                                                                                     |                                                                   | Accounts receivable                      |         |        | 5,521 |       |        |        | (629   | )     |        |       | (476   | )
|                                                     |                                                                                                                                                                     |                                                                   | Inventories                              |         |        | 2,027 |       |        |        | (1,581 | )     |        |       | (1,072 | )
|                                                     |                                                                                                                                                                     |                                                                   | Income taxes payable                     |         |        | (953  | )     |        |        | (180   | )     |        |       | 233    |  
|                                                     |                                                                                                                                                                     |                                                                   | Accounts payable and accrued liabilities |         |        | 597   |       |        |        | 612    |       |        |       | 1,110  |  
|                                                     |                                                                                                                                                                     |                                                                   | Other operating assets and liabilities   |         |        | 511   |       |        |        | (898   | )     |        |       | (45    | )
|                                                    
|                                                     | Net cash from operating activities of continuing operations                                                                                                         |                                                                   |                                          | 405     |        |       |       | 1,070  |        |        |       | 1,644  |      
|                                                    
|Cash flows from (used in) investing activities       |                                                                                                                                                                     |                                                                   |                                          |         |        |       |       |        |        |        |       |       
|                                                     | Expenditures for plant and equipment                                                                                                                                |                                                                   |                                          | (1,267  | )      |       |       | (1,838 | )      |        |       | (795   | )    
|                                                     | Proceeds on disposals of plant and equipment                                                                                                                        |                                                                   |                                          | 208     |        |       |       | 33     |        |        |       | 24     |      
|                                                     | Increase in long-term receivables                                                                                                                                   |                                                                   |                                          | (706    | )      |       |       | (1,658 | )      |        |       | (1,025 | )    
|                                                     | Decrease in long-term receivables                                                                                                                                   |                                                                   |                                          | 472     |        |       |       | 1,300  |        |        |       | 165    |      
|                                                     | Acquisitions of investments and businesses  net of cash acquired                                                                                                   |                                                                   |                                          | (89     | )      |       |       | (316   | )      |        |       | (645   | )    
|                                                     | Proceeds on sale of investments and businesses                                                                                                                      |                                                                   |                                          | 604     |        |       |       | 1,633  |        |        |       | 967    |      
|                                                    
|                                                     | Net cash used in investing activities of continuing operations                                                                                                      |                                                                   |                                          | (778    | )      |       |       | (846   | )      |        |       | (1,309 | )    
|                                                    
|Cash flows from (used in) financing activities       |                                                                                                                                                                     |                                                                   |                                          |         |        |       |       |        |        |        |       |       
|                                                     | Dividends on common and preferred shares                                                                                                                            |                                                                   |                                          | (27     | )      |       |       | (84    | )      |        |       | (231   | )    
|                                                     | Increase in notes payable  net                                                                                                                                     |                                                                   |                                          | 140     |        |       |       | 114    |        |        |       | 27     |      
|                                                     | Proceeds from long-term debt                                                                                                                                        |                                                                   |                                          | 1,530   |        |       |       | 107    |        |        |       |       |      
|                                                     | Repayments of long-term debt                                                                                                                                        |                                                                   |                                          | (469    | )      |       |       | (69    | )      |        |       | (59    | )    
|                                                     | Proceeds from parent                                                                                                                                                |                                                                   |                                          | 1,800   |        |       |       |       |        |        |       |       |      
|                                                     | Decrease in capital leases payable                                                                                                                                  |                                                                   |                                          | (23     | )      |       |       | (2     | )      |        |       | (1     | )    
|                                                     | Issuance of common shares                                                                                                                                           |                                                                   |                                          |        |        |       |       | 206    |        |        |       | 521    |      
|                                                     | Common shares purchased for cancellation                                                                                                                            |                                                                   |                                          |        |        |       |       |       |        |        |       | (14    | )    
|                                                    
|                                                     | Net cash from financing activities of continuing operations                                                                                                         |                                                                   |                                          | 2,951   |        |       |       | 272    |        |        |       | 243    |      
|                                                    
|                                                     | Effect of foreign exchange rate changes on cash and cash equivalents                                                                                                |                                                                   |                                          | (10     | )      |       |       | (25    | )      |        |       |       |      
|                                                    
|                                                     | Net cash from continuing operations                                                                                                                                 |                                                                   |                                          | 2,568   |        |       |       | 471    |        |        |       | 578    |      
|                                                     | Net cash used in discontinued operations                                                                                                                            |                                                                   |                                          | (678    | )      |       |       | (1,057 | )      |        |       | (655   | )    
|                                                    
|Net increase (decrease) in cash and cash equivalents |                                                                                                                                                                     |                                                                   | 1,890                                    |         |        |       | (586  | )      |        |        | (77   | )     
|                                                    
|Cash and cash equivalents at beginning of year  net |                                                                                                                                                                     |                                                                   | 1,567                                    |         |        |       | 2,153 |        |        |        | 2,230 |       
|                                                    
|Cash and cash equivalents at end of year  net       |                                                                                                                                                                     | $                                                                 | 3,457                                    |         |        | $     | 1,567 |        |        | $      | 2,153 |       
|                                                    

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

F-5



---



##### 



NORTEL NETWORKS LIMITED
Notes to Consolidated Financial Statements
(millions of U.S. dollars, except per share amounts, 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. Immediately prior to the
Arrangement, approximately 36 percent of the outstanding common shares of
Old Nortel were held by BCE. A substantial portion of the New Nortel
common shares issuable in respect of BCEs interest in Old Nortel was,
through the Arrangement, indirectly distributed to BCE common shareholders.
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).                                                                                                                                                                        
|  
|   |  | As all Old Nortel common shares are held by New Nortel and are no longer
publicly traded, information concerning Old Nortel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 New Nortel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, 2001 contained in the Current Report on Form 10-K
filed with the United States Securities and Exchange Commission (SEC).                                                                                                                                                                                                                                        
|  
|   |  | 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|   |  | 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. 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. Investments in entities that
Nortel Networks does not control or over which it does not exercise
significant influence are accounted for using the cost method.

F-6



---



##### 





| | (b) |  | Marketable securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | Publicly traded equity securities deemed available-for-sale by Nortel
Networks are measured at fair value. Unrealized holding gains and
losses related to these securities are excluded from net earnings (loss)
and are included in other comprehensive income (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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | (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 other than the United States dollar are translated from such
functional currency 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, including gains
and losses on foreign exchange transactions. 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 OCI.                                                                                                                                                                                                                                                                                                                                                                        
|
| |     |  | Transactions, financial statement items, and the financial statements of
operations in countries considered to have highly inflationary economies
denominated in a currency other than Nortel Networks functional currency
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).                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |     |  | Where 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 contract, 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 sold separately 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 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.

F-7



---



##### 





| |     |  | 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 is recognized under SOP 81-1 or SAB 101. Engineering,
installation and other services are recognized as the services are
performed.                                                                    
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | On long-term contracts, including turnkey contracts revenues are
recognized 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 sales at
the time of shipment.                                                                                                                                                                                                                                                    
|
| |     |  | Accruals for warranty costs, sales returns and other allowances at the
time of shipment 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 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 tax rates.                                                                                                                                    
|
| | (g) |  | Cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |     |  | 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. Cash and cash equivalents consist of cash on hand
and balances with banks, and short-term investments.                                                                                                                                                                                                                  
|
| | (h) |  | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |     |  | Inventories are valued at the lower of cost (calculated generally on a
first-in, first-out basis) and net realizable value. The cost of
finished goods and work in process is comprised of material, labour and
manufacturing overhead.                                                                                                                                                                                                                                                                                                                     
|
| | (i) |  | Plant and equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |     |  | Plant and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated generally 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.                                                                                                                                                                                                                                      
|
| | (j) |  | Intangible assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |     |  | 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.                                                                                                                                                                                                                                                                                                  

F-8



---



##### 





| |     |  | Goodwill represents the excess of the purchase prices over the fair
values of the identifiable net assets of Nortel Networks subsidiaries,
joint ventures and associated companies, and is amortized on a
straight-line basis over its estimated useful life of three to twenty
years. However, for any acquisition completed after June 30, 2001,
goodwill and intangible assets with an indefinite life will not be
amortized (see note 2 (p)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (k) |  | Impairment of intangible assets and other long-lived assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |     |  | When events and circumstances warrant a review, Nortel Networks
evaluates the carrying value of goodwill and long-lived assets, certain
identifiable intangibles, and goodwill related to those assets to be
held and used in accordance with Statement of Financial Accounting
Standards (SFAS) No. 121, Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to be Disposed Of (SFAS 121), and
evaluates the carrying value of enterprise level intangible assets in
accordance with the provisions of Accounting Principles Board Opinion
(APB) No. 17, Intangible Assets (APB 17). An impairment review is
performed whenever events or circumstances indicate that the carrying
value may not be recoverable. Certain factors that Nortel Networks
considers important which could trigger an impairment review include,
but are not limited to, significant underperformance relative to
historical or projected future operating results, significant changes in
the manner of use of the acquired assets or the strategy for Nortel
Networks overall business, significant negative industry or economic
trends, a significant decline in Nortel Networks Corporations stock
price for a sustained period, and Nortel Networks Corporations market
capitalization relative to net book value.
|
| |     |  | The carrying value of enterprise level goodwill is considered impaired
when Nortel Networks net book value exceeds Nortel Networks
Corporations market capitalization indicated by the market price of
Nortel Networks Corporationss equity securities as of the end of each
reporting period. As Nortel Networks comprises substantially all of the
operations of Nortel Networks Corporation, the value of Nortel Networks
equity securities is determined based on Nortel Networks Corporations
market capitalization attributable to Nortel Networks. If net book
value exceeds this value, the excess carrying amount of goodwill is
written off.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |     |  | The carrying values of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets are considered
impaired when the anticipated undiscounted cash flows from such assets
are less than their carrying values. In that event, a loss is
recognized based on the amount by which the carrying value exceeds the
fair value. Fair value is determined using the anticipated cash flows
discounted at a rate commensurate with the risk involved. Losses on
long-lived assets to be disposed of are determined in a similar manner,
except that fair values are reduced by the cost to dispose of such
assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | (l) |  | 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

F-9



---



##### 





| | (m) |  | 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 interest on plan assets and pension obligations;
and straight-line amortization 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 for 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.



| | (n) |  | 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 sale and is based upon, in part, the
previous carrying amount of the financial assets 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 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 servicer. Certain transactions will
enable the servicer, which is generally Nortel Networks, 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 on the collectibility and credit experience of the
assets sold and 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.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.



| | (o) |  | Use of estimates
| | --- |  | ----------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The preparation of Nortel Networks consolidated financial statements in
conformity with generally accepted accounting principles (GAAP)
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Estimates are used
when accounting for items and matters such as long-term contracts,
allowance for uncollectible accounts receivable and customer financings,
inventory obsolescence, product warranty, amortization, asset
valuations, employee benefits, taxes, restructuring and other
provisions, in-process research and development (IPR&D), and
contingencies.



| | (p) |  | Recent pronouncements
| | --- |  | ---------------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In August 2001, the Financial Accounting Standards Board (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 all long-lived assets, including discontinued operations,
and develops one accounting model for long-lived assets to be disposed
of by sale. This Statement supersedes SFAS 121, and the accounting and
reporting provisions of 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.
The provisions of SFAS 144 are required to be adopted by Nortel Networks
effective January 1, 2002. Nortel Networks has not yet determined the
effect that the adoption of SFAS 144 will have on the business, results
of operations, and financial condition of Nortel Networks.

F-10



---



##### 





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



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In July 2001, the FASB issued SFAS No. 141, Business Combinations
(SFAS 141), effective for business combinations initiated after June
30, 2001, and SFAS No. 142, Goodwill and Other Intangible Assets
(SFAS 142) effective for fiscal years beginning after December 15,
2001. SFAS 141 transitional rules require that the purchase method of
accounting be used for all business combinations initiated after June
30, 2001. As a result, the pooling-of-interests method is now
prohibited. SFAS 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Thus, amortization
of goodwill, including goodwill recorded in past business combinations,
and intangibles with an indefinite life, will cease upon adoption of
this Statement, which for Nortel Networks will be January 1, 2002.
However, for any acquisitions completed after June 30, 2001, goodwill
and intangible assets with an indefinite life will not be amortized.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The adoption of SFAS 141 did not have an impact on the business, results
of operations, and financial condition of Nortel Networks. Nortel
Networks will be performing the first of the required SFAS 142
impairment tests during the first six months of 2002 and has not yet
determined the effect that the adoption of SFAS 142 will have on the
business, results of operations, and financial condition of Nortel
Networks.



| | (q) |  | Comparative figures
| | --- |  | -------------------



| |                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------
| | Certain 2000 and 1999 figures in the accompanying Consolidated Financial
Statements have been reclassified to conform to the 2001 presentation.

3.     Accounting changes



| | (a) |  | Impairment of enterprise level goodwill
| | --- |  | ---------------------------------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During the year ended December 31, 2001, Nortel Networks changed its
method of evaluating impairment of enterprise level goodwill in
accordance with APB 17. Nortel Networks changed from the undiscounted
cash flows method to the market value method. Under the market value
method, Nortel Networks net book value is compared to the value
indicated by the market price of Nortel Networks Corporations equity
securities as of the end of each reporting period. As Nortel Networks
comprises substantially all of the operations of Nortel Networks
Corporation, the value of Nortel Networks equity securities is
determined based on Nortel Networks Corporations market capitalization
attributable to Nortel Networks. If net book value exceeds this value,
the excess carrying amount of goodwill is written off. Nortel Networks
believes that the market value method is preferable since it provides a
more realistic valuation than the undiscounted cash flow method. This
change had no effect on the business, results of operations, and
financial condition of Nortel Networks.



| | (b) |  | Derivative financial instruments
| | --- |  | --------------------------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Effective January 1, 2001, 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).

F-11



---



##### 





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

4.     Discontinued operations



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On June 14, 2001, Nortel Networks Board of Directors approved a plan to
discontinue Nortel Networks access solutions operations consisting of all
of Nortel Networks narrowband and broadband solutions, including copper,
cable, and fixed wireless solutions, as well as Nortel Networks then
current consolidated membership interest in Arris Interactive LLC (Arris)
and equity investment in Elastic Networks Inc. Also affected by the
decision were Nortel Networks prior acquisitions of Promatory
Communications, Inc. (Promatory), Aptis Communications, Inc., and
Broadband Networks Inc.



| |                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On August 8, 2001, Nortel Networks filed with the SEC audited Consolidated
Financial Statements and the notes thereto for the three years ended
December 31, 2000, restated for discontinued operations.



| |                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 results of discontinued operations for the years ended December 31,
presented in the accompanying Consolidated Statements of Operations, were
as follows:

|                                                   |  |      |        |      |  |      |       |   |  |   |       |  
|-------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ----- | - |  | - | ----- | -
|                                                  
|                                                   |  | 2001 |        | 2000 |  | 1999
|                                                  
|Revenues                                           |  | $    | 994    |      |  | $    | 2,325 |   |  | $ | 1,659 |  
|                                                  
|Loss from discontinued operations  net of tax (a) |  | $    | (354   | )    |  | $    | (414  | ) |  | $ | (94   | )
|Loss on disposal of operations  net of tax (b)    |  |      | (2,184 | )    |  |      |      |   |  |   |      |  
|                                                  
|Net loss from discontinued operations  net of tax |  | $    | (2,538 | )    |  | $    | (414  | ) |  | $ | (94   | )
|                                                  



| | (a) |  | Loss from discontinued operations was net of applicable income
tax benefits of $122, $96, and $50 for the years ended December 31,
2001, 2000, and 1999, respectively.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | Loss on disposal of operations was net of an applicable income
tax benefit of $596 for the year ended December 31, 2001.                                              



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



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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. The remaining
accruals are expected to be drawn down by cash payments over the planned
period of disposition. Nortel Networks continues to work towards disposing
of or transitioning the ownership of certain operations. Any operations
not disposed of or so transitioned are expected to be closed. Nortel
Networks expects to complete this plan by June 2002, subject to the closing
of specific transactions, the timing of which is impacted by regulatory
approval processes and business issues.
|
| | 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 announced the completion of the
previously announced transfer of its ownership interest in Arris to Arris
Group, Inc. (Arris Group), ANTEC Corporations new parent company. As a
result, at

F-12



---



##### 





| |                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 the General
Electric Company, to sell the Lentronics JungleMUX SONET multiplexer and
TN-1U SDH multiplexer products.



| |                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------
| | The assets and liabilities of discontinued operations presented in the
accompanying Consolidated Balance Sheets as at December 31, were as
follows:

|                                                |  |      |     |      |  |   |       | 
|----------------------------------------------- |  | ---- | --- | ---- |  | - | ----- | 
|                                               
|                                                |  | 2001 |     | 2000
|                                               
|Accounts receivable  net                       |  | $    | 109 |      |  | $ | 922   | 
|Inventories  net                               |  |      | 66  |      |  |   | 499   | 
|Deferred income taxes                           |  |      | 348 |      |  |   | 86    | 
|Other current assets                            |  |      | 175 |      |  |   | 4     | 
|                                               
|Total current assets of discontinued operations |  |      | 698 |      |  |   | 1,511 | 
|                                                |  |      |     |      |  |   |       | 
|Intangible assets  net                         |  |      | 17  |      |  |   | 600   | 
|Other long-term assets                          |  |      | 266 |      |  |   | 590   | 
|                                               
|Total assets of discontinued operations         |  | $    | 981 |      |  | $ | 2,701 | 
|                                               
|                                                |  |      |     |      |  |   |       | 
|Current liabilities                             |  | $    | 384 |      |  | $ | 181   | 
|Long-term liabilities                           |  |      | 11  |      |  |   | 74    | 
|                                               
|Total liabilities of discontinued operations    |  |      | 395 |      |  |   | 255   | 
|                                               



| |                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The net cash used in discontinued operations for the years ended December
31, presented in the accompanying Consolidated Statements of Cash Flows,
were as follows:

|                                                  |                      |   |      |      |      |   |        |      |   |   |      |      |  
|------------------------------------------------- | -------------------- | - | ---- | ---- | ---- | - | ------ | ---- | - | - | ---- | ---- | -
|                                                 
|                                                  |                      |   | 2001 |      | 2000 |   | 1999  
|                                                 
|Cash flows from (used in) discontinued operations |                      |   |      |      |      |   |        |      |   |   |      |     
|                                                  | Operating activities |   | $    | (708 | )    |   | $      | (701 | ) |   | $    | (570 | )
|                                                  | Investing activities |   |      | 30   |      |   |        | (356 | ) |   |      | (85  | )
|                                                 
|Net cash used in discontinued operations          |                      | $ | (678 | )    |      | $ | (1,057 | )    |   | $ | (655 | )   
|                                                 

F-13



---



##### 



5.     Acquisitions



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The following tables set out certain information as at December 31, 2001
for the acquisitions completed by Nortel Networks in the years ended
December 31, 2000 and 1999, excluding those entities acquired which were
subsequently discontinued (see note 4). 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 their respective dates of acquisition.



| |                                                                        
| | -----------------------------------------------------------------------
| | Purchase price allocation and amortization period for intangible assets

|                      |  |          |       |                                 |  |            |       |           |  |          |     |              |  |   |     |  |  |   |    | 
|--------------------- |  | -------- | ----- | ------------------------------- |  | ---------- | ----- | --------- |  | -------- | --- | ------------ |  | - | --- |  |  | - | -- | 
|                      |  |          |       |                                 |  |            |       |           |  | Acquired |     |              |  |   |     |  |  |  
|Closing Date          |  | Purchase |       | Goodwill                        |  | Technology |       |           |  |          |     | Net Tangible
|& Acquisition         |  | Price    |       | ( - - amortization period - - ) |  | IPR&D      |       | Assets   
|                     
|2000                  |  |          |       |                                 |  |            |       |           |  |          |     |              |  |   |     |  |  |   |    | 
|May 12                |  |          |       |                                 |  |            |       |           |  |          |     |              |  |   |     |  |  |   |    | 
|Photonic (i)          |  | $        | 32    |                                 |  | $          | 29    |           |  | $        |    |              |  | $ |    |  |  | $ | 3  | 
|                      |  |          |       |                                 |  | (3 years)  |       |           |  |          |     |              |  |   |     |  |  |  
|                     
|March 16              |  |          |       |                                 |  |            |       |           |  |          |     |              |  |   |     |  |  |   |    | 
|Clarify (ii)          |  | $        | 2,114 |                                 |  | $          | 1,812 |           |  | $        | 210 |              |  | $ | 64  |  |  | $ | 28 | 
|                      |  |          |       |                                 |  | (3 years)  |       | (2 years) |  |          |     |              |  |   |     | 
|                     
|January 28            |  |          |       |                                 |  |            |       |           |  |          |     |              |  |   |     |  |  |   |    | 
|Qtera (iii)           |  | $        | 3,004 |                                 |  | $          | 2,412 |           |  | $        |    |              |  | $ | 559 |  |  | $ | 33 | 
|                      |  |          |       |                                 |  | (3 years)  |       |           |  |          |     |              |  |   |     |  |  |  
|                     
|January 24            |  |          |       |                                 |  |            |       |           |  |          |     |              |  |   |     |  |  |   |    | 
|Dimension (iv)        |  | $        | 65    |                                 |  | $          | 58    |           |  | $        |    |              |  | $ |    |  |  | $ | 7  | 
|                      |  |          |       |                                 |  | (4 years)  |       |           |  |          |     |              |  |   |     |  |  |  
|                     
|Other (v)             |  |          |       |                                 |  |            |       |           |  |          |     |              |  |   |     |  |  |   |    | 
|                     
|1999                  |  |          |       |                                 |  |            |       |           |  |          |     |              |  |   |     |  |  |   |    | 
|November 12           |  |          |       |                                 |  |            |       |           |  |          |     |              |  |   |     |  |  |   |    | 
|Periphonics (vi)      |  | $        | 481   |                                 |  | $          | 271   |           |  | $        | 66  |              |  | $ | 68  |  |  | $ | 76 | 
|                      |  |          |       |                                 |  | (4 years)  |       | (3 years) |  |          |     |              |  |   |     | 
|                     
|April 16              |  |          |       |                                 |  |            |       |           |  |          |     |              |  |   |     |  |  |   |    | 
|Shasta Networks (vii) |  | $        | 349   |                                 |  | $          | 164   |           |  | $        |    |              |  | $ | 180 |  |  | $ | 5  | 
|                      |  |          |       |                                 |  | (3 years)  |       |           |  |          |     |              |  |   |     |  |  |  
|                     



| |                                        
| | ---------------------------------------
| | Form of initial consideration and other



| | (i) |  | Photonic Technologies, Inc. (Photonic) was a developer of
optical component technology for the manipulation and control of the
polarization of light. In connection with the acquisition, Nortel
Networks paid approximately $32 in cash to acquire the remaining
approximate two-thirds ownership interest in Photonic that it did not
previously own.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As part of its work plan to streamline its business, during the third
quarter of 2001, Nortel Networks closed the operations acquired with
the Photonic transaction. The closure of Photonic did not have a
material impact on the business, results of operations, and financial
condition of Nortel Networks.



| | (ii) |  | Clarify Inc. (Clarify) was a provider of eBusiness front office
solutions. In connection with the acquisition, Nortel Networks issued
approximately 31.7 million common shares and assumed the equivalent of
approximately 8.8 million stock options to purchase common shares of
Nortel Networks. The fair value of the assumed Clarify stock options,
using the Black-Scholes valuation model, was $363.
| | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As part of its work plan to streamline its business, on November 28,
2001 Nortel Networks and Amdocs Limited completed a transaction to
sell substantially all assets used in the Clarify portfolio,
including patents,

F-14



---



##### 





| |                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | intellectual property, and trademarks for
approximately $200 in cash. The results relating to Clarify were not
material to the business, results of operations, and financial
condition of Nortel Networks.



| | (iii) |  | Qtera Corporation (Qtera) was a producer of ultra-long-reach
optical networking systems. In connection with the acquisition,
Nortel Networks issued approximately 28.2 million common shares, of
which approximately 5.2 million common shares of Nortel Networks were
issued into escrow related to contingent consideration. The
equivalent of approximately 3.7 million stock options to purchase
common shares of Nortel Networks and 0.9 million warrants convertible
into common shares of Nortel Networks were assumed. The fair values
of the assumed Qtera stock options and warrants, using the
Black-Scholes valuation model were $349 and $78, respectively. These
issued shares, assumed stock options and assumed warrants exclude the
common shares that were to be issued to the former holders of assumed
stock options and warrants on the achievement of certain business
performance objectives.
| | ----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (iv)  |  | Dimension Enterprises, Inc. (Dimension) was an engineering and
business strategy consulting firm. In connection with the
acquisition, Nortel Networks paid approximately $37 in cash for
Dimension.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 



| |                                                                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As part of its work plan to streamline its business, Nortel Networks
made the decision to exit the consulting services business acquired
with this acquisition during the fourth quarter of 2001. The results
relating to Dimension were not material to the business, results of
operations, and financial condition of Nortel Networks (see note 7).



| | (v) |  | Other
| | --- |  | -----



| |                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Nortel 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 and Co. KG) (Nortel Germany), from
a 50 percent joint control interest to a 58 percent controlling
interest.
|
| | Nortel 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.) (Nortel France), from a 50 percent
joint control interest to a 55 percent controlling interest.                     



| | (vi)  |  | Periphonics Corporation (Periphonics) was a provider of
interactive voice solutions used in call centers and other voice and
data network applications. In connection with the acquisition, Nortel
Networks issued approximately 8.4 million common shares and assumed
the equivalent of approximately 0.9 million stock options to purchase
common shares of Nortel Networks. The fair value of the assumed
Periphonics stock options, using the Black-Scholes valuation model,
was $30.
| | ----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (vii) |  | Shasta Networks, Inc. (Shasta Networks) was a provider of
gateways and systems for IP public data networks. In connection with
the acquisition, Nortel Networks issued approximately 9.3 million
common shares.                                                                                                                                                                                                                                                                          



| |                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As described in note 7, the amount of intangible assets associated with a
number of Nortel Networks prior acquisitions was written down during the
year ended December 31, 2001.

F-15



---



##### 



| |                         
| | ------------------------
| | Contingent consideration



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In certain acquisition transactions, Nortel Networks agrees to 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, 2000, and 1999 for which it was possible for contingent
consideration to be earned during the year ended December 31, 2001, if the
acquired businesses met the specific performance objectives.

|            |  |                                                                                                                                                                                                                                                                                                                                                                                                |  |               |     |  |                |  |   |     | 
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | --- |  | -------------- |  | - | --- | 
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                |  | Maximum       |     |  | Contingent    
|Year &      |  |                                                                                                                                                                                                                                                                                                                                                                                                |  | Contingent    |     |  | Consideration 
|Acquisition |  |                                                                                                                                                                                                                                                                                                                                                                                                |  | Consideration |     |  | Earned to Date
|           
|2000        |  |                                                                                                                                                                                                                                                                                                                                                                                                |  |              
|Photonic    |  |                                                                                                                                                                                                                                                                                                                                                                                                |  | $             | 5   |  |                |  | $ |   
|           
|            |  | As part of its
initiatives to streamline its business around its core growth areas, Nortel Networks closed the operations acquired with the Photonic transaction.  The contingent consideration available at January 1, 2001 was not earned during 2001, and as a result, such remaining contingent consideration will not be paid.                                                           
|           
|Qtera       |  |                                                                                                                                                                                                                                                                                                                                                                                                |  | $             | 500 |  |                |  | $ | 300
|           
|            |  | The remaining $200 of contingent consideration available to the former shareholders, option holders and warrant holders of Qtera at January 1, 2001 was not earned during 2001, and as a result such remaining contingent consideration will not be paid.                                                                                                                                     
|           
|Dimension   |  |                                                                                                                                                                                                                                                                                                                                                                                                |  | $             | 34  |  |                |  | $ | 28 
|           
|            |  | Payable in cash, upon Dimension achieving certain business performance objectives by the end of 2002.  Of the $28 earned to date, $13 was earned in 2001, and $15 was earned in 2000.  As part of its initiatives to streamline its business around its core growth areas, Nortel Networks made the decision to exit the consulting services business acquired with the Dimension transaction.
|           

6.     Consolidated financial statement details



| |                                                                      
| | ---------------------------------------------------------------------
| | Consolidated statements of operations                                
|
| | The following tables provide details for the years ended December 31:
|
| | Research and development expense:                                    

|                                          |  |      |       |      |  |      |       |  |  |   |       | 
|----------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                         
|                                          |  | 2001 |       | 2000 |  | 1999
|                                         
|R&D expense                               |  | $    | 3,230 |      |  | $    | 3,626 |  |  | $ | 2,724 | 
|R&D cost incurred on behalf of others (a) |  |      | 68    |      |  |      | 64    |  |  |   | 131   | 
|                                         
|Total                                     |  | $    | 3,298 |      |  | $    | 3,690 |  |  | $ | 2,855 | 
|                                         



| | (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



---



##### 





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

|                                   |  |      |      |      |  |      |      |   |  |   |     |  
|---------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  | - | --- | -
|                                  
|                                   |  | 2001 |      | 2000 |  | 1999
|                                  
|Interest income                    |  | $    | 119  |      |  | $    | 130  |   |  | $ | 132 |  
|Minority interest                  |  |      | 22   |      |  |      | (55  | ) |  |   | 1   |  
|Gain (loss) on sale of investments |  |      | (354 | )    |  |      | 884  |   |  |   | 193 |  
|Other  net                        |  |      | (112 | )    |  |      | (124 | ) |  |   | (90 | )
|                                  
|Other income (expense)  net       |  | $    | (325 | )    |  | $    | 835  |   |  | $ | 236 |  
|                                  



| |                                  
| | ---------------------------------
| | Currency exchange gains (losses):

|                                     |  |      |     |      |  |      |    |  |  |   |     |  
|------------------------------------ |  | ---- | --- | ---- |  | ---- | -- |  |  | - | --- | -
|                                    
|                                     |  | 2001 |     | 2000 |  | 1999
|                                    
|Currency exchange gains (losses) (a) |  | $    | (25 | )    |  | $    | 10 |  |  | $ | (93 | )
|                                    



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



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



| |                                                        
| | -------------------------------------------------------
| | The following tables provide details as at December 31:



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

|                      |  |      |       |      |  |   |       | 
|--------------------- |  | ---- | ----- | ---- |  | - | ----- | 
|                     
|                      |  | 2001 |       | 2000
|                     
|Raw materials         |  | $    | 744   |      |  | $ | 677   | 
|Work in process       |  |      | 576   |      |  |   | 852   | 
|Finished goods        |  |      | 243   |      |  |   | 2,282 | 
|                     
|Inventories  net (a) |  | $    | 1,563 |      |  | $ | 3,811 | 
|                     



| | (a) |  | Net of inventory provisions of $911 and $510 as at December 31,
2001 and 2000, respectively. Nortel Networks has also accrued in
other accrued liabilities $565 at December 31, 2001 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.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

|                               |                         |   |        |        |      |   |        |        |  
|------------------------------ | ----------------------- | - | ------ | ------ | ---- | - | ------ | ------ | -
|                              
|                               |                         |   | 2001   |        | 2000
|                              
|Cost:                          |                         |   |        |        |      |   |        |       
|                               | Land                    | $ | 124    |        |      | $ | 120    |       
|                               | Buildings               |   |        | 1,752  |      |   |        | 1,699  |  
|                               | Machinery and equipment |   |        | 4,374  |      |   |        | 4,298  |  
|                              
|                               |                         |   | 6,250  |        |      |   | 6,117  |       
|                              
|Less accumulated depreciation: |                         |   |        |        |      |   |        |       
|                               | Buildings               |   |        | (792   | )    |   |        | (452   | )
|                               | Machinery and equipment |   |        | (2,999 | )    |   |        | (2,373 | )
|                              
|                               |                         |   | (3,791 | )      |      |   | (2,825 | )     
|                              
|Plant and equipment  net      |                         | $ | 2,459  |        |      | $ | 3,292  |       
|                              

F-17



---



##### 





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

|                               |                     |   |         |        |      |   |        |        |  
|------------------------------ | ------------------- | - | ------- | ------ | ---- | - | ------ | ------ | -
|                              
|                               |                     |   | 2001    |        | 2000
|                              
|Cost:                          |                     |   |         |        |      |   |        |       
|                               | Acquired technology |   | $       | 5,201  |      |   | $      | 5,230  |  
|                               | Goodwill            |   |         | 8,590  |      |   |        | 10,953 |  
|                              
|                               |                     |   | 13,791  |        |      |   | 16,183 |       
|                              
|Less accumulated amortization: |                     |   |         |        |      |   |        |       
|                               | Acquired technology |   |         | (5,181 | )    |   |        | (4,607 | )
|                               | Goodwill            |   |         | (6,307 | )    |   |        | (4,229 | )
|                              
|                               |                     |   | (11,488 | )      |      |   | (8,836 | )     
|                              
|Intangible assets  net        |                     | $ | 2,303   |        |      | $ | 7,347  |       
|                              



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



| |                                                                      
| | ---------------------------------------------------------------------
| | The following tables provide details for the years ended December 31:



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

|                                            |  |      |       |      |  |      |       |  |  |   |       | 
|------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                           
|                                            |  | 2001 |       | 2000 |  | 1999
|                                           
|Cash on hand and balances with banks        |  | $    | 1,249 |      |  | $    | 1,141 |  |  | $ | 534   | 
|Short-term investments                      |  |      | 2,208 |      |  |      | 426   |  |  |   | 1,619 | 
|                                           
|Cash and cash equivalents end of year  net |  | $    | 3,457 |      |  | $    | 1,567 |  |  | $ | 2,153 | 
|                                           



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

|                                                                                               |  |      |     |      |  |      |        |   |  |   |        |  
|---------------------------------------------------------------------------------------------- |  | ---- | --- | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                                                              
|                                                                                               |  | 2001 |     | 2000 |  | 1999
|                                                                                              
|Cash acquired                                                                                  |  | $    |    |      |  | $    | (166   | ) |  | $ | (22    | )
|Total net assets acquired other than cash                                                      |  |      | (89 | )    |  |      | (5,453 | ) |  |   | (1,462 | )
|                                                                                              
|Total purchase price                                                                           |  |      | (89 | )    |  |      | (5,619 | ) |  |   | (1,484 | )
|                                                                                               |  |      |     |      |  |      |        |   |  |   |        |  
|Less: cash acquired                                                                            |  |      |    |      |  |      | 166    |   |  |   | 22     |  
|Less: non-cash consideration paid other than common share
options and contingent consideration |  |      |    |      |  |      | 4,307  |   |  |   | 769    |  
|Less: common share option consideration paid                                                   |  |      |    |      |  |      | 791    |   |  |   | 30     |  
|Less: cash consideration contingent upon the
achievement of certain operational milestones     |  |      |    |      |  |      | 39     |   |  |   | 18     |  
|                                                                                              
|Acquisitions of investments and businesses  net of cash acquired                              |  | $    | (89 | )    |  | $    | (316   | ) |  | $ | (645   | )
|                                                                                              



| |                                
| | -------------------------------
| | Interest and income taxes paid:

|                  |  |      |     |      |  |      |     |  |  |   |     | 
|----------------- |  | ---- | --- | ---- |  | ---- | --- |  |  | - | --- | 
|                 
|                  |  | 2001 |     | 2000 |  | 1999
|                 
|Interest paid     |  | $    | 252 |      |  | $    | 158 |  |  | $ | 179 | 
|Income taxes paid |  | $    | 18  |      |  | $    | 736 |  |  | $ | 421 | 
|                 

F-18



---



##### 





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

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

7.     Special charges



| |                                                                                      
| | -------------------------------------------------------------------------------------
| | The following tables detail special charges incurred for the years ended
December 31:



| |     
| | ----
| | 2001

|                             |                                     |   |         |       |                      |   |               |     |      |   |       |     |   |   |           |     | 
|---------------------------- | ----------------------------------- | - | ------- | ----- | -------------------- | - | ------------- | --- | ---- | - | ----- | --- | - | - | --------- | --- | 
|                            
|                             |                                     |   |         |       |                      |   |               |     |      |   |       |     |   |   | Provision
|                             |                                     |   |         |       | Cumulative drawdowns |   | balance as at
|                             |                                     |   | Special |       |                      |   | December 31, 
|                             |                                     |   | charges |       | Cash                 |   | Non-cash      |     | 2001
|                            
|Restructuring activities:    |                                     |   |         |       |                      |   |               |     |      |   |       |     |   |   |           |    
|                             | Workforce reduction                 |   | $       | 1,343 |                      |   | $             | 964 |      |   | $     | (14 | ) |   | $         | 393 | 
|                             | Contract settlement and lease costs |   |         | 883   |                      |   |               | 110 |      |   |       |    |   |   |           | 773 | 
|                             | Plant and equipment write downs     |   |         | 939   |                      |   |               |    |      |   |       | 939 |   |   |           |    | 
|                             | Intangible asset write-off          |   |         | 106   |                      |   |               |    |      |   |       | 106 |   |   |           |    | 
|                             | Other                               |   |         | 39    |                      |   |               | 8   |      |   |       |    |   |   |           | 31  | 
|                            
|                             |                                     |   | 3,310   |       |                      |   | 1,082         |     |      |   | 1,031 |     |   |   | 1,197     |    
|Intangible assets write down |                                     |   | 2,133   |       |                      |   |              |     |      |   | 2,133 |     |   |   |          |    
|                            
|Total                        |                                     | $ | 5,443   |       |                      | $ | 1,082         |     |      | $ | 3,164 |     |   | $ | 1,197     |    
|                            



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During 2001, in light of the significant 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 implemented its work plan to streamline its
operations and activities around its core markets and leadership
strategies. This work plan was adjusted during the year to reflect the
continued decline in the industry and economic environment, and in the
capital markets.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In addition, as part of its review of financial results during each of the
three months ended June 30, September 30, and December 31, 2001, Nortel
Networks performed separate assessments of the carrying values of its
intangible assets based on the respective intangible asset balances
outstanding in each period. The conclusion of the assessment performed
during the three months ended June 30, 2001 was that the decline in market
conditions within Nortel Networks industry was significant and other than
temporary. As a result, Nortel Networks recorded a $2,133 write down of
intangible assets in the three months ended June 30, 2001, based on the
amount by which the carrying amount of these assets exceeded their fair
value. The conclusions of the assessments performed during both the three
months ended September 30, and December 31, 2001 were that no additional
write down of intangible assets was required. There has been no impairment
in enterprise level goodwill during the year ended December 31, 2001.



| |                         
| | ------------------------
| | Restructuring activities



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | For the year ended December 31, 2001, Nortel Networks recorded
restructuring charges of $3,310.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | Workforce reduction charges of $1,343 were related to the cost of severance
and benefits associated with the approximately 35,500 employees notified of
termination. Of the 35,500 employees notified by December 31, 2001,
approximately 13,800 were direct employees performing manufacturing,
assembly, test and inspection activities associated with the production of
Nortel Networks products, and approximately 21,700 were indirect sales,
marketing, and administrative employees, and manufacturing managers. The
workforce reduction was primarily in North America and the United Kingdom
and extended across all of Nortel Networks segments. As at December 31,
2001, the workforce reduction provision balance has been drawn down by cash
payments of $964, offset by $14 of non-cash curtailment income related to
both pension and other post-retirement benefits, resulting in an ending
provision balance

F-19



---



##### 





| |                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------
| | for workforce reduction of $393. The remaining provision
is expected to be substantially drawn down by the end of 2002.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In conjunction with the above noted workforce reduction, Nortel Networks
identified a number of leased and owned facilities comprised of office,
warehouse and manufacturing space, as well as leased manufacturing
equipment, that were no longer required. As a result, Nortel Networks
recorded net lease costs of approximately $757. The costs primarily related
to Nortel Networks future contractual obligations under operating leases.
Offsetting the total lease charge is approximately $506 in expected
sublease revenue on leases that Nortel Networks cannot terminate. Nortel
Networks expects to have subleased substantially all of these properties by
the end of 2004. Nortel Networks wrote down the net carrying value of
specific owned facilities across all segments within North America, and the
United Kingdom. The write down of approximately $95 reflects the net
realizable value based on market assessments for general purpose
facilities. Contract settlement costs included negotiated settlements of
approximately $126 to either cancel contracts or renegotiate existing
contracts across all of Nortel Networks segments. As at December 31,
2001, the provision balance for contract settlement and lease costs has
been drawn down by cash payments of $110, resulting in an ending provision
balance of $773. The remaining provision is expected to be substantially
drawn down by the end of 2004.



| |                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Plant and equipment write downs of approximately $440 consisted of the
write down of leasehold improvements and certain information technology
equipment associated with the exiting of the above noted leased and owned
facilities.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In addition, as a result of the significant negative industry and economic
trends impacting Nortel Networks operations and expected future growth
rates, Nortel Networks has performed assessments of certain plant and
equipment assets as part of its review of financial results during 2001.
The conclusion of these assessments resulted in a write down of certain
plant and equipment within global operations, a function that supports all
of Nortel Networks segments, and within the Optical Long-Haul Networks
segment, of approximately $404.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Within global operations, it was determined that there was excess test
equipment at a number of system houses that would no longer be required as
a result of the industry and economic environment. As a result, Nortel
Networks recorded a charge of approximately $66 to write down the value of
this equipment to its net realizable value based on the current fair value
for this type of specialized equipment. Nortel Networks expects to dispose
of this equipment by the end of the second quarter of 2002.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Within the Optical Long-Haul Networks segment, it was determined that there
was excess manufacturing equipment at a number of facilities that would no
longer be required as a result of the industry and economic environment.
As a result, Nortel Networks recorded a charge of approximately $247 to
write down the value of this equipment to its net realizable value based on
the current fair market value for this type of specialized equipment.
Nortel Networks expects to dispose of this equipment by the end of the
second quarter of 2002. Nortel Networks also wrote down the net carrying
value of a specialized manufacturing facility within the Optical Long-Haul
Networks segment for the production of optical components within North
America. The write down of approximately $91 reflects the net realizable
value based on market assessments for a general purpose facility.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The intangible asset write-off of $106 was related to the remaining net
book value of goodwill associated with the prior acquisitions of MICOM
Communications Corp and Dimension. As part of Nortel Networks work plan to
streamline its business, Nortel Networks has made the decision 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.



| |                             
| | ----------------------------
| | Intangible assets write down



| |                                                                                                          
| | ---------------------------------------------------------------------------------------------------------
| | For the year ended December 31, 2001, Nortel Networks recorded an
intangible assets write down of $2,133.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Nortel Networks, as part of its review of financial results during the
three months ended June 30, 2001, performed an assessment of the carrying
values of 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.

F-20



---



##### 





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The conclusion of that assessment was that the
decline in market conditions within Nortel Networks industry was
significant and other than temporary. As a result, Nortel Networks
recorded a $2,133 write down of intangible assets in the three months ended
June 30, 2001, based on the amount by which the carrying amount of these
assets exceeded their fair value. The write down was primarily related to
the goodwill associated with the acquisitions of Qtera, within the Optical
Long-Haul Networks segment, and Clarify, within Other.



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



| |     
| | ----
| | 2000

|                           |  |         |     |                      |  |               |     |      |  |   |     |  |  |           |   | 
|-------------------------- |  | ------- | --- | -------------------- |  | ------------- | --- | ---- |  | - | --- |  |  | --------- | - | 
|                          
|                           |  |         |     |                      |  |               |     |      |  |   |     |  |  | Provision
|                           |  |         |     | Cumulative drawdowns |  | balance as at
|                           |  | Special |     |                      |  | December 31, 
|                           |  | charges |     | Cash                 |  | Non-cash      |     | 2001
|                          
|Workforce reduction        |  | $       | 130 |                      |  | $             | 130 |      |  | $ |    |  |  | $         |  | 
|Intangible asset write-off |  |         | 133 |                      |  |               |    |      |  |   | 133 |  |  |           |  | 
|Other                      |  |         | 4   |                      |  |               |    |      |  |   | 4   |  |  |           |  | 
|                          
|                           |  | $       | 267 |                      |  | $             | 130 |      |  | $ | 137 |  |  | $         |  | 
|                          



| |                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In the year ended December 31, 2000, Nortel Networks recorded special
charges aggregating to
$267 relating to restructuring activities, and one-time costs of $2 related
to inventory provisions and included in cost of revenues.



| |                         
| | ------------------------
| | Restructuring activities



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Restructuring activities involved the implementation of Nortel Networks
initiative to strategically realign resources into high growth areas of the
business in response to shifts in customers needs and transitions from
older to newer technologies across Nortel Networks product portfolio, and
the outsourcing of certain information services functions. The outsourcing
of certain corporate services began in the third quarter of 1999.
|
| | Workforce reduction costs of approximately $30 related to approximately
2,000 employees in connection with the outsourcing of certain information
services functions. The remaining workforce reduction charges of
approximately $100 related primarily to approximately 2,000 employees in
connection with the initiative to strategically realign resources.                                                                                    



| |                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The intangible asset write-off of $133 represented a reduction of the
goodwill related to Nortel France. Nortel Networks changed its business
mandate for Nortel France from the product focus for which it was acquired,
and restructured the business to focus on distribution channels.



| |                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The remaining provision balance of $48 as at December 31, 2000, which
related to the approximately 2,000 employees identified in the strategic
resource realignment described above, was fully drawn down in 2001.

F-21



---



##### 





| |     
| | ----
| | 1999

|                                    |  |         |     |                      |  |               |     |      |  |   |    |  |  |           |   | 
|----------------------------------- |  | ------- | --- | -------------------- |  | ------------- | --- | ---- |  | - | -- |  |  | --------- | - | 
|                                   
|                                    |  |         |     |                      |  |               |     |      |  |   |    |  |  | Provision
|                                    |  |         |     | Cumulative drawdowns |  | balance as at
|                                    |  | Special |     |                      |  | December 31, 
|                                    |  | charges |     | Cash                 |  | Non-cash      |     | 2001
|                                   
|Workforce reduction                 |  | $       | 81  |                      |  | $             | 81  |      |  | $ |   |  |  | $         |  | 
|Write down of equipment             |  |         | 14  |                      |  |               |    |      |  |   | 14 |  |  |           |  | 
|Contract settlement and lease costs |  |         | 30  |                      |  |               | 30  |      |  |   |   |  |  |           |  | 
|                                   
|                                    |  | $       | 125 |                      |  | $             | 111 |      |  | $ | 14 |  |  | $         |  | 
|                                   



| |                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In the year ended December 31, 1999, Nortel Networks recorded special
charges aggregating to $125 relating to restructuring activities and
one-time costs of $49.



| |                         
| | ------------------------
| | Restructuring activities



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Restructuring activities involved Nortel Networks exit of the Satellite and
Time Division Multiple Access small switch operations within the former
Service Provider and Carrier (SP&C) segment, and the Consumer Products
and Open Speech operations within the former Enterprise segment. The
restructuring activities also involved the streamlining of the former SP&C
manufacturing operations in connection with Nortel Networks strategy
announced in January 1999.



| |                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Workforce reduction charges represented the cost of severance and related
benefits for the termination of approximately 1,850 employees in the above
noted restructuring activities.



| |                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Contract settlement and lease costs included lease termination costs for
the Open Speech operations, as well as the write-off of leasehold
improvements and furniture and fixtures related to these facilities.



| |                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------
| | The remaining provision balance of $28 as at December 31, 2000, related to
workforce reduction, was fully drawn down in 2001.



| |               
| | --------------
| | One-time costs



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The restructuring of the above noted businesses resulted in Nortel Networks
no longer supporting several of its existing products and new product
introductions. Nortel Networks recorded a charge to write-off the
remaining book value of redundant raw materials inventory related to the
Consumer Products operations and the former SP&C operations. The inventory
provision was recorded in cost of revenues. Also included was a one-time,
non-recurring charge for Nortel Networks coverage of an obligation by a
customer to a third party, a non-recurring and non-operational charge
related to the settlement of a patent infringement suit, and other costs.
These amounts were recorded in selling, general and administrative
expenses.

F-22



---



##### 



8.     Long-term debt and credit facilities



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



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

|                                                                                                |  |      |       |      |  |   |       | 
|----------------------------------------------------------------------------------------------- |  | ---- | ----- | ---- |  | - | ----- | 
|                                                                                               
|                                                                                                |  | 2001 |       | 2000
|                                                                                               
|8.75% Notes due June 12, 2001                                                                   |  | $    |      |      |  | $ | 250   | 
|Term credit facility due June 28, 2001, with a
floating interest rate based on LIBOR + .12%     |  |      |      |      |  |   | 120   | 
|6.88% Notes due October 1, 2002                                                                 |  |      | 300   |      |  |   | 300   | 
|6.00% Notes due September 1, 2003                                                               |  |      | 200   |      |  |   | 200   | 
|6.125% Notes due February 15, 2006                                                              |  |      | 1,500 |      |  |   |      | 
|7.40% Notes due June 15, 2006                                                                   |  |      | 150   |      |  |   | 150   | 
|6.88% Notes due September 1, 2023                                                               |  |      | 200   |      |  |   | 200   | 
|7.88% Notes due June 15, 2026                                                                   |  |      | 150   |      |  |   | 150   | 
|Other long-term debt with various repayment terms and a weighted
average interest rate of 6.49% |  |      | 157   |      |  |   | 209   | 
|Obligations under capital leases                                                                |  |      | 20    |      |  |   | 43    | 
|                                                                                               
|                                                                                                |  |      | 2,677 |      |  |   | 1,622 | 
|Less: Long-term debt due within one year                                                        |  |      | 384   |      |  |   | 445   | 
|                                                                                               
|Long-term debt                                                                                  |  | $    | 2,293 |      |  | $ | 1,177 | 
|                                                                                               



| |                                                                                                            
| | -----------------------------------------------------------------------------------------------------------
| | At December 31, 2001, the amounts of long-term debt payable for the years
ending December 31, consisted of:

|                             |  |  |   |      
|---------------------------- |  |  | - | -----
|2002                         |  |  | $ | 384  
|2003                         |  |  |   | 258  
|2004                         |  |  |   | 13   
|2005                         |  |  |   |     
|2006                         |  |  |   | 1,650
|Thereafter                   |  |  |   | 372  
|                            
|Total long-term debt payable |  |  | $ | 2,677
|                            



| |                                                                      
| | ---------------------------------------------------------------------
| | Nortel Networks long-term debt was unsecured as at December 31, 2001.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On February 8, 2001, Nortel Networks completed an offering of $1,500
of 6.125 percent notes due on February 15, 2006 (the Notes). The
Notes pay interest on a semi-annual basis on February 15 and August
15, which began on August 15, 2001. The 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.



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



| |                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Effective December 20, 2001, Nortel Networks and its subsidiary Nortel
Networks Inc. amended their June 14, 2001 $2,000 364-day syndicated credit
agreements. These amendments reduced the size of the committed facilities
to $1,575 and extended the term of the credit agreements to December 13,
2002, with a one-year term out option to convert outstanding amounts under
the credit agreements into term loans on December 13, 2002.



| |                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The credit agreements contain financial covenants that require (i) the
maintenance of a minimum consolidated tangible net worth at the Nortel
Networks level, and (ii) the achievement of certain minimum consolidated
earnings before

F-23



---



##### 





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | interest, taxes, depreciation and amortization (EBITDA)
thresholds at the consolidated Nortel Networks Corporation level beginning
in the first quarter of 2002. Certain business restructuring charges and
other one-time charges and gains will be excluded from the calculation of
EBITDA. In addition, these credit agreements contain covenants restricting
additional debt, the payment of dividends, corporate events, liens, sale
and leasebacks, and investments, among others. These credit agreements
also provide for the granting of security, which may include a pledge of
shares and/or a guarantee, over substantially all of Nortel Networks assets
and those of most of its United States and Canadian subsidiaries and also
provide for either a pledge of shares or a guarantee by certain of Nortel
Networks other subsidiaries. The security will be granted in the event
that one of Nortel Networks United States senior unsecured long-term debt
ratings fall below investment grade, defined as either Baa3 or BBB-, as
determined by Moodys Investors Services, Inc. (Moodys) or Standard &
Poors Ratings Service (S&P), respectively. The security would be
released when both of these debt ratings return to Baa2 (with a stable
outlook) and BBB (with a stable outlook) as determined by Moodys and S&P,
respectively. In the event that such security is in fact granted as a
result of such rating downgrade, certain of the long-term debt outstanding
at December 31, 2001, will also be secured to the extent required by the
terms and conditions of such long-term debt during the time that the
security arrangements under the credit agreements are in effect.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On April 12, 2000, Nortel Networks and Nortel Networks Inc. entered into
five-year and 364-day syndicated credit agreements, which permit borrowings
in an aggregate amount of up to $2,000. On April 11, 2001, Nortel Networks
and Nortel Networks Inc. extended and increased the April 12, 2000, 364-day
syndicated credit agreements to permit borrowings in an aggregate amount of
up to $1,750 from $1,250, with a one-year term out option to convert
outstanding amounts under the 364-day syndicated credit agreements into
term loans on the termination date of the credit agreements. As a result,
total borrowings permitted under these syndicated five-year and 364-day
credit agreements are $2,500.



| |                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | At December 31, 2001 Nortel Networks was in compliance with the covenants
and had not drawn under any of the credit agreements. In addition, Nortel
Networks debt ratings were within investment grade as determined by both
Moodys and S&P.



| |                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In the event of a debt rating downgrade below investment grade, Nortel
Networks will be subject to additional reporting requirements in its future
filings with the SEC.



| |                                                                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | At December 31, 2001 and 2000, Nortel Networks had total unused committed
credit facilities of approximately $4,400 and $2,160, respectively. These
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 United States long-term debt ratings of Nortel Networks.

F-24



---



##### 



9.     Income taxes



| |                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 the years ended December 31:

|                                                                                                                   |                                                                 |                                                               |         |   |         |   |        |   |        |   |      |   |        |   | 
|------------------------------------------------------------------------------------------------------------------ | --------------------------------------------------------------- | ------------------------------------------------------------- | ------- | - | ------- | - | ------ | - | ------ | - | ---- | - | ------ | - | 
|                                                                                                                  
|                                                                                                                   |                                                                 |                                                               |         |   | 2001    |   | 2000   |   | 1999  
|                                                                                                                  
|Income taxes at Canadian rates
(2001 - 40.8%, 2000 - 42.3%, 1999 - 42.9%)                                          |                                                                 | $                                                             | 5,971   |   |         | $ | (139   | ) |        | $ | (148 | )
|Reduction of Canadian taxes applicable to
manufacturing profits                                                    |                                                                 |                                                               | (71     | ) |         |   | 36     |   |        |   | 44   |  
|Difference between Canadian rate and rates applicable to
subsidiaries in the United States and other jurisdictions |                                                                 |                                                               | (752    | ) |         |   | 114    |   |        |   | 112  |  
|Difference between basic Canadian rate and rates
applicable togain on sale of businesses                           |                                                                 |                                                               | (31     | ) |         |   | (30    | ) |        |   | 32   |  
|Non-deductible amortization of acquired intangibles and
IPR&D expense                                              |                                                                 |                                                               | (1,749  | ) |         |   | (1,313 | ) |        |   | (640 | )
|Foreign operation tax benefit                                                                                      |                                                                 |                                                               | 979     |   |         |   |       |   |        |   |     |  
|Change in valuation allowance                                                                                      |                                                                 |                                                               | (1,331  | ) |         |   |       |   |        |   |     |  
|Utilization of losses                                                                                              |                                                                 |                                                               | 22      |   |         |   | 64     |   |        |   | 34   |  
|Other                                                                                                              |                                                                 |                                                               | 35      |   |         |   | 68     |   |        |   | (10  | )
|                                                                                                                  
|Income tax benefit (provision)                                                                                     |                                                                 | $                                                             | 3,073   |   |         | $ | (1,200 | ) |        | $ | (576 | )
|                                                                                                                  
|Details of Nortel Networks income taxes:                                                                           |                                                                 |                                                               |         |   |         |   |        |   |        |   |      |  
|                                                                                                                   | Earnings (loss) from continuing operations before income taxes: |                                                               |         |   |         |   |        |   |        |   |      |   |       
|                                                                                                                   |                                                                 | Canadian, excluding gain on sale of businesses                |         | $ | (3,394  | ) |        | $ | 868    |   |      | $ | 255    |  
|                                                                                                                   |                                                                 | United States and other, excluding gain on sale of
businesses |         |   | (11,359 | ) |        |   | (713   | ) |      |   | (40    | )
|                                                                                                                   |                                                                 | Gain on sale of businesses                                    |         |   | 125     |   |        |   | 174    |   |      |   | 131    |  
|                                                                                                                  
|                                                                                                                   |                                                                 | $                                                             | (14,628 | ) |         | $ | 329    |   |        | $ | 346  |  
|                                                                                                                  
|                                                                                                                   | Income tax benefit (provision):                                 |                                                               |         |   |         |   |        |   |        |   |      |   |       
|                                                                                                                   |                                                                 | Canadian, excluding gain on sale of businesses                |         | $ | 504     |   |        | $ | (231   | ) |      | $ | (95    | )
|                                                                                                                   |                                                                 | United States and other, excluding gain on sale of
businesses |         |   | 2,651   |   |        |   | (866   | ) |      |   | (456   | )
|                                                                                                                   |                                                                 | Gain on sale of businesses                                    |         |   | (82     | ) |        |   | (103   | ) |      |   | (25    | )
|                                                                                                                  
|                                                                                                                   |                                                                 | $                                                             | 3,073   |   |         | $ | (1,200 | ) |        | $ | (576 | )
|                                                                                                                  
|                                                                                                                   | Income tax benefit (provision):                                 |                                                               |         |   |         |   |        |   |        |   |      |   |       
|                                                                                                                   |                                                                 | Current                                                       |         | $ | 1,236   |   |        | $ | (1,420 | ) |      | $ | (1,166 | )
|                                                                                                                   |                                                                 | Deferred                                                      |         |   | 1,837   |   |        |   | 220    |   |      |   | 590    |  
|                                                                                                                  
|                                                                                                                   |                                                                 | $                                                             | 3,073   |   |         | $ | (1,200 | ) |        | $ | (576 | )
|                                                                                                                  

F-25



---



##### 





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

|                               |                                                   |   |        |       |      |   |       |     | 
|------------------------------ | ------------------------------------------------- | - | ------ | ----- | ---- | - | ----- | --- | 
|                              
|                               |                                                   |   | 2001   |       | 2000
|                              
|Deferred income taxes:         |                                                   |   |        |       |      |   |       |    
|Assets:                        |                                                   |   |        |       |      |   |       |    
|                               | Tax benefit of loss carryforwards and tax credits |   | $      | 2,981 |      |   | $     | 304 | 
|                               | Provisions and reserves                           |   |        | 1,775 |      |   |       | 741 | 
|                               | Post-retirement benefits other than pensions      |   |        | 381   |      |   |       | 173 | 
|                               | Plant and equipment                               |   |        | 25    |      |   |       | 39  | 
|                               | Pension plan liabilities                          |   |        | 49    |      |   |       | 32  | 
|                               | Deferred compensation                             |   |        | 35    |      |   |       | 25  | 
|                               | Unrealized losses on investments                  |   |        | 107   |      |   |       |    | 
|                               | Other                                             |   |        | 13    |      |   |       | 25  | 
|                              
|                               |                                                   |   | 5,366  |       |      |   | 1,339 |    
|Valuation allowance            |                                                   |   | (1,573 | )     |      |   | (149  | )  
|                              
|                               |                                                   |   | 3,793  |       |      |   | 1,190 |    
|                              
|Liabilities:                   |                                                   |   |        |       |      |   |       |    
|                               | Acquired technology                               |   |        | 8     |      |   |       | 232 | 
|                               | Provisions and reserves                           |   |        | 560   |      |   |       | 449 | 
|                               | Plant and equipment                               |   |        | 166   |      |   |       | 132 | 
|                               | Unrealized gains on equity investments            |   |        |      |      |   |       | 108 | 
|                               | Pension plan assets                               |   |        |      |      |   |       | 13  | 
|                               | Other                                             |   |        | 29    |      |   |       | 3   | 
|                              
|                               |                                                   |   | 763    |       |      |   | 937   |    
|                              
|Net deferred income tax assets |                                                   | $ | 3,030  |       |      | $ | 253   |    
|                              



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Nortel Networks has provided a valuation allowance on certain deferred
income tax assets of approximately $63 as at December 31, 2001, which
pertain to certain provisions and loss carryforwards resulting from certain
acquisitions. When recognized 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. For the year ended
December 31, 2000, Nortel Networks recognized approximately $40 of
previously unrecognized loss carryforwards plus other acquired tax benefits
from certain acquisitions which were accounted for as a credit to goodwill.
No such amounts were recognized during the year ended December 31, 2001.



| |                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Nortel Networks had the following net operating and capital loss
carryforwards and tax credits which are scheduled to expire in the
following years at December 31, 2001:

|             |  |           |       |  |         |     |       |         |     |   |       |  |  |   |       | 
|------------ |  | --------- | ----- |  | ------- | --- | ----- | ------- | --- | - | ----- |  |  | - | ----- | 
|            
|             |  | Net       |       |  |         |     |       |         |     |   |       |  |  |  
|             |  | Operating |       |  | Capital |     |       | Tax     |     |   |       | 
|             |  | Losses    |       |  | Losses  | (a) |       | Credits | (b) |   | Total
|            
|2004 - 2006  |  | $         | 779   |  |         | $   |      |         |     | $ | 180   |  |  | $ | 959   | 
|2007 - 2009  |  |           | 3     |  |         |     |      |         |     |   | 283   |  |  |   | 286   | 
|2010 - 2011  |  |           |      |  |         |     |      |         |     |   | 347   |  |  |   | 347   | 
|2017 - 2021  |  |           | 2,442 |  |         |     |      |         |     |   |      |  |  |   | 2,442 | 
|Indefinitely |  |           | 446   |  |         |     | 3,603 |         |     |   |      |  |  |   | 4,049 | 
|            
|             |  | $         | 3,670 |  |         | $   | 3,603 |         |     | $ | 810   |  |  | $ | 8,083 | 
|            



| | (a) |  | The capital losses may only be used to offset future capital
gains realized in the United Kingdom. Nortel Networks has set up a
full valuation allowance against this future tax benefit.                                                   
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | Global investment tax credits of $153, $151, and $143 have been
applied against the income tax provision in 2001, 2000, and 1999,
respectively. Unused tax credits can be utilized primarily to offset
future Canadian income taxes payable.

F-26



---



##### 



10.   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. These transactions are sales and purchases of goods and services
under usual trade terms and are measured at their exchange amounts.



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

|                                 |  |      |     |      |  |      |     |  |  |   |       | 
|-------------------------------- |  | ---- | --- | ---- |  | ---- | --- |  |  | - | ----- | 
|                                
|                                 |  | 2001 |     | 2000 |  | 1999
|                                
|Revenues                         |  | $    | 7   |      |  | $    | 673 |  |  | $ | 2,151 | 
|Purchases                        |  | $    | 76  |      |  | $    | 369 |  |  | $ | 209   | 
|Research and development expense |  | $    | 141 |      |  | $    | 52  |  |  | $ |      | 



| |                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Effective May 1, 2000, in conjunction with the Arrangement, BCEs ownership
interest 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.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Nortel Networks also engages in transactions with Nortel Networks
Corporation and directly owned subsidiaries of Nortel Networks Corporation.
These transactions include sales, purchases and cash borrowings between
the parties in addition to funding activities pursuant to reciprocal credit
agreements. As at December 31, 2001 and 2000, the balance included in
trade and other payables owing to Nortel Networks Corporation was $134 and
$101, respectively, and to directly owned subsidiaries of Nortel Networks
Corporation was $116 and $252, respectively. Research and development
expense relates to research and development services provided to Nortel
Networks by directly owned subsidiaries of Nortel Networks Corporation.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 for 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, unsecured, and unsubordinated
obligation of Nortel Networks. Nortel Networks Corporation lent the full
proceeds from the offering to Nortel Networks for its general corporate
purposes and those of its subsidiaries. On September 30, 2001, Nortel
Networks Corporation converted the entire loan into one additional common
share of Nortel Networks (see note 11).                                                                                                                                                                                                                                                                                     
|
| | In the fourth quarter of 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 December
31, 2001, 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, subject to final adjustments,
comprised of a loan note due in 2002 and a call option to acquire an
additional approximate 7 percent ownership interest in Nortel France
beginning in 2004. At December 31, 2001, Nortel Networks held a 55 percent
ownership interest in Nortel France and EADS held the remaining 45 percent.
Nortel Networks recorded a gain on the sale of approximately $37, included
in loss (gain) on sale of businesses.

11.   Preferred shares and common shares



| |                 
| | ----------------
| | Preferred shares



| |                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Nortel Networks is authorized to issue an unlimited number of Class A
Preferred Shares and Class B Preferred Shares, without nominal or par
value, issuable in series. Class A Preferred Shares have been issued for
consideration denominated in Canadian dollars (C$) and are presented in
United States dollars after translation at the exchange rate

F-27



---



##### 





| |                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------
| | 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, 2001 and 2000, 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 million |  |             | 16,000 |  |  | $ | 294 | 
|                                                                     
|Series 7, issued November 28, 1997 for consideration of C$350 million |  |             | 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 registered 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 the Series 5 Shares were entitled to
an annual fixed cumulative preferential cash dividend of C$1.275 per share
(5.1 percent), payable quarterly. As of December 1, 2001, holders of the
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 the Series 5 Shares during such month, up to a maximum of
100% 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. Holders of Series
6 Shares will have a similar right to convert back into Series 5 Shares
every five years. In certain circumstances, conversions may be automatic
and mandatory. The Series 5 Shares are redeemable at any time after
December 1, 2001, at Nortel Networks option, at C$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 C$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 will, until November 30, 2002, be entitled
to an annual fixed non-cumulative preferential cash dividend of C$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 will be entitled to, if declared, a monthly floating
non-cumulative preferential cash dividend. Holders of Series 7 Shares will
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, 2002 and on December 1 of every fifth year
thereafter. 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. The Series 7 Shares are not
redeemable prior to December 1, 2002, at which time they will be redeemable
at Nortel Networks option at C$25 per share, together with declared and
unpaid dividends to the date of redemption. The Series 7 Shares will be
redeemable after that date at Nortel Networks option at C$25.50 per share
together with declared and unpaid dividends to the date of redemption. The
Series 8 Shares will also be redeemable at Nortel Networks option at C$25
per share, together with declared and unpaid dividends up to, but
excluding, the date of redemption, on December 1, 2007, and on December 1
of every fifth year thereafter.

F-28



---



##### 





| |              
| | -------------
| | 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:

|                                                               |  |                                 |           |   |  |           |         |        |  |           |           |   |  |        |        |  |  |  |           |   |  |   |        |  
|-------------------------------------------------------------- |  | ------------------------------- | --------- | - |  | --------- | ------- | ------ |  | --------- | --------- | - |  | ------ | ------ |  |  |  | --------- | - |  | - | ------ | -
|                                                              
|                                                               |  | 2001                            |           |   |  |           |         | 2000   |  |           |           |   |  | 1999   |        |  |  | 
|                                                              
|                                                               |  | (Number of shares in thousands)
|                                                               |  | Number                          |           |   |  |           |         | Number |  |           |           |   |  | Number |        |  |  | 
|                                                               |  | of shares                       |           | $ |  | of shares |         | $      |  | of shares |           | $
|                                                              
|Balance at beginning of year                                   |  |                                 | 1,453,438 |   |  | $         | 17,024  |        |  |           | 1,377,155 |   |  | $      | 11,745 |  |  |  | 1,326,209 |   |  | $ | 10,109 |  
|Shares issued pursuant to:                                     |  |                                 |           |   |  |           |         |        |  |           |           |   |  |        |        |  |  |  |           |   |  |   |        |  
|Conversion of debt due to parent (a)                           |  |                                 |          |   |  |           | 1,800   |        |  |           |          |   |  |        |       |  |  |  |          |   |  |   |       |  
|Conversion of series 4 preferred
shares (b)                    |  |                                 | 4,090     |   |  |           | 61      |        |  |           |          |   |  |        |       |  |  |  |          |   |  |   |       |  
|Reduction of legal stated capital (c)                          |  |                                 |          |   |  |           | (16,800 | )      |  |           |          |   |  |        |       |  |  |  |          |   |  |   |       |  
|Shareholder dividend reinvestment
and stock      purchase plan |  |                                 |          |   |  |           |        |        |  |           | 9         |   |  |        | 1      |  |  |  | 82        |   |  |   | 4      |  
|Stock option plans                                             |  |                                 |          |   |  |           |        |        |  |           | 12,592    |   |  |        | 205    |  |  |  | 31,940    |   |  |   | 517    |  
|Acquisitions                                                   |  |                                 | 3,451     |   |  |           | 26      |        |  |           | 63,682    |   |  |        | 5,073  |  |  |  | 18,304    |   |  |   | 1,077  |  
|Conversion of debentures                                       |  |                                 |          |   |  |           |        |        |  |           |          |   |  |        |       |  |  |  | 1,145     |   |  |   | 41     |  
|Shares purchased and
cancelled (d)                             |  |                                 |          |   |  |           |        |        |  |           |          |   |  |        |       |  |  |  | (525      | ) |  |   | (3     | )
|                                                              
|Balance at end of year                                         |  |                                 | 1,460,979 |   |  | $         | 2,111   |        |  |           | 1,453,438 |   |  | $      | 17,024 |  |  |  | 1,377,155 |   |  | $ | 11,745 |  
|                                                              



| | (a) |  | On August 15, 2001, Nortel Networks Corporation completed a
private offering of $1,800 of 4.25 percent convertible senior notes
and lent the full proceeds to Nortel Networks. On September 30, 2001,
pursuant to the applicable loan agreement, Nortel Networks Corporation
converted the entire loan into one additional common share.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | During the year ended December 31, 2001, the registered 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 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.                                                                                                                              
|
| | (d) |  | For the year ended December 31, 1999, the excess of cost over the
carrying amount of common shares that were purchased for cancellation
and charged to retained earnings was $11.                                                                                                                                                       

12.  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 (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, Investor Program, and Flexible
Benefits Plan during 2000 the Traditional Program was closed to new
entrants.

F-29



---



##### 





| |                             
| | ----------------------------
| | Benefits other than pensions



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Nortel Networks also provides other benefits, including post-retirement
benefits and post-employment benefits. Employees who elected to stay in
the Traditional Program will either maintain their existing company
sponsored post-retirement benefits or will receive a modified version of
these benefits, depending on age or years of service. Employees who
selected the Balanced Program will maintain their eligibility for
post-retirement benefits at reduced company contribution levels, while
employees who selected the Investor Program will 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 pensions 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 $23 in 2001 ($66 in 2000).



| |                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| | Pension and other benefit costs reflected in the accompanying Consolidated
Statements of Operations are based on the projected benefit method of
valuation.



| |                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The following details both the funded (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
|                                              
|                                               |  | 2001                  |       | 2000                     |  | 2001 |       | 2000
|                                              
|Change in benefit obligation:                  |  |                       |       |                          |  |      |       |      |  |   |     |   |  |   |      |  
|Benefit obligation at beginning of year        |  | $                     | 5,878 |                          |  | $    | 5,823 |      |  | $ | 479 |   |  | $ | 614  |  
|Service cost                                   |  |                       | 197   |                          |  |      | 182   |      |  |   | 13  |   |  |   | 20   |  
|Interest cost                                  |  |                       | 405   |                          |  |      | 394   |      |  |   | 36  |   |  |   | 39   |  
|Plan participants contributions               |  |                       | 17    |                          |  |      | 23    |      |  |   | 2   |   |  |   | 2    |  
|Amendments                                     |  |                       |      |                          |  |      | 16    |      |  |   |    |   |  |   | (119 | )
|Actuarial loss (gain)                          |  |                       | 346   |                          |  |      | 90    |      |  |   | 28  |   |  |   | (19  | )
|Acquisition/divestiture/settlements            |  |                       | (186  | )                        |  |      | (14   | )    |  |   | 15  |   |  |   | (27  | )
|Benefits paid                                  |  |                       | (435  | )                        |  |      | (385  | )    |  |   | (23 | ) |  |   | (25  | )
|Foreign exchange                               |  |                       | (219  | )                        |  |      | (251  | )    |  |   | (21 | ) |  |   | (6   | )
|                                              
|Benefit obligation at end of year              |  | $                     | 6,003 |                          |  | $    | 5,878 |      |  | $ | 529 |   |  | $ | 479  |  
|                                              
|Change in plan assets:                         |  |                       |       |                          |  |      |       |      |  |   |     |   |  |   |      |  
|Fair value of plan assets at beginning of year |  | $                     | 6,374 |                          |  | $    | 5,907 |      |  | $ | 46  |   |  | $ | 37   |  
|Actual return on plan assets                   |  |                       | (811  | )                        |  |      | 986   |      |  |   | 1   |   |  |   | 12   |  
|Employer contributions                         |  |                       | 113   |                          |  |      | 129   |      |  |   | 20  |   |  |   | 21   |  
|Plan participants contributions               |  |                       | 17    |                          |  |      | 23    |      |  |   | 2   |   |  |   | 2    |  
|Acquisition/divestiture/settlements            |  |                       | (60   | )                        |  |      | (31   | )    |  |   |    |   |  |   |     |  
|Benefits paid                                  |  |                       | (435  | )                        |  |      | (385  | )    |  |   | (23 | ) |  |   | (25  | )
|Change in valuation                            |  |                       | (64   | )                        |  |      |      |      |  |   |    |   |  |   |     |  
|Foreign exchange                               |  |                       | (147  | )                        |  |      | (255  | )    |  |   | (5  | ) |  |   | (1   | )
|                                              
|Fair value of plan assets at end of year       |  | $                     | 4,987 |                          |  | $    | 6,374 |      |  | $ | 41  |   |  | $ | 46   |  
|                                              

F-30



---



##### 



|                                                           |  |                       |        |                          |  |      |      |      |  |   |      |   |  |   |      |  
|---------------------------------------------------------- |  | --------------------- | ------ | ------------------------ |  | ---- | ---- | ---- |  | - | ---- | - |  | - | ---- | -
|                                                           |  | Defined benefit plans |        | Post-retirement benefits
|                                                          
|                                                           |  | 2001                  |        | 2000                     |  | 2001 |      | 2000
|                                                          
|Funded (unfunded) status of the plans                      |  | $                     | (1,016 | )                        |  | $    | 496  |      |  | $ | (488 | ) |  | $ | (433 | )
|Unrecognized net plan benefits existing
at January 1, 1987 |  |                       | (28    | )                        |  |      | (12  | )    |  |   |     |   |  |   |     |  
|Unrecognized prior service cost (credit)                   |  |                       | 24     |                          |  |      | 30   |      |  |   | (40  | ) |  |   | (59  | )
|Unrecognized net actuarial losses (gains)                  |  |                       | 814    |                          |  |      | (705 | )    |  |   | (8   | ) |  |   | (65  | )
|                                                          
|Net amount recognized                                      |  | $                     | (206   | )                        |  | $    | (191 | )    |  | $ | (536 | ) |  | $ | (557 | )
|                                                          
|Amounts recognized in the Consolidated
Balance Sheets:     |  |                       |        |                          |  |      |      |      |  |   |      |   |  |   |      |  
|Other liabilities                                          |  | $                     | (343   | )                        |  | $    | (261 | )    |  | $ | (536 | ) |  | $ | (557 | )
|Other assets                                               |  |                       | 25     |                          |  |      | 70   |      |  |   |     |   |  |   |     |  
|Accumulated other comprehensive loss (a)                   |  |                       | 112    |                          |  |      |     |      |  |   |     |   |  |   |     |  
|                                                          
|Net amount recognized                                      |  | $                     | (206   | )                        |  | $    | (191 | )    |  | $ | (536 | ) |  | $ | (557 | )
|                                                          



| | (a) |  | Due to the decline in the fair value of plan assets during 2001,
Nortel Networks was required to record a 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
associated liability recognized in the accompanying Consolidated
Balance Sheets for those plans.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

|                               |  |      |       |      |  |   |     | 
|------------------------------ |  | ---- | ----- | ---- |  | - | --- | 
|                              
|                               |  | 2001 |       | 2000
|                              
|Benefit obligation             |  | $    | 4,778 |      |  | $ | 448 | 
|Accumulated benefit obligation |  | $    | 4,268 |      |  | $ | 326 | 
|Fair value of plan assets      |  | $    | 3,858 |      |  | $ | 7   | 
|                              



| |                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------
| | The following details the components of net pension expense and the
underlying assumptions for the defined benefit plans:

|                                   |  |      |      |      |  |      |      |   |  |   |      |  
|---------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  | - | ---- | -
|                                  
|                                   |  | 2001 |      | 2000 |  | 1999
|                                  
|Pension expense:                   |  |      |      |      |  |      |      |   |  |   |      |  
|Service cost                       |  | $    | 197  |      |  | $    | 182  |   |  | $ | 223  |  
|Interest cost                      |  |      | 405  |      |  |      | 394  |   |  |   | 361  |  
|Estimated return on plan assets    |  |      | (461 | )    |  |      | (450 | ) |  |   | (398 | )
|Amortization of prior service cost |  |      | 8    |      |  |      | 10   |   |  |   |     |  
|Amortization of net losses (gains) |  |      | (25  | )    |  |      | 2    |   |  |   | 53   |  
|Settlement losses (gains)          |  |      | 1    |      |  |      | (7   | ) |  |   |     |  
|Curtailment losses (gains)         |  |      | 16   |      |  |      | (35  | ) |  |   | (16  | )
|                                  
|Net pension expense                |  | $    | 141  |      |  | $    | 96   |   |  | $ | 223  |  
|                                  
|Allocation of net pension expense: |  |      |      |      |  |      |      |   |  |   |      |  
|Continuing operations              |  | $    | 139  |      |  | $    | 93   |   |  | $ | 216  |  
|Discontinued operations            |  |      | 2    |      |  |      | 3    |   |  |   | 7    |  
|                                  
|Net pension expense                |  | $    | 141  |      |  | $    | 96   |   |  | $ | 223  |  
|                                  

F-31



---



##### 



|                                       |  |      |     |      |  |      |     |   |  |  |     |  
|-------------------------------------- |  | ---- | --- | ---- |  | ---- | --- | - |  |  | --- | -
|                                      
|                                       |  | 2001 |     | 2000 |  | 1999
|                                      
|Weighted average assumptions:          |  |      |     |      |  |      |     |   |  |  |     |  
|Discount rate                          |  |      | 6.7 | %    |  |      | 7.0 | % |  |  | 6.8 | %
|Expected rate of return on plan assets |  |      | 7.8 | %    |  |      | 8.1 | % |  |  | 8.0 | %
|Rate of compensation increase          |  |      | 4.6 | %    |  |      | 4.8 | % |  |  | 4.0 | %
|                                      



| |                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------
| | The following details the net cost components and underlying assumptions of
post-retirement benefits other than pensions:

|                                                                    |  |      |      |      |  |      |     |   |      |   |     |  
|------------------------------------------------------------------- |  | ---- | ---- | ---- |  | ---- | --- | - | ---- | - | --- | -
|                                                                   
|                                                                    |  | 2001 |      | 2000 |  | 1999
|                                                                   
|Post-retirement benefit cost:                                       |  |      |      |      |  |      |     |   |      |   |     |  
|Service cost                                                        |  | $    | 13   |      |  | $    | 20  |   |      | $ | 31  |  
|Interest cost                                                       |  |      | 36   |      |  |      | 39  |   |      |   | 44  |  
|Expected return on plan assets                                      |  |      | (3   | )    |  |      | (3  | ) |      |   | (3  | )
|Amortization                                                        |  |      | (5   | )    |  |      | (2  | ) |      |   | 5   |  
|Settlements and curtailments                                        |  |      | (21  | )    |  |      | (26 | ) |      |   |    |  
|                                                                   
|Net post-retirement benefit cost                                    |  | $    | 20   |      |  | $    | 28  |   |      | $ | 77  |  
|                                                                   
|Allocation of net post-retirement benefit cost:                     |  |      |      |      |  |      |     |   |      |   |     |  
|Continuing operations                                               |  | $    | 20   |      |  | $    | 27  |   |      | $ | 74  |  
|Discontinued operations                                             |  |      |     |      |  |      | 1   |   |      |   | 3   |  
|                                                                   
|Net post-retirement benefit cost                                    |  | $    | 20   |      |  | $    | 28  |   |      | $ | 77  |  
|                                                                   
|                                                                   
|Weighted average assumptions:                                       |  |      |      |      |  |      |     |   |      |   |     |  
|Discount rate                                                       |  |      | 7.0  | %    |  |      | 7.5 | % |      |   | 7.4 | %
|Expected rate of return on plan assets                              |  |      | 8.0  | %    |  |      | 8.0 | % |      |   | 8.0 | %
|Weighted average health care cost trend rate                        |  |      | 7.3  | %    |  |      | 7.5 | % |      |   | 7.7 | %
|Weighted average ultimate health care cost
trend rate               |  |      | 5.1  | %    |  |      | 5.1 | % |      |   | 5.0 | %
|Year in which ultimate health care cost trend rate
will be achieved |  |      | 2005 |      |  | 2004 |     |   | 2004
|                                                                   



| |                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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:

|                                                                                                    |  |                    |    |                    |  |   |     |  
|--------------------------------------------------------------------------------------------------- |  | ------------------ | -- | ------------------ |  | - | --- | -
|                                                                                                   
|                                                                                                    |  | 1-percentage-point |    | 1-percentage-point
|                                                                                                    |  | increase           |    | decrease          
|                                                                                                   
|Effect on accumulated post-retirement benefit obligation                                            |  | $                  | 56 |                    |  | $ | (46 | )
|Effect on aggregate of the service and interest cost components
of net post-retirement benefit cost |  | $                  | 5  |                    |  | $ | (4  | )
|                                                                                                   



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Under the terms of the Balanced Program, Investor Program and 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
$139 and $124 for the years ended December 31, 2001 and 2000, respectively.
|
| | Under the terms of the Balanced Program and 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 $41 and $25 for the years ended December 31, 2001 and 2000,
respectively.                                                                                                                                              

F-32



---



##### 



13.  Accumulated other comprehensive loss



| |                                                                                                   
| | --------------------------------------------------------------------------------------------------
| | The after tax components of accumulated other comprehensive loss are
as follows as at December 31:

|                             |  |             |      |             |  |              |     |           |  |               |     |       |  |   |     |       |  |   |      |  
|---------------------------- |  | ----------- | ---- | ----------- |  | ------------ | --- | --------- |  | ------------- | --- | ----- |  | - | --- | ----- |  | - | ---- | -
|                            
|                             |  |             |      |             |  |              |     |           |  | Unrealized    |     |       |  |   |     | Total
|                             |  | Foreign     |      | Unrealized  |  | derivative   |     | Mininum   |  | accumulated  
|                             |  | currency    |      | gain on     |  | losses on    |     | pension   |  | other        
|                             |  | translation |      | investments |  | cash flow    |     | liability |  | comprehensive
|                             |  | adjustment  |      | - net       |  | hedges - net |     | - net     |  | loss         
|                            
|Balance at December 31, 1998 |  | $           | (358 | )           |  | $            | 10  |           |  | $             |    |       |  | $ |    |       |  | $ | (348 | )
|Current-period change        |  |             | (99  | )           |  |              | 13  |           |  |               |    |       |  |   |    |       |  |   | (86  | )
|                            
|Balance at December 31, 1999 |  |             | (457 | )           |  |              | 23  |           |  |               |    |       |  |   |    |       |  |   | (434 | )
|Current-period change        |  |             | (129 | )           |  |              | 22  |           |  |               |    |       |  |   |    |       |  |   | (107 | )
|                            
|Balance at December 31, 2000 |  |             | (586 | )           |  |              | 45  |           |  |               |    |       |  |   |    |       |  |   | (541 | )
|Current-period change        |  |             | (288 | )           |  |              | (40 | ) (a)     |  |               | (14 | ) (b) |  |   | (81 | )     |  |   | (423 | )
|                            
|Balance at December 31, 2001 |  | $           | (874 | )           |  | $            | 5   |           |  | $             | (14 | )     |  | $ | (81 | )     |  | $ | (964 | )
|                            



| | (a) |  | The change during the year ended December 31, 2001 primarily
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 carrying values caused by a significant downturn
in both the telecommunications industry and the economic environment,
resulting in a charge to other income (expense)  net.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | Includes $7 (pre-tax $11) of net derivative losses related to the
adoption of SFAS 133. During the year ended December 31, 2001, $15 of
net derivative losses were reclassified to selling, general and
administrative expense. Nortel Networks estimates that $17 of net
derivative losses included in OCI will be reclassified into earnings
(loss) within the next twelve months.                       



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The foreign currency translation adjustments are not adjusted for income
taxes since they relate to indefinite investments in non-United States
subsidiaries. Unrealized gain on investments is presented net of tax of
$3, $9, and $11 for the years ended December 31, 2001, 2000, and 1999,
respectively. Unrealized derivative losses on cash flow hedges is
presented net of tax of $6 for the year ended December 31, 2001. Minimum
pension liability is presented net of tax of $31 for the year ended
December 31, 2001.

14.  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.

F-33



---



##### 





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

|                |  |                   |       |      |  |       |     |       |  |   |       |  |  |   |       | 
|--------------- |  | ----------------- | ----- | ---- |  | ----- | --- | ----- |  | - | ----- |  |  | - | ----- | 
|               
|                |  | Expected maturity |       |      |  |      
|                |  |                   |       | 2001 |  | 2000 
|Currency        |  | 2002              |       | 2003 |  | Total |     | Total
|               
|Canadian dollar |  | $                 | 1,743 |      |  | $     | 130 |       |  | $ | 1,873 |  |  | $ | 1,133 | 
|British pound   |  |                   | 79    |      |  |       |    |       |  |   | 79    |  |  |   | 879   | 
|Euro            |  |                   | 124   |      |  |       |    |       |  |   | 124   |  |  |   | 225   | 
|Other           |  |                   | 64    |      |  |       |    |       |  |   | 64    |  |  |   | 28    | 
|               
|                |  | $                 | 2,010 |      |  | $     | 130 |       |  | $ | 2,140 |  |  | $ | 2,265 | 
|               



| |                                
| | -------------------------------
| | 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 21 months and 4.5 years. Nortel Networks also enters into United
States to Canadian dollar cross currency swap contracts, which are not
designated as hedging instruments, to limit its exposure to foreign
currency fluctuations on the non-cumulative preferential cash dividends
with respect to the outstanding Series 7 Shares of Nortel Networks. These
contracts have remaining terms to maturity of 21 years.



| |                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------
| | The following table provides a summary of interest rate swaps and dividend
rate swaps and their aggregated weighted-average rates as at December 31:

|                                       |  |   |     |   |      |     |      |   |  |  | 
|-------------------------------------- |  | - | --- | - | ---- | --- | ---- | - |  |  | 
|                                      
|                                       |  |   |     |   | 2001 |     | 2000
|                                      
|Interest rate swaps:                   |  |   |     |   |      |     |      |  
|Received-fixed swaps  notional amount |  | $ | 375 |   | $    | 450
|Average fixed rate received            |  |   | 6.6 | % |      |     | 7.9  | %
|Average floating rate paid             |  |   | 2.5 | % |      |     | 6.7  | %
|                                      
|Pay-fixed swaps  notional amount      |  | $ |    |   |      | $   | 251 
|Average fixed rate paid                |  |   |    |   |      |     | 11.3 | %
|Average floating rate received         |  |   |    |   |      |     | 6.8  | %
|                                      
|Dividend rate swaps:                   |  |   |     |   |      |     |      |  
|Received-fixed swaps  notional amount |  | $ | 220 |   | $    | 211
|Average fixed rate received            |  |   | 4.9 | % |      |     | 4.9  | %
|Average floating rate paid             |  |   | 3.2 | % |      |     | 4.8  | %
|                                      



| |           
| | ----------
| | 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 were
to take place on December 31, 2001; the fair value of option contracts
reflects the cash flows due to or by Nortel Networks if settlement were to
take place on December 31, 2001; and the fair value of long-term debt
instruments reflects a current
yield valuation based on observed market prices as of December 31, 2001.
Accordingly, the fair value estimates are not necessarily indicative of the
amounts that Nortel Networks could potentially realize in a current market
exchange.

F-34



---



##### 





| |                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 the fair values recorded for derivative financial
instruments in accordance with SFAS 133, at December 31:

|                                                                    |                                      |  |          |       |       |  |          |       |       |  |   |       |  |  |   |       |  
|------------------------------------------------------------------- | ------------------------------------ |  | -------- | ----- | ----- |  | -------- | ----- | ----- |  | - | ----- |  |  | - | ----- | -
|                                                                   
|                                                                    |                                      |  | 2001     |       | 2000 
|                                                                   
|                                                                    |                                      |  | Carrying |       | Fair  |  | Carrying |       | Fair 
|                                                                    |                                      |  | Amount   |       | Value |  | Amount   |       | Value
|                                                                   
|Financial liabilities:                                              |                                      |  |          |       |       |  |          |       |       |  |   |       |  |  |   |      
|                                                                    | Long-term debt due within one year   |  | $        | 384   |       |  | $        | 388   |       |  | $ | 445   |  |  | $ | 447   |  
|                                                                    | Long-term debt                       |  | $        | 2,293 |       |  | $        | 2,032 |       |  | $ | 1,177 |  |  | $ | 1,158 |  
|                                                                   
|Derivative
financial instruments,net asset (liability) position:(a) |                                      |  |          |       |       |  |          |       |       |  |   |       |  |  |   |      
|                                                                    | Interest rate swap contracts         |  | $        | 20    |       |  | $        | 20    |       |  | $ |      |  |  | $ | 2     |  
|                                                                    | Forward and option contracts         |  | $        | (38   | )     |  | $        | (38   | )     |  | $ |      |  |  | $ | (31   | )
|                                                                    | Cross currency coupon swap contracts |  | $        | (14   | )     |  | $        | (14   | )     |  | $ |      |  |  | $ | (13   | )
|                                                                    | Other                                |  | $        | 3     |       |  | $        | 3     |       |  | $ |      |  |  | $ |      |  
|                                                                   



| | (a) |  | SFAS 133 was adopted by Nortel Networks effective January 1,
2001, and, therefore, no carrying amounts were recorded for the year
ended December 31, 2000.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |            
| | -----------
| | 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
nonperformance, but does not anticipate nonperformance by any of the
counterparties. Nortel Networks limits its credit risk by dealing with
counterparties that are considered to be of high 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 nonperformance by
the other party to the derivative contracts is limited to those derivatives
that had a positive fair value at December 31, 2001. 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, 2001. No fair value hedges were derecognized or
discontinued for the year ended December 31, 2001.



| |                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Selling, general and administrative expense and revenues included net
losses of $2 and $8, respectively, for the year ended December 31, 2001,
primarily related to changes in the fair value of derivative instruments
not designated as hedging instruments.



| |                                                 
| | ------------------------------------------------
| | Non-derivative and off balance sheet instruments



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Pursuant to certain financing agreements, Nortel Networks is committed to
provide future financing in connection with purchases of Nortel Networks
products and services. These commitments were $1,611 and $4,087 as at
December 31, 2001 and 2000, respectively. Commitments to extend future
financing are conditional agreements generally having fixed expiration or
termination dates and specific interest rates and purposes. These
commitments may therefore

F-35



---



##### 





| |                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | expire without being drawn upon, and do not
necessarily represent future cash flows. Nortel Networks limits its
financing credit risk by utilizing an internal credit committee that
actively monitors the credit exposure of Nortel Networks.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Guarantees                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | At December 31, 2001 and 2000, Nortel Networks had committed and undrawn
guarantees of $1,177 and $1,224, and drawn and outstanding guarantees of
nil and $311, respectively, representing bid, performance, and financial
guarantees. These guarantees had no impact on Nortel Networks net loss.                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | Receivables sales                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | In 2001 and 2000, Nortel Networks entered into various agreements to sell
receivables. These receivables were sold at a discount of $53 and $41 from
book value for the years ended December 31, 2001 and 2000, respectively, at
annualized discount rates of approximately 5 percent to 8 percent and 3
percent to 5 percent for the years ended December 31, 2001 and 2000,
respectively. Certain receivables have been sold with limited recourse,
not exceeding 10 percent, of $6 and $36 as at December 31, 2001 and 2000,
respectively.                                                                                                                                                                        
|
| | Under certain agreements, Nortel Networks has continued as servicing agent
and/or 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 which are sold do not experience prepayments.
The amounts associated with any servicing assets approximates 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 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.                                                                                                                                                                                                                                       

15.  Segmented information



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | General description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | Nortel Networks operations commencing in the three month period ended
December 31, 2001 have been reorganized around three reportable segments;
Metro and Enterprise Networks (Metro and Enterprise), Wireless Networks
(Wireless), and Optical Long-Haul Networks (Optical Long-Haul) in
connection with Nortel Networks decision to focus on three core business
areas.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| | Nortel Networks reportable segments are focused on providing seamless
networking products and service capabilities across Metro and Enterprise,
Wireless and Optical Long-Haul. These product and service solutions are
used by service provider and enterprise customers, including incumbent and
competitive local exchange carriers, interexchange carriers, service
providers with global businesses, wireless service providers, Internet
service providers, application service providers, hosting service
providers, resellers, cable television companies, other communication
service providers, large businesses and their branch offices, small
businesses, and home offices, as well as government, education, and utility
organizations. Metro and Enterprise includes metro optical transmission,
data switching systems, routers and aggregation products to deliver
services via Internet Protocal (IP) and other protocol standards across
local and wide area networks, voice over IP solutions for both greenfield
and circuit to packet network transitions, and traditional voice circuit
switching. Wireless includes wireless mobility switching and access
products for voice and data communications that span most major global
mobility standards. Optical Long-Haul includes long-
haul optical transmission products designed to provide long-distance, high
capacity dense wavelength division multiplexing transport, traditional
optical transmission systems that support most global transmission
standards, optical switch platforms, and optical components for long
distance optical networks.

F-36



---



##### 





| |                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Other represents miscellaneous business activities and corporate
functions. None of these activities meet the quantitative criteria to be
disclosed as reportable segments.                                                                                                                                   
|
| | As described in note 4, Nortel Networks access solutions operations were
discontinued during the year ended December 31, 2001. These operations
were previously included as a separate segment within Other. The data
included below excludes amounts related to the operations of the access
solutions segment.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Nortel Networks President and Chief Executive Officer (CEO) has been
identified as the chief operating decision maker in assessing the
performance of the segments and the allocation of resources to the
segments. Each reportable segment is managed separately with each segment
manager reporting directly to the CEO. The CEO relies on the information
derived directly from Nortel Networks management reporting system.
Contribution margin represents the primary financial measure used by the
CEO in assessing performance and allocating resources, and includes the
cost of revenues, and selling, general and administrative expense, for
which the segment managers are held accountable. Costs associated with
shared services, and other corporate costs are allocated to the segments
based on usage determined by headcount. Costs not allocated are primarily
related to Nortel Networks corporate compliance and other non-operational
activities and are included in Other. In addition, the CEO does not review
asset information on a segmented basis. The accounting policies of the
reportable segments are the same as those described in note 2 to the extent
that the related items are included within contribution margin.



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



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

|                                                 |  |      |         |      |  |      |        |   |  |   |        |  
|------------------------------------------------ |  | ---- | ------- | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                
|                                                 |  | 2001 |         | 2000 |  | 1999
|                                                
|Revenues                                         |  |      |         |      |  |      |        |   |  |   |        |  
|Metro and Enterprise                             |  | $    | 8,782   |      |  | $    | 13,467 |   |  | $ | 11,786 |  
|Wireless                                         |  |      | 5,714   |      |  |      | 5,438  |   |  |   | 4,091  |  
|Optical Long-Haul                                |  |      | 2,240   |      |  |      | 7,882  |   |  |   | 3,416  |  
|Other                                            |  |      | 639     |      |  |      | 1,066  |   |  |   | 335    |  
|                                                
|Total                                            |  | $    | 17,375  |      |  | $    | 27,853 |   |  | $ | 19,628 |  
|                                                
|Contribution margin                              |  |      |         |      |  |      |        |   |  |   |        |  
|Metro and Enterprise                             |  | $    | 223     |      |  | $    | 4,529  |   |  | $ | 3,895  |  
|Wireless                                         |  |      | 332     |      |  |      | 1,024  |   |  |   | 871    |  
|Optical Long-Haul                                |  |      | (2,646  | )    |  |      | 2,538  |   |  |   | 1,198  |  
|Other                                            |  |      | (590    | )    |  |      | (678   | ) |  |   | (897   | )
|                                                
|Total                                            |  |      | (2,681  | )    |  |      | 7,413  |   |  |   | 5,067  |  
|                                                
|Research and development expense                 |  |      | (3,230  | )    |  |      | (3,626 | ) |  |   | (2,724 | )
|In-process research and development expense      |  |      |        |      |  |      | (623   | ) |  |   | (252   | )
|Amortization of acquired technology and goodwill |  |      | (2,656  | )    |  |      | (3,281 | ) |  |   | (1,864 | )
|Stock option compensation                        |  |      |        |      |  |      | (99    | ) |  |   |       |  
|Special charges                                  |  |      | (5,443  | )    |  |      | (267   | ) |  |   | (125   | )
|Gain on sale of businesses                       |  |      | 125     |      |  |      | 174    |   |  |   | 131    |  
|                                                
|Consolidated operating income (loss)             |  | $    | (13,885 | )    |  | $    | (309   | ) |  | $ | 233    |  
|                                                

F-37



---



##### 





| |                 
| | ----------------
| | Product revenues



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

|                                 |  |      |        |      |  |      |        |  |  |   |        | 
|-------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                                
|                                 |  | 2001 |        | 2000 |  | 1999
|                                
|Wireless                         |  | $    | 5,714  |      |  | $    | 5,438  |  |  | $ | 4,091  | 
|Circuit to packet voice networks |  |      | 5,312  |      |  |      | 8,779  |  |  |   | 8,289  | 
|Optical                          |  |      | 2,746  |      |  |      | 9,229  |  |  |   | 3,957  | 
|Packet switching and routing     |  |      | 2,108  |      |  |      | 2,544  |  |  |   | 2,545  | 
|Optical Ethernet                 |  |      | 856    |      |  |      | 797    |  |  |   | 411    | 
|Other                            |  |      | 639    |      |  |      | 1,066  |  |  |   | 335    | 
|                                
|Total                            |  | $    | 17,375 |      |  | $    | 27,853 |  |  | $ | 19,628 | 
|                                



| |                       
| | ----------------------
| | Geographic information



| |                                                                                                        
| | -------------------------------------------------------------------------------------------------------
| | The following table sets forth external revenues by geographic regions for
the years ended December 31:

|                      |  |      |        |      |  |      |        |  |  |   |        | 
|--------------------- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                     
|                      |  | 2001 |        | 2000 |  | 1999
|                     
|External revenues (a) |  |      |        |      |  |      |        |  |  |   |        | 
|United States         |  | $    | 8,524  |      |  | $    | 16,798 |  |  | $ | 11,632 | 
|Canada                |  |      | 936    |      |  |      | 1,505  |  |  |   | 1,244  | 
|Other countries       |  |      | 7,915  |      |  |      | 9,550  |  |  |   | 6,752  | 
|                     
|Total                 |  | $    | 17,375 |      |  | $    | 27,853 |  |  | $ | 19,628 | 
|                     

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



| |                                                                                          
| | -----------------------------------------------------------------------------------------
| | The following table sets forth long-lived assets by geographic regions as
at December 31:

|                     |  |      |       |      |  |   |        | 
|-------------------- |  | ---- | ----- | ---- |  | - | ------ | 
|                    
|                     |  | 2001 |       | 2000
|                    
|Long-lived assets(a) |  |      |       |      |  |   |        | 
|United States        |  | $    | 2,781 |      |  | $ | 8,029  | 
|Canada               |  |      | 964   |      |  |   | 1,257  | 
|Other countries      |  |      | 1,017 |      |  |   | 1,353  | 
|                    
|Total                |  | $    | 4,762 |      |  | $ | 10,639 | 
|                    

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

F-38



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##### 



16.  Commitments



| |                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------
| | At December 31, 2001, the future minimum payments under both operating
leases and outsourcing contracts for the years ending December 31,
consisted of:

|                              |  |           |       |             |  |   |       | 
|----------------------------- |  | --------- | ----- | ----------- |  | - | ----- | 
|                             
|                              |  | Operating |       | Outsourcing
|                              |  | Leases    |       | Contracts  
|                             
|2002                          |  | $         | 235   |             |  | $ | 380   | 
|2003                          |  |           | 227   |             |  |   | 373   | 
|2004                          |  |           | 192   |             |  |   | 361   | 
|2005                          |  |           | 140   |             |  |   | 297   | 
|2006                          |  |           | 106   |             |  |   | 270   | 
|Thereafter                    |  |           | 299   |             |  |   | 795   | 
|                             
|Total future minimum payments |  | $         | 1,199 |             |  | $ | 2,476 | 
|                             



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Rental expense on operating leases for the years ended December 31, 2001,
2000, and 1999 amounted to $748, $676 and $555, respectively.                                                                                                                                                                                                                                                                                                                                                                         
|
| | Outsourcing contracts are for services provided primarily related to
information services, a portion of payroll, accounts payable, and training
and resource functions. Expenses related to these contracts for the years
ended December 31, 2001, 2000, and 1999 amounted to $498, $176, and nil,
respectively. 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.

17.  Contingencies



| |                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In connection with the January 28, 2000 acquisition of Qtera, Qtera and two
of its employees were named as defendants in a lawsuit filed by Siemens ICN
in the 15th Judicial Circuit for Palm Beach County, Florida. The lawsuit
alleged various claims, including purported misappropriation of trade
secrets. This dispute has been resolved to the satisfaction of the parties
and without material adverse effect to Nortel Networks.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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, which have been served through September 24, 2001, in the United
States District Courts for the Eastern District of New York, for the
Southern District of New York and for the District of New Jersey, and in
the provinces of Ontario, Quebec, and British Columbia in Canada, on behalf
of shareholders who acquired Nortel Networks Corporations securities as
early as October 24, 2000 and as late as February 15, 2001, allege, among
other things, violations of United States federal and Canadian provincial
securities laws. Securities regulatory authorities in Canada and the
United States are also reviewing these matters. A class action lawsuit was
also filed in the United States District Court for the Southern District of
New York on behalf of shareholders who acquired the securities of JDS
Uniphase Corporation between January 18, 2001 and February 15, 2001,
alleging violations of the same United States federal securities laws as
the other lawsuits. 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 announced their decision on November 6, 2001 to
discontinue their proceedings and obtained court approval for such
discontinuances 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.
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

F-39



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##### 





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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. In addition, 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 inv
estments in Nortel Networks Corporation common
shares in the Plan.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 and two
of its then current officers in the United States District Court for the
Eastern District of Texas (Marshall Division) (the District Court). The
First Complaint alleges that Entrust, two officers of Entrust, and Nortel
Networks Corporation violated the Securities Exchange Act of 1934 with
respect to certain statements made by Entrust. Nortel Networks Corporation
is alleged to be a controlling person of Entrust. On April 6, 2001, Nortel
Networks Corporation filed a motion to dismiss the First Complaint. On
July 31, 2001, the First Complaint was dismissed without prejudice. On
August 31, 2001, the plaintiffs filed a second amended class action
complaint (the Second Complaint) against the same defendants asserting
claims substantively similar to those in the First Complaint. On September
21, 2001, Nortel Networks Corporation filed a motion to dismiss the Second
Complaint. The motion is currently under consideration by the District
Court.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | On March 4, 1997, Bay Networks, Inc. (Bay Networks), a company acquired
on August 31, 1998, announced that shareholders had filed two separate
lawsuits in the United States District Court for the Northern District of
California (the Federal Court) and the California Superior Court, County
of Santa Clara (the California Court) against Bay Networks and ten of Bay
Networks then current and former officers and directors, purportedly on
behalf of a class of shareholders who purchased Bay Networks common shares
during the period of May 1, 1995 through October 14, 1996. On August 17,
2000, the Federal Court granted the defendants motion to dismiss the
federal complaint and on September 8, 2000, a notice of appeal of that
order and judgment was filed by the plaintiffs. On August 1, 2001, the
United States Court of Appeals for the Ninth Circuit (the Ninth Circuit)
denied the plaintiffs appeal. On April 18, 1997, a second lawsuit was
filed in the California Court, purportedly on behalf of a class of
shareholders who acquired Bay Networks common shares pursuant to the
registration statement and prospectus that became effective on November 15,
1995. The two actions in the California Court were consolidated in April
1998; however, the California Court denied the plaintiffs motion for class
certification. In January 2000, the California Court of Appeal rejected
the plaintiffs appeal of the decision. A petition for review was filed
with the California Supreme Court by the plaintiffs and was denied. In
February 2000, new plaintiffs who allege to have been shareholders of Bay
Networks during the relevant periods, filed a motion for intervention in
the California Court seeking to become the representatives of a class of
shareholders. The motion was granted on June 8, 2001 and the new
plaintiffs filed their complaint-in-intervention on an individual and
purported class representative basis alleging misrepresentations made in
connection with the purchase and sale of securities of Bay Networks in
violation of California statutory and common law. On June 18, 2001, the
defendants removed the consolidated state court actions to the Federal
Court. On September 19, 2001, the defendants motion to dismiss the
complaint was rejected and the plaintiffs motion to remand the case to the
California Court was granted. The defendants filed an appeal in the Ninth
Circuit on October 2, 2001 with respect to the decisions in such motions,
and the Ninth Circuit dismissed the appeal on December 26, 2001.



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



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



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

F-40



---



##### 





| |                      
| | ---------------------
| | 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.



| |                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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, 2001, the accruals on the
accompanying Consolidated Balance Sheets for environmental matters were
$30. Based on information presently available, 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 five of its facilities
and at seven previously occupied sites. 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 $24.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.

F-41



---



##### 



QUARTERLY FINANCIAL DATA (unaudited)

|                                                       |  |                            |        |             |  |             |       |             |  |      |        |      |  |      |       |      |  |   |        |   |  |   |       |   |  |   |        |   |  |   |       |  
|------------------------------------------------------ |  | -------------------------- | ------ | ----------- |  | ----------- | ----- | ----------- |  | ---- | ------ | ---- |  | ---- | ----- | ---- |  | - | ------ | - |  | - | ----- | - |  | - | ------ | - |  | - | ----- | -
|                                                       |  | (millions of U.S. dollars)
|                                                      
|                                                       |  | 4th Quarter                |        | 3rd Quarter |  | 2nd Quarter |       | 1st Quarter
|                                                       |  |                            |        |             |  |             |       |            
|                                                       |  | 2001                       |        | 2000        |  | 2001        |       | 2000        |  | 2001 |        | 2000 |  | 2001 |       | 2000
|                                                      
|Revenues                                               |  | $                          | 3,442  |             |  | $           | 8,114 |             |  | $    | 3,673  |      |  | $    | 6,715 |      |  | $ | 4,571  |   |  | $ | 7,207 |   |  | $ | 5,689  |   |  | $ | 5,817 |  
|Gross profit (loss)                                    |  |                            | 965    |             |  |             | 3,932 |             |  |      | (10    | )    |  |      | 3,109 |      |  |   | 365    |   |  |   | 3,276 |   |  |   | 1,814  |   |  |   | 2,467 |  
|Net earnings (loss) from continuing operations         |  |                            | (1,553 | )           |  |             | 50    |             |  |      | (3,270 | )    |  |      | (96   | )    |  |   | (5,381 | ) |  |   | (147  | ) |  |   | (1,351 | ) |  |   | (678  | )
|Net loss from discontinued operations  net of tax     |  |                            |       |             |  |             | (159  | )           |  |      |       |      |  |      | (79   | )    |  |   | (2,351 | ) |  |   | (132  | ) |  |   | (187   | ) |  |   | (44   | )
|                                                      
|Net loss before cumulative effect of
accounting change |  |                            | (1,553 | )           |  |             | (109  | )           |  |      | (3,270 | )    |  |      | (175  | )    |  |   | (7,732 | ) |  |   | (279  | ) |  |   | (1,538 | ) |  |   | (722  | )
|Cumulative effect of accounting change  net of tax    |  |                            |       |             |  |             |      |             |  |      |       |      |  |      |      |      |  |   |       |   |  |   |      |   |  |   | 15     |   |  |   |      |  
|                                                      
|Net loss                                               |  |                            | (1,553 | )           |  |             | (109  | )           |  |      | (3,270 | )    |  |      | (175  | )    |  |   | (7,732 | ) |  |   | (279  | ) |  |   | (1,523 | ) |  |   | (722  | )
|Dividends on preferred shares                          |  |                            | (6     | )           |  |             | (8    | )           |  |      | (6     | )    |  |      | (7    | )    |  |   | (7     | ) |  |   | (8    | ) |  |   | (8     | ) |  |   | (8    | )
|                                                      
|Net loss applicable to common shares                   |  |                            | (1,559 | )           |  |             | (117  | )           |  |      | (3,276 | )    |  |      | (182  | )    |  |   | (7,739 | ) |  |   | (287  | ) |  |   | (1,531 | ) |  |   | (730  | )

F-42



---



##### 



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, 2002 were as follows:

|                            |  |     |  |  |                                                                
|--------------------------- |  | --- |  |  | ---------------------------------------------------------------
|Name                        |  | Age |  |  | Position with the Company                                      
|                            |  |     |  |  |                                                                
|James Johnston Blanchard    |  | 59  |  |  | Director                                                       
|                           
|Robert Ellis Brown          |  | 57  |  |  | Director                                                       
|                           
|John Edward Cleghorn        |  | 60  |  |  | Director                                                       
|                           
|Frank Andrew Dunn           |  | 48  |  |  | President, Chief Executive Officer, and Chief Financial Officer
|                           
|L. Yves Fortier             |  | 66  |  |  | Director                                                       
|                           
|Robert Alexander Ingram     |  | 59  |  |  | Director                                                       
|                           
|William Arthur Owens        |  | 61  |  |  | Director                                                       
|                           
|John Andrew Roth            |  | 59  |  |  | Vice-Chairman (non-executive)                                  
|                           
|Guylaine Saucier            |  | 55  |  |  | Director                                                       
|                           
|Sherwood Hubbard Smith, Jr. |  | 67  |  |  | Director                                                       
|                           
|Lynton Ronald Wilson        |  | 61  |  |  | Chairman (non-executive)                                       

THE HON. JAMES JOHNSTON BLANCHARD, 59, 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 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, The
John F. Kennedy Memorial Library Foundation, and The J.P. McCarthy Foundation.

ROBERT ELLIS BROWN, 57, Westmount, Québec, has been a director of the Company since April 27, 2000 and of
Nortel Networks Corporation since March 7, 2000. Mr. Brown has been the President and Chief Executive Officer
of Bombardier Inc., a corporation involved in the manufacturing of aircraft and transportation equipment,
since February 1999. Mr. Brown was President and Chief Operating Officer of Bombardier Aerospace prior
thereto. Mr. Brown is also a director of Bombardier Inc.

55



---



##### 



JOHN EDWARD CLEGHORN, 60, 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 RBC Financial Group from January 1995
to July 2001. He is also a director of Canadian Pacific Railway Limited,
Finning International Inc. and SNC-Lavalin Group Inc. He is Chancellor of
Wilfrid Laurier University, Chairman of Historica Foundation of Canada, and
Chairman, Faculty of Management International Advisory Board, and Governor of
McGill University. He is also a director of Canadian Special Olympics
Foundation.

FRANK ANDREW DUNN, 48, 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, Chief Executive Officer and Chief Financial
Officer of the Company and of Nortel Networks Corporation since February 2002.
Mr. Dunn was President and Chief Executive Officer of the both companies from
November 2001 to February 2002, 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, Senior Vice-President, Finance and
Planning of the Company from April 1997 to January 1999, and Vice-President,
Operations Finance and Planning of the Company prior thereto.

L. YVES FORTIER, C.C., Q.C., 66, 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 Governor (Chairman of the Board) of Hudsons Bay Company,
and a director of DuPont Canada Inc., Groupe TVA Inc, NOVA Chemicals
Corporation, and Royal Bank of Canada.

ROBERT ALEXANDER INGRAM, 59, 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 the Chief Operating Officer and President,
Pharmaceutical Operations of GlaxoSmithKline plc, a corporation involved in the
research, development, manufacturing and sale of pharmaceuticals, since January
2001. 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, and President and Chief Executive Officer of
Glaxo Wellcome plc prior thereto. Mr. Ingram is also a director of
GlaxoSmithKline, Lowes Companies, Inc., Misys plc, and Wachovia Corporation.

WILLIAM ARTHUR OWENS, 61, Kirkland, Washington, has been a director of the
Company and 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, prior thereto. Mr. Owens is also a director of
British American Tobacco plc, Cray Inc., ICO Global Communications Corporation,
ICO Global Communications (Holdings) Limited, IDT Corporation, Lumera
Corporation, Metal Storm Limited, Microvision Inc., Polycom, Inc., Symantec
Corporation, Telstra Corporation Limited, and ViaSat, Inc.

JOHN ANDREW ROTH, 59, Orangeville, Ontario, has been a director of the Company
since April 26, 1996 and of Nortel Networks Corporation since March 7, 2000.
Mr. Roth has been non-executive Vice-Chairman of the Board of the Company and
of Nortel Networks Corporation since November 2001. Mr. Roth was the President
and Chief Executive Officer of the Company from September 1999 to November 2001
and of Nortel Networks Corporation from March 2000 to November 2001. Mr. Roth
was Vice-Chairman and Chief Executive Officer of the Company from August 1998
to September 1999, President and Chief Executive Officer of the Company from
October 1997 to August 1998, President and Chief Operating Officer of the
Company from February 1997 to October 1997, and Executive Vice-President and
Chief Operating Officer of the Company prior thereto.

56



---



##### 



GUYLAINE SAUCIER, C.M., F.C.A., 55, 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. She is also a director of Axa Assurances Inc., Bank of Montreal,
Petro-Canada, Tembec Inc., and International Federation of Accountants. Mrs.
Saucier was also Chairman of the Board and a director of the Canadian
Broadcasting Corporation, a public broadcaster, from April 1995 to December
2000.

SHERWOOD HUBBARD SMITH, JR., 67, 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
Northwestern Mutual Life Insurance Company, a director and Chairman of the
Triangle Universities Center for Advanced Studies, Inc., and a trustee and
Vice Chairman of the Research Triangle Foundation.

LYNTON RONALD WILSON, O.C., 61 , 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 Boards of the Company and Nortel
Networks Corporation since February 28, 2002. He was executive Chairman of the
Board of the Company and Nortel Networks Corporation from November 2001 to
February 2002. He was non-executive Chairman of the Boards of the Company and
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 also a director and Chairman of the Board of CAE, Inc., a flight
training, services and equipment company. He is also director of
DaimlerChrysler AG, Imperial Oil Limited, and Ontario Power Generation Inc.

The Companys directors are also directors of Nortel Networks Corporation.
All of the current directors, with the exception of John A. Roth, have been
nominated for election as directors of the Company. All of the current
directors, with the exception of John A. Roth, have also been nominated for
election as directors of Nortel Networks Corporation at its annual and special
meeting of shareholders to be held on April 25, 2002.

Executive Officers of the Registrant

The executive officers of the Company are appointed, and may be removed,
by the Board of Directors of the Company. As of February 28, 2002, the names
of the executive officers of the Company, their ages, offices currently held,
and year of appointment thereto were as follows:

|                             |  |                                                           |  |             |  | 
|---------------------------- |  | --------------------------------------------------------- |  | ----------- |  | 
|                             |  |                                                           |  | Year of    
|Name and Age                 |  | Office Current Held                                       |  | Appointment
|                             |  |                                                           |  |            
|Douglas Charles Beatty (47)  |  | Controller                                                |  | 1999       
|Chahram Bolouri (47)         |  | President, Global Customer Care & Supply
Chain Operations |  | 2000       
|
|Kriss William Bush (42)      |  | Vice-President, Tax                                       |  | 2001       
|Pascal Debon (55)            |  | President, Wireless Networks                              |  | 2001       
|Nicholas John DeRoma (55)    |  | Chief Legal Officer                                       |  | 1998       
|Gary Richard Donahee (55)    |  | President, Americas                                       |  | 2000       
|William John Donovan (44)    |  | Senior Vice-President, Human Resources                    |  | 2000       
|John Marshall Doolittle (38) |  | Assistant Treasurer                                       |  | 1999       
|Frank Andrew Dunn (48)       |  | President and Chief Executive Officer                     |  | 2001       
|                             |  | Chief Financial Officer                                   |  | 2002       
|Robert Bruce Kaye (53)       |  | General Auditor                                           |  | 1999       
|Alan Timothy Kember (49)     |  | Chief Marketing Officer                                   |  | 2001       

57



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##### 



|                                  |  |                                            |  |             |  | 
|--------------------------------- |  | ------------------------------------------ |  | ----------- |  | 
|                                  |  |                                            |  | Year of    
|Name and Age                      |  | Office Current Held                        |  | Appointment
|                                  |  |                                            |  |            
|Robert Yu Lang Mao (58)           |  | Chief Executive Officer, Nortel China      |  | 1997       
|Brian William McFadden (48)       |  | President, Optical Long-Haul Networks      |  | 2001       
|Linda Faye Mezon (48)             |  | Assistant Controller                       |  | 2001       
|Blair Fraser Morrison (37)        |  | Assistant Secretary                        |  | 1998       
|Donald Gregory Mumford (55)       |  | Chief Technology Officer                   |  | 2001       
|Deborah Jean Noble (41)           |  | Corporate Secretary                        |  | 1997       
|Deborah Jean Noble (41)           |  | President, Europe, Middle East and Africa  |  | 2001       
|Frank Plastina (39)               |  | President, Metro & Enterprise Networks     |  | 2001       
|Richard Clyde Ricks (42)          |  | Chief Information Officer                  |  | 2000       
|Eric John Ross (55)               |  | President, Quality & Customer Satisfaction |  | 2001       
|Steven Leo Schilling (47)         |  | President, Enterprise Accounts             |  | 2002       
|Katharine Berghuis Stevenson (39) |  | Treasurer                                  |  | 1999       
|Masood Ahmad Tariq (51)           |  | President, Asia                            |  | 2000       
|Lynton Ronald Wilson (61)         |  | Chairman of the Board (executive)          |  | 2001       
|Vickie Lynn Yohe (48)             |  | President, Circuit Switching               |  | 2001       

All the above-named executive officers of the Company have been employed
in their current position or other senior positions with Nortel Networks 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;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | K.W. Bush was, prior to joining Nortel Networks in June 2001, Senior
Vice-President and Executive Director of Lehman Brothers Inc. and Lehman
Brothers Ltd. (U.K.), investment banking firms, from April 2000,
Vice-President, Tax of Cable and Wireless Plc, a telecommunications
company, from December 1996, and Director of Taxes of ITT Industries,
Inc. (formerly ITT Corporation), a global engineering and manufacturing
company, prior thereto;                                                                                                                                                                                                                                   
|
| |  |  | N.J. DeRoma was, prior to joining Nortel Networks in June 1997,
General Counsel of IBM North America, IBM Corporation, an information
technologies company, from June 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 joining Nortel Networks in September 1997,
Area President of Greater China of Alcatel Telecom, a division of
Alcatel S.A., a supplier of equipment for the telecommunications,
energy, and transport sectors, from January 1996; 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 Inc., a wireless service provider, from March
1998, and Vice-President & Comptroller of Bell Mobility prior thereto.

The executive officers of the Company are the same as the executive
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% of the Companys equity
securities and certain other persons to file reports concerning their
securities ownership

58



---



##### 



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 the year 2001.

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  |           |           |  | 
|                            |  |      |      |        |  | Annual Compensation |           | Compensation |  |         |           |          
|                            |  |      |      |        |  |                     |           |              |  |         |           |          
|                            |  |      |      |        |  |                     |           |              |  |         |           |           |  |              |         |            |  | Awards     |           | Payouts   |  |  |        | 
|                            |  |      |      |        |  |                     |           |              |  |         |           |           |  |              |         |            |  |            |           |           |  | 
|                            |  |      |      |        |  |                     |           |              |  |         |           |           |  |              |         |            |  | Securities |           |           |  |  |        |  |  | 
|Name                        |  |      |      |        |  |                     |           |              |  |         |           |           |  | Other Annual |         | Underlying |  | LTIP       |           | All Other
|And Principal               |  |      |      | Salary |  | Bonus               |           | Compensation |  | Options |           | Payouts   |  | Compensation
|Position                    |  | Year |      | ($)    |  | ($)(2)              |           | ($)          |  | (#)(5)  |           | (#)(5)(6) |  | ($)(7)      
|                           
|F.A. Dunn                   |  |      | 2001 |        |  |                     | 564,833   |              |  |         |          |           |  |              |        |            |  |            | 1,750,000 |           |  |  |       |  |  |  | 16,806  | (1)
|President, Chief            |  |      | 2000 |        |  |                     | 440,909   |              |  |         | 1,014,515 |           |  |              |        |            |  |            | 450,000   |           |  |  | 12,480 |  |  |  | 13,121  | (1)
|Executive Officer,          |  |      | 1999 |        |  |                     | 298,204   |              |  |         | 546,676   |           |  |              |        |            |  |            | 340,000   |           |  |  | 14,400 |  |  |  | 9,194   | (1)
|and Chief Financial
Officer |  |      |      |        |  |                     |           |              |  |         |           |           |  |              |         |            |  |            |           |           |  |  |        |  |  |  |         |    
|                           
|F. Plastina                 |  |      | 2001 |        |  |                     | 534,917   |              |  |         |          |           |  |              |        |            |  |            | 1,200,000 |           |  |  |       |  |  |  | 9,596   | (8)
|President, Metro &          |  |      | 2000 |        |  |                     | 354,545   |              |  |         | 880,800   |           |  |              |        |            |  |            | 450,000   |           |  |  |       |  |  |  | 11,863  | (8)
|Enterprise Networks         |  |      | 1999 |        |  |                     | 213,636   |              |  |         | 341,393   |           |  |              |        |            |  |            | 84,000    |           |  |  |       |  |  |  | 13,477  | (8)
|                           
|G.R. Donahee                |  |      | 2001 |        |  |                     | 513,333   |              |  |         |          |           |  |              | 29,223  | (3)        |  |            | 680,000   |           |  |  |       |  |  |  | 6,120   | (9)
|President, Americas         |  |      | 2000 |        |  |                     | 444,091   |              |  |         | 1,059,840 |           |  |              | 153,591 | (3)        |  |            | 300,000   |           |  |  | 19,200 |  |  |  | 6,120   | (9)
|                            |  |      | 1999 |        |  |                     | 380,000   |              |  |         | 701,739   |           |  |              | 363,056 | (3)        |  |            | 160,000   |           |  |  | 14,400 |  |  |  | 249,794 | (9)
|                           
|N.J. DeRoma                 |  |      | 2001 |        |  |                     | 493,750   |              |  |         |          |           |  |              | 62,921  | (1)(4)     |  |            | 650,000   |           |  |  |       |  |  |  | 27,642  | (1)
|Chief Legal Officer         |  |      | 2000 |        |  |                     | 425,000   |              |  |         | 715,307   |           |  |              | 106,221 | (1)(4)     |  |            | 180,000   |           |  |  | 12,480 |  |  |  | 46,407  | (1)
|                            |  |      | 1999 |        |  |                     | 365,000   |              |  |         | 524,884   |           |  |              | 184,584 | (1)(4)     |  |            | 420,000   |           |  |  |       |  |  |  | 27,748  | (1)
|                           
|C. Bolouri                  |  |      | 2001 |        |  |                     | 459,000   |              |  |         |          |           |  |              |        |            |  |            | 700,000   |           |  |  |       |  |  |  | 27,440  | (1)
|President, Global           |  |      | 2000 |        |  |                     | 340,909   |              |  |         | 807,836   |           |  |              |        |            |  |            | 400,000   |           |  |  |       |  |  |  | 41,374  | (1)
|Customer Care &             |  |      | 1999 |        |  |                     | 249,950   |              |  |         | 385,017   |           |  |              |        |            |  |            | 120,000   |           |  |  |       |  |  |  | 16,863  | (1)
|Supply Chain
Operations     |  |      |      |        |  |                     |           |              |  |         |           |           |  |              |         |            |  |            |           |           |  |  |        |  |  |  |         |    
|                           
|J.A. Roth                   |  |      | 2001 |        |  |                     | 1,416,667 |              |  |         |          |           |  |              |        |            |  |            | 750,000   |           |  |  |       |  |  |  | 42,405  | (1)
|Former President            |  |      | 2000 |        |  |                     | 1,104,167 |              |  |         | 5,636,250 |           |  |              |        |            |  |            | 750,000   |           |  |  | 89,280 |  |  |  | 33,199  | (1)
|and Chief Executive         |  |      | 1999 |        |  |                     | 812,500   |              |  |         | 4,200,000 |           |  |              |        |            |  |            | 1,500,000 |           |  |  | 57,600 |  |  |  | 24,339  | (1)
|Officer                     |  |      |      |        |  |                     |           |              |  |         |           |           |  |              |         |            |  |            |           |           |  |  |        |  |  |  |         |    
|                           

| | (1) |  | 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$1.5489 for 2001, US$1.00 = Cdn$1.4819 for 2000, and US$1.00 =
Cdn$1.4888 for 1999.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (2) |  | Incentive cash awards earned in each fiscal year under the Nortel
Networks Limited SUCCESS Incentive Plan (formerly known as the Nortel
Networks Limited Senior Management Incentive Award Plan), whether or not
deferred by the named executive officer, in respect of each of the fiscal
years.               
|
| | (3) |  | Amounts paid to reimburse Mr. Donahee for income taxes payable by him in
accordance with the Companys long-term international assignment policy.                                                                                                                                                               

59



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##### 



| | (4) |  | 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 the heading Certain
Employment Arrangements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (5) |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | (6) |  | Restricted stock units allocated in 1997 and 1998 under the Nortel
Networks Limited Restricted Stock Unit Plan and earned in 1999 and 2000,
respectively. 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 1997 and 1998 had a return on asset
performance criteria over a three-year performance period, ending December
31, 1999 and December 31, 2000, respectively. The value (based in 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, $511,680 for Mr. Donahee, Cdn$490,589 ($331,054)
for Mr. DeRoma and Cdn$3,509,597 ($2,368,309) for Mr. Roth if each of them had chosen their award in cash. Messrs.
Donahee and DeRoma chose to receive their 2000 restricted stock unit
awards in cash. The value (based on the specified 20-day trading
period) of the pay-out for the restricted stock units
earned in 1999 was equal to Cdn$1,226,682 ($823,940) for Mr. Dunn,
$845,388 for Mr. Donahee, and Cdn$4,906,728 ($3,295,760) for Mr. Roth and each of them chose to receive their 1999
restricted stock awards in cash. Amounts have been converted for Messrs.
Dunns, DeRomas and Roths pay-outs in 2000 and 1999 using the exchange
rates listed in footnote (1) above.
|
| | (7) |  | Except for Messrs. Plastina and Donahee, represents contributions made
under the Nortel Networks Limited Investment Plan for Employees  Canada.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | (8) |  | Represents contributions made under the Nortel Networks Long-Term
Investment Plan in the following amounts: $6,120 in 2001; $6,120 in 2000;
and $5,760 in 1999. Mr. Plastina also received $3,476 in 2001; $5,743 in
2000; and $7,717 in 1999 in housing relocation assistance.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | (9) |  | Represents contributions made under the Nortel Networks Long-Term
Investment Plan in the following amounts: $6,120 in 2001; $6,120 in 2000;
and $5,760 in 1999. In 1999, Mr. Donahee also received $30,417 in housing
relocation assistance and $213,617 under the Companys long-term
international assignment policy.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

Option Grants in 2001

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, 2001.



|                  |                      |                 |           |            |  |                |      |            |  |       |       |        |  |                                   |          |                         |  |  |           |       |  |  |            |      
|----------------- | -------------------- | --------------- | --------- | ---------- |  | -------------- | ---- | ---------- |  | ----- | ----- | ------ |  | --------------------------------- | -------- | ----------------------- |  |  | --------- | ----- |  |  | ---------- | -----
|                 
|Individual Grants |                      |                
|                  | Potential Realizable
|                  |                      |                 |           |            |  | % of Total     |      |            |  |       |       |        |  |                                   |          | Value at Assumed Annual
|                  |                      | Number of       |           | Options    |  |                |      |            |  |       |       |        |  | Rates of Stock Price Appreciation
|                  |                      | Securities      |           | Granted to |  |                |      |            |  |       |       |        |  | For Option Term (4)(5)(6)        
|                  |                      | Underlying      |           | Employees  |  |                |      |            |  |       |       |        |  |                                  
|                  |                      | Options Granted |           | In Fiscal  |  | Exercise Price |      | Expiration |  |       |      
|Name              |                      | (#)             |           | Year(3)    |  | ($/Sh)         |      | Date       |  | 5%($) |       | 10%(4)
|                 
|F.A. Dunn         |                      |                 | 250,000   | (1)        |  |                | 4.01 |            |  |       | 57.67 | (Cdn)  |  |                                   | 01/24/11 |                         |  |  | 9,067,088 | (Cdn) |  |  | 22,977,782 | (Cdn)
|                  |                      |                 | 1,500,000 | (2)        |  |                |      |            |  |       | 9.29  | (Cdn)  |  |                                   | 10/24/07 |                         |  |  | 4,739,233 | (Cdn) |  |  | 10,751,703 | (Cdn)
|                 
|F. Plastina       |                      |                 | 200,000   | (1)        |  |                | 2.75 |            |  |       | 38.26 |        |  |                                   | 01/24/11 |                         |  |  | 4,812,302 |       |  |  | 12,195,317 |      
|                  |                      |                 | 250,000   | (1)        |  |                |      |            |  |       | 7.50  |        |  |                                   | 07/24/11 |                         |  |  | 1,179,177 |       |  |  | 2,988,267  |      
|                  |                      |                 | 750,000   | (2)        |  |                |      |            |  |       | 5.89  |        |  |                                   | 10/24/07 |                         |  |  | 1,502,372 |       |  |  | 3,408,371  |      
|                 
|G.R. Donahee      |                      |                 | 180,000   | (1)        |  |                | 1.56 |            |  |       | 38.26 |        |  |                                   | 01/24/11 |                         |  |  | 4,331,072 |       |  |  | 10,975,786 |      
|                  |                      |                 | 500,000   | (2)        |  |                |      |            |  |       | 5.89  |        |  |                                   | 10/24/07 |                         |  |  | 1,001,582 |       |  |  | 2,272,247  |      
|                 

60



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##### 



|                  |                      |                 |         |            |  |                |      |            |  |             |  |        |          |                                   |  |                         |  |                  |  |  |  |  |  | 
|----------------- | -------------------- | --------------- | ------- | ---------- |  | -------------- | ---- | ---------- |  | ----------- |  | ------ | -------- | --------------------------------- |  | ----------------------- |  | ---------------- |  |  |  |  |  | 
|                 
|Individual Grants |                      |                
|                  | Potential Realizable
|                  |                      |                 |         |            |  | % of Total     |      |            |  |             |  |        |          |                                   |  | Value at Assumed Annual
|                  |                      | Number of       |         | Options    |  |                |      |            |  |             |  |        |          | Rates of Stock Price Appreciation
|                  |                      | Securities      |         | Granted to |  |                |      |            |  |             |  |        |          | For Option Term (4)(5)(6)        
|                  |                      | Underlying      |         | Employees  |  |                |      |            |  |             |  |        |          |                                  
|                  |                      | Options Granted |         | In Fiscal  |  | Exercise Price |      | Expiration |  |             | 
|Name              |                      | (#)             |         | Year(3)    |  | ($/Sh)         |      | Date       |  | 5%($)       |  | 10%($)
|                 
|N.J. DeRoma       |                      |                 | 150,000 | (1)        |  |                | 1.49 |            |  | 57.67 (Cdn) |  |        | 01/24/11 |                                   |  | 5,440,253 (Cdn)         |  | 13,786,669 (Cdn)
|                  |                      |                 | 500,000 | (2)        |  |                |      |            |  | 9.29 (Cdn)  |  |        | 10/24/07 |                                   |  | 1,579,744 (Cdn)         |  | 3,583,901 (Cdn) 
|                 
|C. Bolouri        |                      |                 | 200,000 | (1)        |  |                | 1.60 |            |  | 57.67 (Cdn) |  |        | 01/24/11 |                                   |  | 7,253,671 (Cdn)         |  | 18,382,226 (Cdn)
|                  |                      |                 | 500,000 | (2)        |  |                |      |            |  | 9.29 (Cdn)  |  |        | 10/24/07 |                                   |  | 1,579,744 (Cdn)         |  | 3,583,901 (Cdn) 
|                 
|J.A. Roth         |                      |                 | 750,000 | (1)        |  |                | 1.72 |            |  | 23.05 (Cdn) |  |        | 04/25/11 |                                   |  | 10,872,016 (Cdn)        |  | 27,551,823 (Cdn)
|                 

| | (1) |  | The options have ten-year terms and become exercisable in three equal
annual installments beginning on the first anniversary of the date of
grant. Due to Mr. Roths planned retirement, the 750,000 options granted
to him will become exercisable on the first anniversary date of grant.
Mr. Roth has until October 31, 2004 to exercise these options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (2) |  | The options have six-year terms and become exercisable four years after
the date of grant. However, if certain specified corporate performance
criteria are achieved, vesting will be accelerated, with one-third of the
options becoming exercisable, at the earliest, approximately one year from
the date of grant of the options and the remaining two-thirds of the
options becoming exercisable, at the earliest, approximately two years
from the date of grant of the options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| | (3) |  | In June 2001, Nortel Networks Corporation commenced a voluntary stock
option exchange program whereby eligible employees could exchange certain
outstanding stock options based on a prescribed formula. The named
executive officers were not eligible to participate in the stock option
exchange program. Upon commencement of the stock option exchange program,
the focus of Nortel Networks Corporations option program for the
remainder of 2001 was to provide eligible employees with an opportunity
for realizing potential value with respect to certain existing options.
As a result, except in extraordinary circumstances, Nortel Networks
Corporation did not grant additional options to employees that were
eligible for the stock option exchange program for the remainder of 2001 which has
resulted in each of the named executive officers percentages listed in the Percentage of
Total Options Granted to Employees in Fiscal Year column being higher than
in previous years.                                           
|
| | (4) |  | The dollar amounts shown represent the amount by which the market value
of Nortel Networks Corporations common shares subject to each option
would exceed the exercise price of the option upon the expiration of the
option if the market value of Nortel Networks Corporations common shares
appreciates at the annual rate of five percent and ten percent,
respectively, during the option term. These rates of appreciation are
prescribed by the United States Securities and Exchange Commission. On
February 28, 2002, the closing price of a common share of Nortel Networks
Corporation on the New York Stock Exchange and on The Toronto Stock
Exchange was $5.07 and Cdn$8.05, 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.
|
| | (5) |  | At January 24, 2001, there were 3,109,248,674 common shares of Nortel
Networks Corporation outstanding. Assuming all options were granted on
January 24, 2001 and assuming five percent and ten percent annual share
price appreciation rates for ten years (the term of the options) from
$38.26 per share, the potential incremental aggregate realizable value for
all Nortel Networks Corporations shareholders would be $74,813,213,151
and $189,591,370,793, respectively. Assuming all options were granted on
January 24, 2001 with an exercise price of $38.26, the potential
incremental realizable value of the options granted to the named executive
officers in 2001 would be less than 0.19 percent of the potential
incremental aggregate realizable value for all Nortel Networks
Corporations shareholders, assuming either rate of appreciation.                                                                                                                                                                               

61



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##### 



| | (6) |  | At October 24, 2001, there were 3,199,000,358 common shares of Nortel
Networks Corporation outstanding. Assuming all options were granted on
October 24, 2001 and assuming five percent and ten percent annual share
price appreciation rates for six years (the term of the options) from
$5.89 per share, the potential incremental aggregate realizable value for
all Nortel Networks Corporations shareholders would be $6,408,120,549
and $14,537,839,679, respectively. Assuming all options were granted on
October 24, 2001 with an exercise price of $5.89, the potential
incremental realizable value of the options granted to the named executive
officers in 2001 would be less than 0.18 percent of the potential
incremental aggregate realizable value for all Nortel Networks
Corporations shareholders, assuming either rate of appreciation.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Aggregate Option Exercises in 2001 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, 2001 and the value of unexercised options at December 31, 2001.

|             |  |                 |         |              |  |                               |       |                                      |  |                      |           |               |  |           |           |  |  |           |       |  |           |           |           | 
|------------ |  | --------------- | ------- | ------------ |  | ----------------------------- | ----- | ------------------------------------ |  | -------------------- | --------- | ------------- |  | --------- | --------- |  |  | --------- | ----- |  | --------- | --------- | --------- | 
|            
|             |  |                 |         |              |  |                               |       | 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 ($)(3)(4)
|             |  | on Exercise     |         | Value        |  |                               |       |                                     
|Name         |  | (#)(1)          |         | Realized ($) |  | Exercisable                   |       | Unexercisable                        |  | Exercisable          |           | Unexercisable
|            
|F.A. Dunn    |  |                 |        |              |  |                               |      |                                      |  |                      | 134,667   |               |  |           | 2,300,001 |  |  |           |      |  |           | 3,915,000 | (Cdn)    
|             |  |                 |         |              |  |                               |       |                                      |  |                      |           |               |  |           | 200,000   |  |  |           |      |  |           |           |          | 
|            
|F. Plastina  |  |                 |        |              |  |                               |      |                                      |  |                      | 12,000    |               |  |           | 120,000   |  |  |           |      |  |           |           |          | 
|             |  |                 |         |              |  |                               |       |                                      |  |                      | 171,666   |               |  |           | 1,601,334 |  |  |           |      |  |           |           | 1,177,500 | 
|            
|G.R. Donahee |  |                 |        |              |  |                               |      |                                      |  |                      | 146,668   |               |  |           | 1,286,668 |  |  |           |      |  |           |           | 785,000   | 
|            
|N.J. DeRoma  |  |                 |        |              |  |                               |      |                                      |  |                      | 80,000    |               |  |           |          |  |  |           |      |  |           |           |          | 
|             |  |                 |         |              |  |                               |       |                                      |  |                      | 160,000   |               |  |           | 1,123,334 |  |  |           |      |  |           | 1,305,000 | (Cdn)    
|            
|C. Bolouri   |  |                 | 120,000 |              |  | 5,869,800                     | (Cdn) |                                      |  | 174,666              |           |               |  | 1,193,334 |           |  |  |          |       |  | 1,305,000 | (Cdn)    
|            
|J.A. Roth    |  |                 |        |              |  |                               |      |                                      |  |                      | 4,840,000 |               |  |           | 1,470,000 |  |  | 6,125,456 | (Cdn) |  |           |          |          
|            



| | (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; 60,000 for Mr. Plastina; 160,000 for Mr. Donahee; 160,000 for Mr.
DeRoma; 120,000 for Mr. Bolouri; and 720,000 for Mr. Roth. 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. In accordance with the terms of the
replacement options, Mr. Roths replacement options will not vest and will
not be exercisable by him
|
| | (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, 2001, the                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

62



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| |  |  | closing price of Nortel
Networks Corporations common shares on the New York Stock Exchange and
The Toronto Stock Exchange was $7.46 and Cdn$11.90, respectively.
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

Long-Term Incentive Plans  Awards in Last Fiscal Year

|             |  |                   |         |                    |  |               |  |            |   |                                          |  |  |         |  |  |  |         |  |  | 
|------------ |  | ----------------- | ------- | ------------------ |  | ------------- |  | ---------- | - | ---------------------------------------- |  |  | ------- |  |  |  | ------- |  |  | 
|            
|             |  |                   |         |                    |  |               |  |            |   | Estimated Future Payouts Under Non-Share
|             |  |                   |         |                    |  |               |  |            |   | Price Based Plans                       
|             |  |                   |         |                    |  |               |  |            |   |                                         
|             |  |                   |         | Performance or     |  |               |  |            |   |                                         
|             |  | Number of Shares, |         | Other Period Until |  |               |  |            |   |                                          |  |  |         |  |  | 
|             |  | Units or Other    |         | Maturation or      |  |               |  |            |   |                                          |  |  |         |  |  | 
|Name         |  | Rights (#)(1)     |         | Payout (2)         |  | Threshold (#) |  | Target (#) |   | Maximum (#)                             
|            
|F.A. Dunn    |  |                   | 225,000 |                    |  | 2001 to 2003  |  |            | 0 |                                          |  |  | 150,000 |  |  |  | 225,000 | 
|            
|F. Plastina  |  |                   | 225,000 |                    |  | 2001 to 2003  |  |            | 0 |                                          |  |  | 150,000 |  |  |  | 225,000 | 
|            
|G.R. Donahee |  |                   | 225,000 |                    |  | 2001 to 2003  |  |            | 0 |                                          |  |  | 150,000 |  |  |  | 225,000 | 
|            
|N.J. DeRoma  |  |                   | 225,000 |                    |  | 2001 to 2003  |  |            | 0 |                                          |  |  | 150,000 |  |  |  | 225,000 | 
|            
|C. Bolouri   |  |                   | 225,000 |                    |  | 2001 to 2003  |  |            | 0 |                                          |  |  | 150,000 |  |  |  | 225,000 | 
|            
|J.A. Roth    |  |                   | 375,000 |                    |  | 2001 to 2003  |  |            | 0 |                                          |  |  | 250,000 |  |  |  | 375,000 | 
|            

| | (1) |  | Number of restricted stock units allocated in 2001 to the named executive
officers pursuant to the Nortel Networks Limited Restricted Stock Unit
Plan. When issued, a restricted stock unit entitles the holder to receive
one common share of Nortel Networks Corporation. 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), with the number of
restricted stock units allocated to a participant representing 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 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 have been
achieved.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (2) |  | Restricted stock units allocated in 2001 have a two-year performance
period which is divided into five shorter performance segments. The
performance criteria include resizing activity target for the first segment and
corporate performance objectives under the incentive plan for the
remaining four segments. The Joint Leadership Resources Committee of the
boards of directors of the Company and Nortel Networks Corporation will
assess performance over the five segments and determine the actual number
of restricted stock units to be issued.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

Pension Plans

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 ($170,000 in 2001) 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.

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

63



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##### 



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, Plastinas, Donahees and Roths Canadian service
are shown in Table I (which provides estimates under the old SERP). The
approximate benefits for Messrs. Plastinas and Donahee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                                                                                      
|                                                                                                                                                    
|$    200,000
      250,000
      300,000
      350,000
      400,000
      450,000
      500,000
   1,000,000
   1,500,000
   2,000,000
   2,500,000 |  |                      | $ | 39,000
48,750
58,500
68,250
78,000
87,750
97,500
195,000
292,500
390,000
487,500 |  |  | $ | 52,000
65,000
78,000
91,000
104,000
117,000
130,000
260,000
390,000
520,000
650,000 |  |  | $ | 65,000
81,250
97,500
113,750
130,000
146,250
162,500
325,000
487,500
650,000
812,500 |  |  | $ | 78,000
97,500
117,000
136,500
156,000
175,500
195,000
390,000
585,000
780,000
975,000 |  |  | $ | 91,000
113,750
136,500
159,250
182,000
204,750
227,500
455,000
682,500
910,000
1,137,500
|                                                                                                                                                    

64



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Pension Plan Table II

|                                                                                                                                                     |  |                      |   |                                                                                    |  |  |   |                                                                                     |  |  |   |                                                                                       |  |  |   |                                                                                       |  |  |   |                                                                                         
|---------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------- | - | ---------------------------------------------------------------------------------- |  |  | - | ----------------------------------------------------------------------------------- |  |  | - | ------------------------------------------------------------------------------------- |  |  | - | ------------------------------------------------------------------------------------- |  |  | - | ----------------------------------------------------------------------------------------
|                                                                                                                                                    
|                                                                                                                                                     |  | Years of Service (1)
|                                                                                                                                                     |  |                     
|Total Earnings (1)                                                                                                                                   |  |                      |   | 15                                                                                 |  |  |   | 20                                                                                  |  |  |   | 25                                                                                    |  |  |   | 30                                                                                    |  |  |   | 35                                                                                      
|                                                                                                                                                    
|$    200,000
      250,000
      300,000
      350,000
      400,000
      450,000
      500,000
   1,000,000
   1,500,000
   2,000,000
   2,500,000 |  |                      | $ | 46,193
57,741
69,289
80,837
92,385
103,933
115,481
230,963
346,444
461,925
577,406 |  |  | $ | 56,345
70,431
84,517
98,603
112,689
126,776
140,862
281,724
422,585
563,447
704,309 |  |  | $ | 69,204
86,505
103,806
121,107
138,408
155,709
173,010
346,021
519,031
692,042
865,052 |  |  | $ | 78,341
97,926
117,512
137,097
156,682
176,268
195,853
391,706
587,558
783,411
979,264 |  |  | $ | 91,201
114,001
136,801
159,601
182,401
205,201
228,001
456,003
684,004
912,006
1,140,007
|                                                                                                                                                    



| | (1) |  | The following table sets forth the approximate total eligible earnings
and years of credited pensionable service at December 31, 2001 of the
named executive officers:
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|             |  |                    |           |                        |  |                             |       |     |  |  |       | 
|------------ |  | ------------------ | --------- | ---------------------- |  | --------------------------- | ----- | --- |  |  | ----- | 
|            
|Name         |  | Total Earnings ($) |           | Canadian Service (yrs) |  | United States Service (yrs)
|            
|F.A. Dunn    |  |                    | 726,671   |                        |  |                             | 25.58 |     |  |  |      | 
|            
|F. Plastina  |  |                    | 621,727   |                        |  |                             | 6.08  |     |  |  | 6.25  | 
|            
|G.R. Donahee |  |                    | 728,448   |                        |  |                             | 7.00  |     |  |  | 18.08 | 
|            
|N.J. DeRoma  |  |                    | 680,812   |                        |  |                             | 2.58  | (2) |  |  |      | 
|            
|C. Bolouri   |  |                    | 579,975   | (1)                    |  |                             | 20.00 |     |  |  |      | 
|            
|J.A. Roth    |  |                    | 1,861,770 |                        |  |                             | 33.00 |     |  |  |      | 
|            



| | (1) |  | Mr. Bolouris 1998 incentive cash award which was paid in
Canadian dollars in 1999 has been converted using the average of the
exchange rate in effect during 1999 equal to US$1.00 = Cdn$1.4888.   
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (2) |  | 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.

Certain Employment Arrangements

Upon his retirement
as President and Chief Executive Officer on November 1, 2001,
Mr. Roth commenced a twelve-month leave of absence with pay
prior to service pension in accordance with the Company's
policy. During this period, Mr. Roth will continue to receive
his base salary and continue to accrue service for purposes of
calculating his pension. Certain of Mr. Roth's unvested stock
options vested on November 1, 2001 except that options granted
during the last twelve month period will vest twelve months following
the grant date, and replacement grants under the key contributor
program will vest in accordance with their terms (which in
Mr. Roth's situation will mean that such replacement options
will not vest and will note be exercisable by him). Mr. Roth has
thirty-six months from November 1, 2001 to exercise his stock
options. On March 31, 2003, Mr. Roth will also be eligible,
subject to the terms of his allocation and the committee's discretion to
receive the restricted stock units allocated to him in April 2001.

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, was
extended

65



---



##### 



effective June 2000 to March 2002 and will be reviewed by the Joint Leadership Resources
Committee of the boards of directors of the Company and of Nortel Networks
Corporation on an annual basis. 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 and certain other executive officers
of the Company participate in the Nortel Networks Corporation Executive
Retention and Termination Plan. The Plan provides that if a participants
employment is terminated 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 (other than
Mr. Roth who is no longer covered by the Plan)) of the participants annual
base salary; (ii) 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) the pay-out at target of any
restricted stock units under the Nortel Networks Limited Restricted Stock Unit
Plan.

For purposes of the Plan, a change in control is deemed to occur if:



| | (i)   |  | any party or group acquires ownership of more than 20 percent
of the common shares of Nortel Networks Corporation;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | ----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (ii)  |  | Nortel Networks Corporation participates in a business
combination, including, among other things, a merger, amalgamation,
reorganization 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 own more than 50
percent of the then-outstanding voting shares of the entity resulting
from the business combination (or of a publicly traded
corporation which controls such entity) and a majority of the
members of the board of directors of the entity resulting from the
business combination (or the publicly traded corporation 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 Plan 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 Plan 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 or, 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 Messrs. Dunn and Roth)
and certain other executive officers of the Company also participate in the
Nortel Networks Corporation Special Retention Plan.
The 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 four named executive officers) of the participants
annual base salary; (ii) 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.

66



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##### 



Compensation of Directors

The following table sets forth certain information concerning the current
compensation of directors of the Company and Nortel Networks Corporation,
effective January 1, 2002, who are not salaried employees of the Company,
Nortel Networks Corporation or any of their respective subsidiaries. Mr. Roth
is also entitled to receive the compensation outlined below in his capacity as
a Director and non-executive Vice-Chairman of the Boards of the Company and
Nortel Networks Corporation.

|                                          |  |                                   |  |                                                                                                                                                                                                                                                                                                                                                                                                           
|----------------------------------------- |  | --------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                         
|Payor                                     |  | Type                              |  | Amount                                                                                                                                                                                                                                                                                                                                                                                                    
|                                         
|Company                                   |  | Board Retainer                    |  | $50,000 annually                                                                                                                                                                                                                                                                                                                                                                                          
|                                         
|Company and/orNortel Networks Corporation |  | Committee Membership Retainer     |  | $12,500 annually, or $6,250
annually for members of the same committee of the boards of the Company and Nortel Corporation.                                                                                                                                                                                                                                                                               
|                                         
|Company and/orNortel Networks Corporation |  | Committee Chairmanship Fee        |  | $7,500 annually, or $3,750 annually for chairmanship of the same committee of the boards of the Company and Nortel Networks Corporation.                                                                                                                                                                                                                                                                  
|                                         
|Company and/orNortel Networks Corporation |  | Special Assignments               |  | $3,000 per day, up to $50,000 annually.  No director received any fees for special assignments in 2001.                                                                                                                                                                                                                                                                                                   
|                                         
|Company                                   |  | Retirement Benefits               |  | Non-employee directors of the Company elected prior to January 1, 1996 are entitled to 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.                               
|                                         
|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 the Company's board membership).                                                                                                                                                                                                                                    
|                                         
|Company and NortelNetworks Corporation    |  | Deferred Share Compensation Plans |  | Non-employee directors and Mr. Roth receive their annual retainer and all other fees in the form of share units in lieu of cash.  Share units are credited in respect of dividends paid, if any, on common shares of Nortel Networks Corporation.
Share units are settled on retirement from the board and each share unit entitles the holder to receive one common share of Nortel Networks Corporation.
|                                         

Share ownership guidelines adopted by
the boards 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 for
this purpose.

L. R. Wilson is entitled to additional compensation for serving as
Chairman of the Boards of the Company and Nortel Networks Corporation of
$15,000 per month from each of the Company and Nortel Networks Corporation.
Effective January 1, 2002, Mr. Wilson will receive his additional compensation
in the form of share units. In May 2001, Mr. Wilson was granted 30,000 stock
options, which have a ten-year term and become exercisable in three equal
annual instalments beginning on the first anniversary of the date of grant.
Mr. Wilsons compensation did not change when he assumed the position of
executive Chairman of the Boards of the Company and Nortel Networks
Corporation for the period from November 1, 2001 to February 28, 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), L.Y. Fortier, R.A. Ingram, W.A. Owens, S.H. Smith, Jr. and L.R.
Wilson. Mr. F.C. Carlucci was a member of the committee until his retirement
from the board of directors of the Company and Nortel Networks Corporation in April 2001. No
member of this joint committee was an officer

67



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##### 



(within the meaning of applicable United States securities rules) or
employee of the Company, Nortel Networks Corporation or any of their respective
subsidiaries at any time during the year 2001.

The law firm of Ogilvy Renault, of which Mr. Fortier is a senior partner
and Chairman, provided legal advice to each of the Company and Nortel Networks
Corporation on several matters in 2001 and is expected to provide advice in
2002.

No executive officer of the Company has served on the board of directors
or compensation committee of any other entity that have 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, 2002.

|                                                                                         |  |                              |  |                      |               |                  |  |  |     |  |  | 
|---------------------------------------------------------------------------------------- |  | ---------------------------- |  | -------------------- | ------------- | ---------------- |  |  | --- |  |  | 
|                                                                                        
|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 |  |                      | 1,460,978,634 |                  |  |  | 100 | 
|                                                                                        

Security Ownership of Directors and Management

The following table shows the number of common shares of Nortel Networks
Corporation, Entrust Technologies Inc. and Elastic Networks Inc. beneficially
owned, as of February 28, 2002, by each of the Companys directors, nominees
for election as director and named executive officers, as well as by the
directors, nominees and all executive officers as a group. Entrust
Technologies Inc. and Elastic Networks Inc. were affiliates of the
Company as of February 28, 2002.
On March 5, 2002, Elastic was acquired by Paradyne Networks,
Inc. and Elastic's common shares ceased trading on March 6, 2002. None of the directors, nominees for election as directors, or executive
officers 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 vote or transfer the common share. 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. 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.

68



---



##### 



|                                                                                                              |  |                                                                                                                                                                        |  |                          |                             |                          |  | 
|------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | --------------------------- | ------------------------ |  | 
|                                                                                                             
|                                                                                                              |  |                                                                                                                                                                        |  |                          |                             | 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                                                                                                                           |  |                          | 7,725                       | (2)                     
|                                                                                                              |  | Share units of Nortel Networks Corporation                                                                                                                             |  |                          | 3,735                       | (3)                     
|                                                                                                             
|R.E. Brown                                                                                                    |  | Common shares of Nortel Networks Corporation                                                                                                                           |  |                          | 10,614                      | (4)                     
|                                                                                                             
|J.E. Cleghorn                                                                                                 |  | Common shares of Nortel Networks Corporation                                                                                                                           |  |                          | 8,000                       |                         
|                                                                                                             
|F.A. Dunn                                                                                                     |  | Common shares of Nortel Networks Corporation                                                                                                                           |  |                          | 433,710                     | (5)                     
|                                                                                                             
|L.Y. Fortier                                                                                                  |  | Common shares of Nortel Networks Corporation                                                                                                                           |  |                          | 13,417                      | (6)                     
|                                                                                                              |  | Share units of Nortel Networks Corporation                                                                                                                             |  |                          | 5,188                       | (3)                     
|                                                                                                             
|R.A. Ingram                                                                                                   |  | Common shares of Nortel Networks Corporation                                                                                                                           |  |                          | 4,089                       | (7)                     
|                                                                                                              |  | Share units of Nortel Networks Corporation                                                                                                                             |  |                          | 2,255                       | (3)                     
|                                                                                                             
|W. A. Owens*                                                                                                  |  | Common shares of Nortel Networks Corporation                                                                                                                           |  |                          |                            |                         
|                                                                                                             
|J.A. Roth                                                                                                     |  | Common shares of Nortel Networks Corporation                                                                                                                           |  |                          | 6,402,846                   | (8)                     
|                                                                                                             
|G. Saucier                                                                                                    |  | Common shares of Nortel Networks Corporation                                                                                                                           |  |                          | 16,805                      | (9)                     
|                                                                                                              |  | Share units of Nortel Networks Corporation                                                                                                                             |  |                          | 9,953                       | (3)                     
|                                                                                                             
|S.H. Smith, Jr.                                                                                               |  | Common shares of Nortel Networks Corporation                                                                                                                           |  |                          | 24,524                      | (10)                    
|                                                                                                              |  | Share units of Nortel Networks Corporation                                                                                                                             |  |                          | 11,446                      | (3)                     
|                                                                                                             
|L.R. Wilson                                                                                                   |  | Common shares of Nortel Networks Corporation                                                                                                                           |  |                          | 166,203                     | (11)                    
|                                                                                                              |  | Share units of Nortel Networks Corporation                                                                                                                             |  |                          | 1,495                       | (3)                     
|                                                                                                             
|C. Bolouri                                                                                                    |  | Common shares of Nortel Networks Corporation                                                                                                                           |  |                          | 374,020                     | (12)                    
|                                                                                                             
|N.J. DeRoma                                                                                                   |  | Common shares of Nortel Networks Corporation                                                                                                                           |  |                          | 502,003                     | (13)                    
|                                                                                                             
|G.R. Donahee                                                                                                  |  | Common shares of Nortel Networks Corporation                                                                                                                           |  |                          | 512,055                     | (14)                    
|                                                                                                             
|F. Plastina                                                                                                   |  | Common shares of Nortel Networks Corporation                                                                                                                           |  |                          | 364,711                     | (15)                    
|                                                                                                             
|Directors, nominees and executive officers as a group (consisting of 35 persons, including those named above) |  | Common shares of Nortel Networks CorporationShare units of Nortel Networks CorporationCommon shares of Entrust Technologies Inc.Common shares of Elastic Networks Inc. |  |                          | 14,736,46134,072 1,0005,000 | (16)   (3)   (17)   (18)
|                                                                                                             

| | *   |  | Mr. Owens was appointed a director of the Company and of Nortel Networks
Corporation effective February 28, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (1) |  | Except as set forth below, each person has sole investment and voting
power with respect to the common shares of Nortel Networks Corporation
beneficially owned by such person. Includes common shares of Nortel
Networks Corporation subject to stock options exercisable by February 28,
2002 or that become exercisable within 60 days from February 28, 2002. As
of February 28, 2002, each director, nominee and named executive officer,
and the directors, nominees and executive officers as a group,
beneficially owned less than 1.0 percent of the outstanding common shares
of Nortel Networks Corporation.
|
| | (2) |  | Includes 1,333 common shares of Nortel Networks Corporation subject to
stock options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | (3) |  | Share units of Nortel Networks Corporation issued under 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 Limited Directors' Deferred Share
Compensation Plan is described under the heading "Compensation of Directors".                                                                                                                                                                                                                                                  
|
| | (4) |  | Includes 1,333 common shares of Nortel Networks Corporation 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 331,334 common shares of Nortel Networks Corporation subject to
stock options. Excludes 1,400 common shares beneficially owned by Mr.
Dunns adult children residing with Mr. Dunn. Mr. Dunn disclaims
beneficial ownership of those excluded shares.                                                                                                                                                                                                                                                                                                                                                         

69



---



##### 



| | (6)  |  | Includes 1,333 common shares of Nortel Networks Corporation 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.                                                                                                                                                                                                                                                                 
| | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (7)  |  | Includes 1,333 common shares of Nortel Networks Corporation subject to
stock options and 1,800 common shares as to which Mr. Ingram shares
investment and voting power with his spouse.                                                                                                                                                                                                                                                                                                             
|
| | (8)  |  | Includes 5,590,000 common shares of Nortel Networks Corporation subject
to stock options, 171,600 common shares beneficially owned by a
corporation that is controlled by Mr. Roth, and 12,800 common shares
beneficially owned by Mr. Roths spouse. Excludes 108 common shares
beneficially owned by Mr. Roths adult child residing with Mr. Roth. Mr.
Roth disclaims beneficial ownership of those excluded shares.                                                                             
|
| | (9)  |  | Includes 1,333 common shares of Nortel Networks Corporation subject to
stock options and 14,472 common shares beneficially owned by a corporation
that is wholly-owned by Mrs. Saucier.                                                                                                                                                                                                                                                                                                             
|
| | (10) |  | Includes 1,333 common shares of Nortel Networks Corporation subject to
stock options and excludes 1,600 common shares beneficially owned by Mr.
Smith, Jr.s spouse. Mr. Smith, Jr. disclaims beneficial ownership of those
excluded shares.                                                                                                                                                                                                                                                        
|
| | (11) |  | Includes 1,333 common shares of Nortel Networks Corporation subject to
stock options and 157,855 common shares beneficially owned by a
corporation that is wholly-owned by Mr. Wilson. Also includes 1,000 common
shares owned by an organization of which Mr. Wilson is a member and in
respect of which Mr. Wilson shares investment and voting power.
Excludes 2,204 common shares beneficially owned by Mr. Wilson's
spouse. Mr. Wilson disclaims beneficial ownership of those excluded
shares.
|
| | (12) |  | Includes 347,999 common shares of Nortel Networks Corporation subject to
stock options. Excludes 23,099 common shares subject to stock options
and 6,020 common shares beneficially owned by Mr.
Bolouris spouse. Mr. Bolouri disclaims beneficial
ownership of those excluded shares.                                                                                                                                                                                                             
|
| | (13) |  | Includes 383,334 common shares of Nortel Networks Corporation subject to
stock options and 84,752 common shares as to which Mr. DeRoma shares
investment and voting power with his spouse.                                                                                                                                                                                                                                                                                                          
|
| | (14) |  | Includes 486,669 common shares of Nortel Networks Corporation 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.                                                                                                                                                                                                                               
|
| | (15) |  | Includes 351,665 common shares of Nortel Networks Corporation subject to
stock options.                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | (16) |  | Includes 11,819,216 common shares of Nortel Networks Corporation subject
to stock options. Also includes 247,869 common shares as to which
investment and voting power is shared with one or more other persons.
Excludes 53,266 common shares as to which beneficial ownership is
disclaimed.                                                                                                                                                                                                      
|
| | (17) |  | The number of common shares of Nortel Networks Corporation beneficially
owned represents less than 1.0 percent of the outstanding common shares of
Entrust Technologies Inc.                                                                                                                                                                                                                                                                                                                        
|
| | (18) |  | The number of common shares of Nortel Networks Corporation beneficially
owned represents less than 1.0 percent of the outstanding common shares of
Elastic Networks Inc.                                                                                                                                                                                                                                                                                                                            

ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Mr. Cleghorn served as Chairman and Chief Executive Officer of RBC
Financial Group until July 2001. RBC Financial Group and its affiliates
provided financial advice, investment banking services and banking services to
each of the Company and Nortel Networks Corporation, including their
subsidiaries, and also made financial commitments under various credit
facilities with the Company and one or more of its subsidiaries in 2001. RBC
Financial Group is expected to perform similar services in 2002. See
also "Compensation Committee Interlocks and Insider Participation"
and "Indebtedness of Management".

70



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##### 



Indebtedness of Management

No director, executive officer, senior officer, or nominee for election as
a director of the Company is or has been indebted to the Company or Nortel
Networks Corporation, or their respective subsidiaries, since January 1, 2001,
except for loans made in connection with a relocation. Relocation assistance
is provided to employees who are requested to relocate and is designed to
minimize the financial exposure to employees as a result of the move. The
assistance may include 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.

Approximately $11.6 million of loans extended by the Company and its
subsidiaries to current and former officers, directors, and employees
were outstanding on February 28, 2002. 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, 2001. No loans have been
extended by the Company or its subsidiaries to any director of the Company
since January 1, 2001. The following table sets forth certain additional
information about indebtedness owed by two of the Companys officers.

Table of Indebtedness of
Directors and Executive Officers

|                                          |  |                       |  |                            |         |                             |  |  |         |  |  |  |  |  |  | 
|----------------------------------------- |  | --------------------- |  | -------------------------- | ------- | --------------------------- |  |  | ------- |  |  |  |  |  |  | 
|                                         
|Name and Principal                        |  | Involvement of        |  | Largest Amount Outstanding |         | Amount Outstanding          |  |  |         | 
|Position                                  |  | Company or Subsidiary |  | During 2001 ($)            |         | as at February 28, 2002 ($) |  |  |         | 
|                                         
|P. Debon (1)
President, Wireless Networks |  | Lender                |  |                            | 74,203  |                             |  |  | 0       |  |  |  |  | 
|                                         
|G.R. Donahee (2)
President, Americas      |  | Lender                |  |                            | 150,000 |                             |  |  | 150,000 | 
|                                         

| | (1) |  | A subsidiary of the Company paid certain tax liabilities to the French
taxation authorities on behalf of Mr. Debon in connection with his
relocation from France to the United States in 1999. Mr. Debon repaid the
final installment of the loan on June 1, 2001. The loan was interest-free
and unsecured.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (2) |  | A subsidiary of the Company extended a housing loan to Mr. Donahee in
1994 in connection with a relocation. The loan is for a period of ten
years, interest-free, and secured against Mr. Donahees residence.                                                                                              

Related Party Transactions

The Company engages in transactions with Nortel Networks Corporation and
directly owned subsidiaries of Nortel Networks Corporation. These transactions
include sales, purchases and cash borrowings between the parties in addition to
funding activities pursuant to reciprocal credit agreements. As at December
31, 2001, the balance included in trade and other payables owing to Nortel
Networks Corporation was $134 million, and to directly owned subsidiaries of
Nortel Networks Corporation was $116 million. Research and development expense
relates to research and development services provided to the Company by
directly owned subsidiaries of Nortel Networks Corporation.

71



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##### 



PART IV

ITEM 14.     EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

1.     Financial Statements

The index to the Consolidated Financial Statements appears on page 53.

2.     Financial Statement Schedules

|                                                                                  |                                      |  |      |      | 
|--------------------------------------------------------------------------------- | ------------------------------------ |  | ---- | ---- | 
|                                                                                  |                                      |  | Page
|                                                                                  |                                      |  |     
|                                                                                  | Quarterly Financial Data (Unaudited) |  |      | F-42 | 
|                                                                                  | Independent Auditors Report         |  |      | F-1  | 
|II  Valuation and Qualifying Accounts and Reserves, Provision for Uncollectibles |                                      |  | 81   |     



| |                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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, 2001.

3.     Reports on Form 8-K



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Nortel Networks Limited filed a Current Report on Form 8-K dated October
4, 2001 related to: (i) Nortel Networks Corporations financial outlook
for the third quarter of 2001, including certain restructuring charges and
facility closures related to workforce reductions and business
streamlining activities, an update on its work plan, including expected
additional workforce reductions and business streamlining activities and
the expected impact of the divestiture of non-core businesses; and (ii)
the announcement of Nortel Networks Corporations and Nortel Networks
Limiteds new senior management team, including Frank A. Dunn as Nortel
Networks Corporations and Nortel Networks Limiteds new President and
Chief Executive Officer.



| |                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Nortel Networks Limited filed a Current Report on Form 8-K dated October
22, 2001 related to Nortel Networks Corporations financial results for
the third quarter of 2001.



| |                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Nortel Networks Limited filed a Current Report on Form 8-K dated November
6, 2001 related to the filing of: (i) managements discussion and
analysis of financial condition and results of operations for the year
ended December 31, 2000, restated for discontinued operations; and (ii)
unaudited selected financial data for the five year period ended December
31, 2000, restated for discontinued operations.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Nortel Networks Limited filed a Current Report on Form 8-K dated December
21, 2001 related to: (i) the amendment of the $2.0 billion 364-day credit
agreements entered into in June 2001 by Nortel Networks Limited and Nortel
Networks Inc., extending the term, reducing the size of the facility, and
adding certain financial and other covenants; and (ii) Nortel Networks
Corporations financial outlook for the fourth quarter of 2001, including
certain restructuring charges primarily related to previously announced
workforce reductions and associated facilities actions, and an update on
Nortel Networks Corporations work plan.



| |                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Nortel Networks Limited filed a Current Report on Form 8-K dated December
26, 2001 related to the amended credit agreements referred to in the
Current Report on Form 8-K dated December 21, 2001 referenced above.



| |                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Nortel Networks Limited filed a Current Report on Form 8-K dated January
18, 2002 related to: (i) a certain security agreement, among Nortel
Networks Limited, Nortel Networks Inc., certain other subsidiaries of
Nortel

72



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##### 





| |                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Networks Limited, and JPMorgan Chase Bank, as Collateral Agent, related to
the amended and restated credit agreements filed on the Current Report on
Form 8-K dated December 26, 2001 referenced above; and (ii) Nortel
Networks Corporations financial results for the fourth quarter of 2001
and the year 2001.



| |                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Nortel Networks Limited filed a Current Report on Form 8-K dated February
4, 2002 related to a certain security agreement related to the amended and
restated credit agreements filed on the Current Report on Form 8-K dated
December 26, 2001 referenced above.



| |                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Nortel Networks Limited filed a Current Report on Form 8-K dated February
12, 2002 related to: (i) the resignation of Nortel Networks Corporations
and Nortel Networks Limiteds Chief Financial Officer; and (ii) a
purported class action lawsuit filed on behalf of certain participants and
beneficiaries of the Nortel Networks Long-Term Investment Plan.



| |                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Nortel Networks Limited filed a Current Report on Form 8-K dated February
12, 2002 related to Part I  Item 1  Business of Nortel Networks
Limiteds Annual Report on Form 10-K for the fiscal year ended December
31, 2000.



| |                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Nortel Networks Limited filed a Current Report on Form 8-K/A dated
February 12, 2002 related to amended managements discussion and analysis
of financial condition and results of operations for the year ended
December 31, 2000, restated for discontinued operations, which it
previously filed on the Current Report on Form 8-K dated November 6, 2001
referenced above.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Nortel Networks Limited filed a Current Report on Form 8-K dated February
12, 2002 related to: (i) a pre-effective amendment to a registration
statement of Nortel Networks Corporation and Nortel Networks Limited with
respect to the potential resale by selling securityholders of Nortel
Networks Corporations 4.25% convertible senior notes guaranteed by Nortel
Networks Limited and/or the underlying common shares of Nortel Networks
Corporation; and (ii) Nortel Networks Corporations investor conference
held in New York City, including Nortel Networks Corporations financial
outlook for the year 2002 and the first quarter of 2002.



| |                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Nortel Networks Limited filed a Current Report on Form 8-K dated March 1,
2002 related to the announcement of a number of changes in the make-up of
Nortel Networks Corporations and Nortel Networks Limiteds boards of
directors including the dissolution of the Office of the Chief Executive.

73



---



##### 



4.     Exhibit index



| |                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------
| | The Items listed as Exhibits 10.2 to 10.7, 10.9, and 10.20 to 10.37 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 theCanada Business Corporations Act) (filed as Exhibit 2.1 to
Nortel Networks Limiteds Registration Statement on Form 10
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 19, 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 8 3/4% Notes which were due 2001, the 6 7/8% Notes due 2002, 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 the 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 |             | 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).                                                                                              



---

74



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##### 



|        |        |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|------- | ------ | ----------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
|       
|Number  |        | Description
|        |        |            
|       
|        | *4.6   |             | Short Form Prospectus dated July 6, 1994, filed in each of the provinces of Canada related to 200
Exchange Rights issued to holders of Nortel Networks Limiteds Cumulative Redeemable Class A
Preferred Shares Series 4 on July 8, 1994 (filed as Exhibit 4.5 to Nortel Networks Limiteds Annual
Report on Form 10-K for the year ended December 31, 2000).                                                                                      
|       
|        | 10.1   |             | Second Amended and Restated Reciprocal Credit Agreement dated as of December 20, 2001 between Nortel
Networks Corporation, Nortel Networks Limited, and the other parties who have executed the
agreement, as amended by Amendment No. 1 dated as of December 20, 2001 between Nortel Networks
Corporation, Nortel Networks Limited, and the other parties who have executed the agreement.                                                        
|       
|        | 10.2   |             | Nortel Networks Supplementary Executive Retirement Plan effective October 18, 2001.                                                                                                                                                                                                                                                                                                                                                                
|       
|        | 10.3   |             | Agreement dated April 29, 1997 related to the remuneration of the Chief Legal Officer.                                                                                                                                                                                                                                                                                                                                                             
|       
|        | 10.4   |             | Acknowledgement effective as of June 1, 2000 related to the remuneration of the Chief Legal Officer.                                                                                                                                                                                                                                                                                                                                               
|       
|        | 10.5   |             | Statement describing the retirement arrangements of the former President and Chief Executive Officer.                                                                                                                                                                                                                                                                                                                                              
|       
|        | *10.6  |             | Nortel Networks Corporation Executive Retention and Termination Plan, as amended and restated,
effective from July 26, 2001 (filed as Exhibit 10.2 to Nortel Networks Corporations Quarterly
Report on Form 10-Q for the quarter ended September 30, 2001).                                                                                                                                                                                       
|       
|        | *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  |             | Loan Agreement dated as of August 15, 2001 made between Nortel Networks Limited, as borrower, and
Nortel Networks Corporation, as lender, as amended by Amendment No. 1 dated as of September 30, 2001
between Nortel Networks Limited, as borrower, and Nortel Networks Corporation, as lender (filed as
Exhibit 10.4 to Nortel Networks Corporations Quarterly Report on Form 10-Q for the quarter ended
September 30, 2001).                   
|       
|        | *10.9  |             | 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).     
|       
|        | *10.10 |             | 364 Day 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 10.2 to Nortel Networks Limiteds
Quarterly Report on Form 10-Q for the quarter ended June 30, 2001).                                                                      
|       
|        | *10.11 |             | 364 Day 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 10.3 to Nortel Networks Limiteds Quarterly Report on Form
10-Q for the quarter ended June 30, 2001).



---

75



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##### 



|        |        |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|------- | ------ | ----------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
|       
|Number  |        | Description
|        |        |            
|       
|        | *10.12 |             | 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).                                                                                                                                                                                                                                                            
|       
|        | *10.13 |             | 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).                                                                                                                                                                                     
|       
|        | *10.14 |             | Amended and Restated Credit Agreement dated as of April 11, 2001, among Nortel Networks Limited and
various banks (amending and restating 364 Day Credit Agreement dated April 12, 2000) (filed as
Exhibit 10.6 to Nortel Networks Limiteds Quarterly Report on Form 10-Q for the quarter ended June
30, 2001).                                                                                                                                                                                                                                                                                                                           
|       
|        | *10.15 |             | Amended and Restated Credit Agreement dated as of April 11, 2001, among Nortel Networks Limited,
Nortel Networks Inc. and various banks (amending and restating 364 Day Credit Agreement dated April
12, 2000) (filed as Exhibit 10.7 to Nortel Networks Limiteds Quarterly Report on Form 10-Q for the
quarter ended June 30, 2001).                                                                                                                                                                                                                                                                                                     
|       
|        | *10.16 |             | Credit Agreement dated as of June 14, 2001, as amended by Amendment No. 1 to the Credit Agreement
dated as of July 31, 2001, among Nortel Networks Limited, as borrower, various banks, as lenders,
Credit Suisse First Boston Canada, as syndication agent, and The Chase Manhattan Bank of Canada, as
administrative agent (filed as Exhibit 10.8 to Nortel Networks Limiteds Quarterly Report on Form
10-Q for the quarter ended June 30, 2001).                                                                                                                                                                                       
|       
|        | *10.17 |             | Amended and Restated Credit Agreement dated as of December 20, 2001 among Nortel Networks Limited,
as borrower, and various banks (filed as Exhibit 99.1 to Nortel Networks Limiteds Current Report on
Form 8-K dated December 26, 2001) amending the Credit Agreement dated as of June 14, 2001, as
amended by Amendment No. 1 to the Credit Agreement dated as of July 31, 2001, among Nortel Networks
Limited, as borrower, various banks, as lenders, Credit Suisse First Boston Canada, as syndication
agent, and The Chase Manhattan Bank of Canada, as administrative agent.                                                       
|       
|        | *10.18 |             | Credit Agreement dated as of June 14, 2001, as amended by Amendment No. 1 to the Credit Agreement
dated as of July 31, 2001, among Nortel Networks Limited, as guarantor, Nortel Networks Inc., as
borrower, various banks, as lenders, Credit Suisse First Boston, as syndication agent, and The Chase
Manhattan Bank, as administrative agent (filed as Exhibit 10.9 to Nortel Networks Limiteds
Quarterly Report on Form 10-Q for the quarter ended June 30, 2001).                                                                                                                                                                    
|       
|        | *10.19 |             | Amended and Restated Credit Agreement dated as of December 20, 2001 among Nortel Networks Limited,
as guarantor, Nortel Networks Inc., as borrower, and various banks (filed as Exhibit 99.2 to Nortel
Networks Limiteds Current Report on Form 8-K dated December 26, 2001) amending the Credit Agreement
dated as of June 14, 2001, as amended by Amendment No. 1 to the Credit Agreement dated as of July
31, 2001, among Nortel Networks Limited, as guarantor, Nortel Networks Inc., as borrower, various
banks, as lenders, Credit Suisse First Boston, as syndication agent, and The Chase Manhattan Bank,
as administrative agent.



---

76



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##### 



|        |        |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------- | ------ | ----------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
|       
|Number  |        | Description
|        |        |            
|       
|        | *10.20 |             | 2000 Executive Management Team SUCCESS Plan effective January 1, 2000 (filed as Exhibit 10.2 to
Nortel Networks Corporations Annual Report on Form 10-K for the year ended December 31, 1999).                                                                                                                                                                                                                                                              
|       
|        | *10.21 |             | First Half 2001 SUCCESS Award Program (filed as Exhibit 10.2 to Nortel Networks Limiteds Annual
Report on Form 10-K for the year ended December 31, 2000).                                                                                                                                                                                                                                                                                                  
|       
|        | *10.22 |             | Supplementary Pension Credits Arrangement (filed as Exhibit 10.14 to Nortel Networks Limiteds
Registration Statement on Form S-1 (No. 2-71087)).                                                                                                                                                                                                                                                                                                            
|       
|        | *10.23 |             | Leave of Absence Prior to Pension Procedure dated June 21, 1977, and related resolutions of the
Board of Directors of Nortel Networks Limited dated October 21, 1980 (filed as Exhibit 10.6 to
Nortel Networks Corporations Annual Report on Form 10-K for the year ended December 31, 1998).                                                                                                                                                               
|       
|        | *10.24 |             | Statements describing the right of certain officers and senior managers in Canada and the United
States to defer the receipt of all or part of their short-term and long-term incentive awards (filed
as Exhibit 10.9 to Nortel Networks Corporations Annual Report on Form 10-K for the year ended
December 31, 1996).                                                                                                                                     
|       
|        | *10.25 |             | 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).                                                                                                                                                                                              
|       
|        | *10.26 |             | Statement describing eligibility for the Group Life Insurance Plan for directors who are not
salaried employees of Nortel Networks Limited (filed as Exhibit 10.10 to Nortel Networks
Corporations Annual Report on Form 10-K for the year ended December 31, 1996).                                                                                                                                                                                        
|       
|        | *10.27 |             | Resolutions of the Board of Directors of Nortel Networks Limited dated May 25, 2000, related to the
payment of directors fees (filed as Exhibit 10.2 to Nortel Networks Limiteds Quarterly Report on
Form 10-Q for the quarter ended June 30, 2000).                                                                                                                                                                                                        
|       
|        | *10.28 |             | 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 (filed as Exhibit 10.13 to Nortel Networks Corporations Annual Report
on Form 10-K for the year ended December 31, 1996).
|       
|        | *10.29 |             | Agreement between a director of Nortel Networks Limited and Nortel Networks Limited dated May 13,
1999, setting forth the arrangements with respect to his serving as non-executive Chairman of the
Board of Nortel Networks Limited (filed as Exhibit 10.1 to Nortel Networks Corporations Quarterly
Report on Form 10-Q for the quarter ended June 30, 1999).                                                                                             
|       
|        | *10.30 |             | Resolution of the Board of Directors of Nortel Networks Limited dated May 28, 1999, related to the
remuneration of the Chairman of the Board (filed as Exhibit 10.2 to Nortel Networks Corporations
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999).                                                                                                                                                                                     



---

77



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##### 



|        |        |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|------- | ------ | ----------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
|       
|Number  |        | Description
|        |        |            
|       
|        | *10.31 |             | Resolutions of the Board of Directors of Nortel Networks Limited dated September 23, 1999, related
to the remuneration of the then current Chairman and immediate past Chairman of the Board of
Directors of Nortel Networks Limited (filed as Exhibit 10.6 to Nortel Networks Corporations
Quarterly Report on Form 10-Q for the quarter ended September 30, 1999).                                                                                                                                                                                                 
|       
|        | *10.32 |             | Resolution of the Board of Directors of Nortel Networks Limited dated April 27, 2000, related to the
remuneration of the then current and former Chairman of the Board (filed as Exhibit 10.1 to Nortel
Networks Limiteds Quarterly Report on Form 10-Q for the quarter ended March 31, 2000).                                                                                                                                                                                                                                                                       
|       
|        | *10.33 |             | 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 Limiteds Annual Report on Form 10-K for the year ended
December 31, 2000).                                                                                                                                                                                                                                                 
|       
|        | *10.34 |             | Nortel Networks Limited Directors Deferred Share Compensation Plan effective June 30, 1998 and
amended and restated as of May 1, 2000 (filed as Exhibit 10.4 to Nortel Networks Limiteds Quarterly
Report on Form 10-Q for the quarter ended March 31, 2000).                                                                                                                                                                                                                                                                                                       
|       
|        | *10.35 |             | Nortel Networks Limited Executive Retention and Termination Plan effective September 1, 1999 (filed
as Exhibit 10.5 to Nortel Networks Corporations Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999).                                                                                                                                                                                                                                                                                                                                         
|       
|        | *10.36 |             | 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 10.20 to Nortel Networks Limiteds Annual Report on
Form 10-K for the year ended December 31, 2000).                                                                                                              
|       
|        | *10.37 |             | Nortel Networks U.S. Deferred Compensation Plan (filed as Exhibit 4.3 to Post-Effective Amendment
No. 1 to Nortel Networks Limiteds Registration Statement on Form S-8 (No. 333-11558)).                                                                                                                                                                                                                                                                                                                                                                             
|       
|        | *10.38 |             | Agreement dated May 1, 2000 between Nortel Networks Limited, formerly known as Nortel Networks
Corporation, and Nortel Networks Corporation, formerly known as New Nortel Inc., with respect to
exchange rights attached to the Nortel Networks Limited Cumulative Redeemable Class A Preferred
Shares Series 4 (filed as Exhibit 10.1 to Nortel Networks Limiteds Quarterly Report on Form 10-Q
for the quarter ended March 31, 2000).                                                                                                                              
|       
|        | *10.39 |             | Amendment effective as of July 26, 2001 between Nortel Networks Limited and Nortel Networks
Corporation, amending the Agreement dated May 1, 2001 between Nortel Networks Limited (formerly
known as Nortel Networks Corporation) and Nortel Networks Corporation (formerly known as New
Networks Inc.) with respect to exchange rights attached to Nortel Networks Limiteds Cumulative
Redeemable Class A Preferred Shares Series 4 (filed as Exhibit 10.1 to Nortel Networks Corporations
Quarterly Report on Form 10-Q for the quarter ended September 30, 2001).
|       
|        | 12.    |             | Computation of Ratios.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                



---

78



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##### 



|        |      |             |                                                                                                                                                                                                                                                                                                                                                                                        
|------- | ---- | ----------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
|       
|Number  |      | Description
|        |      |            
|       
|        | *18. |             | Letter of Deloitte & Touche LLP dated August 8, 2001 relating to a change in the methodology of
accounting for evaluating the impairment of enterprise level goodwill in accordance with APB 17 from
the undiscounted cash flow method to the market value method (filed as Exhibit 18 to Nortel Networks
Limiteds Quarterly Report on Form 10-Q for the quarter ended June 30, 2001).
|       
|        | 21.  |             | Subsidiaries of the Registrant (see page 84).                                                                                                                                                                                                                                                                                                                                          
|       
|        | 23.  |             | Consent of Deloitte & Touche LLP.                                                                                                                                                                                                                                                                                                                                                      
|       
|        | 24.  |             | Power of Attorney of certain directors and officers.                                                                                                                                                                                                                                                                                                                                   



---

79



---



##### 



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, 2001 and
2000, and for each of the three years in the period ended December 31, 2001,
and have issued our report thereon dated February 1, 2002; such financial
statements and report are included elsewhere in this Form 10-K. Our audits
also included the consolidated financial statement schedule of Nortel Networks
listed in Item 14. 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

Deloitte & Touche LLP
Chartered Accountants

Toronto, Canada
February 1, 2002

80



---



##### 



Schedule II
Consolidated

NORTEL NETWORKS LIMITED

Valuation and Qualifying Accounts and Reserves
Provision for Uncollectibles*
(millions of U.S. dollars)

|          |  |              |      |                  |  |              |       |              |  |                |     |  |  |   |       | 
|--------- |  | ------------ | ---- | ---------------- |  | ------------ | ----- | ------------ |  | -------------- | --- |  |  | - | ----- | 
|          |  |              |      |                  |  |              |       |              |  |                |     |  |  |   |       | 
|
|         
|          |  | Balance at   |      | Additions        |  |              |       |              |  |                |     | 
|          |  | beginning of |      | charged to costs |  |              |       |              |  | Balance at end
|US GAAP   |  |              | year |                  |  | and expenses |       | Deductions** |  | of year       
|         
|         
|Year 2001 |  | $            | 746  |                  |  | $            | 1,498 |              |  | $              | 761 |  |  | $ | 1,483 | 
|Year 2000 |  | $            | 581  |                  |  | $            | 253   |              |  | $              | 88  |  |  | $ | 746   | 
|Year 1999 |  | $            | 358  |                  |  | $            | 275   |              |  | $              | 52  |  |  | $ | 581   | 



---

|*  |  | Excludes discontinued operations.                                                                                                                       
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|** |  | Includes acquisitions and disposals of subsidiaries and divisions and
amounts written off, less recoveries and foreign exchange translation
adjustments.

81



---



##### 



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 11th day of March, 2002.

| |     |                                                                                 |  | 
| | --- | ------------------------------------------------------------------------------- |  | 
| |     | NORTEL NETWORKS LIMITED                                                        
|
| | By: | FRANK A. DUNN                                                                 | 
| |     |                                                                                 | 
| |     | (Frank A.
Dunn, President, Chief ExecutiveOfficer, and Chief Financial 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 11th day of March, 2002.

|                                         |  |                                                                               
|---------------------------------------- |  | ------------------------------------------------------------------------------
|                                        
|Signature                                |  | Title                                                                         
|                                        
|                                         |  |                                                                               
|                                         |  |                                                                               
|Principal Executive Officer              |  |                                                                               
|                                         |  |                                                                               
|                                         |  |                                                                               
|                                         |  |                                                                               
|FRANK A. DUNN

(FRANK A. DUNN)         |  | President, Chief Executive Officer, andChief Financial Officer, and a Director
|                                         |  |                                                                               
|                                         |  |                                                                               
|                                         |  |                                                                               
|Principal Financial Officer              |  |                                                                               
|                                         |  |                                                                               
|                                         |  |                                                                               
|                                         |  |                                                                               
|FRANK A. DUNN

(FRANK A. DUNN)         |  | President, Chief Executive Officer, andChief Financial Officer, and a Director
|                                         |  |                                                                               
|                                         |  |                                                                               
|                                         |  |                                                                               
|Principal Accounting Officer             |  |                                                                               
|                                         |  |                                                                               
|                                         |  |                                                                               
|                                         |  |                                                                               
|DOUGLAS C. BEATTY

(DOUGLAS C. BEATTY) |  | Controller                                                                    

82



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##### 



Directors:

|                 |      |                                                                         
|---------------- | ---- | ------------------------------------------------------------------------
|J.J. BLANCHARD*  |      | W.A. OWENS*                                                             
|                 |      |                                                                         
|(J.J. BLANCHARD) |      | (W.A. OWENS)                                                            
|                 |      |                                                                         
|                 |      |                                                                         
|                 |      |                                                                         
|R.E. BROWN*      |      | J.A. ROTH*                                                              
|                 |      |                                                                         
|(R.E. BROWN)     |      | (J.A. ROTH)                                                             
|                 |      |                                                                         
|                 |      |                                                                         
|                 |      |                                                                         
|J.E. CLEGHORN*   |      | G. SAUCIER*                                                             
|                 |      |                                                                         
|(J.E. CLEGHORN)  |      | (G. SAUCIER)                                                            
|                 |      |                                                                         
|                 |      |                                                                         
|                 |      |                                                                         
|L.Y. FORTIER*    |      | S.H. SMITH, JR.*                                                        
|                 |      |                                                                         
|(L.Y. FORTIER)   |      | (S.H. SMITH, JR.)                                                       
|                 |      |                                                                         
|                 |      |                                                                         
|                 |      |                                                                         
|R.A. INGRAM*     |      | L.R. WILSON*                                                            
|                 |      |                                                                         
|(R.A. INGRAM)    |      | (L.R. WILSON)                                                           
|                 |      |                                                                         
|                 |      |                                                                         
|                 |      |                                                                         
|                 |      |                                                                         
|                 | By:* | DEBORAH J. NOBLE(DEBORAH J. NOBLE, as attorney-in fact)
March 11, 2002

83



---



##### 



Exhibit 21

Subsidiaries of the Registrant

Significant subsidiary companies of the Registrant at December 31, 2001, were:

|                           |  |                     |  |                |     |            |  | 
|-------------------------- |  | ------------------- |  | -------------- | --- | ---------- |  | 
|                           |  |                     |  |                |     | Percentage
|                           |  |                     |  |                |     | ownership 
|                           |  |                     |  |                |     | of common 
|                           |  | Organized under the |  | shares held by
|                           |  | laws of             |  | Registrant    
|                           |  |                     | 
|Nortel Networks Inc.       |  | State of Delaware   |  |                | 100 |           
|Nortel Networks UK Limited |  | England             |  |                | 100 |           
|Qtera Corporation          |  | State of Delaware   |  |                | 100 |           

84