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

FORM 10-K

	Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2001
	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 001-07260

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

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

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

The common shares are also listed on The Toronto Stock Exchange in Canada

Securities registered pursuant to Section 12(g) of the Act: None

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

Yes      No

Indicate 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.

At February 28, 2002, 3,204,652,807 common shares of Nortel Networks Corporation were issued and outstanding. Non-affiliates of the registrant held 3,189,916,346 common shares having an aggregate market value of $16,172,875,874.22 based upon the last sale price on the New York Stock Exchange on February 28, 2002, of $5.07 per share; for purposes of this calculation, shares held by directors and executive officers have been excluded.

Listed hereunder is the document to be incorporated by reference and the Parts of the Form 10-K into which the document will be incorporated:

TABLE OF CONTENTS

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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.

ALTEON is a trademark of Alteon WebSystems.

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.

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PART I

ITEM 1. BUSINESS

Overview

     Nortel Networks Corporation 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 17 to the Consolidated Financial Statements, and to “Results of operations – 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 incorporated in Canada on March 7, 2000 under the name New Nortel Inc. On May 1, 2000, the Company participated in a Canadian court-approved plan of arrangement with Nortel Networks Limited, previously known as Nortel Networks Corporation, and BCE Inc., the largest shareholder of Nortel Networks Limited 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 Corporation;
	•	the holders of the outstanding publicly traded common shares of Nortel Networks Limited became common shareholders of the Company;
	•	common shares of the Company were distributed to the common shareholders of BCE; and
	•	Nortel Networks Limited became the principal operating subsidiary of the Company.

The Company also assumed Nortel Networks Limited’s financial reporting history as of May 1, 2000, the date of the plan of arrangement, for financial reporting purposes. As a result, management deems Nortel Networks Limited’s consolidated business activities prior to May 1, 2000 to represent the Company’s consolidated business activities as if the Company and Nortel Networks Limited had historically been the same entity. References to “the Company” mean Nortel Networks Corporation without its subsidiaries. References to “we,” “our,” “us,” or “Nortel Networks” mean the Company 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

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signals to be directed or routed simultaneously and more efficiently than in circuit networking, which requires a separate network circuit to be maintained for each communications signal for the duration of the call. Our packet switching and routing systems include data switching systems, aggregation products, virtual private network gateways, and routers.

	•	Our Alteon Web products provide data switching designed to allow service providers and enterprises to provide Internet data security, to manage and prioritize the Internet content that is provided to end users, and to balance the amount of communications traffic on multiple Internet servers.
	•	Our 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

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		migration from an enterprise’s separate voice and data communications infrastructures to a combined next generation Internet-based system. Available applications include voice messaging, cordless phones, contact center software, and data communications routing.
	•	Our 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.

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     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.
	•	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

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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.

     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

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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;
	•	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

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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, 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.

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	•	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.

     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.

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     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 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 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

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	•	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.

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.

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	•	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 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.

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     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 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.

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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 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 17 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 17 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.

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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.

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

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significantly with only one acquisition completed in February 2001. 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.

     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 17,400 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 6,500 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:

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

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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 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 52,600 regular full-time employees,** including approximately:

	•	19,400 regular full-time employees in the United States;
	•	13,800 regular full-time employees in Canada;
	•	13,800 regular full-time employees in Europe; and
	•	5,600 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 36,100 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 5 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.

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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 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 19 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.

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ITEM 2.   PROPERTIES

     At December 31, 2001, we operated 292 sites around the world occupying approximately 22.5 million square feet. The following table sets forth additional information regarding these sites:

     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.

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ITEM 4A.   EXECUTIVE OFFICERS OF THE REGISTRANT

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

     All the above-named executive officers of Nortel Networks Corporation 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;

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	•	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.

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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 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 following table sets forth the high and low sale prices of the common shares of Nortel Networks Corporation since May 1, 2000, and the common shares of Nortel Networks Limited before May 1, 2000, as reported on the New York Stock Exchange composite tape and on The Toronto Stock Exchange. All figures have been adjusted to reflect the division of the common shares of Nortel Networks Corporation on a two-for-one basis effective at the close of business on May 5, 2000.

     On February 28, 2002, the last sale price on the New York Stock Exchange was $5.07 and on The Toronto Stock Exchange was Canadian $8.05.

     On February 28, 2002, over 209,400 registered shareholders held 100 percent of the outstanding common shares of Nortel Networks Corporation. This included the Canadian Depository for Securities and the Depository Trust Company, two clearing corporations, which held a total of approximately 93.9 percent of the common shares of Nortel Networks Corporation on behalf of other shareholders.

Dividends

     On June 15, 2001, Nortel Networks Corporation announced that its Board of Directors decided to discontinue the declaration and payment of common share dividends. As a result, dividends have not been declared and paid on Nortel Networks Corporation common shares after June 29, 2001, and future dividends will not be declared unless and until the Board of Directors decides otherwise. On July 26, 2001, the Board of Directors of Nortel Networks Corporation suspended the operation of the Nortel Networks Corporation Dividend Reinvestment and Stock Purchase Plan.

     In the first and second quarter of 2001, Nortel Networks Corporation declared and paid a cash dividend of $0.01875 per common share. This represents a total dividend of $0.0375 per common share for 2001 and an aggregate payment of $123 million. In 2000, after adjusting for the May 5, 2000 stock split:

•	Nortel Networks Limited declared and paid a cash dividend in the first quarter of 2000 of $0.01875 per common share; and
•	Nortel Networks Corporation declared and paid a cash dividend in each of the second, third and fourth quarters of 2000 of $0.01875 per common share.

This represents a total dividend of $0.075 per common share for 2000 and an aggregate payment of $223 million.

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     The amended and restated credit agreements entered into on December 20, 2001 by Nortel Networks Limited and Nortel Networks Inc., the principal operating subsidiaries of Nortel Networks Corporation, 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.

Canadian Tax Matters

     Dividends

     Under the United States-Canada Income Tax Convention (1980), or the “Convention,” Canadian withholding tax of 15 percent generally applies to the gross amount of dividends (including stock dividends) paid or credited to beneficial owners of Nortel Networks Corporation shares:

•	who are resident in the United States for the purposes of the Convention; and
•	who do not hold the shares in connection with a business carried on through a permanent establishment or a fixed base in Canada.

     The Convention provides an exemption from withholding tax on dividends paid or credited to certain tax-exempt organizations that are resident in the United States for purposes of the Convention. Persons who are subject to the United States federal income tax on dividends may be entitled, subject to certain limitations, to either a credit or deduction with respect to Canadian income taxes withheld with respect to dividends paid or credited on Nortel Networks Corporation shares.

     Sales or Other Dispositions of Shares

     Gains on sales or other dispositions of Nortel Networks Corporation shares by a non-resident of Canada are generally not subject to Canadian income tax, unless the holder realizes the gains in connection with a business carried on in Canada. A gain realized upon the disposition of Nortel Networks Corporation shares by a resident of the United States that is otherwise subject to Canadian tax may be exempt from Canadian tax under the Convention. Where Nortel Networks Corporation shares are disposed of by way of an acquisition of such shares by Nortel Networks Corporation, other than a purchase in the open market in the manner in which shares would normally be purchased by any member of the public in the open market, the amount paid by Nortel Networks Corporation in excess of the paid-up capital of such shares will be treated as a dividend, and will be subject to non-resident withholding tax as described above under the heading “Dividends.”

Sales of Unregistered Securities

     On November 20, 2001, Nortel Networks Corporation acquired Candlestick Networks, Inc. and issued approximately 1.7 million common shares of Nortel Networks Corporation to the Candlestick stockholders in exchange for all of the issued and outstanding shares of Candlestick common stock and preferred stock. Nortel Networks Corporation also assumed all of the outstanding Candlestick stock options and reserved an additional approximate 1.3 million common shares for issuance upon the exercise of these options. Of these stock options, options to purchase a maximum of approximately 0.3 million common shares of Nortel Networks Corporation are, or may become, exercisable. Nortel Networks Corporation placed 15 percent of the 1.7 million common shares issued on closing into escrow in connection with Candlestick’s indemnification obligations. The escrow agent and Nortel Networks Corporation may cancel any or all of these common shares in future periods in response to indemnification claims by Nortel Networks Corporation. All of the common shares that Nortel Networks Corporation has issued, or may in the future issue, to the former Candlestick security holders are deemed to be exempt from registration under the Securities Act of 1933, as amended. This exemption relies on Section 3(a)(10) of the Securities Act, and is based on Nortel Networks Corporation’s receipt of a permit under Section 25121 of the California Corporations Code.

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     During the fourth quarter of 2001, Nortel Networks Corporation issued an aggregate of 110,816 common shares upon the exercise of options granted under the Nortel Networks/BCE 1985 Stock Option Plan and the Nortel Networks/BCE 1999 Stock Option Plan. The common shares issued on the exercise of these options were issued outside of the United States to BCE in connection with options that expired unexercised or were forfeited. The common shares issued are deemed to be exempt from registration under the United States Securities Act of 1933, as amended, pursuant to Regulation S. All funds received by Nortel Networks Corporation in connection with the exercise of stock options granted under the two Nortel Networks/BCE stock option plans are transferred in full to BCE pursuant to the terms of the May 1, 2000 plan of arrangement, except for nominal amounts paid to Nortel Networks Corporation to round up fractional entitlements into whole shares. Nortel Networks Corporation keeps these nominal amounts and uses them for general corporate purposes.

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ITEM 6.  SELECTED FINANCIAL DATA (UNAUDITED)

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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 Corporation 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, pump modules, integrated circuits, and other modules and devices for long-haul optical networking, and related engineering, installation, and support services.

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

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Developments in 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 52,600 employees (excluding employees on notice of termination) from the approximately 94,500 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 $3,359 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 $2,300 (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 August 15, 2001, we also completed a private offering of $1,800 of 4.25 percent convertible senior notes, due September 1, 2008, and 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, we 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 Sonoma Systems, 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 $12,422 (pre-tax) write down of intangible assets in the three months ended June 30, 2001 (See “Special charges” for additional information).

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Legal matters

     Subsequent to the February 15, 2001 announcement in which Nortel Networks 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:

     Geographic revenues

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

(a)

Revenues are attributable to geographic areas based on the location of the customer.

     For the years ended December 31, 2001, 2000, and 1999, revenues in the United States by point of origin (the location of the selling organization) were $9,818, $18,520, and $13,242, respectively.

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     Consolidated

     In 2001, the telecommunications industry underwent a significant adjustment, particularly in the United States. Following a period of rapid infrastructure build-out and strong economic growth in 1999 and 2000, we saw a continued tightening in the capital markets and slowdown in the telecommunications industry throughout 2001. This resulted in lower capital spending by industry participants and substantially less demand for our products and services as service providers focused on maximizing their return on invested capital. 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

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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 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

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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 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: