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

FORM 10-Q

		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended June 30, 2002

OR

		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition Period From                 to

Commission file number 001-07260

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

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

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

Yes		No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as at July 31, 2002

3,838,842,211 without nominal or par value

Table of Contents

TABLE OF CONTENTS

PART I
FINANCIAL INFORMATION

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

ALTEON is a trademark of Alteon Websystems, Inc.
BAY NETWORKS is a trademark of Nortel Networks.
CLARIFY is a trademark of Amdocs Software Systems Limited.
NORTEL NETWORKS, NT are trademarks of Nortel Networks.
QTERA is a trademark of Qtera Corporation.
S&P 500 is a trademark of The McGraw-Hill Companies, Inc.
XROS is a trademark of Xros, Inc.

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PART I
FINANCIAL INFORMATION

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NORTEL NETWORKS CORPORATION
Consolidated Statements of Operations (unaudited)
(millions of U.S. dollars, except per share amounts)

See notes to unaudited consolidated financial statements.

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NORTEL NETWORKS CORPORATION
Consolidated Balance Sheets (unaudited)
(millions of U.S. dollars)

See notes to unaudited consolidated financial statements.

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NORTEL NETWORKS CORPORATION
Consolidated Statements of Cash Flows (unaudited)
(millions of U.S. dollars)

See notes to unaudited consolidated financial statements.

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

1.		Nortel Networks Corporation
		Effective May 1, 2000, a newly formed Canadian corporation (“New Nortel”) and the corporation previously known as Nortel Networks Corporation (“Old Nortel”) participated in a Canadian court-approved plan of arrangement (the “Arrangement”) with BCE Inc. As a result of the Arrangement: Old Nortel and its subsidiaries became direct and indirect subsidiaries, respectively, of New Nortel; New Nortel assumed the name “Nortel Networks Corporation”; New Nortel’s common shares began to trade publicly on the New York and Toronto stock exchanges under the symbol “NT”; Old Nortel was renamed “Nortel Networks Limited” (“NNL”); and 100 percent of Old Nortel’s common shares were acquired by New Nortel and ceased to be publicly traded. The preferred shares and debt securities of Old Nortel outstanding immediately prior to the Arrangement remained outstanding and continued to be obligations of Old Nortel immediately after the Arrangement. All of the business and operations conducted by Old Nortel and its subsidiaries immediately prior to the effective date of the Arrangement continued to be conducted by Old Nortel and its subsidiaries as subsidiaries of New Nortel immediately after the Arrangement.
2.		Basis of presentation
		The accompanying unaudited Consolidated Financial Statements of Nortel Networks Corporation (“Nortel Networks”) include all majority owned subsidiaries over which Nortel Networks exercises control, and have been prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) for the preparation of interim financial information. Accordingly, they do not include all information and notes as required by United States generally accepted accounting principles (“GAAP”) in the preparation of annual consolidated financial statements. The accounting policies used in the preparation of the accompanying unaudited Consolidated Financial Statements are the same as those described in Nortel Networks audited Consolidated Financial Statements prepared in accordance with GAAP for the three years ended December 31, 2001, except as described in note 3. Although Nortel Networks is headquartered in Canada, the accompanying unaudited Consolidated Financial Statements are expressed in United States dollars as the greater part of Nortel Networks financial results and net assets are denominated in United States dollars.
		In the opinion of management, all adjustments necessary to effect a fair statement of the results for the periods presented have been made and all such adjustments are of a normal recurring nature. The financial results for the three months and six months ended June 30, 2002, are not necessarily indicative of financial results for the full year. The accompanying unaudited Consolidated Financial Statements should be read in conjunction with Nortel Networks Annual Report on Form 10-K for the year ended December 31, 2001 (the “2001 10-K”) and Current Report on Form 8-K dated May 13, 2002, which includes certain supplemental financial disclosure and disclosure related to certain events that occurred subsequent to the filing of the original historical audited consolidated financial statements.
		The preparation of Nortel Networks Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates are used when accounting for items and matters such as long-term contracts, allowance for uncollectible accounts receivable and customer financings, inventory obsolescence, product warranty, amortization, asset valuations, employee benefits, taxes, restructuring and other provisions, in-process research and development (“IPR&D”), and contingencies.
		Certain 2001 figures in the accompanying unaudited Consolidated Financial Statements have been reclassified to conform to the 2002 presentation.

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3.

Accounting changes

	(a)		Accounting for goodwill and other intangible assets
			In July 2001, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), effective for fiscal years beginning after December 15, 2001. SFAS 142 changed the accounting for goodwill from an amortization method to an impairment-only approach. Thus, amortization of goodwill, including goodwill recorded in past business combinations, and amortization of intangibles with an indefinite life, ceased upon adoption of this Statement. For any acquisitions completed after June 30, 2001, goodwill and intangible assets with an indefinite life are not amortized.
			Nortel Networks adopted the provisions of SFAS 142 effective January 1, 2002. Nortel Networks completed the first of the required SFAS 142 transitional impairment tests during the second quarter of 2002 and concluded that there was no impairment of recorded goodwill, as the fair value of its reporting units exceeded their carrying amount as of January 1, 2002. Therefore the second step of the transitional impairment test under SFAS 142 was not required to be performed. There can be no assurance that future goodwill impairment tests will not result in a charge to net earnings (loss).
			Acquired technology will continue to be amortized and carried at cost less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, generally two to three years.
			The following tables present the impact on net loss and on basic and diluted loss per common share from both continuing and discontinued operations for the three months and six months ended June 30, 2002 and 2001, and for the years ended December 31, 2001, 2000, and 1999, of the SFAS 142 requirement to cease the amortization of goodwill as if the standard had been in effect beginning January 1, 1999:

			Three months ended								Six months ended
			June 30,								June 30,
			2002				2001				2002				2001
Reported results:
	Net loss from continuing operations		$	(697	)		$	(16,644	)		$	(1,538	)		$	(19,013	)
	Net loss from discontinued operations — net of tax			—				(2,784	)			—				(3,010	)
	Cumulative effect of accounting change — net of tax of $9			—				—				—				15
Net loss — reported			$	(697	)		$	(19,428	)		$	(1,538	)		$	(22,008	)
Adjustments:
	Amortization of goodwill from continuing operations — net of tax(a)		$	—			$	1,644			$	—			$	3,240
	Amortization of goodwill from discontinued operations			—				94				—				190
Total net adjustments			$	—			$	1,738			$	—			$	3,430
Adjusted results:
	Net loss from continuing operations		$	(697	)		$	(15,000	)		$	(1,538	)		$	(15,773	)
	Net loss from discontinued operations — net of tax			—				(2,690	)			—				(2,820	)
	Cumulative effect of accounting change — net of tax of $9			—				—				—				15
Net loss — adjusted			$	(697	)		$	(17,690	)		$	(1,538	)		$	(18,578	)
Reported basic and diluted loss per common share:
	- from continuing operations		$	(0.20	)		$	(5.21	)		$	(0.46	)		$	(6.00	)
	- from discontinued operations			—				(0.87	)			—				(0.94	)
Basic and diluted loss per common share — reported			$	(0.20	)		$	(6.08	)		$	(0.46	)		$	(6.94	)
Adjusted basic and diluted loss per common share:
	- from continuing operations		$	(0.20	)		$	(4.70	)		$	(0.46	)		$	(4.97	)
	- from discontinued operations			—				(0.84	)			—				(0.89	)
Basic and diluted loss per common share — adjusted			$	(0.20	)		$	(5.54	)		$	(0.46	)		$	(5.86	)

(a)

Includes goodwill amortization of equity accounted investments, net of tax of $2 and $5 for the three months and six months ended June 30, 2001, respectively.

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The following historical financial information is provided in accordance with the SEC’s June 2002 announcement on SFAS 142 transition disclosures:

			Year ended December 31,
			2001				2000				1999
Reported results:
	Net loss from continuing operations		$	(24,307	)		$	(2,995	)		$	(257	)
	Net loss from discontinued operations — net of tax			(3,010	)			(475	)			(94	)
	Cumulative effect of accounting change — net of tax of $9			15				—				—
Net loss — reported			$	(27,302	)		$	(3,470	)		$	(351	)
Adjustments:
	Amortization of goodwill from continuing operations — net of tax (a)		$	4,157			$	3,735			$	1,178
	Amortization of goodwill from discontinued operations			190				224				29
Total net adjustments			$	4,347			$	3,959			$	1,207
Adjusted results:
	Net earnings (loss) from continuing operations		$	(20,150	)		$	740			$	921
	Net loss from discontinued operations — net of tax			(2,820	)			(251	)			(65	)
	Cumulative effect of accounting change — net of tax of $9			15				—				—
Net earnings (loss) — adjusted			$	(22,955	)		$	489			$	856
Reported basic and diluted loss per common share:
	- from continuing operations		$	(7.62	)		$	(1.01	)		$	(0.10	)
	- from discontinued operations			(0.94	)			(0.16	)			(0.03	)
Basic and diluted loss per common share — reported			$	(8.56	)		$	(1.17	)		$	(0.13	)
Adjusted basic earnings (loss) per common share:
	- from continuing operations		$	(6.31	)		$	0.25			$	0.34
	- from discontinued operations			(0.89	)			(0.08	)			(0.02	)
Basic earnings (loss) per common share — adjusted			$	(7.20	)		$	0.17			$	0.32
Adjusted diluted earnings (loss) per common share:
	- from continuing operations		$	(6.31	)		$	0.24			$	0.33
	- from discontinued operations			(0.89	)			(0.08	)			(0.02	)
Diluted earnings (loss) per common share — adjusted			$	(7.20	)		$	0.16			$	0.31

(a)

Includes goodwill amortization of equity accounted investments, net of tax of $5, $7 and nil for the years ended December 31, 2001, 2000 and 1999, respectively.

	(b)		Impairment or disposal of long-lived assets
			In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144 applies to certain long-lived assets, including discontinued operations, and develops one accounting model for long-lived assets to be disposed of by sale. This Statement supersedes SFAS No. 121, “Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of”, and the accounting and reporting provisions of Accounting Principles Board Opinion (“APB”) No. 30, “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” (“APB 30”), for the disposal of a segment of a business.
			SFAS 144 requires that long-lived assets to be disposed of by sale be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. Discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet been incurred. SFAS 144 also broadens the reporting of discontinued operations to include the disposal of a component of an entity provided that the operations and cash flows of the component will be eliminated from the ongoing operations of the entity and the entity will not have any significant continuing involvement in the operations of the component.

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Nortel Networks adopted the provisions of SFAS 144 effective January 1, 2002. The adoption of SFAS 144 did not have a material effect on the business, results of operations, and financial condition of Nortel Networks.

4.		Discontinued operations
		On June 14, 2001, Nortel Networks Board of Directors approved a plan to discontinue Nortel Networks access solutions operations consisting of all of Nortel Networks narrowband and broadband solutions, including copper, cable, and fixed wireless solutions, as well as Nortel Networks then current consolidated membership interest in Arris Interactive LLC (“Arris”) and equity investment in Elastic Networks Inc. (“Elastic Networks”). Also affected by the decision were Nortel Networks prior acquisitions of Sonoma Systems (“Sonoma”), Promatory Communications, Inc. (“Promatory”), Aptis Communications, Inc. (“Aptis”), and Broadband Networks Inc.
		Pursuant to APB 30, the revenues, costs and expenses, assets and liabilities, and cash flows of Nortel Networks access solutions operations have been segregated in the accompanying unaudited Consolidated Statements of Operations, unaudited Consolidated Balance Sheets, and unaudited Consolidated Statements of Cash Flows, and are reported as “discontinued operations”.
		The results of discontinued operations for the three months and six months ended June 30, presented in the accompanying unaudited Consolidated Statements of Operations, were as follows:

	(a)		Loss from discontinued operations was net of applicable income tax recovery of nil and $54 for the three months ended June 30, 2002 and 2001, respectively, and an income tax recovery of nil and $119 for the six months ended June 30, 2002 and 2001, respectively.
	(b)		Loss on disposal of operations was net of applicable income tax recovery of $604 for the three months and six months ended June 30, 2001.

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

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		On March 5, 2002, Nortel Networks divested its approximately 46 percent ownership interest in Elastic Networks to Paradyne Networks, Inc. (“Paradyne”) in exchange for an approximately 8 percent ownership interest in Paradyne. Nortel Networks recorded a gain of approximately $7 on the transaction, which is included in the estimated remaining provisions required for discontinued operations.
		In connection with the decision to discontinue the access solutions operations on June 14, 2001, Nortel Networks recorded a pre-tax loss on disposal of the access solutions operations of $3,172 in the second quarter of 2001, which reflected the estimated costs directly associated with Nortel Networks plan of disposition. The loss reflected: the write-off of goodwill associated with the acquisitions of Sonoma and Promatory in the amount of $755; provisions for both short-term and long-term receivables of $601; a provision for inventories of $379; other asset write-offs totaling $156; future contractual obligations and estimated liabilities of $1,104; and estimated operating losses during the planned period of disposition of $177.
		During the six months ended June 30, 2002, Nortel Networks has continued to actively wind down the access solutions operations and there has been no change to the initial disposal strategy or intent to exit the business since June 14, 2001. However, the continued deterioration in industry and market conditions has delayed certain disposal activities beyond the original planned timeframe of one year. In particular, actions involving negotiations with customers, who have also been affected by industry conditions, are taking longer than expected. Therefore, although disposal activities continue beyond the one-year period generally contemplated under APB 30, Nortel Networks continues to present the access solutions operations as discontinued operations in the Consolidated Financial Statements. Nortel Networks has disposed of or transitioned the ownership of certain operations, and operations not disposed of or so transitioned are expected to be closed. Nortel Networks now expects to complete this plan by the end of 2002 or early 2003, subject to the closing of specific transactions, the timing of which may continue to be impacted by customer issues, any applicable regulatory requirements, and business issues.
		At June 30, 2002, the remaining accruals of $164 related to the above-noted future contractual obligations and estimated liabilities, and estimated operating losses during the planned period of disposition were included in current liabilities of discontinued operations. The remaining accruals are expected to be substantially drawn down by cash payments over the period of disposition, the impact of which is expected to be offset by proceeds from the sale of certain remaining assets to be disposed of.
		The assets and liabilities of discontinued operations presented in the accompanying unaudited Consolidated Balance Sheets were as follows:

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The net cash from (used in) discontinued operations for the six months ended June 30, 2002 and 2001, presented in the accompanying unaudited Consolidated Statements of Cash Flows, was as follows:

5.		Consolidated financial statement details
		Consolidated balance sheets
		The following tables provide details as at:
		Inventories — net: