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Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read this Management’s Discussion and Analysis of Financial Condition and Results of Operation, or MD&A, in combination with
the accompanying audited consolidated financial statements prepared in accordance with accounting principles generally accepted in the
United States, or U.S. GAAP. As discussed herein, this MD&A gives effect to the Second Restatement as described below in “Developments in
2003 and 2004 — Nortel Networks Audit Committee Independent Review; restatements; related matters” and in “Restatement” in note 3 of the
accompanying audited consolidated financial statements. A number of our and Nortel Networks Limited’s past filings with the United States
Securities and Exchange Commission, or SEC, remain subject to ongoing review by the SEC’s Division of Corporation Finance. In addition,
the Second Restatement involved the restatement of our consolidated financial statements for 2001 and 2002 and the first, second and third
quarters of 2003. Amendments to our prior filings with the SEC would be required in order for us to be in full compliance with our reporting
obligations under the Exchange Act. However, we do not believe that it will be feasible to amend our Annual Report on Form 10-K/A for the
y
ear ended December 31, 2002, or 2002 Form 10-K/A, and our 2003 Form 10-Qs due to, among other factors, identified material weaknesses
in our internal control over financial reporting, the significant turnover in our finance personnel, changes in accounting systems,
documentation weaknesses, a likely inability to obtain third party corroboration in certain cases due to the substantial industry adjustment in
recent years and the passage of time generally. In addition, disclosure in the 2002 Form 10-K/A and 2003 Form 10-Qs would in large part
repeat the disclosure expected to be contained in this report and the 2004 Form 10-Qs. Accordingly, we do not plan to amend our 2002 Form
10-K/A and 2003 Form 10-Qs. We believe that we have included in this report all information needed for current investor understanding.
Ongoing SEC review may require us to amend this Annual Report on Form 10-K or our other public filings further. See “Risk factors/forward
looking statements”.
This section contains forward looking statements and should be read in conjunction with the risk factors described below under “Risk
f
actors/forward looking statements”. All dollar amounts in this MD&A are in millions of United States, or U.S., dollars unless otherwise
stated.
Where we say “we”, “us”, “our” or “Nortel Networks”, we mean Nortel Networks Corporation or Nortel Networks Corporation and its
subsidiaries, as applicable, and where we refer to the “industry”, we mean the telecommunications industry.
Business overview
Our business
Nortel Networks is a recognized leader in delivering communications capabilities that enhance the human experience, ignite and power global
commerce, and secure and protect the world’s most critical information. Serving both service provider and enterprise customers, we deliver
innovative technology solutions encompassing end-to-end broadband, Voice over IP, multimedia services and applications, and wireless
broadband solutions designed to help people solve the world’s greatest challenges. Our business consists of the design, development,
manufacture, assembly, marketing, sale, licensing, installation, servicing and support of these networking solutions. A substantial portion of
our business has a technology focus and is dedicated to research and development, or R&D. This focus forms a core strength and is a factor
that we believe differentiates us from many of our competitors. We envision a networked society where people are able to connect and interact
with information and with each other instantly, simply and reliably, accessing data, voice and multimedia communications services and sharing
experiences anywhere, anytime.
The common shares of Nortel Networks Corporation are publicly traded on the New York Stock Exchange, or NYSE, and Toronto Stock
Exchange, or TSX, under the symbol “NT”. Nortel Networks Limited, or NNL is our principal direct operating subsidiary and its results are
consolidated into our results. Nortel Networks holds all of NNL’s outstanding common shares but none of its outstanding preferred shares.
NNL’s preferred shares are reported in minority interests in subsidiary companies in the consolidated balance sheets and dividends and the
related taxes on preferred shares are reported in minority interests — net of tax in the consolidated statements of operations.
Our segments
During 2003 and up to September 30, 2004, our operations were organized into four reportable segments as follows:
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