(MONEY Magazine) – Northern Telecom used to be a sleepy Canadian maker of (yawn) telephone-switching equipment. Then came John Roth. As head of North American operations, and CEO since 1997, he dismantled Northern Telecom's bureaucracy and reconfigured it into Nortel Networks, a leading supplier of Internet and wireless-networking gear.

Roth dumped low-margin businesses and sped up R&D efforts. (Programs that once required approval by the board of directors can now be initiated by general managers.) And in 1998 he shocked Wall Street with the company's $6.9 billion purchase of Silicon Valley's Bay Networks, a deal that vaulted Nortel into big-time Internet equipment sales, competing against the likes of Lucent Technologies and Cisco Systems.

Roth's best move, however, was to bet that communications providers would want to upgrade their old-fashioned copper-wire networks with fiber-optic technology. Nortel now has No. 1 market share in optical systems and is growing its business at triple-digit rates, while its competitors play catch-up.

That success is why Nortel's stock more than tripled last year to $101 and as of late February had leaped another 12% to $113.50, or about 87 times 2000 earnings. Roth spoke with MONEY's Lisa Gibbs.

Q. Now that your competitors know that optical is the place to be, what's to keep them from snatching your customers?

A. We've been shipping 10-gigabit systems [the fastest optical networks available] for four years. Our competitors have yet to ship their first ones. We're on our third-generation network and our seventh release of software.

Q. Is meeting demand a concern? You just announced a $400 million commitment to expand production capability.

A. A lot of our capacity investment is going into laser production: Putting different color lasers into a single fiber-optic strand is how we increase the capacity of our networks. That's important for our customers because it is such a huge investment for them to put fiber optics into the ground. Their economic equation is, "How much traffic can I put across this investment? If I can double the traffic, I can double the return on my investment." Everything becomes: How much data can I get across that strand of glass?

Q. You can already zap the entire contents of the Library of Congress across the country in about two minutes.

A. You've heard of Moore's law [the proposition that semiconductors will double in power every 18 months]? Well, this is Nortel's law of optics: Every nine to 12 months we need to double the capacity of our optical systems and halve the cost.

Q. But even the likes of Cisco have made several key optical acquisitions, and they're getting into this in a big way. How will you compete with Cisco and others specifically?

A. Cisco is extremely strong in building networks for corporations. But companies are seeing traffic on their own networks growing 100% a year; it's getting too big for these companies to keep up, so they're turning to service providers, which build networks to serve many corporations, not just one. That's a huge opportunity for Nortel. We built the network the Federal Reserve Board runs its transactions on. Building the technologies that Cisco is known for--but on a scale that's two orders of magnitude larger--is very difficult. If a very large network goes down even for a very short period, hundreds of customers are impacted; these networks must not go down--or you're out of business. The real competitor for Nortel is Lucent. With its Bell Labs, it's a very powerful organization. This is a difficult technology to master, but I'm sure that Bell Labs is going to get it mastered.

Q. What kind of growth rates can investors expect?

A. The industry is growing 14% to 15% a year, and we're going to grow six points faster than that. For a company our size, that's pretty heady stuff.

Q. So is a P/E of 87.

A. It's getting up there, but there's still plenty of room to grow our valuation as we execute on the wireless strategy. You look at companies like Nokia, which has a strong position in the handset market [and a P/E of 71], and Cisco, which has a strong position in the router market [and a P/E of 121]--people are starting to realize that Nortel has an equally strong position in the optical market.

Q. What's the Next Big Thing?

A. Broadband wireless, or the "wireless Internet," is the next big event. Over 20% of Nortel's revenue comes from the wireless business. And we're No. 2 in terms of contract wins in 1999 for wireless-infrastructure business. Now we all have to take the wireless infrastructure and make it Internet-ready.

Q. Is that why you invested in Canadian wireless company Research in Motion, also known as RIMM?

A. RIMM has a wireless pager service called Blackberry. So you could have something that looks like a Palm Pilot, and it could be picking up e-mail messages from your office as you move. We're collaborating with RIMM to be able to offer Blackberry not only on pagers but on cellular. There's far more capacity in the cellular infrastructure than there is in the paging infrastructure, and we think people will want the service in big numbers. That makes good business sense for Nortel because we sell cellular infrastructure. We think Blackberry will drive the demand for cellular traffic, which will in turn cause an expansion of the cellular network.

Q. You're doing your part to overload everybody's network.

A. Absolutely.

Q. Looking ahead even further, what nascent technology are you betting on?

A. If I tell you that, Lucent might start developing it. Let them figure that out for themselves.