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

FORM 10-Q

OR

For the Transition Period From _____________________ to _____________________

Commission file number 001-07260

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

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

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

Yes ü                  No

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as at April 30, 2003

3,852,615,643 without nominal or par value

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PART I
FINANCIAL INFORMATION

PART II
OTHER INFORMATION

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

NORTEL NETWORKS, NORTEL NETWORKS LOGO, NT and the GLOBEMARK are trademarks of Nortel Networks.
MOODY’S is a trademark of Moody’s Investor Services, Inc.
S&P 100, S&P 500 and STANDARD & POOR’S are trademarks of The McGraw-Hill Companies, Inc.

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PART I
FINANCIAL INFORMATION

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NORTEL NETWORKS CORPORATION
Consolidated Statements of Operations (unaudited) for the three months ended

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

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NORTEL NETWORKS CORPORATION
Consolidated Balance Sheets (unaudited) as at

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

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NORTEL NETWORKS CORPORATION
Consolidated Statements of Cash Flows (unaudited) for the three months ended

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

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

1.		Significant accounting policies
		Basis of presentation
		The accompanying unaudited consolidated financial statements of Nortel Networks Corporation (“Nortel Networks”) include all majority owned subsidiaries over which Nortel Networks exercises control and have been prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) for the preparation of interim financial information. They do not include all information and notes required by accounting principles generally accepted in the United States (“GAAP”) in the preparation of annual consolidated financial statements. The accounting policies used in the preparation of the accompanying unaudited consolidated financial statements are the same as those described in Nortel Networks audited consolidated financial statements prepared in accordance with GAAP for the three years ended December 31, 2002, except as described in note 2. Although Nortel Networks is headquartered in Canada, the accompanying unaudited consolidated financial statements are expressed in United States dollars as the greater part of Nortel Networks financial results and net assets are denominated in United States dollars.
		In the opinion of management, all adjustments necessary to effect a fair statement of the results for the periods presented have been made and all such adjustments are of a normal recurring nature. The financial results for the three months ended March 31, 2003 are not necessarily indicative of financial results for the full year. The accompanying unaudited consolidated financial statements should be read in conjunction with Nortel Networks Annual Report on Form 10-K for the year ended December 31, 2002 filed with the SEC on March 10, 2003.
		Recent accounting pronouncements

	(a)		In April 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 149, “Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities” (“SFAS No. 149”). SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”). In particular, it (1) clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative as discussed in SFAS 133, (2) clarifies when a derivative contains a financing component, (3) amends the definition of an underlying to conform it to the language used in FASB Interpretation No. (“FIN”) 45, “Guarantor Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”) and (4) amends certain other existing pronouncements.
			SFAS 149 is effective for contracts entered into or modified after June 30, 2003, except as stated below and for hedging relationships designated after June 30, 2003.
			The provisions of SFAS 149 that relate to SFAS 133 implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates. In addition, certain provisions relating to forward purchases or sales of when-issued securities or other securities that do not yet exist, should be applied to existing contracts as well as new contracts entered into after June 30, 2003. SFAS No. 149 should be applied prospectively.
			Nortel Networks will adopt the provisions of SFAS 149 for the quarter ending June 30, 2003. Nortel Networks has not yet determined the impact that the adoption of SFAS 149 will have on its business, results of operations and financial position.
	(b)		In January 2003, the FASB issued FIN 46 — “Consolidation of Variable Interest Entities” (“FIN 46”). FIN 46 clarifies the application of Accounting Research Bulletin No. 51 — Consolidated Financial Statements to those entities defined as “Variable Interest Entities” (more commonly referred to as special purpose entities) in which equity investors do not have the characteristics of a “controlling financial interest” or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 applies immediately to all Variable Interest Entities created after January 31, 2003, and by the beginning of the first interim or annual reporting period commencing after June 15, 2003 for Variable Interest Entities created prior to February 1, 2003.
			Nortel Networks currently conducts certain receivable sales and lease financing transactions through special purpose entities and is in the process of assessing the structure of these transactions against the criteria set out in FIN 46. Receivable sales transactions are generally conducted either directly with financial institutions or with multi-seller conduits. It is not expected that Nortel Networks will be required to consolidate any of these special purpose entities or provide any of the additional disclosures set out in FIN 46.
			Certain lease financing transactions are structured through single transaction special purpose entities that currently do not have sufficient equity at risk as defined in FIN 46. In addition, Nortel Networks retains certain risks associated with guaranteeing recovery of the unamortized principal balance of the debt which is expected to represent the majority of the risks associated with the special purpose entities’ activities. The amount of the guarantee will be adjusted over time as the underlying debt matures. Therefore, it is expected that unless the existing arrangements are modified prior to July 1, 2003, Nortel Networks will be required to consolidate the assets, liabilities and any non-controlling interests of these special purpose entities effective July 1, 2003. The total assets and total liabilities held by these entities at March 31, 2003 were each approximately $176 and these amounts represent the collateral and maximum exposure to loss, respectively, as a result of our involvement with these entities.
	(c)		In November 2002, the FASB Emerging Issues Task Force (“EITF”) reached a consensus on Issue 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”), which must be applied to all revenue arrangements entered into after June 30, 2003. However, the EITF is continuing discussion of the interaction of EITF 00-21 with higher level accounting literature, including Statement of Position 81-1, “Accounting

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for Performance of Construction-Type and Certain Production-Type Contracts”. EITF 00-21 governs how to separately account for goods or services or both that are to be delivered in a bundled sales arrangement and allows for either prospective application or a cumulative adjustment upon adoption. Nortel Networks is unable to determine the impact of EITF 00-21 on its business, results of operations and financial condition, until the EITF resolves uncertainties regarding the scope of this pronouncement.

		Comparative figures
		Certain 2002 figures in the accompanying unaudited consolidated financial statements have been reclassified to conform to the 2003 presentation.
2.		Accounting changes

	(a)		Stock-based compensation
			Prior to fiscal 2003, Nortel Networks, as permitted under SFAS No. 123, “Accounting for Stock-based Compensation” (“SFAS 123”), applied Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related interpretations in accounting for its stock-based compensation plans. SFAS 123 required disclosure of pro forma amounts to reflect the impact if Nortel Networks had elected to adopt the optional recognition provisions of SFAS 123 for its stock option plans and employee stock purchase plans.
			In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an Amendment of FASB Statement No. 123” (“SFAS 148”), which amended the transitional provisions of SFAS 123 for entities choosing to recognize stock-based compensation under the fair value based method of SFAS 123, rather than electing to continue to follow the intrinsic value method of APB 25. Under SFAS 148, Nortel Networks could have adopted the recommendations of SFAS 123 either (1) prospectively to awards granted or modified after the beginning of the year of adoption, (2) retroactively with restatement for awards granted or modified since January 1, 1995, or (3) prospectively to awards granted or modified since January 1, 1995. Effective January 1, 2003, Nortel Networks has elected to expense employee stock-based compensation using the fair value based method prospectively for all awards granted or modified after January 1, 2003. The effect of adoption of SFAS 148 was a stock option expense of $5 for the three months ended March 31, 2003.
			Had Nortel Networks applied the fair value based method to all stock-based awards, reported net earnings (loss) and earnings (loss) per common share would have decreased (increased) to the pro forma amounts indicated below for each of the three months ended:

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The fair value of stock options used to compute pro forma net earnings (loss) and net earnings (loss) per common share was the estimated fair value at grant date using the Black-Scholes option-pricing model with the following weighted average assumptions for each of the three months ended:

	(b)		Guarantees
			Nortel Networks has entered into agreements that contain features which meet the definition of a guarantee under FIN 45. FIN 45 defines a guarantee to be a contract that contingently requires Nortel Networks to make payments (either in cash, financial instruments, other assets, common shares of Nortel Networks or through the provision of services) to a third party based on changes in an underlying economic characteristic (such as interest rates or market value) that is related to an asset, a liability or an equity security of the other party. Effective January 1, 2003, Nortel Networks adopted the initial recognition and measurement provisions of FIN 45, which apply on a prospective basis to certain guarantees issued or modified after December 31, 2002. FIN 45 requires that a liability be recognized for the estimated fair value of the guarantee at its inception. The adoption of FIN 45 did not have a material impact on the business, results of operations and financial condition of Nortel Networks. See note 9 for additional disclosure on guarantees.
	(c)		Asset retirement obligations
			Effective January, 1, 2003, Nortel Networks adopted the initial recognition and measurement provisions of SFAS No. 143, “Accounting for Asset Retirement Obligations” (“SFAS 143”), which applies to certain obligations associated with the retirement of tangible long-lived assets. SFAS 143 requires that a liability be recognized for the estimated fair value of the obligation when it is incurred. The adoption of SFAS 143 did not have a material impact on Nortel Networks business, results of operations and financial condition.
	(d)		Accounting for costs associated with exit or disposal activities
			In June 2002, the FASB issued SFAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”), which is effective for exit or disposal activities initiated after December 31, 2002. SFAS 146 supercedes EITF Issue No. 94-3 “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in Restructuring)” (“EITF 94-3”). SFAS 146 requires that costs associated with an exit or disposal activity be recognized when the liability is incurred, whereas EITF 94-3 required recognition of a liability when an entity committed to an exit plan. The effect of SFAS 146 will be to change the timing of recognition of certain liabilities and no material valuation differences are expected. Plans initiated before December 31, 2002 continue to be accounted for under EITF 94-3. Nortel Networks adopted the requirements of SFAS 146 effective January 1, 2003. See note 5 for additional disclosure and the effects of adoption of SFAS 146.

3.		Consolidated financial statement details
		The following unaudited consolidated financial statement details are presented as at March 31, 2003 and December 31, 2002 for the consolidated balance sheet details, and for each of the three months ended March 31, 2003 and 2002 for the consolidated statement of cash flows:

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		Consolidated balance sheets
		Inventories — net:

Plant and equipment — net:

Intangible assets — net:

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Other accrued liabilities:

		Consolidated statements of cash flows
		Interest and income taxes paid (recovered):

		Goodwill
		Goodwill represents the excess of the purchase price of an acquired enterprise over the fair values of the identifiable assets acquired and liabilities assumed. Nortel Networks tests for impairment of goodwill on an annual basis on October 1, and at any other time if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount.
		Circumstances that could trigger an impairment test include but are not limited to: a significant adverse change in the business climate or legal factors; an adverse action or assessment by a regulator; unanticipated competition; loss of key personnel; the likelihood that a reporting unit or significant portion of a reporting unit will be sold or otherwise disposed; results of testing for recoverability of a significant asset group within a reporting unit; and recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit.
		The impairment test for goodwill is a two-step process. Step one consists of a comparison of the fair value of a reporting unit with its carrying amount, including the goodwill allocated to the reporting unit. Measurement of the fair value of a reporting unit is based on one or more of the following fair value measures including: estimated amounts at which the unit as a whole could be bought or sold in a current transaction between willing parties; using present value techniques of estimated future cash flows; or using valuation techniques based on multiples of earnings or revenue, or a similar performance measure. Nortel Networks also considers its market capitalization as of the date of the impairment test. If the carrying amount of the reporting unit exceeds the fair value, step two requires the fair value of the reporting unit to be allocated to the underlying assets and liabilities of that reporting unit, resulting in an implied fair value of goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss equal to the excess is recorded in net earnings (loss).
		Other
		During the three months ended March 31, 2003 Nortel Networks net earnings (loss) included approximately $80 of favorable impacts (of which $50 was included in Other income (expense) — net, $25 in selling, general and administrative expense and $5 in research and development expense) associated with reductions in accruals principally related to the wind-down of integration activities of previously acquired companies, operations originally structured as joint ventures and miscellaneous tax matters.
4.		Segmented information
		General description
		Nortel Networks operations are organized around four reportable segments: Wireless Networks; Enterprise Networks; Wireline Networks; and Optical Networks. Wireless Networks includes network access and core networking products for voice and data communications that span second and third generation wireless technologies and most major global standards for mobile networks. Enterprise Networks includes circuit and packet voice solutions, data networking and security solutions and the related professional services used by our enterprise customers. Wireline Networks includes circuit and packet voice solutions, data networking and security solutions and the related professional services used by our service provider customers. Optical Networks includes metropolitan, regional and long-haul photonic dense wavelength division multiplexing transmission systems, synchronous optical transmission systems, optical switching solutions, network management software and intelligence solutions and Optical Ethernet solutions for our service provider and enterprise customers.
		“Other” represents miscellaneous business activities and corporate functions. None of these activities meet the quantitative criteria to be disclosed as reportable segments.

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		Segments
		The following tables set forth information by segment for each of the three months ended:

		For the three months ended March 31, 2003, one customer accounted for 10.1 percent of total revenues. No single customer accounted for greater than 10 percent of revenues for the three months ended March 31, 2002.
5.		Special charges
		During the three months ended March 31, 2003, Nortel Networks continued to implement its restructuring work plan initiated in 2001. Changes in the provision for special charges are shown below:

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Regular full-time (“RFT”) employee notifications included in special charges were as follows:

		Three months ended March 31, 2003
		For the three months ended March 31, 2003, Nortel Networks recorded total special charges of $134.
		Workforce reduction charges of $61 were related to severance and benefit costs associated with approximately 800 employees notified of termination during the three month period ended March 31, 2003 which extended across all segments. These charges were net of $10 relating to provision amounts that were no longer required. During the three month period ended March 31, 2003, the workforce reduction provision balance was drawn down by cash payments of $132. The remaining provision is expected to be substantially drawn down by mid 2004.
		Contract settlement and lease costs of $78 consisted of net lease charges related to a number of leased facilities (comprised of office, warehouse and manufacturing space) and leased manufacturing equipment that were no longer required, across all segments. Lease costs represented Nortel Networks estimated future net contractual obligations under its operating leases for those leases that Nortel Networks cannot terminate. Included in the $78 of contract settlement and lease costs was $55 relating to changes in sublease revenue assumptions associated with certain properties and $23 of net lease charges related to newly identified leased facilities and equipment that were no longer required which were valued using the estimated net present value method as prescribed under SFAS 146. During the three months ended March 31, 2003, the provision balance for contract settlement and lease costs was drawn down by cash payments of $55. The remaining provision, net of approximately $345 in expected sublease revenue, is expected to be substantially drawn down by the end of 2010.
		Plant and equipment write downs of $(5) were net of $(26) related primarily to changes in the estimated net realizable value of leasehold improvements and related assets. Current period write downs to net realizable value were $21 for various leasehold improvements and excess equipment.
6.		Income taxes
		At March 31, 2003, Nortel Networks net deferred tax assets, excluding discontinued operations, were $3,338, reflecting temporary differences between financial reporting and tax treatment of certain assets and liabilities, in addition to the tax benefit of net operating loss and tax credit carryforwards. These carryforwards expire at various dates beginning in 2003.
		During the three months ended March 31, 2003, Nortel Networks recorded a full valuation allowance on the tax benefit of the pre-tax loss from continuing operations of $131. The valuation allowance was recorded in accordance with SFAS No. 109, “Accounting for Income taxes”, which requires that tax valuation allowances be established when it is more likely than not that some portion or all of a company’s deferred tax assets will not be realized. The valuation allowances can be primarily attributed to continued uncertainty in the telecommunications market.
7.		Long-term debt, credit and support facilities
		Long-term debt
		During the three months ended March 31, 2003, Nortel Networks purchased a portion of its 6.125 percent notes due February 15, 2006 with a face value of $39. The transaction resulted in a gain of $4 which was included in the consolidated statement of operations within Other income (expense) — net.