Though Nortel's (NT) true financial health remains shrouded, one thing seems clear: Last year's executive bonuses were too good to be true.

On Wednesday, Nortel served up some more details on its April accounting shocker. Saying internal audits would continue for at least another quarter, Nortel reiterated that cleaning up its books would slash 2003 earnings by some $300 million and eliminate last year's surprising first-half profit.

Most important, Nortel said for the first time that 2003's phantom profits came from its core business of selling telecom gear -- not from selling assets or other one-time events. That disclosure is crucial, because it draws a link between the company's oft-questioned executive pay incentive plan and the recent accounting missteps. Analysts and investors say the link could shed some light on this spring's firing of top execs including former CEO Frank Dunn.

The company paid out more than $50 million in bonuses to select officers last year after posting a surprising first-half profit. Dunn alone received $2.15 million, according to a report last month in

The Globe and Mail

of Toronto.

Nortel's filings specify that the bonuses be paid only if the company reaches a profit on "pro forma earnings from continuing operations." But even at the time the company posted the stunning swing, the numbers

failed to add up.

Indeed, people were questioning those profits from the day they were reported. The link between the bonuses and Nortel's slippery profit number was

flagged a year ago in

. At the time, several observers suggested that the company had stuffed the continuing operations profit line with noncore gains in order to make executives and employees eligible for millions of dollars in "return to profit" bonuses.

In April, Nortel said its restatement was focused "largely" on profits from continuing operations. But on Wednesday, Nortel said all its profits from continuing operations in the first half of 2003 would be moved back to prior years. As a result, it seems clear that the company failed to meet its bonus targets, going by legitimately booked profits.

When asked by analysts on a conference call Wednesday if that meant the bonuses would have to be taken back, new CEO Bill Owens said Nortel would "look at those numbers and the compensation that was awarded as a result of those numbers, and we will do the right thing."

The company was equally vague on other issues Wednesday. Nortel made its comments in bowing to Canadian securities regulations that mandated an update on the company's financial condition and restatement progress. While Nortel did manage to provide sales guidance by saying it would grow faster than the industry's low-single-digit percentage pace, there was no exact time frame given and no more specific target mentioned.

Some analysts, though frustrated by Nortel's lack of detailed information, found some reassurance that the accounting shenanigans were limited in scope. These people continue to expect that a solid company will emerge once the investigations are complete.

But even as the company was providing a smoking gun of sorts, executives spent a good portion of the call justifying the incentive plan that seems to lie at the heart of the accounting trouble.

CEO Owens said that back in 2002, after two-thirds of company's the staff had been cut, morale was low. It was during that time that Nortel created plans "to incentivize a return to good results."

The plan worked, sort of.

"It's pretty clear that the groundwork was laid in 2002 to have a good 2003," says CIBC's Steve Kamman, who rates Nortel stock buy. Nortel is a banking client of CIBC. "This has all the hallmarks of something that wasn't done at the last moment."

In addition to investigations by the

Securities and Exchange Commission

, Canadian regulators, the Royal Canadian Mounted Police and U.S. Justice Department, Nortel is also the subject of dozens of shareholder lawsuits focused on the company's accounting practices. Critics have also charged that what was a short-term morale booster for the rank-and-file became a moral hazard for executives who pulled the most important financial strings.

In his prepared remarks and in his answers to analysts, Owens, a board member for several years, seemed keenly aware of the board's role in the incentive plans. At one point on the conference call he defended the board's action, saying "the awards were paid based on the best information available to the board at the time, information that had been provided by management."

Nortel shares fell 22 cents to $3.86 Wednesday as investors were left empty-handed after waiting for the company to come clean.

Said one observer, "It's time for them to crawl out of the bunker in Brampton," referring to Nortel's Ontario home base.