No one's happier with the market's rejection of pro forma accounting than Nortel ( NT) executives. Of course, with a $50 million annual bonus pool you'd be smiling too.

Last Thursday, the Brampton, Ontario-based, phone gearmaker posted a first-quarter profit. Investors were surprised . They were surprised again, if less agreeably, when a look at the numbers showed that the profit came from businesses Nortel is getting out of. Then they were surprised a third time when the company said that passing the profit milestone had triggered a rash of bonus payments contributing to Nortel's latest quarterly operating loss.

Now Wall Street wonders if the future might hold more unpleasant surprises for investors. Some observers question how Nortel can justify the incentive payments, pointing to a regulatory filing that lays out a pro forma profitability standard that the company doesn't appear to have met in the latest quarter. (Conveniently, Nortel said in its earnings report that it will no longer report pro forma numbers.) The questions loom large because senior executives stand to rake in much bigger bonuses if the company stays profitable for the rest of the year.

Nortel declined several requests for comment, and analysts who have been briefed by the company say it calls the executive bonus payout immaterial. But not everyone is convinced.

Lehman Brothers analyst Steve Levy, who was one of the first to put an asterisk on Nortel's profit claims, said after a briefing with Nortel bigwigs, "We still have questions about how they measure profits which trigger the bonus." (Levy has a neutral rating on the stock and his firm has no banking ties to the company.)

Diving In

There's no question that Nortel made money last quarter. The question is whether those profits should trigger the bonus payments.

A look at regulatory filings suggests not. The return-to-profit bonus plan was first mentioned in a quarterly Securities and Exchange Commission filing last fall. According to that document, Nortel profits are defined as "pro forma earnings from continuing operations."

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