Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations

        The Company's net earnings were $91 million, or 46 cents per share (45 cents per share on a diluted basis), for the third quarter of 2002, compared with $33 million, or 14 cents per share (14 cents per share on a diluted basis), in the corresponding 2001 period. Third quarter 2002 results included the benefit of favourable non-cash currency translation adjustments of $31 million, or 17 cents per share, due to a weakening of the Canadian dollar relative to the U.S. dollar during the quarter, and after-tax interest income of $8 million, or four cents per share, associated with a tax refund. Third quarter 2001 results included favourable non-cash currency translation adjustments of $28 million, or 15 cents per share.

        The Company's net loss was $1,480 million, or $8.22 per share ($8.22 per share on a diluted basis) for the first nine months of 2002, compared with net earnings of $310 million, or $1.59 per share ($1.55 per share on a diluted basis), in the corresponding 2001 period. The results for the first nine months of 2002 included the previously announced non-cash after-tax asset impairment charges of $1,626 million, or $8.90 per share, to reduce the carrying value of the Voisey's Bay project and certain other assets, and unfavourable non-cash currency translation adjustments of $4 million, or two cents per share. For the first nine months of 2001, net earnings included an unusual non-cash deferred tax benefit of $173 million, or 95 cents per share, recorded in the second quarter of 2001, and the benefit of favourable non-cash currency translation adjustments of $36 million, or 20 cents per share.

        The following table summarizes the Company's results for the periods indicated:

        Operating earnings for the third quarter of 2002, compared with the corresponding 2001 period, reflected significantly higher average realized prices for nickel and higher deliveries of platinum-group metals and Inco-source nickel, partially offset by lower realized prices for platinum-group metals.

        Operating earnings for the first nine months of 2002, compared with the corresponding 2001 period, reflected higher average realized prices for nickel, increased deliveries for Inco-source nickel and platinum-group metals and lower nickel unit cash cost of sales before by-product credits, partially offset by lower realized prices for platinum-group metals. Operating results for the first nine months of 2002 also included the previously announced pre-tax asset impairment charges of $2,415 million to reduce the carrying value of the Voisey's Bay project and certain other assets and unfavourable currency translation adjustments of $4 million. Operating results for the first nine months of 2001 included the benefit of favourable currency translation adjustments of $36 million.

Prices and Deliveries

        The following tables show the Company's average realized prices for nickel and copper and the London Metal Exchange ("LME") average cash prices for nickel and copper for the periods indicated:

        The Company's deliveries of primary metals for the periods indicated are shown below:

        Nickel deliveries increased 12 per cent and 7 per cent in the third quarter and first nine months of 2002, respectively, compared with the corresponding periods for 2001, reflecting higher demand for the Company's products primarily by the stainless steel industry. Copper deliveries decreased 13 per cent and 6 per cent, respectively, in the third quarter and first nine months of 2002, compared with the corresponding 2001 periods, due to lower copper production attributable to efforts to improve productivity at certain production facilities at the Company's Ontario operations taking longer than anticipated to implement.

Production Data and Operating Expenses

        The following table sets forth production data for nickel, nickel unit cash cost of sales both before and after by-product credits for the periods indicated, and finished nickel inventories as of the end of the periods indicated:

        Nickel production increased in the third quarter of 2002 relative to the corresponding period of 2001 primarily due to the previously announced decision to run the Company's Ontario operations in 2002 without any planned vacation shutdown. Nickel production for the third quarter of 2002 was affected by technical problems experienced at the Company's Manitoba operations in blending external feeds from Australia with Manitoba-derived feeds and maintenance and equipment problems at certain mines at the Company's Ontario operations. These maintenance and equipment problems experienced have been resolved and the Company's technical personnel have continued to work on possible solutions to the blending issue at the Manitoba operations, with a resolution currently anticipated to be implemented during the first half of 2003. The increase in nickel unit cash cost of sales before by-product credits in the third quarter of 2002, compared with the corresponding quarter of 2001, was primarily due to lower mine production at the Company's Manitoba operations, increased maintenance and overburden stripping costs at the Company's 59% owned Indonesian subsidiary, PT International Nickel Indonesia Tbk ("PT Inco"), and higher electrical energy costs at its Ontario operations. The increase in nickel unit cash cost of sales after by-product credits in the third quarter of 2002, compared with the corresponding 2001 period, was primarily due to the above-mentioned factors, partially offset by increased contributions from by-product credits, principally resulting from higher deliveries of platinum-group metals. It is currently expected that at least some of the principal factors which have caused these increases in nickel unit cash cost of sales before and after by-product credits in the third quarter of 2002 will continue to adversely affect such nickel unit costs into the fourth quarter of 2002 and into 2003. The Company also expects pension expense to continue to increase in 2003.

        Selling, general and administrative expenses increased by $13 million for the first nine months of 2002, compared with the 2001 corresponding period, primarily due to higher expenses related to new projects and higher legal fees relating primarily to certain outstanding tax matters and litigation. Other income of $27 million in the first nine months of 2002 included interest income of $14 million associated with a tax refund.

Interest Expense

        Interest expense for the third quarter and first nine months of 2002 was $12 million and $35 million, respectively, compared with $13 million and $46 million for the corresponding periods of 2001. The decreases were due to lower interest rates on floating rate debt in 2002 relative to 2001 and increased capitalized interest on debt incurred to finance the development of the Voisey's Bay and Goro projects. Given the recent underwritten public offerings of debt securities referred to under "Financial Condition" below, the Company expects that its interest expense will increase somewhat in future quarters, depending upon the amount of interest to be capitalized.

Income and Mining Taxes

        The Company's effective tax rate was 34.2 per cent and 31.1 per cent for the third quarter and first nine months of 2002, respectively. For the third quarter of 2002, the effective tax rate of 34.2 per cent was significantly higher than the effective tax rate of 11.9 per cent for the corresponding period of 2001 due to the impact of non-taxable currency translation gains which represented a higher proportion of net earnings in the third quarter of 2001. For the first nine months of 2001, income and mining taxes included an unusual deferred tax benefit of $173 million. Excluding this benefit, the effective tax rate of 31.1 per cent for the first nine months of 2002 was lower than the effective tax rate of 39.2 per cent for the corresponding period of 2001. The decrease was primarily due to the effect of the asset impairment charges, a portion of which was not deductible for tax purposes, certain non-deductible expenses and the effect of foreign tax rate differences.

Minority Interest

        Minority interest represents the respective minority shareholders' interests in the earnings of PT Inco, Inco TNC Limited and Jinco Nonferrous Metals Co., Ltd. The increase in minority interest in the third quarter of 2002, compared with the corresponding 2001 period, was primarily due to the higher earnings of PT Inco.

Cash Flows

        Cash flow generated from the Company's operating activities before changes in working capital was $155 million in the third quarter of 2002, up from $114 million in the corresponding 2001 period. Cash provided by operating activities after changes in working capital in the third quarter of 2002 was $267 million, up from $65 million in the corresponding quarter of 2001. Cash provided by the Company's operating activities in the first nine months of 2002 increased to $466 million from $205 million in the corresponding period of 2001. The increases were due to higher earnings before inclusion of the non-cash impairment charges, currency translation adjustments and an unusual deferred tax benefit and a decrease in working capital, principally reflecting an increase in income and mining taxes payable.

        Capital expenditures were $181 million and $338 million in the third quarter and first nine months of 2002, respectively, compared with $71 million and $163 million, respectively, in the corresponding 2001 periods. The increases during 2002 were primarily due to a planned increase in spending on the Company's Voisey's Bay and Goro projects.

        The Company completed on September 23, 2002 an underwritten public offering in the United States of $400 million aggregate principal amount of its 7.20 per cent debentures due 2032 (the "Debentures"). The net proceeds from this offering of Debentures of approximately $395 million, after underwriting commissions and other expenses, are being used to fund capital requirements to sustain the Company's existing operations and for general corporate purposes, which may include the purchase or redemption of the Company's outstanding securities (other than common shares) and funding capital expenditures for its development projects.

Financial Condition

        At September 30, 2002, the Company's cash and marketable securities were $1,188 million, up significantly from $306 million at December 31, 2001, reflecting the net proceeds received from the sales of the Debentures in September 2002 and $400 million aggregate principal amount of the Company's 7.75 per cent notes due 2012 in May 2002 and positive cash flow from operating activities. Total debt was $1,607 million at September 30, 2002, up from $840 million at December 31, 2001. Net debt as a per centage of net debt plus shareholders' equity was 10 per cent at September 30, 2002, up slightly from 9 per cent at December 31, 2001, reflecting the reduction in shareholders' equity as a result of the non-cash impairment charge recorded in the second quarter of 2002. Under Canadian GAAP, the LYON Notes issued by the Company in the first quarter of 2001 are classified as equity and not debt.

Liquidity

        Effective as of June 4, 2002, the Company renewed, without any material changes in terms and conditions, the terms of its bank credit facilities aggregating $625 million in total commitments, including one facility entered into by one of its United States subsidiaries which is guaranteed by the Company. During the third quarter of 2002, the Company entered into two additional bank credit facilities totalling $50 million in commitments. All of the renewed and new facilities are provided by a group of banks under separate agreements, the terms of which are substantially the same. Except for three facilities totalling $100 million in commitments, the renewed facilities include revolving commitments of from 364 days to up to five years, in each case commencing from June 4, 2002, with the revolving period for the new facilities commencing from August 28, 2002 but then having the same dates as the renewed facilities with respect to when the revolving commitments would end. The other three facilities totalling $100 million in commitments have only revolving periods which expire either in June 2005 or June 2006. The revolving period of each of the facilities may be extended for an additional 364-day period at the discretion of the respective bank under the particular facility, subject to the approval of lenders representing, in the aggregate, at least 66 2/3 per cent of the total aggregate commitments under the facilities, and any amounts outstanding at the maturity of the revolving period are repayable at that time. The facilities provide that, so long as advances are outstanding, the Company will be required to maintain (i) a ratio of Consolidated Indebtedness to Tangible Net Worth, as defined thereunder, not to exceed 50:50 and (ii) Tangible Net Worth, as defined, of not less than $1,500 million. Taking into account the non-cash asset impairment charge referred to above, the Company's Tangible Net Worth was $3.3 billion as of September 30, 2002 and the ratio of Consolidated Indebtedness to Tangible Net Worth was approximately 30:70.

        The Company has had in effect for a number of years defined benefit pension plans principally in Canada, the United States and the United Kingdom. Each of the jurisdictions in which these plans are located has legislation and regulations which, among other statutory requirements, cover the minimum contributions to be made to these plans to meet their potential liabilities as calculated in accordance with such legislation and regulations. Based upon the current values of the assets in those plans subject to provincial legislation and regulations in Canada and other factors to be taken into account under such legislative or regulatory requirements, the Company currently estimates that it would, in accordance with applicable legislation or regulations, be required to increase its contributions to such plans from 2001 and 2002 levels by an amount in the range of $50 to $75 million in 2003 and for two or more additional years. The actual increase in such contributions will be determined in accordance with such legislation and regulations and will reflect the value of the assets in such plans, in each case as of year-end 2002. Based upon applicable accounting requirements relating to the Company's pension expenses for these plans, the Company currently expects that such expenses could increase from 2002 levels by in the range of $15 to $25 million in 2003 and for two or more additional years. The Company continues to evaluate how it will comply with these legislative and regulatory requirements applicable to such contributions.

Update on Goro and Voisey’s Bay Projects

(a)        Voisey's Bay

        During the quarter, the Company moved forward on a number of key aspects of its Voisey's Bay project. As part of the $35 million in expenditures relating to the project to be made in the Province of Newfoundland and Labrador over the July 2002 - March 2003 period, infrastructure work at the concentrator site in Labrador has continued, with construction of an access road and a temporary dock and runway nearing completion.

        In early October 2002, the Company signed definitive agreements with the Government of Newfoundland and Labrador intended to implement the non-binding Statement of Principles entered into in June 2002 covering the development of the Voisey's Bay project. Consistent with the terms and provisions of the Statement of Principles, the definitive agreements set forth the terms for the development of the mine and concentrator at Voisey's Bay, the research and development program focusing on hydrometallurgical processing technology, the industrial and employment benefits program for the Voisey's Bay project, the timetable for the start and completion of the principal stages of the project, and the other key parts and requirements covering the overall development of the Voisey's Bay project. Under the terms of these definitive agreements, certain provisions become effective immediately. The next steps to be met by the end of March 2003 for these agreements to become effective overall include, as provided for by their terms, completing a bankable feasibility study for the mine and concentrator and related facilities and Inco securing acceptable financing arrangements for the project. SNC Lavalin has been retained by Inco to complete the feasibility study. It is currently expected that this study, to be completed in the next few months, will provide an update on capital cost estimates for the project. Certain of the other previously identified conditions to be met before the Voisey's Bay project could proceed, including the execution of Impacts and Benefits Agreements with the Labrador Inuit Association and Innu Nation, were met during the past three months.

(b)        Goro

        In early September 2002, the Company's 85 per cent owned Goro nickel-cobalt project in the French Overseas Territory of New Caledonia experienced temporary labour disruptions by personnel associated with certain project construction subcontractors. As a result of these disruptions, the decision was made to curtail certain activities at the project's site to enable the project company, Goro Nickel S.A., contractors, subcontractors and other interested parties to develop procedures to avoid future disruptions. A number of procedures have been put in place and the Company and Goro Nickel S.A. are currently in the process of implementing a phased resumption of certain activities. The Company and Goro Nickel S.A. also initiated an update of the status of certain key aspects of the project, including the necessary permitting, capital cost estimate, schedule and organization. Work on certain critical parts of the project, including engineering, has continued during this update process. At the current stage of project procurement and engineering, the project's current capital cost estimate of $1,450 million could increase by about 15 per cent. The Company expects to continue to evaluate opportunities to reduce the project's capital costs by having third parties construct, own, and operate certain facilities required for the project. It is currently estimated that this update process, including an updated capital cost estimate, will be completed by early 2003. This process is also currently expected to result in an updated project schedule where initial production could be delayed by a few months or until early 2005.

        With respect to the necessary financing arrangements for the Goro project, the Company and Goro Nickel S.A. have been negotiating the final terms of the Paul (formerly Pons) Act financing currently expected to be extended under this legislation by the French government by the end of 2002 and the definitive agreements to have a Japanese consortium to be led by Sumitomo Metal Mining Co., Ltd. acquire a 25 per cent interest in Goro. These definitive agreements, currently expected to be completed by late 2002, are expected to include certain conditions to their effectiveness, including having the consortium arrange the required financing for the acquisition of its interest in Goro and its ongoing investment in the project. During the quarter, the Company entered into a letter of intent to purchase the 15 per cent interest in the Goro project held by a French government agency, Bureau de Recherches Geologiques et Minieres.