10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

	þ     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)              OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2007
	o     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)        OF THE SECURITIES EXCHANGE ACT OF 1934

          For the transition period from            to           

Commission file number 000-30758

Nortel Networks Limited

(Exact name of registrant as specified in its charter)

Canada	62-12-62580
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

195 The West Mall,	M9C 5K1
Toronto, Ontario, Canada (Address of principal executive offices)	(Zip Code)

Registrant’s telephone number including area code: (905) 863-7000

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Each Exchange on Which Registered
Guarantees of Nortel Networks Corporation’s 4.25% Convertible Senior Notes Due 2008	New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark if the registrant is a well known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o     No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes o     No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days.

Yes þ     No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

Large accelerated filer o Accelerated filer o Non-Accelerated filer þ Smaller reporting company o

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o     No þ

On February 19, 2008, 1,460,978,638 common shares of Nortel Networks Limited were issued and outstanding, all of which are held by Nortel Networks Corporation. The common shares of the registrant are not traded on any stock exchange.

TABLE OF CONTENTS

PART I
ITEM 1.	Business	1
	Overview	1
	Developments in 2007 and 2008	2
	Business Segments	5
	Sales and Distribution	11
	Backlog	12
	Product Standards, Certifications and Regulations	12
	Sources and Availability of Materials	12
	Seasonality	13
	Acquisitions and Divestitures, Alliances and Minority Investments	13
	Research and Development	13
	Intellectual Property	14
	Employee Relations	14
	Environmental Matters	15
	Financial Information about Segments and Product Categories	15
	Financial Information by Geographic Area	15
	Working Capital	15
ITEM 1A.	Risk Factors	18
ITEM 1B.	Unresolved Staff Comments	28
ITEM 2.	Properties	29
ITEM 3.	Legal Proceedings	29
ITEM 4.	Submission of Matters to a Vote of Security Holders	33
PART II
ITEM 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	33
	Dividends
	Securities Authorized for Issuance Under Equity Compensation Plans
	Shareholder Return Performance Graph
	Canadian Tax Matters
	Sales or Other Dispositions of Shares
	Sales of Unregistered Securities
ITEM 6.	Selected Financial Data	34
ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
	Executive Overview	35
	Results of Operations	41
	Segment Information	47
	Liquidity and Capital Resources	53
	Off-Balance Sheet Arrangements	59
	Application of Critical Accounting Policies and Estimates	60
	Accounting Changes and Recent Accounting Pronouncements	74
	Outstanding Share Data	77
	Market Risk	77
	Environmental Matters	77
	Legal Proceedings	78
	Cautionary Notice Regarding Forward-Looking Information	78
ITEM 7A.	Quantitative and Qualitative Disclosures About Market Risk	78
	Equity Price Risk	80
ITEM 8.	Financial Statements and Supplementary Data	81
ITEM 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	163
ITEM 9A.	Controls and Procedures	163
ITEM 9B.	Other Information	168

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PART III
ITEM 10.	Directors, Executive Officers and Corporate Governance	169
ITEM 11.	Executive Compensation	182
ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	218
ITEM 13.	Certain Relationships and Related Transactions, and Director Independence	228
ITEM 14.	Principal Accountant Fees and Services	229
PART IV
ITEM 15.	Exhibits and Financial Statement Schedules	232
SIGNATURES		239
EX-10.68
EX-10.69
EX-10.70
EX-10.71
EX-10.72
EX-10.73
EX-10.74
EX-10.75
EX-10.76
EX-12
EX-14
EX-21
EX-23.1
EX-23.2
EX-24
EX-31.1
EX-31.2
EX-32

All dollar amounts in this document are in United States Dollars unless otherwise stated.

NORTEL, NORTEL (Logo), NORTEL NETWORKS, the GLOBEMARK (Logo), NT, and NORTEL >BUSINESS MADE SIMPLE are trademarks of Nortel Networks.

MOODY’S is a trademark of Moody’s Investors Service, Inc.

NYSE is a trademark of the New York Stock Exchange, Inc.

SAP design mark is a trademark of SAP Aktiengesellschaft

S&P and STANDARD & POOR’S are trademarks of The McGraw-Hill Companies, Inc.

All other trademarks are the property of their respective owners.

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PART I

ITEM 1.   Business

Overview

Nortel supplies end-to-end networking products and solutions that help organizations enhance and simplify communications. These organizations range from small businesses to multi-national corporations involved in all aspects of commercial and industrial activity to federal, state and local government agencies and the military. They include cable operators, wireline and wireless telecommunications service providers, and Internet service providers.

Today’s organizations face significant challenges from new technologies, higher operational expectations and increased competitiveness, creating new levels of complexity. At the same time, these customers find it increasingly challenging to design, operate and maintain their communications networks.

Our networking solutions include hardware and software products and services designed to reduce complexity, improve efficiency, increase productivity and drive customer value. We design, develop, engineer, market, sell, supply, license, install, service and support these networking solutions worldwide. We have technology expertise across carrier and enterprise, wireless and wireline, applications and infrastructure. Our strengths are bolstered by continued strategic investment in technology research and development, or R&D, and strong customer loyalty earned over more than 100 years of providing reliable technology and services.

The Company has its principal executive offices at 195 The West Mall, Toronto, Ontario, Canada M9C 5K1, (905) 863-7000. The Company was incorporated in Canada as the Northern Electric Company, Limited on January 15, 1914, as a successor to the business of Northern Electric and Manufacturing Company, Limited, a subsidiary of Bell Canada incorporated in 1895. The Company participated in a corporate amalgamation with two of its wholly owned subsidiaries on January 14, 1982. The Company changed its name to Northern Telecom Limited on March 1, 1976, and to Nortel Networks Corporation on April 29, 1999. On May 1, 2000, the Company participated in a Canadian court-approved plan of arrangement with Nortel Networks Corporation, previously known as New Nortel Inc., and BCE Inc., the largest shareholder of the Company prior to the plan of arrangement, and changed its name to Nortel Networks Limited. In connection with the plan of arrangement, the Company became the principal operating subsidiary of Nortel Networks Corporation, or NNC. All of the Company’s common shares are owned by NNC, and its Cumulative Redeemable Class A Preferred Shares Series 5 and Non-cumulative Redeemable Class A Preferred Shares Series 7 are publicly traded on the Toronto Stock Exchange, or TSX, under the symbols “NTL.PR.F” and “NTL.PR.G”, respectively. The Company’s guarantee of the 4.25% Convertible Senior Notes due 2008, issued by Nortel Networks Corporation, or the 4.25% Notes due 2008, is listed on The New York Stock Exchange, or NYSE. The Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports are available free of charge under “Investor Relations” on our website at www.nortel.com, or our website, as soon as reasonably practicable after providing them to the United States Securities and Exchange Commission, or SEC. Our Code of Business Conduct is also available on our website. Any future amendments to our Code of Business Conduct will be posted on our website. Any waiver of a requirement of our Code of Business Conduct, if granted by the boards of directors of the Company and NNC, or the Nortel boards, or audit committees, will be posted on our website as required by law. Information contained on our website is not incorporated by reference into this or any such reports. The public may read and copy these reports at the SEC’s Public Reference Room at 100 F Street NE, Washington, DC 20549 (1-800-SEC-0330). Also, the SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding certain issuers including the Company and NNC, at www.sec.gov. The Company is not a foreign private issuer, as defined in Rule 3b-4 under the U.S. Securities Exchange Act of 1934, as amended, or the Exchange Act. All dollar amounts in this report are in millions of United States, or U.S., Dollars, except for Part III hereof, and except as otherwise stated.

Where we say “we”, “us”, “our”, “Nortel” or “the Company”, we mean Nortel Networks Limited or Nortel Networks Limited and its subsidiaries, as applicable, unless otherwise stated. References to “NNL” mean Nortel Networks Limited without its subsidiaries. Where we refer to the “industry”, we mean the telecommunications industry.

Many of the technical terms used in this report are defined in the Glossary of Certain Technical Terms beginning at page 16.

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Developments in 2007 and 2008

Business Environment

We operate in a highly competitive business environment. Consolidation of communications vendors and customers continued throughout 2007. The formation of larger vendors and customers continues to drive pricing and margin pressure in the service provider market. Large companies in the information technology, or IT, sector are also focusing more on addressing the communications market with software and services offerings, both on their own and in partnership with telecommunications equipment vendors. There is also intense competition from the Asia region, driven by local, low-cost vendors who have expanded their market beyond Asia. Current general economic uncertainties, in particular threats of a recession in the U.S., are raising concerns about projected spending growth rates of both carrier and enterprise customers.

Industry growth in 2007 was driven primarily by enterprise spending on IP telephony, mobility and collaboration applications (such as audio, video and Web conferencing systems), as well as the data network upgrades and network security solutions required to support these capabilities. Enterprises are also looking to align IT investments with business processes, resulting in software and service opportunities in both service-oriented architecture, or SOA, and unified communications solutions. Service provider spending was focused on third-generation, or 3G, wireless network deployment, VoIP and products and services that will allow delivery of voice, data and video over IP networks (such as carrier switches/routers, broadband access and next-generation optical networks). The industry is increasingly focused on software, services and solutions. Convergence of multi-vendor networks and the advent of new types of communications applications are expected to drive demand for services that help enterprises and service providers design, deploy, support and evolve their networks. This includes, in some cases, the outsourcing by enterprises and service providers of all or part of their communications networks.

We operate on a global basis, and market conditions vary geographically. In emerging markets, growth continues to be driven primarily by connectivity solutions, especially for wireless. In established markets, such as North America and Western Europe, service providers are upgrading their networks to enable new types of services, such as IPTV and mobile video. Regulatory issues in certain countries and regions impact market growth, such as the delay in granting next-generation wireless licenses in China, which are now expected to be granted in 2008 and beyond.

The telecommunications industry has evolved over the past two decades by developing the technology and networks that enable worldwide connectivity and making those networks smarter and faster. We believe the industry is at a significant inflection point at which the level of connectivity grows exponentially. This market trend is called Hyperconnectivity and we believe that it is fast becoming a reality, offering several opportunities, including richer, more connected and more productive communications experiences for consumers, businesses and society as a whole. We anticipate that it can also create significant new revenue opportunities for network operators, equipment vendors and applications developers.

Hyperconnectivity brings new challenges for the industry, both in creating new business models and service strategies to capitalize on its opportunities and in preparing networks and applications for the coming era. We believe that Hyperconnectivity will require the industry to rethink how we put networks together and to completely reinvent our applications models. We believe that the industry needs to focus on two critical transformations that are the pillars of Hyperconnectivity: achieving “true” broadband and communications-enabling today’s IT applications.

We define true broadband as being a communications experience so seamless that users will no longer have to consider which technology, wireline or wireless, is being used to make a connection. They will simply communicate anywhere, anytime from whatever device is most convenient; essential in a hyperconnected world. Moreover, in our vision the broadband experience will become so economical that the range of uses exceeds any experience of the past. Although the industry has highlighted the concept of true broadband for many years, it is a promise that has yet to become reality. To deliver it, we need to solve a number of technology challenges in today’s networks. These include scaling the access network, scaling the metro and long-haul networks, and providing unified communications across all networks, wireline and wireless, public and private.

To deliver on Hyperconnectivity, however, it will not be enough simply to provide a seamless broadband experience at the infrastructure level. We believe that we must also transform the communications experience at the applications level so that it is seamless across devices, networks, applications and enterprise boundaries.

A key to doing this will be marrying the capabilities and intelligence that exist today only in the telecom network with IT software to create a new type of application, a communications-enabled application. This includes “environmentally aware applications” that incorporate real-world information received from network-attached sensors and act on them appropriately. A communications-enabled application will bring together all communications services including voice; instant

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messaging, or IM; video or network services such as conferencing; location; presence; proximity; and identity. These applications will essentially leverage the capacity, sophistication and intelligence inherent in a true broadband network and make that power available to the range of new and existing business applications and processes. For example, consider the application we have built to improve the efficiency and effectiveness of healthcare organizations. This new solution tracks the whereabouts of medical staff and sorts them by skill and specialty. When an emergency occurs, the network can dynamically and automatically find, contact, and connect qualified staff near the patient by audio or video conference.

We believe that no one vendor has all of the technology and know-how required to make this transition to Hyperconnectivity. That is why we are also complementing our strengths by partnering with others, in a commitment to create a broad ecosystem that includes such industry leaders as Microsoft and IBM; joint ventures such as the LG-Nortel Co. Ltd., or LG-Nortel, joint venture with LG Electronics Inc., or LGE; and relationships with other application providers and many of the largest carriers in the world.

For additional information regarding our Business Environment, see the Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, section of this report, and the Risk Factors section of this report.

Strategy

We believe that our capability and experience in enterprise and service provider networking positions us well to deliver in the new era of Hyperconnectivity. We plan to capitalize on the opportunities of a hyperconnected world by providing a true broadband experience and communications-enabling today’s IT applications. As part of our strategy to address these mega-trends, we are focused on three primary areas of growth: transforming the enterprise with unified communications, delivering next-generation mobility and convergence capabilities, and adding value to customer networks through solutions, services and applications.

We are strongly committed to recreating a great company, to delivering on our model of Business Made Simple to our customers, to identifying and seizing the opportunities that exist for us in the market, and to driving innovation as a cornerstone of everything we do.

We are addressing this commitment with a six-point plan for transformation, announced in 2006, that establishes a framework for recreating a world-class business. We are committed to:

1.	Building a world-class management team, culture and processes,
2.	Focusing aggressively on our balance sheet, corporate governance, and business and financial controls,
3.	Driving to world-class cost structures and quality levels,
4.	Targeting market share,
5.	Investing for profitable growth, and
6.	Increasing our emphasis on service and software solutions.

We are seeking to generate profitable growth by using this focus to identify markets and technologies where we can attain a market leadership position. Key areas of investment include unified communications, 4G broadband wireless technologies, Carrier Ethernet, next-generation optical, advanced applications and services, secure networking, professional services for unified communications and multimedia services.

We are also leveraging our technology and expertise to address global market demand for network integration and support services, network managed services and network application services.

We continue to focus on the execution of the six-point plan and on operational excellence through transformation of our businesses and processes, or our Business Transformation plan. On June 27, 2006, we announced the implementation of changes to our pension plans to control costs and align with industry-benchmarked companies, initiatives to improve our Operations organization to speed customer responsiveness, improve processes and reduce costs, and organizational simplification through the elimination of approximately 700 positions. In February 2007, we outlined plans for a further net reduction of approximately 2,900 positions, with approximately 1,000 additional positions affected by movement to lower cost locations, and reductions in our real estate portfolio. During 2007, approximately 150 additional positions were identified and incorporated into the plan, and 300 removed from the plan due to a change in strategy, increasing the total number of workforce reductions to approximately 2,750. On February 27, 2008, we announced a further net reduction of our global workforce of approximately 2,100 positions, with an additional 1,000 positions to be moved from higher cost to lower cost locations, and a further reduction of our global real estate portfolio. For further information, see “Executive

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Overview — Significant Business Developments — Business Transformation Initiatives” and “Results of Operations — Special Charges” in the MD&A section of this report.

We remain committed to integrity through effective corporate governance practices, maintaining effective internal control over financial reporting and enhanced compliance. We continue to focus on increasing employee awareness of ethical issues through various means such as on-line training, quarterly updates from the Chief Compliance Officer to all employees, and our code of business conduct.

Cooperation of multiple vendors and effective partnering are critical to the continued success of our solutions for both enterprises and service providers. Timely development and delivery of new products and services to replace a significant base of mature legacy offerings will also be critical in driving profitable growth. To help support this, we expect to continue to play an active role in influencing emerging broadband and wireless standards.

We are positioned to respond to evolving technology and industry trends by providing our customers with end-to-end solutions that are developed internally and enhanced through strategic alliances, acquisitions and minority investments. We have partnered with industry leaders, like Microsoft, LGE and IBM, whose technology and vision are complementary to ours, and we continue to seek and develop similar relationships with other companies.

For additional information regarding our Strategy, see the MD&A and Risk Factors sections of this report.

Significant Developments

Executive Appointments

•  Enhanced the senior executive leadership team under Chief Executive Officer, or CEO, Mike Zafirovski with the appointments of Paviter Binning as Executive Vice-President and Chief Financial Officer, William Nelson as Executive Vice President, Global Sales, Steven J. Bandrowczak as Chief Information Officer, Alvio Barrios as President, Caribbean and Latin America Region, or CALA, Joel Hackney as President, Enterprise Solutions and Joseph Flanagan as Senior Vice President, Global Operations.

Strategic Alliances

•  Enhanced our Innovative Communications Alliance, or ICA, with the announcement of Microsoft’s Office Communications Server, combining our communications technology and services expertise with Microsoft’s desktop leadership to deliver a shared vision for unified communications. Our ICA with Microsoft has delivered more than 300 joint wins.

•  Improved our go-to-market strategy through an alliance with Dell, making Dell a key sales channel for us in the U.S.

•  Expanded our alliance with IBM in working to provide simple, rapid and efficient delivery of communications-enabled applications and business processes through the use of SOA.

Operations

•  Undertook over 250 Lean Six Sigma projects focused on driving growth, efficiency and customer satisfaction.

•  Opened our Center of Excellence in Istanbul, Turkey, providing technical and operational support to our customers deploying next-generation mobile, converged, metro Ethernet and optical networks. Similar to our Center of Excellence in Mexico, this Center of Excellence is an essential part of our business transformation, supporting increased customer focus and growth initiatives aimed at improving our global competitiveness.

•  Successfully deployed SAP (a software package for integrating finance systems) system functionality for the general ledger, inter-company accounts, financial consolidation, accounts payable, accounts receivable, direct and indirect tax, fixed assets and treasury activities as part of the continued transformation of the finance organization.

•  Continued aligning our business processes toward a common corporate platform through a multi-year reduction of our current base of more than 600 IT applications.

Channels to Market

•  Enhanced our channels to market through alliances with Microsoft, IBM and Dell for enterprise and carrier solutions.

•  Expanded our North American distribution network by signing up over 400 new channel partners in 2007, an increase of approximately 70%.

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•  Launched a two-year transition of our Partner Advantage Program from a volume-centric model to a value-based model, to align with an industry shift.

•  Announced specializations as a new requirement for our Partner Advantage designation status. Specializations available to date include unified communications, small- to medium-sized businesses, or SMBs, and advanced services.

Finance

•  Guaranteed the offering by Nortel Networks Corporation of $1,150 of convertible senior notes, or the Convertible Notes, in March 2007. NNC used the net proceeds to redeem at par $1,125 principal amount of the 4.25% Notes due 2008, plus accrued and unpaid interest.

•  Appointment of KPMG LLP as our principal independent public accountants was approved by shareholders at NNC’s Annual and Special Meeting of Shareholders on May 2, 2007.

•  Elimination, as of December 31, 2007, of our previously reported revenue related material weakness in internal control over financial reporting. See the “Controls and Procedures” section of this report.

Other

•  Announced an agreement to settle two significant class action lawsuits pending in the U.S. District Court for the Southern District of New York, or the Global Class Action Settlement, in February 2006. Subsequently, we entered into agreements to settle all related Canadian actions. In December of 2006 and January of 2007, the Global Class Action Settlement was approved by the courts in New York, Ontario, Quebec and British Columbia. The Global Class Action Settlement became effective on March 20, 2007.

•  The Ontario Securities Commission, or OSC, approved a settlement agreement on May 22, 2007, which fully resolved all issues between us, NNC and the OSC. The decision recognized the extensive efforts made by our senior management and Board of Directors to be forthcoming and transparent in reporting significant accounting and internal control issues, and then solving them. The OSC order did not impose any administrative penalty or fine. However, NNC made a payment to the OSC in the amount of $1 million Canadian Dollars as a contribution towards the costs of its investigation.

•  We and NNC reached a settlement on all issues with the SEC on October 15, 2007 in connection with its investigation of our previous restatements of our financial results. The SEC recognized our full cooperation in the investigation as well as the proactive measures we took to address the issues that were investigated. As part of the settlement, we agreed to pay a civil penalty of $35 and a disgorgement in the amount of one U.S. Dollar, and we and NNC consented to be restrained and enjoined from future violations of certain provisions of U.S. federal securities laws.

Business Segments

Our reportable segments are Carrier Networks, Enterprise Solutions, Metro Ethernet Networks, or MEN, and Global Services. We changed the name of our Mobility and Converged Core Networks segment to Carrier Networks in the first quarter of 2007.

Sales of approximately $1,149 to Verizon Communications Inc. constituted approximately 11% of our 2007 consolidated revenue, of which approximately $730 was in the Carrier Networks segment.

Carrier Networks

We offer wireline and wireless networks that help service providers and cable operators supply mobile voice, data and multimedia communications services to individuals and enterprises using cellular telephones, personal digital assistants, laptops, soft-clients, and other wireless computing and communications devices. We also offer circuit- and packet-based voice switching products that provide local, toll, long distance and international gateway capabilities for local and long distance telephone companies, wireless service providers, cable operators and other service providers.

These service providers are driving increased demand for products and solutions that offer the latest broadband technology and services and support converged data, voice and multimedia communications over a single network for greater cost efficiency, capacity, speed, quality, performance, resiliency, security and reliability.

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Our strategy focuses on supporting customers as they transition from circuit voice to converged IP networks and from 2G and 3G to 4G wireless networks. It also centers on developing a more tightly-defined migration strategy for dominant CDMA service providers as they evolve their own networks to next-generation technologies.

Our plan is to establish a competitive advantage with products and expertise spanning the gap between these legacy and future-focused network environments. We have identified strategic alliances as a key element of a successful offer and we are taking steps to create these alliances.

Our Carrier Networks portfolio includes 3G and 2.5G mobility networking solutions based on CDMA, GSM, GSM-R, GPRS and EDGE technologies. These include an array of indoor and outdoor base transceiver stations designed for capacity, performance, flexibility, scalability and investment protection.

We also offer 4G mobile broadband solutions for service providers based on WiMAX and underlying OFDM and MIMO technologies, and are developing solutions based on LTE. We own significant OFDM and MIMO patents and are a leader in the development of these standards, which provide a common foundation for WiMAX, LTE and WLAN (802.11n). Our WiMAX solution delivers high performance and low cost per megabit.

In addition, we offer a variety of voice over packet products (softswitches, media gateways, international gateways), multimedia communication servers, SIP-based application servers, IMS products, optical products, WAN switches and digital, circuit-based telephone switches.

Our product development for Carrier Networks is focused on next-generation mobile broadband, enhanced residential and business services, cable solutions, and converged voice and data solutions for wireline and wireless service providers. We continue to build on our leadership in VoIP to drive broad-based deployment of SIP, pre-IMS IP-based applications and IMS. We have already installed more than 1,000 SIP-enabled networks around the world. Over the last nine years, we have also made progressive investments in 4G technologies. To date, our WiMAX product program has resulted in over 40 contract wins and trials with customers on five continents. We continue to focus on developing a viable, self-sustaining chipset, device and application ecosystem for both WiMAX and LTE to drive early service adoption.

Carrier Networks competitors include Ericsson, Alcatel-Lucent, Motorola, Samsung, Nokia Siemens Networks, Huawei, ZTE, NEC and Cisco Systems. The most important competitive factor is best-in-class technology and features. Additional factors include, in order of priority, product quality and reliability, customer and supplier relationships, warranty and customer support, network management, availability, interoperability, price and cost of ownership, regulatory certification and customer financing. Capital costs are becoming less important as operating costs and device subsidies (often given by service providers to their customers for purchase of handheld devices) become a bigger part of the service provider business case.

We are ranked second globally in CDMA revenues and, according to the November 2007 Dell’Oro Group report for the second and third quarters of 2007, we have benefited from continued customer network upgrades to 3G technology, like CDMA2000 1x and EV-DO Rev A, for faster broadband wireless access. GSM, though declining, is expected to remain the largest telecommunications equipment market for several years and is dominated by Ericsson and Nokia Siemens Networks. We have GSM customers across North America, CALA, EMEA, or Europe, Middle East and Africa, and Asia, with economies of scale to support ongoing development for those seeking to delay the move to UMTS or seeking to move directly to 4G. We also expect to benefit from economic conditions that we believe are more favorable for WiMAX today than was the case for UMTS historically. UMTS experienced a lack of innovation and investment caused by very high spectrum license fees for service providers, and the downturn, early in this decade, of available capital for dot-com companies including those working with UMTS. In turn, we believe that 4G delivers significantly improved capacity and performance at a lower overall cost. 4G is arriving in parallel with established application and device ecosystems.

Two customers make up approximately 28% of Carrier Networks 2007 revenue. The loss of either of these customers could have a material adverse effect on the Carrier Networks segment.

Significant Carrier Networks Developments

•  Selected by Verizon Wireless as an early LTE trial partner to support the next-generation evolution path chosen by Verizon and Vodafone.

•  Conducted industry-first live over-the-air demonstrations of next-generation wireless technologies LTE and WiMAX, featuring unified communications over WiMAX and real time applications leveraging our collaborative MIMO solution.

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•  Selected by Videotron, a Quebec communications services operator, to provide new videocalling service, the ability for their customers to communicate anywhere, over any device, with one of the first deployments of a new service that provides videocalling and customizable VoIP call routing functions with a new cable solution.

•  Partnered with Microsoft to offer hosted solutions that will enable service providers to deliver comprehensive unified communications services to SMBs, as well as enterprises. The alliance will allow carriers to host unified business communication and collaboration services for their customers.

•  Introduced Communication Server 1500, enabling regional service providers in North America to simplify the transition from traditional voice technology to VoIP.

•  Provided AT&T with key elements of a recently announced all-IP product line for GSM and UMTS wireless core networks designed to help service providers easily evolve to an all-IP network, helping to streamline business operations and decrease operating costs.

•  Selected by PEOPLEnet, Ukraine’s first nationwide 3G mobile operator, to expand its network to meet widespread demand for high-bandwidth, real-time wireless services with Nortel CDMA2000 1x and EV-DO Rev A technology.

•  Chosen by Far Eastone, one of Taiwan’s largest telecommunications operators, to launch WiMAX-based mobile broadband services such as streaming video, music, IPTV, VoIP, videoconferencing and corporate applications across Taipei county.

•  Completed testing with Qualcomm of our IMS-based Voice Call Continuity, or VCC, network solution and Qualcomm’s chipset. This is a major step towards the availability of out-of-the box VCC-enabled mobile phones.

Enterprise Solutions

We provide enterprise communications solutions addressing the headquarters, branch and home office needs of large and small businesses globally across a variety of industries, including healthcare and financial service providers, retailers, manufacturers, utilities, educational institutions and government agencies.

We offer unified communications solutions that help remove the barriers between voice, email, conferencing, video and instant messaging. For the hyperconnected enterprise, this means faster decisions, increased productivity and the ability to provide a simple and consistent user experience across all types of communication. The market is preparing for the integration of communications-enabled applications into business processes, using presence-based unified communications technologies and SOA.

Our extensive Enterprise Solutions portfolio addresses businesses of all sizes with reliable, secure and scalable products spanning unified communications, IP and digital telephony (including phones), wireless LANs, IP and SIP contact centers, self-service solutions, messaging, conferencing, and SIP-based multimedia solutions.

Through our strategic alliances with companies such as Microsoft, IBM and LGE, as well as the addition of companies such as Dell, we strive to create unique differentiation within our targeted markets. The ICA with Microsoft is providing seamless technology integration for customers looking to coordinate desktop software suites with business communications solutions. The Nortel-IBM alliance provides delivery of communication-enabled applications and business processes through the use of SOA. In addition to the product development and integration partnerships, we have partnered with Dell to further enhance our go-to-market strategy. The Nortel-Dell agreement allows Dell to offer its customers in the U.S. all of our Enterprise solutions, including those developed under our ICA with Microsoft, as well as a suite of our services related to unified communications. We are seeking to improve our competitive position in the enterprise market through such alliances, and by expanding partnerships to improve the coverage and efficiency of our channels to market.

The global enterprise equipment market segments in which we compete can generally be categorized as unified communications and converged data. The competitive landscape has changed as IBM and Microsoft increase their participation in unified communications. Cisco, Avaya, Alcatel-Lucent, Siemens Enterprise and NEC are our primary competitors in the unified communications market. Cisco is our primary competitor in the converged data market.

Competitive factors include product quality, product reliability, product availability, best-in-class technology and features, price and total cost of ownership, warranty and customer support, installed base, customer and supplier relationships, ability to comply with regulatory and industry standards on a timely basis, end-to-end portfolio coverage, distribution channels and alternative solutions from service providers. We believe that our competency in unified communications, multi-media applications and data networking, with our key strategic partnerships and established customer base, provides us a competitive position in the converging enterprise environment.

We collaborate with an extensive array of channel partners, including major global service providers, to generate breadth and depth for our global market reach. We continue to strengthen our two-tier value-added distribution system to better

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serve mid-market and SMBs. Agreements have been established with key resellers to jointly market, manage, recruit and grow a base of smaller resellers specializing in various SMB ’sub-segments’. We have also created simplified accreditation and ‘fast-track’ training programs to lower partner cost of entry for selling our SMB portfolio and increasing sales.

Significant Enterprise Solutions Developments

•  Selected by the Vancouver Organizing Committee as the Official Converged Network Equipment Suppler for the 2010 Olympic and Paralympic Winter Games providing the LAN.

•  Chosen by Bell Canada to supply the WAN equipment to enable secure and reliable communications to all 2010 Olympic and Paralympic Winter Games event venues, the first all-IP converged Olympic Games network.

•  Expanded our relationship with IBM into unified communications and SOA with our joint announcement around communications-enabled applications that allow enterprises to leverage SOA frameworks to integrate communications into their business processes.

•  Enhanced our go-to-market strategy through a partnership with Dell. Due to Dell’s significant relationship with Microsoft, this becomes a key unified communications sales channel for us in the U.S.

•  Selected to provide a state of the art unified communications and data communication network in support of both Mumbai International Airport Private Limited and Bangalore International Airport Limited.

•  Provided, with Microsoft, a converged unified communications and data network to Indiana University, one of the largest universities in the U.S. with approximately 110,000 students and 18,000 employees.

•  Teamed with Northwestern University to demonstrate an international network based on next-generation optical network technology, which is designed and optimized to deliver digital media and video in real time.

•  Selected by Baylor University Medical Center in Dallas, ranked among the top 50 U.S. hospitals, to implement a unique integrated communication system. The system is believed to be the first to use IM and presence awareness on mobile devices to improve efficiency and productivity in a healthcare environment.

•  Implemented a network business solution for Jobing.com Arena, home of the National Hockey League’s Phoenix Coyotes, which provides unified communications, data, wireless and multimedia communications infrastructure and services to help transform the venue into a cutting-edge entertainment facility.

•  Provided VoIP networks for a number of enterprises around the world including Jyske Bank of Denmark, Children’s’ Medical Center in Dallas, Purdue University, Kerzner International Limited’s The Cove Atlantis in the Bahamas, Canadian Specialist hospital in Dubai, Bank of Bern, and the Australia Taxation Office.

Global Services

We provide services and solutions supporting the entire lifecycle of multi-vendor, multi-technology networks for enterprises and carriers worldwide seeking to reduce costs, improve efficiency and performance, and capitalize on new revenue opportunities. This includes services to help design, deploy, support and evolve networks for SMBs and large global enterprises; municipal, regional and federal government agencies; wireline and wireless carriers; cable operators; and MVNOs. To keep up with the changing needs of businesses and consumers, carriers must be able to provide new and enhanced services quickly and globally. We believe that we are well suited for this challenge because of our extensive experience in designing, installing and operating both enterprise and carrier networks around the world.

The value of and demand for services is increasing in the industry, with managed services and applications services continuing to grow at above market rates. There are significant opportunities to deliver customer value through services, including opportunities to transform networks to IP, implement next-generation wireless technologies, deliver unified communications and multimedia solutions, and help customers manage their networks from a performance and cost efficiency perspective.

Our Global Services portfolio is organized into four service product groups:

•  Network implementation services including network planning, installation, integration, optimization and security services that help ensure our solutions, including multi-vendor products and services, are engineered and deployed to high industry standards and meet the specific requirements of our customers.

•  Network support services including technical support, hardware maintenance, equipment spares logistics, and on-site engineers that help deliver higher network performance and reduced total cost of ownership.

•  Network managed services, ranging from support of individual solutions to entire networks that provide access to advanced network capabilities while reducing customer investment in assets and operational management. We monitor and manage customer networks from network management centers in Europe, Asia and North America.

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•  Network application services including application development, integration and communications-enabled application solutions, as well as hosted multimedia services. These services are employed by our customers to enhance business processes, maximize new revenue opportunities and reduce costs. High-definition telepresence, desktop video conferencing, and applications performance engineering are examples of the services offered.

We combine these services with products, consulting and multi-vendor integration to create network business solutions addressing specific customer business needs. We also develop network partner solutions that leverage relationships with our major industry partners such as Dell, Microsoft and IBM.

We sell services on a direct basis in the carrier market, and employ both direct and indirect sales models for the enterprise market. We have a flexible model that allows channel partners to partner with us in the delivery of a service, or invest to become fully capable in the delivery of that service. This flexibility invites participation that will continue to drive the presence of our services in the market.

Our key competitors in Global Services include Ericsson, Nokia Siemens Networks, Alcatel-Lucent and Motorola in the carrier market, and Cisco, Avaya and Siemens Enterprise in the enterprise market. As well, we both partner and compete with global system integrators such as IBM and HP. Principal competitive factors include, in order of priority: size and scale, global delivery capability and brand recognition. Other important competitive factors include reputation, commitment, investment, pricing, installed base, solutions focus and multi-vendor expertise.

As the impact of convergence continues, we expect that our experience in serving enterprises and carriers (wireline, wireless and cable) will become an increasingly important differentiator for our Global Services offerings. We have significant market presence and incumbent service relationships in both of these markets. Market consolidation and mergers of major competitors have increased the competition for services, as has the continued consolidation of IT and communications. Our top competitors are focused on the large market opportunity for services and have launched competitive service-led strategies. We are addressing this challenge by expanding our service capabilities through strategic partnerships and through the acquisition of resources with critical skills.

We will continue our commitment to services and solutions as a strategic growth segment. With a large installed base, multi-vendor expertise and brand recognition, we believe that we have a significant opportunity to expand services sales.

Two customers make up approximately 16% of Global Services 2007 revenue. The loss of either of these customers could have a material adverse effect on the Global Services segment.

Significant Global Services Developments

•  Partnered with market leaders to create a global ecosystem for delivering and managing unified communications solutions:

•  Named as a Microsoft “Preferred Partner’’ for integrating unified communications solutions and achieved Microsoft’s elite Gold Certified Partner status. Established Microsoft / Nortel collaboration centers in EMEA and North America.

•  Unveiled a comprehensive communications enablement strategy that leverages SOA and Web services for the simple, rapid and efficient delivery of communications-enabled applications and business processes.

•  Continued momentum in managed and hosted services; for example, we:

•  Launched a hosted solutions portfolio for enterprises and carriers.

•  Selected by TELMEX, the leading telecommunications company in Mexico, to provide hosted IP telephony and multimedia services for delivery to enterprises.

•  Selected by THUS to improve the U.K. network operator’s service quality with our managed services.

•  Announced new applications and multimedia services portfolio; for example, we:

•  Launched a complete applications services portfolio including audio conferencing services, video conferencing services, Webcasting services and Web collaboration.

•  Announced an agreement with Polycom to jointly deliver immersive telepresence and high definition, or HD, video conferencing solutions to enterprises worldwide.

•  Named by the State of Georgia as systems integrator for a complete customer service solution including a hosted IP-based multimedia contact center.

•  Implemented network business solutions with innovative, media-rich applications and services for some of North America’s best known sports facilities, including arenas in New Orleans, Montreal, Ottawa, Denver and San Francisco. Jobing.com Arena, home of the National Hockey League’s Phoenix Coyotes, was transformed into a cutting-edge entertainment facility with unified communications, data, wireless and multimedia solutions.

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•  Increased momentum in vertical market solutions including:

•  Healthcare: delivered an integrated communication solution for Baylor University Medical, focused on improving business processes and efficiency in patient care.

•  Government: deployed a municipal wireless network in Greenville, N.C. with WindChannel Communications, a leading provider of wireless solutions for government and private enterprise.

•  Hospitality: delivered an advanced hospitality communications solution to MotorCity•Casino Hotel, providing unified communications throughout its facilities.

Metro Ethernet Networks

As applications converge over IP, Ethernet is evolving from a technology for business-to-business communications to an infrastructure capable of delivering next-generation, IP-based voice, video and data applications. IP-based video traffic, in particular, is accelerating this shift to an Ethernet infrastructure. Internet video, residential broadcast TV, video on demand, and new wireless broadband multimedia applications are driving significantly increased bandwidth requirements. Many service providers are now looking to Ethernet as the transport technology for these new video services, in addition to other voice and data services for residential and business customers. We believe that Ethernet technology has the potential to become the infrastructure of choice for the growing metropolitan transport market.

Our MEN solutions are designed to deliver carrier-grade Ethernet transport capabilities focused on meeting customer needs for higher performance and lower cost for emerging video-intensive applications. The MEN portfolio includes Carrier Ethernet switching, optical networking, and multiservice switching products. With our extensive experience in the optical and Ethernet arenas, MEN solutions use technology innovation to drive scale, simplicity, and cost savings for our customers.

Providing network intelligence, fast failover capability, service scalability and carrier-class operations, our Carrier Ethernet portfolio provides Ethernet switching devices optimized for aggregating and transporting next-generation multimedia services within a service provider’s metropolitan network. Our Carrier Ethernet products feature innovative Provider Backbone Transport, or PBT, technology developed by us that can enable service providers and large enterprises to simplify network management, redefine QoS and deliver substantial cost savings. We now have over 30 Carrier Ethernet customers following our significant PBT win with BT in January 2007 and we are working to build market momentum and drive additional sales in 2008.

We are a leading contributor in the drive to establish PBB-TE, an IEEE standard based on PBT, for extending the simplicity and ease-of-use of Ethernet beyond connectivity services to include network transport.

In 2007, we also formed the Carrier Ethernet Ecosystem, currently consisting of over 20 members, which serves as a partnering framework for the industry’s best solution providers to adopt Ethernet as the preferred means of information transport in carrier networks.

Key to delivering the capacity and service agility to the network are our Adaptive Intelligent All Optical solutions. Our 40Gig Dual Polarization QPSK solution will deliver bandwidth to support video and advanced business applications as well as provide the foundation for a hyperconnected network. This will be accomplished with a solution based on a more efficient data pipeline that has much greater capacity. Moreover, the solution is designed to be simple to deploy, and because it can leverage the existing network infrastructure, it delivers an attractive cost model.

Built with innovative eDCO and eROADM technologies, our solutions not only deliver the required bandwidth, but incorporate network planning and engineering functions, improving network provisioning and restoration times.

With their ability to switch new IP-based applications, deliver Ethernet connectivity services and maintain efficient transport of data traffic on legacy equipment, our multiservice SONET/SDH solutions give our customers flexibility and agility. This enables them to react quickly to changing customer and service requirements to capitalize on the trends driving the industry.

Our multiservice switch portfolio offers reduced networking costs for service providers and enterprises through network consolidation, supporting multiple networking technologies such as ATM, frame relay, IP and voice on a single platform.

Throughout the transition to next-generation packet-based networks, MEN solutions provide a comprehensive and consistent operations solution for all parts and layers of optical and Ethernet networks. We provide one network and domain management system for optical and Ethernet services, retaining key elements of circuit-based operation for Ethernet services.

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Cisco and Alcatel-Lucent have leading market shares in the existing Carrier Ethernet market. Other competitors include Huawei, Hitachi Cable, Nokia Siemens Networks and Foundry. We believe the Carrier Ethernet market will divide into two camps: one that supports Ethernet over MPLS solutions and the other that favors native Carrier Ethernet switching solutions such as ours. We have chosen a direction that is different from that of our primary competition, and we look to obtain a leadership share in the new and evolving Carrier Ethernet switching market.

The global optical market is segmented and market position can fluctuate significantly on a quarter-by-quarter basis, but we remain a leading global provider of optical networking, especially in optical WDM equipment. Our principal competitors in this market are large communications companies such as Alcatel-Lucent, Huawei, Nokia Siemens Networks, Fujitsu and Cisco, as well as others that address specific niches within this market, such as Ciena, ADVA, Tellabs and Infinera.

Our MEN solutions can reduce the total cost of deployment and ongoing operation through advanced features that enable network flexibility, adaptability and faster turn-up. Key differentiators also include ease of migration to Ethernet-based networks, our ability to maximize QoS and the implementation of standards-based products for inter-vendor operability.

Three customers make up approximately 24% of MEN 2007 revenue. The loss of any one or more of these customers could have a material adverse effect on the MEN segment.

Significant MEN Developments

•  Selected by BT to supply carrier-grade Ethernet solutions, based on PBT technology pioneered by us, for high-bandwidth services transport over BT’s 21st Century Network.

•  Verizon Business selected our adaptive all optical intelligent equipment for its pan-European long haul network, and our OME 6500 to deliver converged optical transport across 17 European countries and 13 countries in Asia.

•  Provided an optical wireless backhaul infrastructure to SK Telecom, Korea’s largest wireless communications operator, for delivering new wireless services such as wireless Internet, 3D gaming, digital home services and telematics.

•  Chosen by Cyberindo Aditama, Indonesia’s largest Internet service provider, to deliver high-bandwidth services using a Carrier Ethernet solution with PBB technology.

•  Selected by TDC, Denmark’s leading provider of communications solutions, to provide an adaptive all optical intelligent solution to help meet the growing demand in Denmark and the Nordic region for high bandwidth multimedia services such as IPTV, VoIP and enterprise Virtual Private Networks.

•  Selected by service providers groupe-e in Switzerland, Promigas Telecomunicaciones in Colombia, and Highland Telecom and Southern Light in the US, to deliver high bandwidth services using Carrier Ethernet equipment with PBT.

•  Upgraded the backbone network infrastructure of Hong Kong Exchanges and Clearing Ltd, one of Asia’s largest international stock exchanges, with high-bandwidth metro WDM equipment.

•  Selected by Mumbai International Airport Private Limited to provide optical and Carrier Ethernet equipment with PBB and PBT for a new communications infrastructure.

•  Chosen by Taiwan Post, the largest postal, banking and insurance services provider in Taiwan, to deliver a single converged metro WDM infrastructure.

•  Enabled collaborative research globally by supplying optical networks to research and educational institutions such as the Massachusetts Institute of Technology, Internet2, and Northwestern University in the United States, SurfNet in the Netherlands, and VERNet in Australia.

Sales and Distribution

All of our reportable segments use our direct sales force to market and sell to customers around the world. This sales force operates on a regional basis and markets and sells Nortel products and services to customers located in Canada, the U.S., CALA, EMEA and the Asia region. Our sales offices are aligned with customers on a country and regional basis. For instance, we have dedicated sales account teams for certain major service provider customers located near the customers’ main purchasing locations. In addition, teams within the regional sales groups work directly with top regional enterprises, and are also responsible for managing regional distribution channels. We also have centralized marketing, product management and technical support teams dedicated to providing individual product line support to the global sales and support teams.

In some regions, we also use sales agents who assist us when we interface with our customers. In addition, we have some non-exclusive distribution agreements with distributors in all of our regions, primarily for enterprise products. Certain

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service providers, system integrators, value-added resellers and stocking distributors act as our non-exclusive distribution channels under those agreements.

Backlog

Our order backlog was approximately $5,100 and $5,200 as of each of December 31, 2007 and 2006, respectively. The backlog consists of confirmed orders as well as $3,109 of deferred revenues in 2007 as reported in our consolidated balance sheet. A portion of our deferred revenues and advanced billings are non-current and we do not expect to fill them in 2008. Most orders are typically scheduled for delivery within twelve months, although in some cases there could be significant amounts of backlog relating to revenue deferred for longer periods. These orders are subject to future events that could cause the amount or timing of the related revenue to change, such as rescheduling or cancellation of orders by customers (in some cases without penalty where management believes it is in our best interest to do so), or customers’ inability to pay for or finance their purchases. Backlog should not be viewed as an indicator of our future performance. A backlogged order may not result in revenue in a particular period, and actual revenue may not be equal to our backlog estimates. Our presentation of backlog may not be comparable with that of other companies.

Product Standards, Certifications and Regulations

Our products are heavily regulated in most jurisdictions, primarily to address issues concerning inter-operability of products of multiple vendors. Such regulations include protocols, equipment standards, product registration and certification requirements of agencies such as Industry Canada, the U.S. Federal Communications Commission, requirements cited in the Official Journal of the European Communities under the New Approach Directives, and regulations of many other countries. For example, our products must be designed and manufactured to avoid interference among users of radio frequencies, permit interconnection of equipment, limit emissions and electrical noise, and comply with safety and communications standards. In most jurisdictions, regulatory approval is required before our products can be used. Delays inherent in the regulatory process may force us to postpone or cancel introduction of products or features in certain jurisdictions, and may result in reductions in sales. Failure to comply with these regulations could result in a suspension or cessation of local sales, substantial costs to modify our products, or payment of fines to regulators. For additional information, see “Environmental Matters” in each of the MD&A and Legal Proceedings sections, and the Risk Factors section of this report. The operations of our service provider customers are also subject to extensive country-specific regulations.

Sources and Availability of Materials

Our manufacturing and supply chain strategy has evolved since 1999 from a traditional in-house model to an outsourced model where we rely primarily on electronic manufacturing services, or EMS, suppliers. We believe this model allows us to benefit from leading manufacturing technologies, leverage existing global resources, lower cost of sales, more quickly adjust to fluctuations in market demand, and decrease our investment in plant, equipment and inventories. By 2007, we had divested substantially all of our manufacturing and related activities.

We continue to retain all supply chain strategic management and overall control responsibilities, including customer interfaces, customer service, order management, quality assurance, product cost management, new product introduction, and network solutions integration, testing and fulfillment. We are generally able to obtain sufficient materials and components to meet the needs of our reportable segments to be able to deliver products within customary delivery periods. In each segment, we:

•  Make significant purchases, directly or indirectly through our EMS suppliers, of electronic components and assemblies, optical components, original equipment manufacturer products, software products, outsourced assemblies, outsourced products and other materials and components from many domestic and foreign sources.

•  Maintain alternative sources for certain essential materials and components.

•  Occasionally maintain or request our suppliers to maintain inventories of components or assemblies to satisfy customer demand or minimize effects of possible market shortages.

For more information on our supply arrangements, see note 9, “Acquisitions, divestitures and closures — Manufacturing operations”, and note 13, “Commitments”, to the accompanying audited consolidated financial statements and “Liquidity and Capital Resources — Future Uses and Sources of Liquidity — Future Uses of Liquidity” in the MD&A section, and the Risk Factors section of this report. For more information on inventory, see “Application of Critical Accounting Policies and Estimates — Provisions for Inventories” in the MD&A section of this report.

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Seasonality

We experienced a seasonal decline in revenues in the first quarter of 2007 compared to the fourth quarter of 2006, followed by sequential growth in each quarter thereafter. Results through each reportable segment fluctuated but overall we showed growth quarter over quarter in 2007. The quarterly profile of our business results in 2008 is not expected to be consistent across all reportable segments. We typically expect a seasonal decline in revenue in the first quarter but there is no assurance that results of operations for any quarter will necessarily be consistent with our historical quarterly profile, or that our historical results are indicative of our expected results in future quarters. See “Results of Operations” in the MD&A section, and the Risk Factors section, of this report.

Acquisitions and Divestitures, Alliances and Minority Investments

In an effort to improve our competitive position and accelerate innovation, we, like many of our competitors, continue to actively evaluate potential inorganic opportunities such as strategic acquisitions and divestitures, alliances and minority investments.

Research and Development

Through internal R&D initiatives and external R&D partnerships, we continue to invest in the development of technologies that we believe address customer needs to reduce operating and capital expenses, transition seamlessly to next-generation converged networks and deploy new, profitable services that we believe will change the way people live, work and play.

We are focused on key technologies that we believe will make communications simpler in an emerging era of Hyperconnectivity, and enable businesses and consumers to enjoy a true broadband experience in accessing personalized content and services from any location at any time.

Indeed, the challenges that must be overcome today (such as fixed-mobile convergence, real-time communications handoff, true presence, extension of enterprise applications to mobile devices and carrier-grade enterprise mobility) are multi-dimensional, spanning the domains of wireless and wireline, carrier and enterprise, and infrastructure and applications.

To drive transformation of today’s networks, we are investing in a variety of innovative technologies, primarily focused in the areas of 4G broadband wireless (WiMAX, LTE, Mesh, OFDM, MIMO), Carrier Ethernet (PBT, PBB), next-generation optical (eDCO, eROADM, DOC, 40Gig Dual Polarization QPSK), unified communications, Web-based applications and services (IMS, SOA), secure networking, professional services for unified communications and telepresence.

As at December 31, 2007, we employed approximately 11,778 regular full-time R&D employees (excluding employees on notice of termination and including employees of our joint ventures). We conduct R&D through ten key R&D Centers of Excellence across the globe. We also invest in approximately 50 technology innovation initiatives with more than 20 major universities around the world. We complement our in-house R&D through strategic alliances, partners, and joint ventures with other best-in-class companies. As an example, we have established a joint venture with LGE and formed strategic relationships with a number of companies, including Microsoft and IBM.

We also work with and contribute to leading research organizations, research networks and international consortia, including the Canadian National Research Network or CANARIE, the Global Lambda Integrated Facility, or GLIF, Internet2, and SURFnet.

Standards are a key component of product development, providing an essential framework for adoption of new technologies and services. We participate in approximately 100 global, regional and national standards organizations, forums and consortia, spanning IT and telecom, and hold leadership positions in many of them.

Over the last year, we have taken some significant steps to enhance our R&D function, known for its innovation. In particular, we are increasing our focus on speed and velocity (in terms of time to market with products and solutions and achieving year-over-year improvement in development cycle time), quality and productivity. Specifically, we:

•  Accelerated the shift of our R&D dollars towards new and emerging markets and technologies,

•  Established a common engineering function to centralize those key engineering functions, technologies, and platforms that have the greatest potential to be leveraged across the entire company,

•  Increased our focus on hiring new R&D graduates,

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•  Created an R&D site governance council to help ensure that we always have the right skills for the future, in the right jobs and the right locations,

•  Made the decision to pursue the Capability Maturity Model Integration, or CMMI, framework, an industry-recognized set of best practices, as a way to develop, refine and benchmark our R&D processes at the product, business and site levels, and

•  Executed on our strategy to more effectively recognize the significance of the contributions of our R&D community, through such new programs as the Technical Fellowship of Nortel Program and the Distinguished Member of Technical Staff Program. We also held the first Nortel Technical Conference, which will annually bring together several hundred of our leading engineers to network, share their key innovations and help solve some of the biggest challenges facing the industry today.

We expect to continue our R&D investment at an industry-competitive rate of 15% of revenue in 2008.

The following table shows our consolidated expenses for R&D in each of the past three fiscal years ended December 31:

	2007		2006		2005
R&D expense	$	1,723	$	1,940	$	1,874
R&D costs incurred on behalf of others*		7		16		28
Total	$	1,730	$	1,956	$	1,902

*  These costs include research and development charged to customers pursuant to contracts that provided for full recovery of the estimated cost of development, material, engineering, installation and other applicable costs, which were accounted for as contract costs.

Intellectual Property

Intellectual property is fundamental to us and the business of each of our reportable segments. We generate, maintain, use and enforce a substantial portfolio of intellectual property rights, including trademarks, and an extensive portfolio of patents covering significant innovations arising from R&D activities. We have entered into mutual patent cross-license agreements with several major companies to enable each party to operate with reduced risk of patent infringement claims. In addition, we license certain of our patents and/or technology to third parties, and license certain intellectual property rights from third parties. Our trademarks and trade names, Nortel and Nortel Networks, are two of our most valuable assets. We sell products primarily under these brand names. We have registered the Nortel and Nortel Networks trademarks, and many of our other trademarks, in countries around the world.

We use intellectual property rights to protect investments in R&D activities, strengthen leadership positions, protect our good name, promote our brand name recognition, enhance competitiveness and otherwise support business goals. See the Risk Factors section of this report.

Employee Relations

At December 31, 2007, we employed approximately 32,550 regular full-time employees (excluding employees on notice of termination and including employees of our joint ventures), including approximately:

•  11,975 regular full-time employees in the U.S.;

•  6,800 regular full-time employees in Canada;

•  5,625 regular full-time employees in EMEA; and

•  8,150 regular full-time employees in other countries.

We also employ individuals on a regular part-time basis and on a temporary full- or part-time time basis, and engages the services of contractors as required.

In January 2007, we reduced our workforce by approximately 1,700 employees, primarily in France, Ottawa, Canada and Beijing, China, in connection with the sale of our UMTS Access business to Alcatel-Lucent. Additionally, in February 2007, we outlined plans for a net reduction to our global workforce of approximately 2,900 positions as part of our Business Transformation plan. Approximately 70% of these reductions took place in 2007. At that time we also announced plans to shift 1,000 additional positions to lower cost locations, and approximately 35% of this activity took place in 2007. During 2007, approximately 150 additional positions were identified and incorporated into the plan. Also, due to delay in implementation of a shared services initiative, 300 positions were removed from the plan, reducing the total number of workforce reductions to approximately 2,750. These remaining actions are expected to be completed over 2008

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and 2009. On February 27, 2008, we announced a further net reduction of our global workforce of approximately 2,100 positions, with an additional 1,000 positions to be moved from higher cost to lower cost locations.

For additional information, see “Special charges” in note 6 of the accompanying audited consolidated financial statements and “Executive Overview — Significant Business Developments — Business Transformation Initiatives” and “Results of Operations — Special Charges” in the MD&A section of this report.

At December 31, 2007, labor contracts covered approximately 2% of our employees, including four contracts covering approximately 2.5% of Canadian employees, three contracts covering approximately 5% of EMEA employees, one contract covering all employees in Brazil, and one contract covering less than 1% of employees in the U.S. (employed by Nortel Government Solutions Incorporated, or NGS).

While overall employee satisfaction increased slightly in 2007, this continues to be an important area of focus for us.

During 2007, approximately 2,750 regular full-time employees were hired, approximately 40% of which were new graduates. We believe it will become increasingly important to our future success to attract, integrate and retain an appropriate mixture of new graduate talent along with experienced recruits with high levels of technical, management and financial expertise, and other skill sets critical to the industry. See the ”Risk Factors” section of this report.

Environmental Matters

Our business is subject to a wide range of continuously evolving environmental laws in various jurisdictions. We seek to operate our business in compliance with these changing laws and regularly evaluate their impact on operations, products and facilities. Existing and new laws may cause us to incur additional costs. In some cases, environmental laws affect our ability to import or export certain products to or from, or produce or sell certain products in, some jurisdictions, or have caused us to redesign products to avoid use of regulated substances. Although costs relating to environmental compliance have not had a material adverse effect on our capital expenditures, earnings or competitive position to date, there can be no assurance that such costs will not have a material adverse effect going forward. For additional information on environmental matters, see “Environmental matters” in each of the MD&A and Legal Proceedings sections of this report.

Financial Information about Segments and Product Categories

For financial information about segments and product categories, see note 5, “Segment information”, to the accompanying audited consolidated financial statements, and “Segment Information” in the MD&A section of this report.

Financial Information by Geographic Area

For financial information by geographic area, see note 5, “Segment information”, to the accompanying audited consolidated financial statements and “Results of Operations — Revenues” in the MD&A section of this report.

Working Capital

For a discussion of our working capital practices, see note 10, “Long-term debt”, to the accompanying audited consolidated financial statements, “Liquidity and Capital Resources” and “Application of Critical Accounting Policies and Estimates” in the MD&A section of this report, the Risk Factors section of this report and “Sources and Availability of Materials” above in this section of this report.

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GLOSSARY OF CERTAIN TECHNICAL TERMS

3GPP (3^rd Generation Partnership Project) is a collaboration between groups of telecommunications associations, to make a globally applicable third generation, or 3G, mobile phone system specification.

40Gig Dual Polarization QPSK (Quadrature Phase Shift Keying) is an innovative modulation scheme that enables 40Gbps transmission with 10Gig-equivalent reach and dispersion tolerances, reducing the amount of equipment/capital expenses required in the network.

ATM (Asynchronous Transfer Mode) is a high-performance, cell-oriented switching and multiplexing technology that uses fixed-length packets to carry different types of traffic.

CDMA2000 1x (Code Division Multiple Access) is a 3G digital mobile technology.

CDMA2000 EV-DO (Evolution — Data Optimized) is a 3G digital mobile technology enabling high performance wireless data transmission.

CMMI (Capability Maturity Model Integration) is an industry-recognized set of best practices that we have adopted as a way to develop, refine, and benchmark our processes at the product, business, and site levels.

DOC (Domain Optical Controller) is an intelligent software engine responsible for continuously monitoring and optimizing an entire optical network.

eDCO (electronic Dispersion Compensating Optics) extends wavelengths over 2,000 kilometers without regeneration, amplification or dispersion compensation.

EDGE (Enhanced Data GSM Environment) is a faster version of GSM’s data protocols.

eROADM (enhanced Reconfigurable Optical Add/Drop Multiplexer) is a component of Nortel’s Common Photonic Layer, or CPL, an agile, self-optimizing DWDM platform for cost-effective metro, regional and long haul networks. eROADM enables dynamic optical branching of up to five different optical paths in addition to basic add/drop of individual wavelengths.

Ethernet is the world’s most widely used standard (IEEE 802.3) for creating a local area network connecting computers and allowing them to share data.

Failover is the capability to switch automatically to a redundant or standby network device without human intervention when a failure occurs.

GPRS (General Packet Radio Service) is a 2.5G standard for wireless data communications based on GSM.

GSM (Global System for Mobile communications) is a 2G digital mobile technology.

GSM-R (Global System for Mobile Railway communications) is a secure wireless standard based on GSM for voice and data communication between railway drivers, dispatchers, shunting team members, train engineers, station controllers and other operational staff.

IEEE means the Institute of Electrical and Electronics Engineers.

IMS (IP Multimedia Subsystem) is an open industry standard for voice and multimedia communications using the IP protocol as its foundation.

IP (Internet Protocol) is a standard that defines how data is communicated across the Internet.

IT means information technology.

LAN (Local Area Network) is a computer network that spans a relatively small area — usually a single building or group of buildings — to connect workstations, personal computers, printers and other devices.

LTE (Long Term Evolution) is an evolving networking standard expected to enable wireless networks to support data transfer rates up to 100 megabits per second.

Mesh is a network solution that extends the reach of wireless LANs securely and effectively and is often used in municipal wireless networks.

MIMO (Multiple Input Multiple Output) uses multiple antennas on wireless devices to send data over multiple pathways and recombine it at the receiving end, improving transmission efficiency, distance, speed and quality.

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MPLS (MultiProtocol Label Switching) is a data-carrying mechanism that emulates some properties of a circuit-switched network over a packet-switched network.

MVNO (Mobile Virtual Network Operator) is a wireless service provider without radio spectrum or network infrastructure that buys minutes of use for sales to its customers under its brand from another wireless service provider.

OFDM (Orthogonal Frequency-Division Multiplexing) is a technique used with wireless LANS to transmit large amounts of digital data over a large number of carriers spaced at precise radio frequencies.

PBB (Provider Backbone Bridging) extends the ease-of-use, high capacity and lower cost of Ethernet technology beyond corporate networks to service provider networks by providing sufficient additional addressing space for orders of magnitude greater scalability.

PBB-TE (Provider Backbone Bridging — Transport Engineering) is the IEEE standard being developed that is based on PBT.

PBT (Provider Backbone Transport) is an innovative technology that delivers the TDM-like connection management characteristics service providers are familiar with to traditionally connectionless Ethernet.

QoS (Quality of Service) refers to control mechanisms that prioritize network traffic to ensure sufficient bandwidth for real-time, delay-sensitive applications like VoIP and IPTV.

SIP (Session Initiation Protocol) is an IP telephony signaling protocol developed by the IETF, or Internet Engineering Task Force, primarily for VoIP but flexible enough to support video and other media types as well as integrated voice-data applications.

Six Sigma is a popular business improvement methodology employed by many companies to eliminate defects and improve customer satisfaction.

SOA (Service Oriented Architecture) uses a range of technologies that define use of loosely coupled software services to support requirements of business processes and software users. SOA allows independent services with defined interfaces to perform tasks in a standard way without having foreknowledge of the calling application.

SONET/SDH (Synchronous Optical NETwork/Synchronous Digital Hierarchy) is a method for distributing digital information over optical fiber and allowing communication between interfacing equipment from different vendors. SONET is the protocol for North America and Japan while SDH is the definition for Europe.

UMTS means Universal Mobile Telecommunications System.

VCC (Voice Call Continuity) is a 3GPP specification that describes how a voice call can be persisted as a mobile phone moves between circuit switched and packet switched radio domains.

VoIP (Voice over IP) refers to routing voice over the Internet or any IP-based network.

WAN (Wide Area Network) is a wireline and wireless long-distance communications network that covers a wide geographic area, a state or country, for example, to connect LANs.

WDM (Wave Division Multiplexing) is used with optical fiber to modulate several data streams onto a different part of the light spectrum.

WiMAX (Worldwide Interoperability for Microwave Access) is a long-range wireless networking standard for broadband wireless access networks.

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ITEM 1A.   Risk Factors

Certain statements in this Annual Report on Form 10-K contain words such as “could”, “expects”, “may”, “anticipates”, “believes”, “intends”, “estimates”, “plans”, “envisions”, “seeks” and other similar language and are considered forward-looking statements. These statements are based on our current expectations, estimates, forecasts and projections about the operating environment, economies and markets in which we operate. In addition, other written or oral statements which are considered forward-looking may be made by us or others on our behalf. These statements are subject to important risks, uncertainties and assumptions, which are difficult to predict and actual outcomes may be materially different. In particular, the risks described below could cause actual events to differ materially from those contemplated in forward-looking statements. Unless required by applicable securities laws, we do not have any intention or obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

You should carefully consider the risks described below before investing in our securities. The risks described below are not the only ones facing us. Additional risks not currently known to us or that we currently believe are immaterial may also impair our business, results of operations, financial condition and liquidity.

We have organized our risks into the following categories:

•  Risks Relating to Our Business;

•  Risks Relating to Our Liquidity, Financing Arrangements and Capital; and

•  Risks Relating to Our Prior Restatements and Related Matters.

Risks Relating to Our Business

We face significant emerging and existing competition, may not be able to maintain our market share and may suffer from competitive pricing practices.

We operate in a highly volatile industry that is characterized by industry rationalization and consolidation (both in our competitors and our larger customers), vigorous competition for market share and rapid technological development. Competition is heightened in periods of slow overall market growth. These factors could result in aggressive pricing practices and growing competition from smaller niche companies and established competitors, as well as well-capitalized computer systems and communications companies which, in turn, could separately or together with consolidation in the industry have a material adverse effect on our gross margins. Increased competition could result in price reductions, negatively affecting our operating results and reducing profit margins, and could potentially lead to a loss of market share.

The more traditional distinctions between communications equipment providers, computer hardware and software providers and service and solutions companies are blurring with increasing competition between these entities and yet we believe that to be successful going forward it will be increasingly necessary for companies to partner with others in this group in order to offer an integrated and broader based solution. As such distinctions blur, there are new opportunities but increasing uncertainty and risk, including the potential that regulatory decisions or other factors may affect customer spending decisions.

Since some of the markets in which we compete are characterized by the potential for rapid growth and, in certain cases, low barriers to entry and rapid technological changes, smaller, specialized companies and start-up ventures are now, or may in the future become, our principal competitors. In particular, we currently, and may in the future, face increased competition from low cost competitors and other aggressive entrants in the market seeking to grow market share.

Some of our current and potential competitors may have substantially greater marketing, technical and financial resources, including greater access to the capital markets, than we do. These competitors may have a greater ability to provide customer financing in connection with the sale of products and may be able to accelerate product development or engage in aggressive price reductions or other competitive practices, all of which could give them a competitive advantage over us. Our competitors may enter into business combinations or other relationships to create even more powerful, diversified or aggressive competitors.

We may also face competition from the resale of used telecommunications equipment, including our own, by failed, downsized or consolidated high technology enterprises and telecommunications service providers.

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We may be materially and adversely affected by cautious capital spending, including as a result of current economic uncertainties, or a change in technology focus by our customers, particularly certain key customers.

Continued cautiousness in capital spending by service providers and other customers (including certain recent announcements) may affect our revenues and operating results more than we currently expect and may require us to adjust our current business model. We have focused on larger customers in certain markets, which provide a substantial portion of our revenues and margin. Reduced spending, or a loss, reduction or delay in business from one or more of these customers, a significant change in technology focus or a failure to achieve a significant market share with these customers, could have a material adverse effect on our business, results of operations, financial condition and liquidity, and we could be required to reduce our capital expenditures and investments or take other measures in order to meet our cash requirements. Further, the trend towards the sale of converged networking solutions could also lead to reduced capital spending on multiple networks by our customers as well as other significant technology shifts, including for our legacy products, which could materially and adversely affect our business, results of operations and financial condition.

Rationalization and consolidation among our customers may lead to increased competition and harm our business.

Continued rationalization and consolidation among our customers could result in our dependence on a smaller number of customers, purchasing decision delays by the merged companies and our playing a lesser role, or no longer playing a role, in the supply of communications products to the merged companies and downward pressure on pricing of our products. This rationalization and consolidation could also cause increased competition among our customers and pressure on the pricing of their products and services, which could cause further financial difficulties for our customers and result in reduced spending. Some of our customers have experienced financial difficulty and have filed, or may file, for bankruptcy protection or may be acquired by other industry participants. A rationalization of customers could also increase the supply of used communications products for resale, resulting in increased competition and pressure on the pricing for our new products.

We operate in highly dynamic and volatile industries. If we are unable to develop new products rapidly and accurately predict, or effectively react to, market opportunities, our ability to compete effectively in our industry, and our sales, market share and customer relationships, could be materially and adversely affected.

We operate in highly dynamic and volatile industries. The markets for our products are characterized by rapidly changing technologies, evolving industry standards and customer demand, frequent new product introductions and potential for short product life cycles. Our success depends, in substantial part, on the timely and successful introduction of timely, cost competitive, innovative and high quality new products and upgrades to replace our legacy products with declining market demand, as well as cost reductions on current products to address the operational speed, bandwidth, efficiency and cost requirements of our customers. Our success will also depend on our ability to comply with emerging industry standards, to sell products that operate with products of other suppliers, to integrate, simplify and reduce the number of software programs used in our portfolio of products, to anticipate and address emerging market trends, to provide our customers with new revenue-generating opportunities and to compete with technological and product developments carried out by others.

The development of new, technologically advanced products, including IP-optimized networking solutions, software products and 4G wireless networks, such as LTE and WiMax to either evolve customers from a CDMA network to a 4G network or implement a new wireless network, is a complex and uncertain process. It requires maintaining financial flexibility to react to changing market conditions and significant R&D commitments, as well as the accurate anticipation of technological and market trends along with the timely delivery of new technology. Investments in this environment may result in our R&D and other expenses growing at a faster rate than our revenues, particularly since the initial investment to bring a product to market may be high or market trends could change unexpectedly. We may not be successful in targeting new market opportunities, in developing and commercializing new products in a timely manner or in achieving market acceptance for our new products.

If we fail to respond in a timely and effective manner to unanticipated changes in one or more of the technologies affecting telecommunications and data networking or our new products or product enhancements fail to achieve market acceptance, our ability to compete effectively in our industry, and our sales, market share and customer relationships could be materially and adversely affected.

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Our performance may be materially and adversely affected if our expectations regarding market demand for particular products prove to be wrong.

We expect that data communications traffic will grow at a faster rate than the growth expected for voice traffic and that the use of the Internet will continue to increase, and that this in turn will lead to the convergence of data and voice through either upgrades of traditional voice networks to transport large volumes of data traffic or the construction of new networks designed to transport both voice and data traffic. Either approach would require significant capital expenditures by service providers. We also believe that these developments will increase the demand for IP-optimized networking solutions and 4G wireless networks.

The demand for IP-optimized networking solutions or 4G wireless networks may be lower than we currently expect or may increase at a slower pace than we currently anticipate. On a regional basis, growth of our revenues from sales of our networking solutions in developing countries, such as China and India, may be less than we anticipate if current customer demand does not translate into future sales, we are unable to establish strategic alliances in key markets or developing countries experience slower growth or fewer deployments of VoIP and wireless data networks than we anticipate.

The market may also develop in an unforeseen direction. Certain events, including the commercial availability and actual implementation of new technologies, including 4G wireless networks, or the evolution of other technologies, may occur, which would affect the extent or timing of anticipated market demand, or increase demand for products based on other technologies, or reduce the demand for IP-optimized networking solutions or 4G wireless networks. For example we are seeing an increased demand for LTE as the path to evolve older technologies such as CDMA to 4G wireless networks. Any such change in demand may reduce purchases of our networking solutions by our customers, require increased or more rapid expenditures to develop and market different technologies, or provide market opportunities for our competitors.

Certain key and new product evolutions are based on different or competing standards and technologies. There is a risk that the proposals we endorse and pursue may not evolve into an accepted market standard or sufficient active market demand.

If our expectations regarding market demand and direction are incorrect, or the rate of development or acceptance of our next-generation solutions such as LTE does not meet market demand and customer expectation, or, if sales of our traditional circuit switching solutions decline more rapidly than we anticipate, or if the rate of decline continues to exceed the rate of growth of our next-generation solutions, it could materially and adversely affect our business, results of operations and financial condition.

We continue to restructure and transform our business. The assumptions underlying these efforts may prove to be inaccurate, or we may fail to achieve the expected benefits from these efforts, we may not successfully manage our costs and we may have to restructure or transform our business again in the future.

In order to be successful, we must have a competitive business model which brings innovative products and services to market in a timely way. We continue to restructure and transform our business in response to changes in industry and market conditions and to focus on business simplification, quality improvement, reduce direct and indirect costs, and new revenue growth. We must manage the potentially higher growth areas of our business, which entail higher operational and financial risks, as well as the non-core areas, in order for us to achieve improved results. Our assumptions underlying these actions may not be correct, we may be unable to successfully execute these plans, and even if successfully executed, our actions may not be effective or may not lead to the anticipated benefits, or we may not on an ongoing basis successfully manage our costs. As a result, we may determine that further restructuring or business transformation will be needed, which could result in the need to record further special charges such as costs associated with workforce reductions, and we may be unable to maintain or improve our market competitiveness or profitability.

In connection with the transformation of our business, we have made, and will continue to make, judgments as to whether we should further reduce, relocate or otherwise change our workforce. Costs incurred in connection with workforce reduction efforts may be higher than estimated. Furthermore, our workforce efforts may impair our ability to achieve our current or future business objectives. Any further workforce efforts including reductions may not occur on the expected timetable and may result in the recording of additional charges.

Further, we have made, and will continue to make, judgments as to whether we should limit investment in, exit, or dispose of certain businesses. Any decision by management to further limit investment in, or exit or dispose of, businesses may result in the recording of additional charges. Any such decisions may not occur on the expected timetable, or at all, which may have a material adverse effect on our business, results of operations and financial condition.

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As part of our review of our restructured business, we look at the recoverability of tangible and intangible assets. Future market conditions may indicate these assets are not recoverable based on changes in forecasts of future business performance and the estimated useful life of these assets, and therefore trigger further write-downs of these assets.

Further write-downs may have a material adverse effect on our business, results of operations and financial condition.

Negative developments associated with our suppliers and contract manufacturers, including our reliance on certain suppliers for key optical networking solutions components, and on a sole supplier for the majority of our manufacturing and design functions and consolidation in the industries in which our suppliers operate may materially and adversely affect our business, results of operations, financial condition and customer relationships.

Our equipment and component suppliers have experienced, and may continue to experience, consolidation in their industry, and at times financial difficulties, which may result in fewer sources of components or products, increased prices and greater exposure relating to the financial stability of our suppliers. A reduction or interruption in component supply or external manufacturing capacity, a significant increase in the price of one or more components, or excessive inventory levels could materially and negatively affect our gross margins and our operating results and could materially damage customer relationships.

In particular, we currently rely on certain suppliers for key optical networking solutions components, and our supply of such components could be materially adversely affected by adverse developments in that supply arrangement with these suppliers. If these suppliers are unable to meet their contractual obligations under our supply arrangements and if we are then unable to make alternative arrangements, it could have a material adverse effect on our revenues, cash flows and relationships with our customers.

As part of the transformation of our supply chain from a vertically integrated manufacturing model to a virtually integrated model, we have outsourced substantially all of our manufacturing capacity, and divested associated assets, to contract manufacturers, including an agreement with Flextronics Telecom Systems Ltd., or Flextronics. As a result, a significant portion of our supply chain is concentrated with Flextronics. In addition, further consolidation in the contract manufacturing industry has had the effect of increasing that concentration. Outsourcing our manufacturing capability to contract manufacturers involves potential challenges in designing and maintaining controls relating to the outsourced operations in an effective and timely manner. We work closely with our suppliers and contract manufacturers to address issues such as cost, quality and timely delivery and to meet increases in customer demand, when needed, and we also manage our internal inventory levels as required. However, we may encounter difficulties, including shortages or interruptions in the supply of quality components and/or products in the future, and we may also encounter difficulties with our concentrated supply chain relationships, which could be compounded by potential consolidation by our key suppliers. Further, certain key elements of our efforts to transform our business require and are reliant on our suppliers meeting their commitments and working cooperatively and effectively on these transformation aspects.

A reduction or interruption in component supply or external manufacturing capacity, untimely delivery of products, a significant increase in the price of one or more components, or excessive inventory levels or issues that could arise in our concentrated supply chain relationships or in transitioning between suppliers could materially and negatively affect our gross margins and our operating results and could materially damage customer relationships.

We may be required to pay significant penalties or liquidated damages, or our customers may be able to cancel contracts, in the event that we fail to meet contractual obligations including delivery and installation deadlines, which could have a material adverse effect on our revenues, operating results, cash flows and relationships with our customers.

Some of our contracts with customers contain delivery and installation timetables, performance criteria and other contractual obligations which, if not met, could result in our having to pay significant penalties or liquidated damages and the termination of the contract. Our ability to meet these contractual obligations is, in part, dependent on us obtaining timely and adequate component parts and products from suppliers and contract manufacturers. Because we do not always have parallel rights against our suppliers, in the event of delays or failures to timely provide component parts and products, such delays or failures could have a material adverse effect on our revenues, operating results, cash flows and relationships with our customers.

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Defects, errors or failures in our products could result in higher costs than we expect and could harm our reputation and adversely affect our business, results of operations and financial condition.

Our products are highly complex, and some of them can be fully tested only when deployed in telecommunications networks or with other equipment. From time to time, our products have contained undetected defects, errors or failures. The occurrence of defects, errors or failures in our products could result in cancellation of orders and product returns, and the loss of or delay in market acceptance of our products, loss of sales and increased operating or support costs. Further, our customers or our customers’ end users could bring legal actions against us, resulting in the diversion of our resources, legal expenses and judgments, fines or other penalties or losses. Any of these occurrences could adversely affect our business, results of operations and financial condition.

We record provisions for estimated costs related to product warranties given to customers to cover defects. These provisions are based in part on historical product failure rates and costs. See “Application of Critical Accounting Policies and Estimates — Provisions for Product Warranties” in the MD&A section of this report. If actual product failure rates or materials replacement, labor or servicing costs are greater than our estimates, our gross margin could be negatively affected.

Fluctuations in foreign currency exchange rates could negatively impact our business, results of operations and financial condition.

As an increasing proportion of our business may be denominated in currencies other than U.S. Dollars, fluctuations in foreign currency exchange rates may have an adverse impact on our business, results of operations and financial condition. Our primary currency exposures are to Canadian Dollars, British Pounds and the Euro. These exposures may change over time as we change the geographic mix of our global business and as our business practices evolve. For instance, if we increase our presence in emerging markets, we may see an increase in our exposure to emerging market currencies, such as the Indian Rupee, Brazilian Real and the Chinese Yuan. These currencies may be affected by internal factors and external developments in other countries. Also, our ability to enter into normal course derivative or hedging transactions to mitigate such exposures in the future may be impacted by our credit condition. Significant foreign exchange rate fluctuations could have a material adverse effect on our business, results of operations and financial condition.

We also engage in economic foreign exchange and interest rate hedging programs. If these programs do not meet the hedge effectiveness designation criteria prescribed by certain accounting rules, or if we choose not to pursue such designation, changes in the fair value of the hedge could result in volatility to our income statement or have a negative effect on our results of operations.

If we fail to manage the higher operational and financial risks associated with our international expansion efforts, it could have a material adverse effect on our business, results of operations and financial condition.

We intend to continue to pursue international and emerging market growth opportunities. In many international markets, long-standing relationships between potential customers and their local suppliers and protective regulations, including local content requirements and approvals, create barriers to entry. In addition, pursuing international opportunities may require significant investments for an extended period before returns on those investments, if any, are realized, which may result in expenses growing at a faster rate than revenues. Furthermore, those projects and investments could be adversely affected by, among other factors: reversals or delays in the opening of foreign markets to new competitors or the introduction of new technologies into those markets; a challenging pricing environment in highly competitive new markets; exchange controls; restrictions on repatriation of cash; nationalization or regulation of local industry; economic, social and political risks; taxation; challenges in staffing and managing international opportunities; and acts of war or terrorism.

Difficulties in foreign financial markets and economies and of foreign financial institutions, particularly in emerging markets, could adversely affect demand from customers in the affected countries. An inability to maintain or expand our business in international and emerging markets while balancing the higher operational and financial risks associated with these markets could have a material adverse effect on our business, results of operations and financial condition.

If market conditions deteriorate or future results of operations are less than expected, an additional valuation allowance may be required for all or a portion of our deferred tax assets.

We currently have significant deferred tax assets, which may be used to reduce taxable income in the future. We assess the realization of these deferred tax assets quarterly, and if we determine that it is more likely than not that some portion

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of these assets will not be realized, an income tax valuation allowance is recorded. If market conditions deteriorate or future results of operations are less than expected, or there is a change to applicable tax rules, future assessments may result in a determination that it is more likely than not that some or all of our net deferred tax assets are not realizable. As a result, we may need to establish an additional valuation allowance for all or a portion of our net deferred tax assets, which may have a material adverse effect on our business, results of operations and financial condition.

If we fail to protect our intellectual property rights, or if we are subject to adverse judgments or settlements arising out of disputes regarding intellectual property rights, our business, results of operations and financial condition could be materially and adversely affected.

Our proprietary technology is very important to our business. We rely on patent, copyright, trademark and trade secret laws to protect that technology. Our business is global, and the extent of that protection varies by jurisdiction. The protection of our proprietary technology may be challenged, invalidated or circumvented, and our intellectual property rights may not be sufficient to provide us with competitive advantages.

In particular, we may not be successful in obtaining any particular patent. Even if issued, future patents or other intellectual property rights may not be sufficiently broad to protect our proprietary technology. Competitors may misappropriate our intellectual property, disputes as to ownership may arise, and our intellectual property may otherwise fall into the public domain or similar intellectual property may be independently developed by competitors reducing the competitive benefits of our intellectual property.

In addition, as part of our business transformation program in 2007, we substantially reduced and began focusing our total overall expenditure on protecting our intellectual property rights with an intention to focus on the key elements of such rights but there is a risk we may not adequately protect key elements. Expenditures on protecting intellectual property in 2008 are expected to be essentially flat from 2007. Additionally, efforts at refocusing the total expenditure on protecting intellectual property rights will continue in 2008.

Claims of intellectual property infringement or trade secret misappropriation may also be asserted against us, or against our customers in connection with their use of our products or our intellectual property rights may be challenged, invalidated or circumvented, or fail to provide significant competitive advantages. We believe that intellectual property licensed from third parties will remain available on commercially reasonable terms in such cases, however there can be no assurance such rights will be available on such terms and an inability to license such rights could have a material adverse effect on our business. An unfavorable outcome in such a claim could require us to cease offering for sale the products that are the subject of such a claim, pay substantial monetary damages to a third party, make ongoing royalty payments to a third party and indemnify our customers.

Defense or assertion of claims of intellectual property infringement or trade secret misappropriation may require extensive participation by senior management and other key employees and may reduce their time and ability to focus on other aspects of our business. Successful claims of intellectual property infringement or other intellectual property claims against us or our customers, or a failure by us to protect our proprietary technology, could have a material adverse effect on our business, results of operations and financial condition.

If we are unable to maintain the integrity of our information systems, our business and future prospects may be harmed.

We rely on the security of our information systems, among other things, to protect our proprietary information and information of our customers. If we do not maintain adequate security procedures over our information systems, we may be susceptible to computer viruses, break-ins and similar disruptions from unauthorized tampering with our computer systems to access our proprietary information or that of our customers. Even if we are able to maintain procedures that are adequate to address current security risks, hackers or other unauthorized users may develop new techniques that will enable them to successfully circumvent our current security procedures. The failure to protect our proprietary information could seriously harm our business and future prospects or expose us to claims by our customers, employees or others that we did not adequately protect their proprietary information.

Changes in regulation of the Internet or other regulatory changes may affect the manner in which we conduct our business and may materially and adversely affect our business, operating results and financial condition.

The telecommunications industry is highly regulated by governments around the globe, although market-based reforms are taking place in many countries. Changes in telecommunications regulations, product standards and spectrum availability,

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or other industry regulation in any country in which we or our customers operate could significantly affect demand for and the costs of our products. For example, regulatory changes could affect our customers’ capital spending decisions, increase competition among equipment suppliers or increase the costs of selling our products, any of which could have a material adverse effect on our business, results of operation and financial condition.

We are subject to various product content laws and product takeback and recycling requirements that will require full compliance in the coming years. As a result of these laws and requirements, we will incur additional compliance costs. See “Environmental Matters” in the Legal Proceedings section of this report. Although compliance costs relating to environmental matters have not resulted in a material adverse effect on our business, results of operations and financial condition in the past, they may result in a material adverse effect in the future. If we cannot operate within the scope of those laws and requirements, we could be prohibited from selling certain products in the jurisdictions covered by such laws and requirements, which could have a material adverse effect on our business, results of operations and financial condition.

We may make strategic acquisitions. If we are not successful in operating or integrating these acquisitions, our business, results of operations and financial condition may be materially and adversely affected.

From time to time, we consider acquisitions of businesses that we believe will enhance the expansion of our business and products. Acquisitions involve significant risks and uncertainties, including:

•  the industry may develop in a different direction than anticipated and the technologies we acquire may not prove to be those we need or the business model of acquired companies may become obsolete;

•  the future valuations of acquired businesses may decrease from the market price we paid for these acquisitions;

•  the revenues of acquired businesses may not offset increased operating expenses associated with these acquisitions;

•  potential difficulties in completing in-process research and development projects and delivering high quality products to our customers;

•  potential difficulties in integrating new products, software, internal controls, businesses and operations in an effective and timely manner or at all;

•  our customers or customers of the acquired businesses may defer purchase decisions as they evaluate the impact of the acquisitions on our future product strategy;

•  potential loss of key employees of the acquired businesses;

•  diversion of the attention of our senior management from the operation of our daily business;

•  entering new markets in which we have limited experience and where competitors may have a stronger market presence;

•  the potential adverse effect on our cash position as a result of all or a portion of an acquisition purchase price being paid in cash;

•  potential issuance of equity or equity related securities as a result of all or a portion of an acquisition purchase price being paid with such equity or equity related securities, which could result in the significant dilution of existing equity positions; and

•  potential assumption of liabilities.

If we do not successfully operate and integrate newly acquired businesses appropriately, effectively and in a timely manner, it could have a material adverse effect on our ability to take advantage of further growth in demand for IP-optimized network solutions and other advances in technology, as well as on our revenues, gross margins and expenses.

Our business may suffer if our strategic alliances are not consummated or are not successful.

We have announced a number of strategic alliances with suppliers, developers and members of our industry to facilitate product compatibility, encourage adoption of industry standards or to offer complementary product or service offerings to meet customer needs, including our joint venture with LGE and our alliances with Microsoft and IBM. We believe that cooperation between multiple vendors is critical to the success of our communications solutions for both service providers and enterprises. In some cases, the companies with which we have strategic alliances also compete against us in some of our business areas. If a member of a strategic alliance fails to perform its obligations, if the relationship fails to develop as expected or if the relationship is terminated, we could experience delays in product availability or impairment of our relationships with our customers. Our business may also be adversely affected if our choice of strategic alliance collaborators does not enable us to leverage our existing and future product and service offerings in order to capitalize on expected future market trends (such as convergence in the enterprise market).

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We may not be able to attract or retain the personnel necessary to achieve our business objectives.

Competition for certain key positions and specialized technical and sales personnel in the high-technology industry remains strong. Our future success depends in part on our continued ability to hire, assimilate in a timely manner and retain qualified personnel, particularly in key senior management positions and in our key areas of potential growth. The loss of key managers could have a material adverse effect on our business, results of operations and financial condition. If we are not successful in attracting, recruiting or retaining qualified employees, including members of senior management, we may not have the personnel necessary to achieve our business objectives, including our business transformation initiatives and the implementation of our remedial measures.

Our risk management strategy may not be effective or commensurate to the risks we are facing.

We maintain global blanket policies of insurance of the types and in the amounts of companies of the same size and in the same industry. We have retained certain self-insurance risks with respect to certain employee benefit programs such as worker’s compensation, group health insurance, life insurance and other types of insurance. Our risk management programs and claims handling and litigation processes utilize internal professionals and external technical expertise. If this risk management strategy is not effective or is not commensurate to the risks we are facing, these risks could have a material adverse effect on our business, results of operations, financial condition and liquidity.

Risks Relating to Our Liquidity, Financing Arrangements and Capital

Cash flow fluctuations may affect our ability to fund our working capital requirements and achieve our business objectives in a timely manner. Additional sources of funds may not be available on acceptable terms or at all.

Our working capital requirements and cash flows historically have been, and are expected to continue to be, subject to quarterly and yearly fluctuations, depending on such factors as timing and size of capital expenditures, level of sales, timing of deliveries and collection of receivables, inventory levels, customer payment terms, customer financing obligations and supplier terms and conditions. As of December 31, 2007, our primary source of liquidity was cash and we expect this to continue throughout 2008. We cannot be assured that our operations will generate significant cash flow in 2008. If we do not meet our business transformation goals, including those relating to our operating margins, restructuring and working capital programs, our cash flow could be adversely impacted. As discussed below under “We are subject to ongoing criminal investigations in the U.S. and Canada, which could require us to pay substantial fines or other penalties or subject us to sanctions that may have material adverse effects on us,” any payments we make in connection with any judgments, fines, penalties or settlements in connection with our pending civil litigation and investigations could materially adversely affect our cash position and more generally our business, results of operations and financial condition.

We may seek additional funds from liquidity-generating transactions and other sources of external financing (which may include a variety of debt, convertible debt and/or equity financings), but these financings may not be available to us on acceptable terms or at all. In addition, we may not continue to have access to our $750 support facility with Export Development Canada, or the EDC Support Facility, when and as needed. Our inability to manage cash flow fluctuations resulting from the above factors and the potential reduction or termination of the EDC Support Facility could have a material adverse effect on our ability to fund our working capital requirements from operating cash flows and other sources of liquidity or to achieve our business objectives in a timely manner.

If we are unable to, or decide not to, refinance our existing debt that is coming due in 2008, the amount of cash available to finance our operations and other business activities and our ability to pay any judgments, fines, penalties or settlements, if any, would be significantly reduced, which could have a material adverse effect on our business, results of operations, financial condition and liquidity.

Our high level of debt could materially and adversely affect our business, results of operations, financial condition and liquidity.

In order to finance our business, we have incurred significant levels of debt. As of December 31, 2007, NNC had approximately $4.5 billion of debt. In the future, we may need to obtain additional sources of funding, which may include debt or convertible debt financing. A high level of debt, arduous or restrictive terms and conditions related to accessing certain sources of funding, or any significant reduction in, or access to, the EDC Support Facility, could place us at a competitive disadvantage compared to competitors that have less debt and could materially and adversely affect our ability to: fund the operations of our business; borrow money in the future or access other sources of funding; refinance our

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existing debt, should we decide to do so; pay interest, or judgments, settlements, fines or other penalties; and maintain our flexibility in planning for or reacting to economic downturns, adverse industry conditions and adverse developments in our business, and our ability to withstand such events.

Covenants in the indentures governing certain of our senior notes impose operating and financial restrictions on us, which may prevent us from issuing new debt and from capitalizing on business opportunities.

The indentures governing our senior notes contain various restrictive covenants. See “Liquidity and Capital Resources” in the MD&A section of this report.

These and other restrictions in the indentures governing our senior notes may limit our ability to execute our business strategy. A failure to comply with these restrictions could result in an event of default under the senior notes. In such circumstances, it is possible that the holders of our public debt or our lenders would seek to accelerate the maturity of our debt and we and NNC may be unable to meet our respective payment obligations. If this were to occur, we might be forced to seek a waiver or an amendment under the indenture, which could make the terms of these arrangements more onerous for us.

Our credit ratings are below investment grade, which may adversely affect our liquidity.

Our long-term corporate credit rating from Moody’s is currently “B3” and our preferred share rating is “Caa3” and from S&P, it is currently “B−” and its preferred share rating is “CCC−”. Both Moody’s and S&P have set their respective outlooks at stable. These ratings are below investment grade. These ratings and our current credit condition affect, among other things, our ability to raise debt, access the commercial paper market (which is currently closed to us), engage in alternative financing arrangements, obtain bank financings and our ability and the cost to sell or securitize receivables, obtain customer bid, performance-related and other bonds and contracts and/or enter into normal course derivative or hedging transactions. These factors also affect the terms under which some customers and suppliers are willing to continue to do business with us and the price of our publicly traded securities. If our credit ratings are lowered or rating agencies issue adverse commentaries in the future, it could have a material adverse effect on our business, results of operations, financial condition and liquidity.

An increased portion of our cash and cash equivalents may be restricted as cash collateral if we are unable to secure alternative support for certain obligations arising out of our normal course business activities.

The EDC Support Facility may not provide all the support we require for certain of our obligations arising out of our normal course of business activities. As of December 31, 2007, there was approximately $146 of outstanding support utilized under the EDC Support Facility, approximately $89 of which was outstanding under the small bond sub-facility. The EDC Support Facility will terminate on December 31, 2011, subject to automatic annual renewal each following year, unless either party provides written notice to the other of its intent to terminate. Individual bonds supported under the EDC Facility currently expire on the fourth anniversary of such individual bond regardless of the termination date of the EDC Support Facility. EDC may also suspend its obligation to issue us any additional support if events occur that have a material adverse effect on our business, financial position or results of operations. If we do not have access to sufficient support under the EDC Support Facility, and if we are unable to secure alternative support, an increased portion of our cash and cash equivalents may be restricted as cash collateral, which would reduce our liquidity.

An inability of our subsidiaries to provide us with funding in sufficient amounts could adversely affect our ability to meet our obligations.

We generally depend primarily on loans, dividends or other forms of financing from our subsidiaries to meet our obligations to pay interest and principal on outstanding debt and to pay corporate expenses. If our subsidiaries are unable to pay dividends or provide us with loans or other forms of financing in sufficient amounts, or if there are any restrictions on the transfer of cash between us and our subsidiaries, including those imposed by foreign governments and commercial limitations on transfers of cash pursuant to our joint ventures commitments, our liquidity and our ability to meet our obligations would be adversely affected.

We may need to make larger contributions to our defined benefit plans in the future, which could have a material adverse impact on our liquidity and our ability to meet our other obligations.

We currently maintain various defined benefit plans in North America and the U.K. covering various categories of employees and retirees, which represent our major retirement plans. In addition, we have smaller retirement plans in other

26

countries. Effective January 1, 2008, accrual for service will no longer continue under our North American defined benefit plans. In November 2006, we reached an agreement with the Trustee of our pension plan in the U.K. that sets the levels of contribution through April 2012. As a result of these North American and U.K. changes, we have greater clarity regarding our contribution levels for the next several years. Our obligations to make contributions to fund benefit obligations under these plans are based on actuarial valuations, which themselves are based on certain assumptions about the long-term operation of the plans, including employee turnover and retirement rates, the performance of the financial markets and interest rates. If future trends differ from the assumptions, the amounts we are obligated to contribute to the plans may increase. If the financial markets perform lower than the assumptions, we may have to make larger contributions in the future than we would otherwise have to make and expenses related to defined benefit plans could increase. Also, if interest rates are lower in the future than we assume they will be, then we could be required to make larger contributions than we would otherwise have to make.

Our exposure to our customers’ credit risk under customer financing arrangements could increase.

The competitive environment in which we operate has required us at times to provide significant amounts of medium-term and long-term customer financing. Customer financing arrangements may include financing in connection with the sale of our products and services, funding for certain non-product and service costs associated with network installation and integration of our products and services, financing for working capital and equity financing. While we have significantly reduced our customer financing exposure, we may in the future provide customer financing to customers in areas that are strategic to our core business activity.

From time to time, certain of our customers may experience financial difficulties and fail to meet their financial obligations. When this occurs, we may incur charges for provisions related to certain trade and customer financing receivables. Any future financial difficulties experienced by any of our customers could have a material adverse effect on our cash flow and operating results.

Risks Relating to Our Prior Restatements and Related Matters

We are subject to ongoing criminal investigations in the U.S. and Canada, which could require us to pay substantial fines or other penalties or subject us to sanctions that may have material adverse effects on us.

We have effected successive restatements of certain prior periods financial results (see our Annual Reports on Form 10-K for the fiscal years ended 2006, 2005, 2004 and 2003). We and NNC have also received U.S. federal grand jury subpoenas for the production of certain documents sought in connection with an ongoing criminal investigation being conducted by the U.S. Attorney’s Office for the Northern District of Texas, Dallas Division. Further, a criminal investigation into our and NNC’s financial accounting situation by the Integrated Market Enforcement Team of the Royal Canadian Mounted Police is also ongoing. See the Legal Proceedings section of this report.

We cannot predict when these investigations will be completed or the timing of any other related developments, nor can we predict what the results of these investigations may be.

We continue to incur expenses in connection with these investigations and may be required to pay material judgments, fines, penalties or settlements, and we have not taken any reserves for any such payments. The investigations may adversely affect our ability to obtain, or increase the cost of obtaining, directors’ and officers’ liability insurance and other types of insurance, which could have a material adverse effect on our business, results of operations and financial condition. In addition, the findings and outcomes of the criminal investigations and our settlements with the OSC and SEC in May 2007 and October 2007, respectively, may adversely affect the course of the remaining civil litigation against us.

The Global Class Action Settlement requires NNC to pay a substantial cash amount and will result in a significant dilution of existing equity positions.

NNC has entered into agreements to settle the U.S. class actions and all but one of the related Canadian actions. In December 2006 and January 2007, the Global Class Action Settlement was approved by all of the courts in New York, Ontario, British Columbia and Quebec.

Under the terms of the Global Class Action Settlement, NNC agreed to pay $575, plus applicable accrued interest, in cash and will issue approximately 62,866,775 Nortel Networks Corporation common shares (representing approximately 14.5% of Nortel Networks Corporation common shares outstanding as of February 7, 2006), to the plaintiffs, and NNC will contribute to the plaintiffs one-half of any recovery from its ongoing litigation against certain of its former senior officers

27

who were terminated for cause in 2004, which seeks the return of payments made to them in 2003 under its bonus plan. The effective date of the Global Class Action Settlement was March 20, 2007, on which date the number of shares issuable in connection with the equity component was fixed. The administration of the settlement continues to be a complex and lengthy process. Although we cannot predict how long the process will take, approximately 4% of the settlement shares have been issued, and we currently expect the issuance of the balance to commence in the first half of 2008. NNC’s insurers agreed to pay $229 towards the settlement and NNC agreed with the insurers to certain indemnification obligations. While we believe that these indemnification obligations would be unlikely to materially increase NNC’s total payment obligations under the Global Class Action Settlement, any such indemnification payments could be material and would not reduce the amounts payable by NNC. The equity component of the Global Class Action Settlement will result in a dilution of existing equity positions, could contribute to volatility in the market price of Nortel Networks Corporation common shares and could materially and adversely impact future financings with equity or equity-related securities.

We are subject to additional pending civil litigation actions, which are not encompassed by the Global Class Action Settlement and which, if decided against us or as a result of settlement, could require us to pay significant judgments or settlements and could result in the dilution of existing equity positions, and we cannot predict the timing of developments in these matters.

In addition to the shareholder class actions encompassed by the Global Class Action Settlement and litigation in the ordinary course of business, we are currently, and may in the future be, subject to class actions, other securities litigation and other actions arising in relation to our accounting restatements. See the Legal Proceedings section of this report. This litigation is, and any such additional litigation could be, time consuming and expensive and could distract our executive team from the conduct of our daily business. The adverse resolution of any specific lawsuit could have a material adverse effect on our ability to favorably resolve other lawsuits and on our financial condition and liquidity. In addition, the resolution of those matters may require us to issue equity or equity-related securities, which could potentially result in the significant dilution of existing equity positions.

ITEM 1B.   Unresolved Staff Comments

None.

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ITEM 2.   Properties

In 2007, we continued to reduce the size of our facilities as part of a square footage reduction program associated with our 2007 Business Transformation plan. We vacated approximately 1 million square feet of operating space. In addition, we fully disposed of approximately 1.9 million square feet of space, eliminating any direct or contingent liability with respect to that space. The disposed space included our Montreal, Canada facility and a portion of our Monkstown, Northern Ireland facility, netting a combined $65. During 2008, we plan to vacate an additional 0.5 million square feet and fully dispose of 0.8 million square feet as a continuation of the plan. On February 27, 2008, we announced our plan to further reduce our real estate portfolio by an additional 750,000 square feet by the end of 2009. For further information see “Executive Overview — Significant Business Developments — Business Transformation Initiatives” and “Results of Operations — Special Charges” in the MD&A section of this report.

We believe our facilities are suitable, adequate and sufficient to meet current needs. Most sites are used by multiple business segments for various purposes. As of December 31, 2007, estimated facilities use by segment was 25% Global Operations, 19% Carrier Networks, 13% Enterprise Solutions, 7% MEN, 17% Global Services, and 19% one or more segments and/or corporate facilities. In 2007, we operated 207 sites occupying approximately 11.1 million square feet.

	Number		Number
Type of Site*	Owned		Leased		Geographic Locations
Manufacturing and repair**		5		—	EMEA, CALA and the Asia region
Distribution centers		—		7	U.S., EMEA, CALA and the Asia region
Offices (administration, sales and field service)		2		183	All geographic regions
Research and development		3		8	U.S., Canada, EMEA and the Asia region
TOTAL***		10		198

*	Indicates primary use. A number of sites are mixed-use facilities.
**	Manufacturing sites in China and Thailand are operated by Nortel joint ventures. The site in China is owned pursuant to land use rights granted by Chinese authorities. Small amounts of integration and test activity are conducted by Nortel in Northern Ireland, Brazil and Turkey.
***	Excludes approximately 4.1 million square feet, designated as part of planned square footage reduction plans, of which approximately 3.1 million square feet was sub-leased.

ITEM 3.   Legal Proceedings

Nortel I Class Actions: Subsequent to NNC’s announcement on February 15, 2001, in which it provided revised guidance for financial performance for the 2001 fiscal year and the first quarter of 2001, NNC and certain of its then-current officers and directors were named as defendants in several purported class action lawsuits in the U.S. and Canada, or collectively, the Nortel I Class Actions. These lawsuits in the U.S. District Court for the Southern District of New York, where all the U.S. lawsuits were consolidated, the Ontario Superior Court of Justice, the Supreme Court of British Columbia and the Quebec Superior Court were filed on behalf of shareholders who acquired NNC securities during certain periods between October 24, 2000 and February 15, 2001. The lawsuits alleged, among other things, violations of U.S. federal and Canadian provincial securities laws.

Nortel II Class Actions: Subsequent to the announcement on March 10, 2004, in which NNC indicated it was likely that it would need to revise its previously announced unaudited results for the year ended December 31, 2003 and the results reported in certain of its quarterly reports in 2003, and to restate its previously filed financial results for one or more earlier periods, NNC and certain of its then-current and former officers and directors were named as defendants in several purported class action lawsuits in the U.S. and Canada, or collectively, the Nortel II Class Actions. These lawsuits in the U.S. District Court for the Southern District of New York, the Ontario Superior Court of Justice and the Quebec Superior Court were filed on behalf of shareholders who acquired NNC securities during certain periods between February 16, 2001 and July 28, 2004. The lawsuits alleged, among other things, violations of U.S. federal and Canadian provincial securities laws, negligence, misrepresentations, oppressive conduct, insider trading and violations of Canadian corporation and competition laws in connection with certain of NNC’s financial results.

Global Class Action Settlement: During 2006, NNC entered into agreements to settle all of the Nortel I Class Actions and Nortel II Class Actions, or the Global Class Action Settlement, concurrently, except one related Canadian action described below. In December 2006 and January 2007, the Global Class Action Settlement was approved by the courts in New York, Ontario, British Columbia and Quebec, and became effective on March 20, 2007.

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Under the terms of the Global Class Action Settlement, NNC agreed to pay $575 in cash plus accrued interest and issue approximately 62,866,775 Nortel Networks Corporation common shares to the plaintiffs (representing approximately 14.5% of Nortel Networks Corporation common shares outstanding as of February 7, 2006, the date an agreement in principle was reached with the plaintiffs in the U.S. class action lawsuits). NNC will also contribute to the plaintiffs one-half of any recovery from its ongoing litigation against certain of its former senior officers who were terminated for cause in 2004, which seeks the return of payments made to them in 2003 under NNC’s bonus plan. The total settlement amount includes all plaintiffs’ court-approved attorneys’ fees. On June 1, 2006, NNC placed $575 plus accrued interest of $5 into escrow and classified this amount as restricted cash. As a result of the Global Class Action Settlement, NNC established a litigation reserve and recorded a charge in the amount of $2,474 to its full-year 2005 financial results, $575 of which related to the cash portion of the Global Class Action Settlement, while $1,899 related to the equity component. The equity component of the litigation reserve was adjusted each quarter from February 2006 through March 20, 2007 to reflect the fair value of the Nortel Networks Corporation common shares issuable.

The effective date of the Global Class Action Settlement was March 20, 2007, on which date the number of shares issuable in connection with the equity component was fixed. As such, a final measurement date occurred for the equity component of the settlement and the value of the shares issuable was fixed at their fair value of $1,626 on the effective date.

NNC recorded a shareholder litigation settlement recovery of $54 during the first quarter of 2007 as a result of the final fair value adjustment for the equity component of the Global Class Action Settlement made on March 20, 2007. In addition, the litigation reserve related to the equity component was reclassified to additional paid-in capital within shareholders’ equity on March 20, 2007 as the number of issuable shares was fixed on that date. The reclassified amount will be further reclassified to Nortel Networks Corporation common shares as the shares are issued. At the effective date of March 20, 2007, NNC also removed the restricted cash and corresponding litigation reserve related to the cash portion of the settlement, as the funds became controlled by the escrow agents and NNC’s obligation has been extinguished. The administration of the settlement will be a complex and lengthy process. Plaintiffs’ counsel will submit lists of claims approved by the claims administrator to the appropriate courts for approval. Once all the courts have approved the claims, the process of distributing cash and share certificates to claimants will begin. Although we cannot predict how long the process will take, approximately 4% of the settlement shares have been issued, and NNC currently expects the issuance of the balance to commence in the first half of 2008.

NNC’s insurers have agreed to pay $229 in cash toward the settlement and NNC has agreed to certain indemnification obligations with them. NNC believes that it is unlikely that these indemnification obligations will materially increase its total cash payment obligations under the Global Class Action Settlement.

Under the terms of the Global Class Action Settlement, NNC also agreed to certain corporate governance enhancements. These enhancements, included the codification of certain of NNC’s current governance practices in the written mandate for its Board of Directors and the inclusion in NNC’s Statement of Corporate Governance Practices contained in its annual proxy circular and proxy statement of disclosure regarding certain other governance practices.

Ontario Settlement: In August 2006, NNC reached a separate agreement in principle to settle a class action lawsuit in the Ontario Superior Court of Justice that is not covered by the Global Class Action Settlement, subject to court approval, or the Ontario Settlement. In February 2007, the court approved the Ontario Settlement. The settlement did not have a material impact on NNC’s financial condition and an accrued liability was recorded in the third quarter of 2006 for the related settlement, which was paid in the first quarter of 2007.

SEC Settlement: We and NNC had been under investigation by the SEC since April 2004 in connection with previous restatements of our and NNC’s consolidated financial statements. As a result of discussions with the Enforcement Staff of the SEC for purposes of resolving the investigation, NNC recorded an accrual in its consolidated financial statements in the second quarter of 2007 in the amount of $35, which it believed represented the best estimate for the liability associated with this matter at that time. In October 2007, we and NNC reached a settlement on all issues with the SEC in connection with its investigation of the previous restatements of our and NNC’s financial results. As part of the settlement, NNC agreed to pay a civil penalty of $35 and a disgorgement in the amount of one U.S. Dollar, and we and NNC consented to be restrained and enjoined from future violations of the antifraud, reporting, books and records and internal control provisions of U.S. federal securities laws. Further, we and NNC are required to provide to the SEC quarterly written reports detailing our progress in implementing our and NNC’s remediation plan and actions to address our remaining weakness relating to revenue recognition. This reporting requirement began following the filing of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 and is expected to end following the filing of this report

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and delivery of the corresponding remediation progress report, based upon the elimination of our remaining material weakness and full implementation of our remediation plan.

OSC Settlement: In April 2004, NNC also announced that we and NNC were under investigation by the Ontario Securities Commission, or the OSC, in connection with the same matters as the SEC investigation. In May 2007, we and NNC entered into a settlement agreement with the Staff of the OSC in connection with its investigation. On May 22, 2007, the OSC issued an order approving the settlement agreement, which fully resolves all issues with the OSC. Under the terms of the OSC order, we and NNC are required to deliver to the OSC Staff quarterly and annual written reports detailing, among other matters, our progress in implementing our remediation plan. This reporting obligation began following the filing of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 and is expected to end following the filing of this report and delivery of the corresponding remediation progress report based upon the elimination of our remaining material weakness relating to revenue recognition. The OSC order did not impose any administrative penalty or fine. However, NNC made a payment to the OSC in the amount CAD $1 million as a contribution toward the cost of its investigation.

SEC complaint against former Nortel officers: In connection with these investigations, on March 12, 2007, the SEC filed a complaint against certain of NNC’s former officers in the U.S. District Court for the Southern District of New York alleging substantially to the effect that they engaged in fraud or deceit upon purchasers of Nortel securities, falsified books, records or accounts; made materially false or misleading statements or statements that omitted material facts; issued certifications in violation of Section 13a-14 of the Exchange Act; and aided and abetted us in violating the Exchange Act by filing with the SEC factually inaccurate periodic reports, not keeping accurate books, records and accounts, not maintaining a system of internal accounting controls sufficient to provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in conformity with U.S. GAAP and not maintaining accountability for our assets. The complaint was subsequently amended and filed with the Court on September 12, 2007.

OSC complaint against former Nortel officers: In addition, on March 12, 2007, the OSC issued a notice of hearing with respect to certain of our former officers in respect of the same underlying facts as the SEC complaint. The statement of allegations accompanying the notice of hearing alleges substantially to the effect that the former officers authorized, permitted or acquiesced in the making of material misstatements in our public financial disclosure filed with the OSC where they knew or ought to have known that such statements were materially misleading, contrary to Ontario securities law; breached their duty of care by failing to act prudently and on a reasonably informed basis in respect of ensuring the fairness and completeness of our financial disclosure; failed to implement appropriate internal controls and procedures to identify, supervise, monitor, control and fully disclose accounting policies relating to the recognition of revenue and/or the proper recording and release of accrued liabilities and other provisions; by the manner in which they emphasized the achievement of earnings targets, instigated and/or reinforced a culture of non-compliance with generally accepted accounting principles; and failed to apply reasonable internal controls in circumstances where they knew or ought to have known such conduct could or would lead to unreliable and materially misleading financial disclosure.

U.S. federal grand jury subpoenas and RCMP investigation: In May 2004, NNC received a federal grand jury subpoena for the production of certain documents, including financial statements and corporate, personnel and accounting records, in connection with an ongoing criminal investigation being conducted by the U.S. Attorney’s Office for the Northern District of Texas, Dallas Division. In August 2005, NNC received an additional federal grand jury subpoena seeking additional documents, including documents relating to the Nortel Retirement Income Plan and the Nortel Long-Term Investment Plan. These investigations are ongoing. A criminal investigation into NNC’s financial accounting situation by the Integrated Market Enforcement Team of the Royal Canadian Mounted Police is also ongoing.

ERISA lawsuit: Beginning in December 2001, NNC, together with certain of its then-current and former directors, officers and employees, were named as a defendant in several purported class action lawsuits pursuant to the United States Employee Retirement Income Security Act. These lawsuits have been consolidated into a single proceeding in the U.S. District Court for the Middle District of Tennessee. This lawsuit is on behalf of participants and beneficiaries of the Nortel Long-Term Investment Plan, who held shares of the Nortel Networks Stock Fund during the class period, which has yet to be determined by the court. The lawsuit alleges, among other things, material misrepresentations and omissions to induce participants and beneficiaries to continue to invest in and maintain investments in Nortel Networks Corporation common shares through the investment plan. The court has not yet ruled as to whether the plaintiff’s proposed class action should be certified.

Ontario proposed derivative action: In December 2005, an application was filed in the Ontario Superior Court of Justice for leave to commence a shareholders’ derivative action on NNC’s behalf against certain of its then-current and former

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officers and directors. The derivative action alleges, among other things, breach of fiduciary duties, breach of duty of care and negligence, and unjust enrichment in respect of various alleged acts and omissions. If the application is granted, the proposed derivative action would seek on NNC’s behalf, among other things, compensatory damages of Canadian $1,000 and punitive damages of Canadian $10 from the individual defendants. The proposed derivative action would also seek an order directing NNC’s Board of Directors to reform and improve its corporate governance and internal control procedures as the court may deem necessary or desirable and an order that NNC pay the legal fees and other costs in connection with the proposed derivative action. The application for leave to commence this action has not yet been heard.

Shareholder statement of claim against Deloitte: On February 8, 2007, a Statement of Claim was filed in the Ontario Superior Court of Justice in the name of Nortel against Deloitte & Touche LLP. The action was commenced by three shareholders without leave, and without our knowledge or authorization. The three shareholders have indicated that they filed the action in anticipation of bringing an application for leave to commence a derivative action on behalf of Nortel against Deloitte under the Canada Business Corporations Act, and that the three shareholders would be seeking leave on a retroactive basis to authorize their action. The claim alleges, among other things, breach of contract, negligence, negligent misrepresentation, lack of independence and breach of fiduciary duty. The claim seeks damages and other relief on Nortel’s behalf, including recovery of payments that NNC will make to class members as part of the Global Class Action Settlement. The Litigation Committee of NNC’s Board of Directors has reviewed the matter and has advised the law firm pursuing the derivative action of Nortel’s position on the proposed claim. On February 6, 2008, an application was filed by the three shareholders for leave to commence a derivative action in the name of Nortel against Deloitte.

Nortel statement of claim against its former officers: In January 2005, we and NNC filed a Statement of Claim in the Ontario Superior Court of Justice against Messrs. Frank Dunn, Douglas Beatty and Michael Gollogly, our former senior officers who were terminated for cause in April 2004, seeking the return of payments made to them under NNC’s bonus plan in 2003.

Former officers’ statements of claims against Nortel: In April 2006, Mr. Dunn filed a Notice of Action and Statement of Claim in the Ontario Superior Court of Justice against us and NNC asserting claims for wrongful dismissal, defamation and mental distress, and seeking punitive, exemplary and aggravated damages, out-of-pocket expenses and special damages, indemnity for legal expenses incurred as a result of civil and administrative proceedings brought against him by reason of his having been an officer or director of the defendants, pre-judgment interest and costs.

In May and October 2006, respectively, Messrs. Gollogly and Beatty filed Statements of Claim in the Ontario Superior Court of Justice against us and NNC asserting claims for, among other things, wrongful dismissal and seeking compensatory, aggravated and punitive damages, and pre-and post-judgment interest and costs.

Ipernica: In June 2005, Ipernica Limited (formerly known as QSPX Development 5 Pty Ltd), an Australian patent holding firm, filed a lawsuit against NNC in the U.S. District Court for the Eastern District of Texas alleging patent infringement. In April 2007, the jury reached a verdict to award damages to the plaintiff in the amount of $28. Post-trial motions have been filed. The trial judge will next enter a judgment that could range from increasing the damages award against NNC to a reversal of the jury’s verdict.

Except as otherwise described herein, in each of the matters described above, the plaintiffs are seeking an unspecified amount of monetary damages. Nortel is unable to ascertain the ultimate aggregate amount of monetary liability or financial impact to Nortel or NNC of the above matters, which, unless otherwise specified, seek damages from the defendants of material or indeterminate amounts or could result in fines and penalties. With the exception of $2,474 and the related fair value adjustments, which NNC recorded in 2006 and first quarter of 2007 financial results as a result of the Global Class Action Settlement and the accrued liability for the Ontario Settlement, neither Nortel nor NNC has made any provisions for any potential judgments, fines, penalties or settlements that may result from these actions, suits, claims and investigations. Except for the Global Class Action Settlement, NNC cannot determine whether these actions, suits, claims and proceedings will, individually or collectively, have a material adverse effect on its business, results of operations, financial condition or liquidity. Except for matters encompassed by the Global Class Action Settlement and the Ontario Settlement, NNC intends to defend these actions, suits, claims and proceedings, litigating or settling cases where in management’s judgment it would be in the best interest of shareholders to do so. Nortel and NNC will continue to cooperate fully with all authorities in connection with the regulatory and criminal investigations.

NNC is also a defendant in various other suits, claims, proceedings and investigations that arise in the normal course of business.

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Environmental Matters

We are exposed to liabilities and compliance costs arising from our past generation, management and disposal of hazardous substances and wastes. As of December 31, 2007, the accruals on our consolidated balance sheet for environmental matters were $26. Based on information available as of December 31, 2007, management believes that the existing accruals are sufficient to satisfy probable and reasonably estimable environmental liabilities related to known environmental matters. Any additional liabilities that may result from these matters, and any additional liabilities that may result in connection with other locations currently under investigation, are not expected to have a material adverse effect on our capital expenditures, earnings or competitive position.

We have remedial activities under way at 12 sites that are either currently or previously owned or occupied facilities. An estimate of our anticipated remediation costs associated with all such sites, to the extent probable and reasonably estimable, is included in the environmental accruals referred to above in an approximate amount of $26.

We are also listed as a potentially responsible party under the U.S. Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, at four Superfund sites in the U.S. At three of the Superfund sites, we are considered a de minimis potentially responsible party. A potentially responsible party within the meaning of CERCLA is generally considered to be a major contributor to the total hazardous waste at a Superfund site (typically 1% or more, depending on the circumstances). A de minimis potentially responsible party is generally considered to have contributed less than 1% (depending on the circumstances) of the total hazardous waste at a Superfund site. An estimate of our share of the anticipated remediation costs associated with such Superfund sites is expected to be de minimis and is included in the environmental accruals of $26 referred to above.

Liability under CERCLA may be imposed on a joint and several basis, without regard to the extent of our involvement. In addition, the accuracy of our estimate of environmental liability is affected by several uncertainties such as additional requirements which may be identified in connection with remedial activities, the complexity and evolution of environmental laws and regulations, and the identification of presently unknown remediation requirements. Consequently, our liability could be greater than our current estimate.

ITEM 4.   Submission of Matters to a Vote of Security Holders

Not applicable.

PART II

ITEM 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common shares are not listed and posted for trading on any stock exchange. NNC holds 100% of our issued and outstanding common shares. The common shares of Nortel Networks Corporation are listed and posted for trading on the NYSE in the U.S. and on the Toronto Stock Exchange in Canada.

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ITEM 6.   Selected Financial Data (Unaudited)

The selected financial data presented below was derived from our audited consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K except for the summarized balance sheet data as of December 31, 2005, 2004 and 2003 and summarized results of operations data for the years ended December 31, 2004 and 2003.

	2007			2006			2005			2004			2003
	(Millions of U.S. Dollars, except per share amounts)
Results of Operations
Total Revenues	$	10,948		$	11,418		$	10,509		$	9,478		$	9,907
Research and development expense		1,723			1,940			1,874			1,975			1,977
Special charges		210			105			169			181			291
Operating earnings (loss)		224			65			(262	)		(269	)		(55	)
Other income — net		444			186			272			222			477
Income tax benefit (expense)		(1,114	)		(60	)		81			20			26
Net earnings (loss) from continuing operations		(798	)		(41	)		(48	)		(154	)		267
Net earnings (loss) from discontinued operations — net of tax		—			—			1			49			183
Cumulative effect of accounting changes — net of tax		—			9			—			—			(12	)
Dividends on preferred shares		42			38			26			22			24
Net earnings (loss) applicable to common shares		(840	)		(70	)		(73	)		(127	)		414
Financial Position as of December 31
Total assets	$	17,973		$	18,882		$	17,932		$	17,676		$	17,060
Total debt(a)		2,720			2,700			2,096			2,091			2,217
Minority interests in subsidiary companies		294			243			247			88			77
Preferred shares		536			536			536			536			536

(a)  Total debt includes long-term debt, long-term debt due within one year and notes payable.

See notes 3, 4, 6 and 9 to the accompanying audited consolidated financial statements for the impact of accounting changes, reclassifications, special charges and acquisitions, divestitures and closures, respectively, that affect the comparability of the above selected financial data.

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ITEM 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

TABLE OF CONTENTS

Executive Overview	35
Results of Operations	41
Segment Information	47
Liquidity and Capital Resources	53
Off-Balance Sheet Arrangements	59
Application of Critical Accounting Policies and Estimates	60
Accounting Changes and Recent Accounting Pronouncements	74
Outstanding Share Data	77
Market Risk	77
Environmental Matters	77
Legal Proceedings	78
Cautionary Notice Regarding Forward-Looking Information	78

The following Management’s Discussion and Analysis, or MD&A, is intended to help the reader understand the results of operations and financial condition of Nortel Networks Limited. The MD&A should be read in combination with our audited consolidated financial statements and the accompanying notes. All Dollar amounts in this MD&A are in millions of United States, or U.S., Dollars except per share amounts or unless otherwise stated.

Certain statements in this MD&A contain words such as “could”, “expects”, “may”, “anticipates”, “believes”, “intends”, “estimates”, “plans”, “envisions”, “seeks” and other similar language and are considered forward-looking statements or information under applicable securities laws. These statements are based on our current expectations, estimates, forecasts and projections about the operating environment, economies and markets in which we operate which we believe are reasonable but which are subject to important assumptions, risks and uncertainties and may prove to be inaccurate. Consequently, our actual results could differ materially from our expectations set out in this MD&A. In particular, see the Risk Factors section of this report, for factors that could cause actual results or events to differ materially from those contemplated in forward-looking statements. Unless required by applicable securities laws, we disclaim any intention or obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. We are the principal direct operating subsidiary of Nortel Networks Corporation, or NNC. NNC holds all of our outstanding common shares but none of our outstanding preferred shares.

Executive Overview

Our Business and Strategy

We are a global supplier of networking solutions serving both service provider and enterprise customers. Our networking solutions include hardware and software products and services designed to reduce complexity, improve efficiency, increase productivity and drive customer value. Our technologies span access and core networks, support multimedia and business-critical applications, and help eliminate today’s barriers to efficiency, speed and performance by simplifying networks and connecting people with information. We design, develop, engineer, market, sell, supply, license, install, service and support these networking solutions.

The telecommunications industry has evolved over the past two decades by developing the technology and networks that enable worldwide connectivity and making those networks smarter and faster. We believe that the industry is at a significant inflection point at which the level of connectivity grows exponentially. This market trend is called Hyperconnectivity and we believe that it is fast becoming a reality, offering several opportunities including richer, more connected and more productive communications experiences for consumers, businesses and society as a whole. We anticipate that it can also create significant new revenue opportunities for network operators, equipment vendors and applications developers.

Hyperconnectivity brings new challenges for the industry, both in creating new business models and service strategies to capitalize on its opportunities and in preparing networks and applications for the coming era. We believe that

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Hyperconnectivity will require us, as an industry, to fundamentally rethink how we put networks together and to completely reinvent our applications model. We believe that the industry needs to focus on two critical transformations that are the pillars of Hyperconnectivity: achieving “true” broadband and communications-enabling today’s IT applications.

We define true broadband as being a communications experience so seamless that users no longer have to consider which technology, wireline or wireless, is being used to make a connection. They simply communicate anywhere, anytime from whatever device is most convenient; essential in a hyperconnected world. Moreover, in our vision the broadband experience becomes so economical that the range of uses exceeds any experience of the past. Although the industry has highlighted the concept of true broadband for many years, it is a promise that has yet to become reality. To deliver it, we need to solve a number of technology challenges in today’s networks. These include scaling the access network, scaling the metro and long-haul networks, and providing unified communications across all networks, wireline and wireless, public and private.

We believe that our capability and experience in enterprise and service provider networking positions us well to deliver in the new era of Hyperconnectivity. We plan to capitalize on the opportunities of a hyperconnected world by providing a true broadband experience and communications-enabling today’s IT applications. As part of our strategy to address these mega-trends, we are focused on three primary areas of growth: transforming the enterprise with unified communications, delivering next-generation mobility and convergence capabilities, and adding value to customer networks through solutions, services and applications.

We are strongly committed to recreating a great company, to delivering on our model of Business Made Simple to our customers, to identifying and seizing the opportunities that exist for us in the market, and to driving innovation as a cornerstone of everything we do.

We are addressing this commitment with a six-point plan for transformation, announced in 2006, that establishes a framework for recreating a world-class business. We are committed to:

1. Building a world-class management team, culture and processes,

2. Focusing aggressively on our balance sheet, corporate governance, and business and financial controls,

3. Driving to world-class cost structures and quality levels,

4. Targeting market share,

5. Investing for profitable growth, and

6. Increasing our emphasis on service and software solutions.

We are seeking to generate profitable growth by using this focus to identify markets and technologies where we can attain a market leadership position. Key areas of investment include unified communications, 4G broadband wireless technologies, Carrier Ethernet, next-generation optical, advanced applications and services, secure networking, professional services for unified communications and multimedia services.

We are also leveraging our technology and expertise to address global market demand for network integration and support services, network managed services and network application services.

We continue to focus on the execution of the six-point plan and on operational excellence through transformation of our businesses and processes. On June 27, 2006, we announced the implementation of changes to our pension plans to control costs and align with industry-benchmarked companies, initiatives to improve our Operations organization to speed customer responsiveness, improve processes and reduce costs, and organizational simplification through the elimination of approximately 700 positions. On February 7, 2007, we outlined plans for a further net reduction of approximately 2,900 positions, with approximately 1,000 additional positions affected by movement to lower cost locations, and reductions in our real estate portfolio. For further information, see “Results of Operations — Special Charges” in the MD&A section of this report. On February 27, 2008, we announced a further net reduction of our global workforce of approximately 2,100 positions, with an additional 1,000 positions to be moved from higher cost to lower cost locations, and a further reduction of our global real estate portfolio.

We remain committed to integrity through effective corporate governance practices, maintaining effective internal control over financial reporting and an enhanced compliance function that places even greater emphasis on compliance with law and company policies. We continue to focus on increasing employee awareness of ethical issues through on-line training and our code of business conduct.

Cooperation of multiple vendors and effective partnering are critical to the continued success of our solutions for both enterprises and service providers. Timely development and delivery of new products and services to replace a significant

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base of mature, legacy offerings will also be critical in driving profitable growth. To help support this, we expect to continue to play an active role in influencing emerging broadband and wireless standards.

We are positioned to respond to evolving technology and industry trends by providing our customers with end-to-end solutions that are developed internally and enhanced through strategic alliances, acquisitions and minority investments. We have partnered with industry leaders, like Microsoft, LG and IBM, whose technology and vision are complementary to ours, and we continue to seek and develop similar relationships with other companies.

Our four reportable segments are: Carrier Networks, or CN, Enterprise Solutions, or ES, Global Services, or GS, and Metro Ethernet Networks, or MEN. Until the first quarter of 2007, CN was named Mobility and Converged Core Networks segment. The CN segment provides wireless networking solutions that enable service providers and cable operators to supply mobile voice, data and multimedia communications services to individuals and enterprises using mobile telephones, personal digital assistants, and other wireless computing and communications devices. CN also offers circuit- and packet-based voice switching products that provide traditional, full featured voice services as well as internet-based voice and multimedia communication services to telephone companies, wireless service providers, cable operators and other service providers. Increasingly, CN addresses customers who want to provide service across both wireless and wired devices. The ES segment provides communication solutions for our enterprise customers that are used to build new networks and transform existing communications networks into more cost effective, packet-based networks supporting data, voice and multimedia communications. The GS segment provides a broad range of services to address the requirements of our carrier and enterprise customers throughout the entire lifecycle of their networks. The MEN segment provides optical networking and carrier grade Ethernet data networking solutions to make our carrier and large enterprise customers’ networks more scalable and reliable for the high speed delivery of diverse multimedia communications services.

Beginning in the first quarter of 2007, revenues from network implementation services consisting of network planning, engineering, installation and project management services bundled in customer contracts, which were previously included with sales in each of CN, ES and MEN, have now been reallocated to our GS segment for management reporting purposes. The amounts reallocated to the GS segment have been based primarily on the stated value of the services in the respective bundled customer arrangements. We have recast our 2005 and 2006 segment information to reflect this change in our reportable segments.

How We Measure Business Performance

Our president and chief executive officer, or CEO, has been identified as our chief operating decision maker in assessing the performance and allocating resources to our operating segments. The primary financial measures used by the CEO in 2007 were operating margin and management earnings (loss) before income taxes, or Management EBT. Operating margin is not a measure under generally accepted accounting principles in the U.S., or non-GAAP, measure defined as gross profit less selling, general and administrative, or SG&A and R&D expenses. Operating margin percentage is a non-GAAP measure defined as operating margin divided by revenue. Management EBT is a non-GAAP measure defined as operating margin less interest expense, other operating income — net, other income — net, minority interests — net of tax and equity in net earnings (loss) of associated companies — net of tax. Interest attributable to long-term debt is not allocated to a reportable segment and is included in “Other”. Our management believes that these measures are meaningful measurements of operating performance and provide greater transparency to investors with respect to our performance and provide supplemental information used by management in its financial and operational decision making. These non-GAAP measures may also facilitate comparisons to our historical performance and our competitors’ operating results.

Beginning in the first quarter of 2008, the primary financial measure used by our CEO will be operating margin. Our management believes that this is the most meaningful measure of our operating performance.

These non-GAAP measures should be considered in addition to, but not as a substitute for, the information contained in our audited consolidated financial statements prepared in accordance with GAAP. These measures may not be synonymous to similar measurement terms used by other companies.

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Financial Highlights

The following is a summary of our 2007 and 2006 financial highlights:

	For the Years Ended December 31,
	2007			2006			$ Change			% Change
Revenues	$	10,948		$	11,418		$	(470	)		(4	)
Gross profit		4,627			4,430			197			4
Gross margin %		42.3	%		38.8	%					3.5 points
Selling, general and administrative expense		2,486			2,491			(5	)		(0	)
Research and development expense		1,723			1,940			(217	)		(11	)
Operating margin		418			(1	)		419
Operating margin %		3.8	%		0.0	%					3.8 points
Other operating income — net		(35	)		(13	)		(22	)
Interest expense		281			209			72			34
Other income — net		(444	)		(186	)		(258	)
Minority interest — net of tax		73			21			52			248
Equity in net (earnings) loss of associated companies — net of tax		(2	)		2			(4	)
Management EBT		545			(34	)		579
Amortization of intangible assets		50			26			24			92
In-process research and development expense		—			22			(22	)		(100	)
Special charges		210			105			105			100
Gain on sales of businesses and assets		(31	)		(206	)		175
Income tax expense		1,114			60			1,054			1,757
Net earnings (loss) before cumulative effect of accounting change	$	(798	)	$	(41	)	$	(757	)

•  Revenues decreased 4% to $10,948:  Revenues decreased in 2007 compared to 2006 in the CN, MEN, GS and Other segments, partially offset by an increase in the ES segment. From a geographic perspective, the decrease was driven by the Europe, Middle East, and Africa, or EMEA, and U.S. regions, partially offset by increases in the Canada, Asia and Caribbean and Latin America, or CALA, regions. The revenue decline was primarily attributable to declines in CN and GS of $660 related to the divestiture of our Universal Mobile Telecommunications System, or UMTS, Access business in the fourth quarter of 2006. The revenue decline in MEN was primarily driven by the recognition of less deferred revenues in 2007 compared to 2006, partially offset by an increase in optical revenues. These decreases were partially offset by an increase in ES due to the recognition of previously deferred revenues as a result of the completion or elimination of customer deliverable obligations for certain products in 2007. The net recognition of deferred revenue contributed approximately $367 to our consolidated 2007 revenues.

•  Gross margin increased 3.5 percentage points to 42.3%:  The increase was primarily due to improvements in our cost structure within the CN, GS and ES segments, partially offset by decreases in the MEN and Other segments. The main increase was in the CN segment, due to divestiture of the UMTS Access business in the fourth quarter of 2006. Further, the net increase was also due to the favorable impact of product and customer mix offset by volume and price erosion.

•  Operating margin increased by $419 to earnings of $418:  The increase in operating margin was primarily due to increased gross profit as result of increased gross margin. The operating margin was impacted favorably by a decrease in R&D expense as a result of the continued momentum of our business transformation cost reduction initiatives and headcount reductions as a result of the UMTS Access divestiture. These cost savings were partially offset by an increase in charges incurred in relation to our employee compensation plans. The impact of foreign exchange on operating margin was minimal as the favorable impact on revenues was largely offset by the unfavorable impact on cost of revenues, SG&A and R&D.

•  Management EBT increased by $579 to earnings of $545:  The increase was due to the increase in gross profit and decreases in SG&A and R&D expense. The increase in Management EBT was driven primarily by increases in the CN, ES, GS and Other segments, partially offset by decreases in the MEN segment. Management EBT increased by $328 in CN due to decreases in SG&A and R&D expense, partially offset by an increase in minority interest expense and a decrease in gross profit. Management EBT for ES increased by $41 and for GS by $39 primarily due to an increase in gross profit, partially offset by increases in SG&A and R&D expense. Management EBT for Other increased by $254 primarily due to foreign exchange gains, increase in other income and reductions in SG&A. The decrease in MEN Management EBT of $83 was primarily due to a decrease in gross profit and an

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increase in R&D expense, partially offset by a decrease in SG&A expense. The CN and GS segments continued to be significantly more profitable than ES and MEN.

•  Net loss before cumulative effect of accounting change increased from a net loss of $41 to loss of $798: The increase was primarily due to an increase in the valuation allowance related to Canadian deferred tax assets in the fourth quarter of 2007 due to changes in our Canadian tax profile, which include the sustained strength of the Canadian Dollar relative to the U.S. Dollar, and the recent reduction of the Canadian federal tax rate and other expectations related to the timing of Canadian taxable income. Further, the loss was also impacted by higher special charges, as well as lower gain on sale of business compared to 2006, primarily from gain on sale of UMTS Access business. These declines were partially offset by an increase in operating margin in 2007 and higher Other Income- net, mainly due to a net favorable impact of the strengthening Canadian Dollar against the U.S. Dollar.

•  Cash and cash equivalents increased from $3,487 at December 31, 2006 to $3,526 at December 31, 2007: The increase in cash was driven by cash from operating activities of $193 and net positive impact from foreign exchange of $104, partially offset by cash used in investing activities of $177 and cash used in financing activities of $81.

Significant Business Developments

Business Transformation Initiatives

On February 27, 2008, we outlined further steps to our Business Transformation plan with the announcement of a plan to implement a further net reduction in our global workforce of approximately 2,100 positions, or the 2008 Restructuring Plan. We expect that approximately 70% of these reductions will take place in 2008. As part of this plan we will also shift approximately 1,000 positions from higher-cost to lower-cost locations. The 2008 Restructuring Plan also includes initiatives to more efficiently manage our various business locations and further reduce our global real estate portfolio by approximately 750,000 square feet by the end of 2009. The 2008 Restructuring Plan is expected to result in annual gross savings of approximately $300, with 65% of these savings expected to be achieved in 2008. We expect total charges to earnings and cash outlays related to workforce reductions to be approximately $205, with approximately 70% of the charges to be incurred in 2008 and the remainder in 2009 and cash outlays to be incurred generally in the same timeframe. We expect total charges to earnings related to consolidating real estate to be approximately $70, including approximately $25 related to fixed asset writedowns, with approximately 60% of the charges to be incurred in 2008 and the remainder in 2009, and cash outlays of approximately $45 to be incurred through 2024. The plan also includes the sale of certain real estate assets expected to result in cash proceeds of approximately $70.

On February 7, 2007, we had outlined the next steps of our Business Transformation plan with the announcement of a work plan to implement a net reduction of approximately 2,900 positions, or the 2007 Restructuring Plan. During 2007, approximately 150 additional headcount were identified and incorporated into the plan while 300 were removed from the plan, decreasing the total net number of workforce reductions to approximately 2,750. As part of this plan we will also shift approximately 1,000 positions from higher-cost to lower-cost locations. The 2007 Restructuring Plan also includes initiatives to more efficiently manage our various business locations and reduce our global real estate portfolio. Upon completion, the 2007 Restructuring Plan is expected to result in annual gross savings of approximately $400, with approximately half of these annual gross savings realized in 2007. We expect a portion of these savings to be reinvested in the growth areas of our business.

Global Class Action Settlement

NNC has entered into agreements to settle two significant U.S. and all but one Canadian class action lawsuits, or the Global Class Action Settlement. In December 2006 and January 2007, the Global Class Action Settlement was approved by the courts in New York, Ontario, Quebec and British Columbia. The settlement became effective on March 20, 2007.

Convertible Notes Offering

On March 28, 2007, NNC completed an offering of convertible senior notes, or the Convertible Notes, in an aggregate principal amount of $1,150. On September 28, 2007, NNC used net proceeds from this offering to redeem at par $1,125 principal amount of NNC’s 4.25% convertible senior notes due 2008, or the 4.25% Notes due 2008, plus accrued and unpaid interest.

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Appointment of KPMG LLP

On May 2, 2007, the appointment of KPMG LLP as our principal independent public accountants beginning with fiscal 2007 was approved by our shareholders. KPMG LLP was also appointed as NNC’s principal independent public accountants on the same date.

Appointment of Paviter Binning as Executive Vice-President and Chief Financial Officer

Effective November 12, 2007, NNC appointed Paviter S. Binning Executive Vice President and Chief Financial Officer, or CFO. Mr. Binning is a senior executive with more than 25 years of financial experience, including CFO positions at Hanson PLC and Marconi PLC. Mr. Binning was also appointed our Executive Vice President and CFO effective the same date.

Regulatory Actions

In May 2007, we and NNC entered into a settlement agreement with the Staff of the Ontario Securities Commission, or OSC, in connection with its investigation into prior accounting practices that led to certain restatements of our and NNC’s financial results. On May 22, 2007, the OSC issued an order approving the settlement agreement, which fully resolves all issues with the OSC with respect to Nortel. Under the terms of the OSC order, we and NNC are required to deliver to the OSC Staff quarterly and annual written reports detailing, among other matters, our progress in implementing our remediation plan. This reporting obligation began following the filing of the Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 and is expected to end following the filing of this report and delivery of the corresponding remediation progress report, based upon the elimination of our remaining material weakness relating to revenue recognition. The OSC order did not impose any administrative penalty or fine. However, NNC has made a payment to the OSC in the amount of CAD$1 million as a contribution toward the cost of its investigation.

In October 2007, we and NNC reached a settlement on all issues with the U.S. Securities and Exchange Commission, or SEC, in connection with its investigation in connection with previous restatements of our and NNC’s financial results. As part of the settlement, we agreed to pay a civil penalty of $35 and a disgorgement in the amount of one U.S. Dollar and we consented to be restrained and enjoined from future violations of the antifraud, reporting, books and records and internal control provisions of U.S. federal securities laws. Further, we and NNC are required to provide to the SEC quarterly written reports, detailing our progress in implementing our remediation plan and actions to address our remaining material weakness relating to revenue recognition. This reporting requirement began following the filing of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 and is expected to end following the filing of this report and delivery of the corresponding remediation progress report, based upon the elimination of our remaining material weakness and full implementation of our remediation plan.

We have received U.S. federal grand jury subpoenas for the production of certain documents sought in connection with an ongoing criminal investigation being conducted by the U.S. Attorney’s Office for the Northern District of Texas, Dallas Division. Further, a criminal investigation into our financial accounting and reporting by the Integrated Market Enforcement Team of the Royal Canadian Mounted Police is ongoing. We will continue to cooperate fully with all authorities in connection with these investigations.

Elimination of Revenue Related Material Weakness

During 2007, we developed and implemented internal controls to address the revenue related material weakness. An extensive analysis of the revenue recognition-related processes was undertaken in the second quarter of 2007. Control points were created or identified leading to a better understanding of the overall process and identifying the specific areas that required improvement, in particular with respect to flow of information between different groups within Nortel necessary to ensure proper accounting treatment. During 2007 we also continued to build on the remedial actions undertaken in 2005 and 2006 and continued to implement the recommendations for remedial measures in the Independent Review Summary that resulted in full implementation of such recommendations. As at December 31, 2007, we concluded that measures we have taken resulted in the elimination of the material weakness. See the Controls and Procedures section of this report.

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Results of Operations

Revenues

The following table sets forth our revenue by geographic location of the customers:

	For the Years Ended
	December 31,						2007 vs. 2006						2006 vs. 2005
	2007		2006		2005		$ Change			% Change			$ Change			% Change
United States	$	4,974	$	5,092	$	5,203	$	(118	)		(2	)	$	(111	)		(2	)
EMEA		2,740		3,239		2,704		(499	)		(15	)		535			20
Canada		822		720		571		102			14			149			26
Asia		1,768		1,736		1,422		32			2			314			22
CALA		644		631		609		13			2			22			4
Consolidated	$	10,948	$	11,418	$	10,509	$	(470	)		(4	)	$	909			9

2007 vs. 2006

Revenues decreased to $10,948 in 2007 from $11,418 in 2006, a decrease of $470 or 4%. The decline was the result of lower revenues in EMEA and the U.S., partially offset by increased revenues in Canada. Revenues decreased in EMEA primarily due to the UMTS Access divestiture in the fourth quarter of 2006 and in the U.S. primarily due to reduced legacy Time-Division Multiplexing, or TDM, demand, whereas increases in Canada were across all segments driven primarily by volume increases. The net recognition of previously deferred revenue contributed approximately $367 to our consolidated 2007 revenues, compared to $125 in 2006.

Revenues decreased by $499 in EMEA in 2007 compared to 2006. The decline was due to lower revenues in the CN and GS segments, partially offset by increased revenues in the ES and MEN segments. The decrease in CN segment revenues was primarily due to lower revenues from the Global System for Mobile Communication, or GSM, and Universal Mobile Telecommunication System, or UMTS, solutions and Code Division Multiple Access, or CDMA, solutions businesses. GSM and UMTS solutions business had a decrease in revenues of $457 as a result of the UMTS Access divestiture and a decline in demand for Voice and Packet GU Core, partially offset by increased demand in GSM Access. The CDMA solutions business had a decline of $74 due to the completion of projects in 2006 and the recognition of previously deferred revenues recorded in 2006 that was not repeated in 2007. Revenues from the GS segment declined by $142, also as a result of the UMTS Access divestiture and lower sales volumes. The increase in ES segment revenues of $155 was due to increased revenues in both the circuit and packet voice solutions and data networking and security solutions businesses in 2007 that were not present in 2006. The increase in revenues in the circuit and packet voice solutions business of $76 was primarily a result of certain supply chain delays in 2006 resulting from difficulty in obtaining components required to meet European Union Restrictions on Hazardous Substances, or RoHS, standards and volume increases. Revenues in the data networking and solutions business increased by $79 as a result of the recognition of previously deferred revenues due to the completion or elimination of customer deliverable obligations for certain products and volume increases. The increased revenues in MEN were driven by an increase in optical networking solutions of $93 primarily due to recognition of previously deferred revenues as a result of the completion of certain customer contract deliverables in the first quarter of 2007, increases in volume and favorable foreign exchange impacts due to fluctuations between the Euro and U.S. Dollar. This increase in optical networking solutions was partially offset by a decline in data networking and security solutions of $78 primarily due to the recognition of previously deferred multi-service switch revenues in 2006 that was not repeated in 2007.

Revenues decreased by $118 in the U.S. in 2007 compared to 2006. The decline was primarily due to decreased revenues in the CN and Other segments, partially offset by increased revenues in the ES, MEN and GS segments. The decrease in CN of $235 was due to a decrease in the circuit and packet voice solutions and GSM and UMTS solutions businesses. The decline in the circuit and packet voice solutions business of $122 was driven by the one-time recognition of previously deferred revenues in the third quarter of 2006 not repeated in 2007 to the same extent and a decline in legacy Time-Division Multiplexing, or TDM, demand. The GSM and UMTS solutions business decrease of $116 was primarily driven by customers focusing on their UMTS Access build-out versus GSM Access or GSM and UMTS Core, or GU Core. The decrease in Other of $22 related to the delay in issuance and, in some cases, cancellation of certain intended contract offerings by the U.S. government. The increase in ES segment revenues was due to an increase in the data networking and security solutions business of $50 primarily due to the recognition of previously deferred revenue and volume increases, partially offset by reduced demand for legacy products, and an increase in the circuit and packet voice

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solutions business of $6 due to increased volume, partially offset by reduced demand for legacy products. The increase in revenues in the MEN segment was due to the increase in the data networking and security solutions business of $31 and increased optical networking solutions business of $22. The increase in data networking and security solutions was due to the recognition of previously deferred revenue in 2007 as a result of the completion of certain contract deliverables resulting from the termination of a supplier agreement, partially offset by volume decreases due to a decline in the multi switch/service edge router market. The increase in revenues in the GS segment by $30 was primarily due to volume increases in network support services.

Revenues increased by $102 in Canada in 2007 compared to 2006, due to increased revenues in all of our segments. The increase in CN revenues of $54 was due to an increase in the CDMA solutions business of $41 associated with the continuing rollout of our EV-DO Rev A technology. The primary increase in the MEN revenues of $27 was primarily due to an increase in optical networking solutions of $21 as a result of optical market growth, while the increase in GS of $12 was due to volume increase in network support services.

Revenues increased by $32 in Asia in 2007 compared to 2006, driven primarily by increased revenues in the ES, CN and GS segments, partially offset by a decrease in MEN segment revenues. The increase in ES revenues was attributable to an increase in the data networking and security solutions business of $83, primarily as a result of the recognition of previously deferred revenue due to completion or elimination of customer deliverable obligations for certain products, and volume increases. The increase in CN revenues was due to an increase in the CDMA solutions business of $153 primarily as a result of increased investments by certain of our customers in their infrastructure in order to enhance their service offerings within LG-Nortel, our joint venture with LG Electronics, or LGE. This increase was partially offset by the decreases in the GSM and UMTS solutions of $59 and circuit and packet voice solutions of $20 due to recognition of previously deferred revenues as a result of the completion of certain customer contract deliverables in 2006 that was not repeated in 2007. The increase in GS revenues of $42 was due to new CDMA network rollouts and the release of previously deferred revenue. The decrease in revenues in the MEN segment of $171 was primarily due to the recognition of previously deferred revenues in 2006 that was not repeated in 2007.

Revenues increased by $13 in CALA. The increase in CALA was due to increased revenues in the ES, GS and MEN segments, partially offset by a decrease in revenues in the CN segment. The increase in ES revenues was due to increased revenues in the circuit and packet voice solutions of $13, while the increase in MEN was due to increased volume in the optical networking solutions business of $20, partially offset by a decrease in the data and networking solutions of $10. The increase in GS of $13 was primarily in the Network Implementation Services, or NIS, and Network Application Services, or NAS, portfolios with a slight offset in Network Support Services, or NSS. This increase was partially offset by a decrease in CN of $28 due to a decline in GSM and UMTS solutions of $13 resulting from fluctuation in customer spending, a decrease in CDMA solutions of $9 and circuit and voice packet solutions of $6.

2006 vs. 2005

Revenues increased to $11,418 in 2006 from $10,509 in 2005, an increase of $909, or 9%. Revenues increased by approximately 6% in 2006 as a result of the addition of a full year of results from Nortel Government Solutions, or NGS, and LG-Nortel. In addition, 2006 revenues benefited from favorable foreign currency exchange impacts, resulting in an estimated increase of approximately 1%, driven by the strengthening of the Canadian Dollar, British Pound, and Euro against the U.S. Dollar. The net recognition of previously deferred revenue contributed approximately $125 to our consolidated 2006 revenues, with the most significant impact in EMEA and the MEN segment.

Revenues increased by $314 in Asia in 2006, driven primarily by increases in our ES and MEN segments. Enterprise circuit and packet solutions saw an increase of $102 in Asia, driven primarily by the addition of a full year of results from LG-Nortel, which was formed on November 3, 2005. Optical networking solutions in Asia increased by $136 in 2006, driven primarily by the recognition of previously deferred revenues resulting from the delivery of a software upgrade. GS revenues increased by $43 and were primarily driven by the addition of LG-Nortel and growth in our network support services business.

Revenues increased by $535 in EMEA in 2006, driven primarily by increases in our CN, ES, and MEN segments. GSM and UMTS solutions revenue in EMEA increased by $128 and was primarily driven by the recognition of previously deferred UMTS solutions revenue due to a contract renegotiation and the completion of certain contract deliverables. CDMA solutions in EMEA increased by $89, primarily driven by the recognition of previously deferred revenue triggered by the delivery of a software upgrade. Enterprise circuit and packet solutions increased by $108 in EMEA mainly due to the addition of a full year of results from LG-Nortel, which included ES sales to LG-Nortel’s international customers,

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primarily in Europe. MEN data networking and security solutions in EMEA increased by $66 and were positively impacted by the recognition of previously deferred revenue.

Revenues increased by $149 in Canada, driven by increases in all segments. The increase in CN revenues was due to an increase in CDMA solutions by $66, primarily driven by increased volumes with a key carrier customer. Circuit packet and voice solutions increased by $19, due to increased volume in our next-generation products. The increase in MEN was due to increased revenues in the optical networking solutions business of $59, partially offset by a decrease in the data networking and security solutions business of $5.

Revenues decreased in the U.S. by $111, due to decreases in the GS, CN, MEN and ES segments, partially offset by an increase in Other segment revenues. The decline in the U.S. was driven primarily by a $327 decrease in our GSM and UMTS solutions in our CN segment, due to lower customer spending, the loss of certain contracts resulting from industry consolidation, and the completion of a large network project in 2005 which was not repeated in 2006. This decline was partially offset by increased demand for our next-generation wireless solutions with the rollout of our CDMA EV-DO Rev A technology, which was the primary driver of a $194 increase in CDMA solutions revenue in the U.S. The revenues for the MEN segment declined in optical networking solutions by $40 and data networking and security solutions by $10. The ES segment experienced a slight decline in the U.S. of $26, primarily due to the recognition of deferred revenue in 2005 in our enterprise voice solutions portfolio which was not repeated in 2006, partially offset by increased volume in our enterprise data networking and security solutions business. U.S. revenues increased in 2006 by $97 due to the inclusion of a full year of results from NGS.

Gross Margin

	For the Years Ended December 31,									2007 vs. 2006					2006 vs. 2005
	2007			2006			2005			$ Change		% Change			$ Change		% Change
Gross profit	$	4,627		$	4,430		$	4,239		$	197		4.4	%	$	191		4.5	%
Gross margin		42.3	%		38.8	%		40.3	%				3.5 points					(1.5 points	)

2007 vs. 2006

Gross Profit increased by $197, while gross margin increased by 3.5%. The increase in gross profit was driven by cost structure improvements of $300 and favorable product and customer mix of $41, partially offset by decreases from volume reductions and lower revenue recognition of previously deferred revenue of $150. Cost structure improvements were primarily driven by decreases in the CN, MEN and GS segments and contributed an improvement of 2.2% to the gross margin. In the CN segment, cost reductions primarily related to CDMA and GSM Access businesses and the divestiture of the UMTS Access business in the fourth quarter of 2006. The customer and product mix had a favorable impact on the CN and ES segments and was partially offset by negative impact on the MEN segment. The increases due to cost structure improvements and favorable mix were offset by reductions in volume and lower recognition of deferred revenue in the CN and MEN segments, partially offset by increases in the ES and GS segments. The favorable impact of product and customer mix was offset by volume and price erosion, resulting in a net increase in gross margin of 1.0%.

2006 vs. 2005

Gross margin decreased to 38.8% in 2006 from 40.3% in 2005, a decrease of 1.5%. Historically our gross margins have been lower in Asia and EMEA than in Canada and the U.S., primarily due to competitive pressures and product mix. In 2006 the percentage of our total revenue derived from Asia and EMEA grew while declining in the U.S. This change in geographic mix had a negative impact of 2% on our gross margin. Gross margin declined by approximately 1.5% due to unfavorable product mix as a result of shifts from mature technologies with higher margins to next-generation technologies with lower margins. 2006 gross margin increased by approximately 2% due to negative margin impacts associated with a contract in India in 2005 and not repeated in 2006 to the same levels.

Operating Margin

	For the Years Ended December 31,									2007 vs. 2006				2006 vs. 2005
	2007			2006			2005			$ Change		% Change		$ Change		% Change
Operating margin	$	418		$	(1	)	$	(52	)	$	419			$	51
Operating margin as a percentage of revenue		3.8	%		0.0	%		(0.5	)%				3.8 points				0.5 points

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2007 vs. 2006

Operating margin increased from a loss of $1 in 2006 to earnings of $418 in 2007, an increase of $419. Operating margin as a percentage of revenue increased by 3.8% in 2007 compared to 2006. The increase in operating margin was primarily the result of increases in gross profit and decreases in R&D and SG&A expense. R&D expenses decreased by $217, primarily due to reductions of $320 in the CN segment due to the divestiture of the UMTS Access business and reduction in investment in legacy products. This decrease was partially offset by an increase in R&D expenses in the ES and MEN segments of $62 and $29, respectively, to facilitate development of next-generation technologies. SG&A expenses decreased by $5, primarily as a result of lower expenses related to our internal control remediation plans of $30, finance transformation activities of $30 and lower restatement costs of $10, partially offset by increase in charges incurred in relation to our employee compensation plans of $56. The impact of foreign exchange on operating margin was minimal as the favorable impact on revenues was largely offset by the unfavorable impact on cost of revenues, SG&A and R&D.

2006 vs. 2005

Operating margin increased from a loss of $52 in 2005 to a loss of $1 in 2006, an increase of $51. Operating margin as a percentage of revenue increased by 0.5% in 2006 compared to 2005. Operating margin increased as a result of reductions in SG&A and R&D as a percentage of revenue, though the SG&A and R&D expenses were higher. SG&A expense was higher in 2006 due to the inclusion of full year operating results for LG-Nortel, higher expenses related to employee bonus plans and the strengthening of the Canadian Dollar, Euro and British Pound against the U.S. Dollar, partially offset by reduction in restatement related activities. R&D expense increased due to inclusion of full year LG-Nortel results and foreign exchange impact, partially offset by cost savings associated with the changes made to our employee benefit plans.

Special Charges

The following table sets forth special charges by restructuring plan:

	For the Years Ended December 31,
	2007		2006		2005
2007 Restructuring Plan	$	171	$	—	$	—
2006 Restructuring Plan		17		68		—
2004 Restructuring Plan		9		20		180
2001 Restructuring Plan		13		17		(11	)
Total special charges	$	210	$	105	$	169

2007 Restructuring Plan

In the first quarter of 2007, we outlined the next steps of our Business Transformation plan with the announcement of the 2007 Restructuring Plan. The plan included a net reduction of approximately 2,900 positions and shifting an additional 1,000 positions from higher-cost locations to lower-cost locations. During the year ended December 31, 2007, approximately 150 additional positions were identified and incorporated into the plan with associated costs and savings of approximately $15 and $18 respectively. Other revisions to the workforce plan included a change in strategy regarding shared services resulting in approximately 300 positions being removed from the plan, with associated costs and savings of approximately $18 and $20, respectively. The revised net headcount reduction is now expected to be approximately 2,750. The 2007 Restructuring Plan also includes initiatives to more efficiently manage our various business locations and reduce our global real estate portfolio by approximately 500,000 square feet by the end of 2007. During the year ended 2007, approximately 550,000 square feet was vacated and approximately 350,000 square feet is planned to be vacated during 2008. We originally estimated the total charges to earnings and cash outlays associated with the 2007 Restructuring Plan would be approximately $390 and $370, respectively. As a result of higher voluntary terminations and redeployment of employees, we previously revised the total estimated charges to earnings and cash outlays down to approximately $350 and $330, respectively. As of the year ended 2007, we now estimate total charges to earnings and cash outlays to be approximately $340 and $320, respectively, to be incurred over fiscal 2007, 2008 and 2009. We expect to incur charges of approximately $340, with approximately $260 related to the workforce reductions and approximately $80 related to the real estate actions. Cash expenditures are currently estimated to be approximately $320, of which $97 were incurred in the year ended 2007. Workforce related cash expenditures are generally expected to be incurred within a year with real estate associated charges extending throughout the remaining life of the lease agreements. Upon completion, these actions are expected to deliver approximately $400 in annual savings, with approximately half of these annual savings realized in

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2007. In 2007, we recorded special charges of $171, of which $131 related to workforce reductions, $32 related to the real estate initiatives and $8 related to asset write downs.

2006 Restructuring Plan

During the second quarter of 2006, in an effort to increase competitiveness by improving operating margins and overall business performance, we announced the 2006 Restructuring Plan, which includes workforce reductions of approximately 1,900 employees as well as the creation of approximately 800 new positions to be located in our Operations Centers of Excellence in Turkey and Mexico. The workforce reductions spanned all of our segments and were expected to include approximately 350 middle management positions throughout Nortel, with the balance of workforce reductions to primarily occur in the U.S. and Canada. During the third quarter of 2007, we revised the workforce reduction, which included both voluntary and involuntary reductions, to 1,750 employees compared to the original estimate of 1,900 employees. The change in the estimated workforce reduction is primarily due to a reduction in the number of affected middle management positions. We originally estimated the total charges to earnings and cash outlays associated with the 2006 Restructuring Plan to be approximately $100; however, during the third quarter we revised the total costs expected down to $91. During the fourth quarter 2007, the program was determined to be substantially complete resulting in a revised total cost of $85. During the year ended December 31, 2007, we incurred the remaining $17 resulting in total charges of $85 for the 2006 Restructuring Plan. The cost revisions were primarily due to higher voluntary attrition reducing the number of involuntary actions requiring benefits. Annual savings from these actions were approximately $100 in 2007 and are targeted to be approximately $175 by 2008 and we continue to expect to meet these targeted savings. From the inception of the 2006 Restructuring Plan to December 31, 2007, we have made total cash payments related to the 2006 Restructuring Plan of approximately $76 with the remaining cash costs expected to be incurred during the first half of 2008.

2004 and 2001 Restructuring Plans

During 2004 and 2001, we implemented work plans to streamline operations through workforce reductions and real estate optimization strategies, or the 2004 Restructuring Plan and the 2001 Restructuring Plan. All of the charges with respect to the workforce reductions have been incurred, and the remainder of the cash payments for ongoing lease costs is to be substantially incurred by the end of 2016 for the 2004 Restructuring Plan and 2013 for the 2001 Restructuring Plan. For the year ended 2007, the provision balance for contract settlement and lease costs was drawn down by cash payments of $11 for the 2004 Restructuring Plan, and $41 for the 2001 Restructuring Plan.

The following table sets forth special charges by segment for each of the years ended December 31:

	2007		2006
	Restructuring		Restructuring				2004						2001
	Plan		Plan				Restructuring Plan						Restructuring Plan							Total Special Charges
	2007		2007		2006		2007		2006		2005		2007		2006		2005			2007		2006		2005
Special charges by segment:
Carrier Networks	$	105	$	6		36	$	4	$	8	$	121	$	6	$	11	$	(1	)	$	121	$	55	$	120
Enterprise Solutions		23		2		14		2		3		27		2		3		(2	)	$	29	$	20	$	25
Global Services		27		7		5		2		1		9		3		1		—			39	$	7		9
Metro Ethernet Networks		16		2		7		1		8		23		2		2		(8	)		21	$	17	$	15
Other		—		—		6		—		—		—		—		—		—			—		6		—
Total special charges	$	171	$	17	$	68	$	9	$	20	$	180	$	13	$	17	$	(11	)	$	210	$	105	$	169

Loss (Gain) on Sales of Businesses and Assets

We recorded a gain on sales of businesses and assets of $31 in 2007, primarily due to recognition of previously deferred gains of $21 related to the divestiture of our manufacturing operations to Flextronics Telecom Systems Ltd., or Flextronics, $10 related to the divestiture of the UMTS Access business and $12 related to the sale of a portion of our LG-Nortel wireline business. This gain was partially offset by a loss of $8 related to the disposals and write-offs of certain long-lived assets.

In 2006, gain on sale of businesses and assets was $206, primarily due to gains of $166 on the sale of certain assets and liabilities related to our UMTS Access business, $40 related to the sale of real estate assets in Canada and EMEA, and $23 on the sale of certain assets related to our blade server business. These gains were partially offset by write-offs of certain long-lived assets of $13 and charges related the divestiture of our manufacturing operations to Flextronics of $7.

In 2005, loss on sale of businesses and assets of $47 was primarily due to charges related to the divestiture of our manufacturing operations to Flextronics.

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Other Operating Income — Net

The components of other operating income — net were as follows:

	For the Years Ended December 31,
	2007		2006			2005
Royalty license income — net	$	29	$	21		$	13
Litigation recovery (charges)		2		(9	)		10
Other — net		4		1			—
Other operating income — net(a)	$	35	$	13		$	23

(a)  Includes items that were previously reported as non-operating and have been reclassified from “Other income — net” accordingly.

In 2007, other operating income- net was $35, primarily driven by royalty license income of $29, was comprised of royalty income from cross patent license agreements.

In 2006, other operating income-net of $13 was primarily comprised of $21 on royalty income from patented technology, partially offset by expenses of $9 related to various litigation and settlement costs.

In 2005, other operating income-net of $23 was comprised of royalty license income of $13 and litigation recovery of $10 from various settlements.

Other Income — Net

The components of other income — net were as follows:

	For the Years Ended December 31,
	2007			2006			2005
Interest and dividend income		228			122			112
Gain (loss) on sales and write downs of investments		(5	)		(6	)		67
Currency exchange gains (losses) — net		180			(18	)		63
Other — net		41			88			30
Other income — net	$	444		$	186		$	272

In 2007, other income — net was $444, primarily comprised of interest and dividend income from our short-term investments of $228, foreign exchange gains of $180 and sub-lease income of $18. The increase in currency exchange gains was primarily driven by the strengthening of the Canadian Dollar against the U.S. Dollar. The Canadian Dollar appreciated 18% against the U.S. Dollar in 2007 which resulted in net gains as a result of the revaluation of Canadian Dollar denominated net monetary assets in U.S. Dollar functional entities.

In 2006, other income — net was $186, which included interest and dividend income of $122, a net loss on the sales and write downs of investments of $6, and net currency exchange losses of $18. Other net income of $88 was primarily driven by a gain of $26 related to the sale of a note receivable from Bookham, Inc., income of $22 from the sub-lease of certain facilities, and a gain of $24 related to changes in fair value of derivative financial instruments that did not meet the criteria for hedge accounting. These gains were partially offset by expenses of $7 from the securitization of certain receivables.

In 2005, other income — net was $272, which included interest and dividend income on our short-term investments of $112 and a net currency exchange gain of $63. We also generated a net gain of $67 on the sale of investments, which was primarily driven by a gain of $21 related to the sale of Arris Group Inc. shares, a gain of $45 on the sale of Axtel S.A. de CV shares and a gain of $7 on the sale of shares of Volt Delta. Other net income of $30 was primarily driven by gains of $35 related to customer settlements and customer financing arrangements and income of $22 from the sublease of certain facilities, partially offset by a loss of $20 on the sale of certain accounts receivable.

Interest Expense

Interest expense increased by $72 in 2007 compared to 2006. The increase was primarily due to higher debt levels, interest rates and borrowing costs on our debt as a result of the issuance of the $2,000 aggregate principal amount of senior notes due 2011, 2013 and 2016 on July 5, 2006, or the July 2006 Notes, which were in place throughout 2007.

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Interest expense increased by $79 in 2006 compared to 2005. The increase was primarily due to higher debt levels, interest rates and borrowing costs on our debt as a result of the one-year credit facility in the aggregate principal amount of $1,300, or the 2006 Credit Facility, and the July 2006 Notes offering.

The increase in interest expense in 2005 was primarily due to increases in short-term rates which negatively impacted our floating rate swap exposure compared to 2004.

Income Tax Expense

During the year ended December 31, 2007, Nortel recorded a tax expense of $1,114 on earnings from operations before income taxes, minority interests and equity in net earnings (loss) of associated companies of $387. The tax expense of $1,114 is largely comprised of several significant items including $1,036 of net valuation allowance increase including an increase of $1,064 in Canada offset by releases in Europe and Asia, $74 of income taxes on profitable entities in Asia and Europe, including a reduction of Nortel’s deferred tax assets in EMEA, $29 of income taxes relating to tax rate reductions enacted during 2007 in EMEA and Asia, and other taxes of $17 primarily related to taxes on preferred share dividends in Canada. This tax expense is partially offset by a $25 benefit derived from various tax credits, primarily R&D related incentives, and a $17 benefit resulting from true up of prior year tax estimates including a $14 benefit in EMEA as a result of transfer pricing adjustments.

During the year ended December 31, 2006, Nortel recorded a tax expense of $60 on earnings from operations before income taxes, minority interests and equity in net earnings (loss) of associated companies of $42. The tax expense of $60 is largely comprised of $69 of income taxes resulting from a reduction of Nortel’s deferred tax assets in EMEA,$28 of various corporate, minimum and withholding taxes including $15 of income taxes on preferred share dividends in Canada and $13 resulting from true up of prior year tax estimates including a $12 tax expense in EMEA as a result of transfer pricing adjustments. This tax expense is partially offset by $41 benefit derived from various tax credits, primarily R&D related incentives and $19 benefit resulting from valuation allowance reductions in EMEA and Asia.

As of December 31, 2007, we have substantial loss carryforwards and valuation allowances in our significant tax jurisdictions (Canada, the U.S., the U.K., and France). These loss carryforwards will serve to minimize our future cash income related taxes.

We will continue to assess the valuation allowance recorded against our deferred tax assets on a quarterly basis. The valuation allowance is in accordance with Statement of Financial Accounting Standards, “Accounting for Income Taxes”, or SFAS 109, which requires that a tax valuation allowance be established when it is more likely than not that some portion or all of a company’s deferred tax assets will not be realized. Given the magnitude of our valuation allowance, future adjustments to this valuation allowance based on actual results could result in a significant adjustment to our effective tax rate. For additional information, see “Application of Critical Accounting Policies and Estimates — Tax Asset Valuation.”

Segment Information

Carrier Networks

The following table sets forth revenues and Management EBT for the CN segment:

	For the Years Ended December 31,						2007 vs. 2006						2006 vs. 2005
	2007		2006		2005		$ Change			% Change			$ Change			% Change
Revenue
CDMA solutions	$	2,425	$	2,311	$	1,972	$	114			5	%	$	339			17	%
GSM and UMTS solutions		1,373		2,021		2,248		(648	)		(32	)%		(227	)		(10	)%
Circuit and packet voice solutions		695		825		695		(130	)		(16	)%		130			19	%
Total Revenue	$	4,493	$	5,157	$	4,915	$	(664	)		(13	)%	$	242			5	%
Management EBT	$	783	$	455	$	343	$	328			72	%	$	112			33	%

2007 vs. 2006

CN revenues decreased to $4,493 in 2007 from $5,157 in 2006, a decrease of $664 or 13%. The decrease was driven primarily by the UMTS Access divestiture, and declines in demand for Voice and Packet GU Core products and our

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traditional technology such as TDM in the circuit and packet voice solutions business. These declines were partially offset by increased revenue from our CDMA solutions.

CDMA solutions increased $114 in 2007, primarily due to strong growth in sales in Asia of $153 primarily as a result of increased investments by certain of our customers in their infrastructure in order to enhance their service offerings within LG-Nortel, increased revenues in Canada of $41 associated with the continuing rollout of our EV-DO Rev A technology, and delays in spending by a major customer in 2006. EMEA and CALA declined in CDMA revenues by $74 and $9, respectively, due to the completion of projects in 2006 not repeated to the same extent as 2007 and the recognition of previously deferred revenues recorded in 2006 and not repeated in 2007. In the U.S. revenues remained unchanged, largely due to recognition of previously deferred revenue and increased spending by certain customers, entirely offset by lower spending by certain other customers in the fourth quarter of 2007.

The decline in GSM and UMTS solutions of $648 was primarily due to declines in EMEA of $457, the U.S. of $116 and Asia of $59. The decline in EMEA was primarily due to a $484 decrease in UMTS solutions as a result of the UMTS Access divestiture and a decline in demand for Voice and Packet GU Core, partially offset by increased demand in GSM Access. The U.S. decline was due to customer investment in UMTS Access solutions rather than GSM Access or GU Core solutions and recognition of less deferred revenue compared to 2006. The decline in Asia was due to reduced customer spending and price erosion, partially offset by revenues from one-time support business resulting from sale of the UMTS Access business.

The decrease in circuit and packet voice solutions of $130 was primarily in the U.S. and Asia. U.S. revenues declined $122 as a result of reduced legacy TDM demand and one-time third quarter 2006 recognition of deferred revenues in 2006 not repeated in 2007 to the same extent. This decrease was partially offset by an increase in revenues in next-generation products. Asia revenues declined by $20 primarily due to the recognition of previously deferred revenues as a result of the completion of certain customer contract deliverables in 2006 that was not repeated to the same extent in 2007.

Management EBT for CN increased to $783 in 2007 from $455 in 2006, an improvement of $328, or 72%. The increase in Management EBT was the result of decreases in SG&A and R&D expenses of $87 and $320, respectively, partially offset by increases in minority interest expense and a decrease in gross profit of $41.

CN gross profit decreased from $2,262 to $2,221, due to reductions in volume, substantially offset by a gross margin increase from 43.9% to 49.4% as a result of favorable CDMA product mix, product cost reductions, and improved GSM solutions margins. The decrease in SG&A of $87 was due to lower headcount costs as a result of the UMTS Access divestiture, partially offset by increased spending for new technologies. R&D expense decreased by $320 primarily due to the UMTS Access divestiture, and headcount reductions, lower-cost outsourcing and reduced investment in maturing technologies. The related cost reductions were partially offset by focused increases in R&D related to opportunities we believe have the greatest potential for growth.

2006 vs. 2005

CN revenues increased to $5,157 in 2006 from $4,915 in 2005, an increase of $242, or 5%. In 2006, demand for our next-generation wireless solutions increased with the rollout of our CDMA EV-DO Rev A technology. Our UMTS and succession voice solutions increases were driven by the addition of LG-Nortel and from the recognition of previously deferred revenue as we completed certain contract deliverables. This increase was partially offset by significant declines in the demand for our traditional wireless technologies such as GSM.

The rollout of our CDMA EV-DO Rev A technology was the primary driver of an increase in CDMA solutions revenue in the U.S. of $194, as certain of our significant customers increased investments in their infrastructure in order to enhance their service offerings. CDMA solutions increased in Canada by $66 primarily due to increased volumes with a key carrier customer and by $89 in EMEA primarily as a result of the completion of certain contract deliverables which resulted in the recognition of previously deferred revenue.

The decline in GSM and UMTS solutions was primarily due to a decline in the U.S. of $327 and a decline in Asia of $96. In the U.S. the decline was largely the result of decreases in GSM solutions due to lower customer spending, the loss of certain contracts due to industry consolidation, and the completion of a network project in 2005. The decline in Asia of $96 was due to revenues associated with a GSM contract in India in 2005 that were not repeated in 2006, partially offset by the addition of GSM and UMTS revenues from LG-Nortel. The declines in the U.S. and Asia were partially offset by an increase in EMEA of $128. The increase in EMEA was driven by higher UMTS solutions, primarily due to the

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recognition of previously deferred revenues resulting from a contract renegotiation and the completion of certain contract deliverables, partially offset by a decline in GSM solutions.

The increase in CN circuit and packet voice solutions was driven primarily by increased demand for next-generation packetized communications solutions such as VoIP. Demand for our VoIP solutions primarily drove increases in North America and Asia of $84 and $59, respectively.

Management EBT for the CN segment increased to $455 in 2006 from $343 in 2005, an increase of $112 or 33%. The increase was the result of an increase in gross profit of $160, partially offset by an increase in R&D expense of $19.

CN gross margin remained essentially flat and gross profit increased by $160 primarily due to increased sales volume, product mix, and negative margin impacts associated with a contract in India that were incurred in 2005 and not repeated in 2006 to the same levels. These increases were offset by higher warranty and costs to meet regional environmental specifications. R&D expense increased by $19 primarily due to the negative impact of foreign exchange, increased investment in targeted next-generation wireless programs to increase the feature content in our portfolio solutions and increased expenses related to LG-Nortel. In 2006 R&D in the CN segment was focused on driving additional investment in new product opportunities such as WiMAX and IMS while decreasing investment in legacy products.

Enterprise Solutions

The following table sets forth revenues and Management EBT for the ES segment:

	For the Years Ended December 31,							2007 vs. 2006					2006 vs. 2005
	2007		2006			2005		$ Change		% Change			$ Change			% Change
Revenue
Circuit and packet voice solutions	$	1,723	$	1,618		$	1,464	$	105		6	%	$	154			11	%
Data networking and security solutions		897		674			597		223		33	%		77			13	%
Total Revenue	$	2,620	$	2,292		$	2,061	$	328		14	%	$	231			11	%
Management EBT	$	39	$	(2	)	$	141	$	41		(2,050	)%	$	(143	)		(102	)%

2007 vs. 2006

The enterprise market is in the process of transitioning from traditional communications systems to next-generation Internet Protocol networks. The change in the product mix of our ES revenues in 2006 and 2007 is consistent with this trend. We continue to see growth in our packet-based voice solutions which support the next-generation technology, while seeing continued decline in our traditional circuit-based voice solutions.

ES revenues increased to $2,620 in 2007 from $2,292 in 2006, an increase of $328 or 14%. The increase in 2007 was primarily due to the recognition of previously deferred revenues as a result of the completion or elimination of customer deliverable obligations for certain products in our ES data networking and security solutions business and volume growth across both portfolios.

Revenues from ES circuit and packet voice solutions increased by $76 in EMEA, primarily due to supply chain delays resulting from difficulty in obtaining components required to meet RoHS standards in 2006 that were not present in 2007 and volume increases, $13 in CALA and $6 in the U.S. due to volume increases, partially offset by reduced demand for legacy products.

The increase in ES data networking and security solutions was primarily the result of increases of $83 in Asia, $79 in EMEA and $50 in the U.S. primarily due to the recognition of previously deferred revenues as a result of completion or elimination of customer deliverable obligations in 2006 for certain products and volume increases, partially offset by reduced demand for legacy products.

Management EBT for ES increased to earnings of $39 in 2007 from a loss of $2 in 2006, an improvement of $41. This increase in Management EBT was primarily driven by an increase in gross profit of $183, partially offset by increases in SG&A and R&D expenses of $92 and $62, respectively.

Gross margin increased from 44.3% to 45.8% primarily due to favorable product mix and gross profit increased from $1,016 to $1,199 primarily due to the release of high margin deferred revenue, higher sales volumes and favorable product mix. The increase in SG&A expense of $92 was due to increased headcount investments across all regions to drive growth

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and also due to unfavorable foreign exchange impacts. Increased headcount investment in the development of our packet-based voice, data and security solutions portfolios and negative foreign exchange impact resulted in an increase in R&D expense of $62.

2006 vs. 2005

ES revenues increased to $2,292 in 2006 from $2,061 in 2005, an increase of $231 or 11%. The increase in 2006 was driven primarily by the addition of a full year of results from LG-Nortel.

Pricing pressures, particularly on our traditional circuit-based switching, had a negative impact on revenues primarily in EMEA and the U.S.

Revenues from enterprise circuit and packet voice solutions increased by $108 in EMEA and $102 in Asia as a result of the addition of a full year of results from LG-Nortel. The increases in EMEA and Asia were partially offset by a decline of $60 in the U.S. which is primarily attributable to the recognition of deferred revenue in 2005 in our enterprise voice solutions portfolio which was not repeated in 2006.

The increase in enterprise data networking and security solutions was primarily the result of increases of $32 and $29 in the U.S. and Asia, respectively.

Management EBT for the ES segment decreased to a loss of $2 in 2006 from earnings of $141 in 2005, a decrease of $143. This decrease in Management EBT was primarily driven by a decrease in gross profit of $14, and an increase in SG&A and R&D expenses of $55 and $81, respectively. ES gross margin decreased by 5.7% while gross profit decreased by $14 as the impact of the gross margin decline was partially offset by higher sales volumes. The decline in gross margin is primarily attributable to the addition of lower margin products to our portfolio from LG-Nortel, unfavorable product mix and pricing pressures on our voice products, particularly in EMEA. The increase in ES SG&A expense of $55 was due to increased selling and marketing costs associated with the addition of LG-Nortel, increased selling costs, and unfavorable foreign exchange impacts. The addition of LG-Nortel, increased investment in the development of our voice, data, and security solutions portfolios and unfavorable foreign exchange impacts drove an increase in R&D expense of $81.

Global Services

The following table sets forth revenues and Management EBT for the GS segment:

	For the Years Ended
	December 31,						2007 vs. 2006						2006 vs. 2005
	2007		2006		2005		$ Change			% Change			$ Change			% Change
Revenue	$	2,087	$	2,132	$	2,040	$	(45	)		(2	)%	$	92			5	%
Management EBT	$	381	$	342	$	474	$	39			11	%	$	(132	)		(28	)%

2007 vs. 2006

GS revenues were $2,087 in 2007 compared to $2,132 in 2006, a decline of $45 or 2%. The decrease was primarily related to the UMTS Access divestiture, which resulted in a $176 decrease, partially offset by increased volumes.

The decrease in GS revenues was primarily due to a decrease in network implementation services primarily related to the UMTS Access divestiture, and lower sales volumes in EMEA. The decrease in GS revenues in EMEA of $142, of which the UMTS Access divestiture accounted for $176, was partially offset by an increase of $42 in Asia due to increased volumes and contracts where key milestones were met. The decrease in network implementation services was partially offset by growth of $47 in network support services across all regions except CALA where we experienced significant price pressures and technology changes, and growth of $33 in network managed services, primarily in the U.S., Asia and EMEA. In 2007, the majority of GS revenue continued to be generated by network support services.

Management EBT for GS increased to $381 in 2007 from $342 in 2006, an increase of $39, or 11%. This increase in Management EBT was primarily driven by improved gross profit of $112, partially offset by increases in SG&A and R&D expenses of $54 and $7, respectively.

Gross profit increased from $592 to $704 and gross margin increased from 27.8% to 33.7% due to the favorable impact of cost-reduction programs, the favorable impact of foreign exchange in EMEA, and certain one-time items. The increase in gross profit was partially offset by the declines in volumes primarily related to the UMTS Access divestiture. SG&A and

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R&D increased by $54 and $7, respectively, due to investments in resources and capabilities in the areas within the GS segment we believe have the greatest potential for growth.

2006 vs. 2005

GS revenues increased to $2,132 in 2006 from $2,040 in 2005, an increase of $92, or 5%. Substantially all of our GS revenues are generated from network implementation and support services. The continued investment in voice and data convergence and network transformation across the carrier and enterprise markets is the primary driver for growth in our network integration and network managed services. We believe our large installed base represents an opportunity for network transformation and convergence services. However, the continued shift toward standardization of network components will weaken services tied to manufactured equipment and provide opportunities for multi-vendor service expansion, leading to increased competition.

Growth in GS revenue in 2006 was experienced across all portfolio offerings but was primarily driven by increases of $53 and $32 in network implementation services and network managed services, respectively and growth of $22 in network support services. In 2006 the majority of GS revenue continued to be generated by network implementation services and network support services. Increases in GS revenues in EMEA and Asia of $121 and $43, respectively, were partially offset by a decline in the U.S. of $61.

Management EBT in the GS segment decreased to $342 in 2006 from $474 in 2005, a decrease of $132. Gross margin decreased by 4.9% and gross profit declined by $70 primarily as a result of the decline in gross margin. An increase in SG&A of $50 and an increase in R&D of $6 further drove the decrease in Management EBT. The increase in SG&A resulted from investments in resources and capabilities in the areas within the GS segment we believe have the greatest potential for growth. R&D in the GS segment was focused on developing new service offerings for the Network Implementation Services and Network Application Services businesses.

Metro Ethernet Networks

The following table sets forth revenues and Management EBT for the MEN segment:

	For the Years Ended December 31,								2007 vs. 2006						2006 vs. 2005
	2007			2006		2005			$ Change			% Change			$ Change		% Change
Revenue
Optical networking solutions	$	1,185		$	1,128	$	954		$	57			5	%	$	174		18	%
Data networking and security solutions		340			463		393			(123	)		(27	)%		70		18	%
Total Revenue	$	1,525		$	1,591	$	1,347		$	(66	)		(4	)%	$	244		18	%
Management EBT	$	(14	)	$	69	$	(78	)	$	(83	)		(120	)%	$	147		188	%

2007 vs. 2006

MEN revenues decreased to $1,525 in 2007 from $1,591 in 2006, a decrease of $66 or 4%. The decrease in the MEN segment was driven by the recognition of less deferred revenues in 2007 than in 2006 and decreases in volumes for certain mature product portfolios, partially offset by increased optical volumes and a favorable impact of foreign exchange.

Revenues from optical networking solutions increased by $93 in EMEA, primarily due to the recognition of previously deferred revenues as a result of the completion of certain customer contract deliverables in 2007, increased volume and favorable impact of foreign exchange due to fluctuations between the Euro and the U.S. Dollar. Revenues increased by $21 in Canada and $20 in CALA due to optical market growth. In the U.S., revenues increased by $22 due to an increase in volume, partially offset by deferred revenue recognized in 2006, which was not repeated in 2007. These increases were partially offset by a decrease of $99 in Asia, primarily due to the recognition of previously deferred revenues as a result of the completion of certain customer contract deliverables in 2006 that was not repeated in 2007, partially offset by increased volumes.

Revenues from data networking and security solutions decreased by $78 and $72 in EMEA and Asia, respectively, primarily due to the recognition of previously deferred revenues in 2006, which was not repeated in 2007. These decreases were partially offset by an increase of $31 in the U.S., primarily due to the recognition of previously deferred revenue in 2007 as a result of the completion of certain customer contract deliverables resulting from the termination of a supplier

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agreement. Further, all three regions had volume decreases due to a declining multi-service switch/services edge router market.

Management EBT for MEN decreased to a loss of $14 in 2007 from earnings of $69 in 2006, a decrease of $83, or 120%. This decrease in Management EBT was primarily driven by a decrease in gross profit of $71 and an increase in R&D expenses of $29, partially offset by a decrease in SG&A expense of $24.

MEN gross profit decreased from $588 to $517 and gross margin decreased from 37.0% to 33.9% due to the recognition of deferred revenues at lower margins in the first quarter of 2007 and deferred revenue recognized at higher margins in 2006, combined with an unfavorable product and customer mix. These decreases were partially offset by volume increases primarily in optical networking solutions and cost reduction programs. The MEN segment also continues to experience pricing pressure resulting in lower margins. SG&A expense declined by $24 as a result of cost reductions in North America, legal expenses incurred in 2006 not repeated in 2007, and lower bad debt expenses in 2007. R&D expenses increased by $29 primarily due to the incremental investment in Carrier Ethernet and Optical OME products and the unfavorable impact of the strengthening of the Canadian Dollar, partially offset by the cancellation of certain R&D programs.

2006 vs. 2005

MEN revenues increased to $1,591 in 2006 from $1,347 in 2005, an increase of $244 or 18%. The increase in the MEN segment was primarily driven by increases in our optical networking solutions primarily due to increased volumes and the delivery of software upgrades which triggered the recognition of deferred revenue.

Revenues from optical networking solutions increased by $136 in Asia, primarily due to the recognition of previously deferred revenue resulting from the delivery of certain software upgrades. Revenues from data networking and security solutions increased by $66 in EMEA, primarily due to the recognition of previously deferred revenue resulting from the completion of certain contract deliverables.

Management EBT for the MEN segment increased to $69 in 2006 from a loss of $78 in 2005, an increase of $147. The increase in 2006 was mainly the result of an increase in gross profit of $84 and a decrease in R&D expense of $55. MEN gross margin decreased by 0.4% while gross profit increased by $84 as the impact of the decline in margin was offset by increased sales volumes. The decline in gross margin is primarily attributable to unfavorable product mix, unfavorable foreign exchange impacts, and the impact of provision releases in 2005 on previously provided for optical inventory not repeated in 2006. MEN R&D expense decreased by $55 primarily due to the cancellation of certain programs, partially offset by R&D spending in LG-Nortel and a write down of R&D lab equipment.

Other

The following table sets forth revenues and Management EBT for the Other segment:

	For the Years Ended December 31,									2007 vs. 2006						2006 vs. 2005
	2007			2006			2005			$ Change			% Change			$ Change			% Change
Revenue	$	223		$	246		$	146		$	(23	)		(9	)%	$	100			68	%
Management EBT	$	(644	)	$	(898	)	$	(776	)	$	254			(28	)%	$	(122	)		(16	)%

2007 vs. 2006

Other revenues are comprised primarily of revenues from NGS. Other revenues decreased to $223 in 2007 from $246 in 2006, a decrease of $23 or 9%. The decrease was due to declines in NGS revenues as a result of delay in the issuance and, in some cases, cancellation of certain intended contract offerings by the U.S. Federal government.

Other Management EBT includes corporate charges and increased from a loss of $898 in 2006 to a loss of $644 in 2007, an increase of $254. The increase was primarily driven by an increase in foreign exchange net gain of $198, an increase in interest and dividend income of $106. Other SG&A decreased by $40 primarily due to lower costs related to our internal control remediation, finance transformation program and business transformation initiatives, partially offset by increased interest expense of $72 due to higher debt levels and borrowing costs and lower gains on sale of certain investments.

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2006 vs. 2005

Other revenues are comprised primarily of revenues from NGS. Other revenues increased to $246 in 2006 from $146 in 2005, an increase of $100. The increase was due to the addition of a full year of results from NGS in 2006 as compared to the inclusion of seven months of results in 2005.

Other Management EBT decreased by $122 in 2006 and was primarily the result of increases in other items expense of $164, partially offset by a decline in SG&A expense of $47. The increase in other items expense was primarily due to an increase in interest expense of $79 due to higher debt levels and borrowing costs, lower net foreign transactional gains of $81, and lower net investment gains of $73. These impacts were partially offset by increased dividend and interest income of $10 and increased gains of $31 on changes in the fair value of derivative financial instruments that did not meet the criteria for hedge accounting. These increases were partially offset by a decrease in SG&A expense of $47, primarily due to lower costs related to our restatement related activities and internal control remedial measures, partially offset by costs associated with our Business Transformation initiatives.

Liquidity and Capital Resources

Cash Flow

Our total cash and cash equivalents excluding restricted cash increased by $39 in 2007 to $3526 as at December 31, 2007, primarily due to cash from operating activities and the impact of foreign exchange on cash and cash equivalents.

Our liquidity and capital resources are primarily impacted by: (i) current cash and cash equivalents, (ii) operating activities, (iii) investing activities, (iv) financing activities and (v) foreign exchange rate changes. The following table summarizes our cash flows by activity and cash on hand as of December 31:

	For the Years Ended December 31,
	2007			2006			2005
Net earnings (loss)	$	(798	)	$	(32	)	$	(47	)
Non-cash items		1,576			744			717
Changes in operating assets and liabilities:
Accounts receivable — net		4			(496	)		(334	)
Inventories — net		(66	)		(42	)		285
Accounts payable		94			(80	)		188
		32			(618	)		139
Deferred costs		223			97			(538	)
Income taxes		18			(18	)		(57	)
Payroll, accrued and contractual liabilities		(107	)		(252	)		(356	)
Deferred revenue		(424	)		(229	)		161
Advanced billings in excess of revenues recognized to date on contracts		149			120			102
Restructuring liabilities		(7	)		(21	)		(149	)
Other		(469	)		(74	)		(144	)
Changes in other operating assets and liabilities		(617	)		(377	)		(981	)
Net cash from (used in) operating activities		193			(283	)		(172	)
Net cash from (used in) investing activities		(177	)		317			(424	)
Net cash from (used in) financing activities		(81	)		483			(65	)
Effect of foreign exchange rate changes on cash and cash equivalents		104			94			(102	)
Net cash from (used in) operating activities of continuing operations		39			611			(763	)
Net cash from (used in) operating activities of discontinued operations		—			—			33
Net increase (decrease) in cash and cash equivalents		39			611			(730	)
Cash and cash equivalents at beginning of year		3,487			2,876			3,606
Cash and cash equivalents at end of year	$	3,526		$	3,487		$	2,876

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Operating Activities

In 2007, our net cash from operating activities of $193 was as a result of our net loss of $798 plus adjustments for non-cash items of $1,576, net cash from operating assets and liabilities of $32 and net cash used in other operating assets and liabilities of $617. The primary additions to our net income for non-cash items were deferred income taxes of $1,019, amortization and depreciation of $328, pension and other accruals of $276, share based compensation expense of $105 and minority interest of $73. These additions were partially offset by other non-cash changes of $210, primarily due to foreign exchange impacts on long-term assets and liabilities of $293.

In 2006, our net cash used in operating activities of $283 was driven by a net loss of $32 plus adjustments for non-cash items of $744, a net use of cash of $618 due to changes in operating assets and liabilities, and a net use of cash of $377 due to changes in other operating assets and liabilities. The primary additions to our net loss for non-cash items of $744 were pension and other accruals of $345, amortization and depreciation of $290, share based compensation expense of $112, and net other additions of $127. These additions were partially offset by net gain on sale of businesses and assets of $200.

Accounts Receivable

	December 31,		December 31,
	2007		2006		$ Change			% Change
Accounts Receivable	$	2,578	$	2,785	$	(207	)		(7	)
Days sales outstanding in accounts receivable (DSO)(a)		72		75

(a)  DSO is the average number of days our receivables are outstanding based on a 90 day cycle. DSO is a metric that approximates the measure of the average number of days from when we recognize revenue until we collect cash from our customers. DSO for each quarter is calculated by dividing the quarter end accounts receivable-net balance by revenues for the quarter, in each case as determined in accordance with U.S. GAAP, and multiplying by 90 days.

Accounts receivable decreased to $2,578 as at December 31, 2007 from $2,785 as at December 31, 2006, a decrease of $207. DSO decreased by 3 days in the fourth quarter of 2007 compared to the fourth quarter of 2006. The decrease in DSO was due to billing improvements driven by certain specific billing initiatives as well as effective management and focus on delinquencies and billing disputes.

Inventory

	December 31,		December 31,
	2007		2006		$ Change		% Change
Inventory — net (excluding deferred costs)	$	513	$	456	$	57		13
Net inventory days (NID)(a)		26		22

(a)  NID is the average number of days from procurement to sale of our product based on a 90 day cycle. NID for each quarter is calculated by dividing the average of the current quarter and prior quarter inventories — net (excluding deferred costs) by the cost of revenues for the quarter and multiplying by 90 days.

Inventory, excluding deferred costs, increased to $513 as at December 31, 2007 from $456 as at December 31, 2006, an increase of $57. NID increased by 4 days compared to the fourth quarter of 2006. The increase in NID was due to a decrease in cost of revenues, inventory build-up related to new products and customer service improvement initiatives.

Accounts Payable

	December 31,		December 31,
	2007		2006		$ Change		% Change
Trade accounts payable	$	1,145	$	1,085	$	60		6
Days of purchasing outstanding in accounts payable (DPO)(a)		57		49

(a)  DPO is the average number of days from when we receive purchased goods and services until we pay our suppliers based on a 90 day cycle. DPO for each quarter is calculated by dividing the quarter end accounts payable by the cost of revenues for the quarter, in each case as determined in accordance with U.S. GAAP, and multiplying by 90 days.

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Trade accounts payable increased to $1,145 as at December 31, 2007 from $1,085 at December 31, 2006, an increase of $60. DPO increased by 8 days compared to the fourth quarter of 2006. The increase in DPO is attributable to improved supplier payment terms and improved Accounts Payable payment processing practices.

Deferred Revenue

Billing terms and collections periods related to arrangements under which we defer revenue are generally similar to other revenue arrangements. Similarly, payment terms and cash outlays related to products and services associated with delivering under these arrangements are also generally similar to other revenue arrangements. As a result, neither cash inflows nor outflows are unusually impacted under arrangements in which revenue is deferred, compared to arrangements in which revenue is not deferred, and the DSO and DPO include all these arrangements.

Investing Activities

In 2007, our net cash used in investing activities was $177 and was primarily due to expenditures for plant and equipment of $235, partially offset by proceeds of $90 primarily related to the sale of our facility located in Montreal, Quebec.

In 2006, our net cash from investing activities was $317 and was primarily due to $600 related to the proceeds on sale of certain investments and businesses which we no longer consider strategic, including $306 related to the sale of certain assets and liabilities relating to our UMTS access business and $219 related to the transfer of certain manufacturing assets to Flextronics and proceeds from disposals of plant and equipment of $143. These inflows were partially offset by $146 for acquisitions of investments and businesses, net of cash acquired, including $99 related to our acquisition of Tasman Networks, and $316 for the purchase of plant and equipment.

Financing Activities

In 2007, our net cash used in financing activities was $81, resulting primarily from dividends paid of $52, primarily related to our outstanding preferred shares.

In 2006, our net cash from financing activities was $483 and was primarily from (i) cash proceeds of $2,000 from the issuance of the July 2006 Notes, the proceeds of which were used to repay $1,300 outstanding under the 2006 Credit Facility, which facility had been primarily used to repay $1,275 relating to the aggregate principal amount of our 6.125% Notes and to replenish cash outflows of $150 used to repay at maturity the outstanding aggregate principal amount of the 7.40% Notes due June 15, 2006 and (ii) net proceeds from other notes payable of $26 partially offset by, (iii) dividends of $60 primarily related to our outstanding preferred shares and (iv) other payments of $59, including $42 in transaction costs associated with the issuance of the July 2006 Notes.

Other Items

In 2007, our cash increased by $104 due to favorable effects of changes in foreign exchange rates, primarily due to the strengthening of the Canadian Dollar, the British Pound and the Euro against the U.S. Dollar.

In 2006, our cash increased by $94 due to favorable effects of changes in foreign exchange rates primarily of the Euro and the British Pound against the U.S. Dollar.

Convertible Notes Offering

On March 28, 2007, NNC completed a $1,150 offering of the Convertible Notes to qualified institutional buyers pursuant to Rule 144A under the U.S. Securities Act of 1933, as amended, or the Securities Act, and in Canada to qualified institutional buyers that are also accredited investors pursuant to applicable Canadian private placement exemptions. The Convertible Notes consist of $575 principal amount of convertible senior notes due 2012, or the 2012 Notes, and $575 of convertible senior notes due 2014, or the 2014 Notes, in each case including $75 principal amount of Convertible Notes issued pursuant to the exercise in full of over-allotment options granted to the initial purchasers. The 2012 Notes pay interest semi-annually at a rate per annum of 1.75% and the 2014 Notes pay interest semi-annually at a rate per annum of 2.125%.

The 2012 Notes and 2014 Notes are each convertible into common shares of NNC at any time based on an initial conversion rate of 31.25 common shares per $1,000.00 principal amount of Convertible Notes (which is equal to an initial conversion price of $32.00 per common share), which rate is not a beneficial conversion option. In each case, the conversion rate is subject to adjustment in certain events, including a change of control. Holders who convert their

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Convertible Notes in connection with certain events resulting in a change in control may be entitled to a “make-whole” premium in the form of an increase in the conversion rate.

Upon a change of control, NNC would be required to offer to repurchase the Convertible Notes for cash at 100% of the outstanding principal amount thereof plus accrued and unpaid interest and additional interest, if any, to but not including the date of repurchase.

NNC may redeem in cash the 2012 Notes and the 2014 Notes at any time on or after April 15, 2011 and April 15, 2013, respectively, at repurchase prices equal to 100.35% and 100.30% of their outstanding principal amount, respectively, plus accrued and unpaid interest and any additional interest up to but excluding the applicable redemption date. NNC may redeem each series of Convertible Notes at any time in cash at a repurchase price equal to 100% of the aggregate principal amount, together with accrued and unpaid interest and any additional interest to the redemption date in the event of certain changes in applicable Canadian withholding taxes.

The Convertible Notes are fully and unconditionally guaranteed by us, and initially guaranteed by Nortel Networks Inc., or NNI. The Convertible Notes are senior unsecured obligations of NNC and rank pari passu with all of its other senior obligations. Each guarantee is the senior unsecured obligation of the respective guarantor and ranks pari passu with all other senior obligations of that guarantor.

In connection with the issuance of the Convertible Notes, we, NNC and NNI entered into a registration rights agreement obligating NNL to file with the SEC prior to or on October 5, 2007, and to use its reasonable best efforts to cause to become effective prior to or on January 5, 2008, a resale shelf registration statement covering the Convertible Notes, the related guarantees and the common shares issuable upon conversion of the Convertible Notes. We filed the resale shelf registration statement on Form S-3 with the SEC on September 24, 2007, and it was declared effective on December 21, 2007.

Future Uses and Sources of Liquidity

The forward-looking statements below are subject to important risks, uncertainties and assumptions, which are difficult to predict and the actual outcome may be materially different from that anticipated. See the Risk Factors section of this report. We believe the following are the key uncertainties that exist regarding our liquidity:

•  We expect our ability to increase revenue and generate positive cash from operating activities to be a primary uncertainty regarding our liquidity. In prior years, our operating results have generally produced negative cash flow from operations due in large part to our inability to reduce operating expenses as a percentage of revenue and the continued negative impact on gross margin due to competitive pressures, product mix and other factors discussed in this report. If capital spending by our customers changes or pricing and margins change from what we currently expect, due to current economic uncertainties in North America or elsewhere raising concerns about decreases in projected spending rates by both carrier and enterprise customers, or for other reasons, our revenues and cash flows may be materially lower and we may be required to further reduce our investments or take other measures in order to meet our cash requirements;

•  Our ability and willingness to access the capital markets is based on many factors including market conditions and our overall financial objectives. Currently, our ability is limited by the covenant restrictions in our indentures and by our and NNC’s credit ratings both of which have, in part, contributed to our increased interest and borrowing costs. We cannot provide any assurance that our net cash requirements will be as we currently expect, that we will be able to refinance any maturing debt as it comes due or that financings will be available to us on acceptable terms, or at all; and

•  We are subject to litigation proceedings and, as a result, any judgments or settlements in connection with our pending civil litigation not encompassed by the Global Class Action Settlement, or criminal investigations related to the restatements, could have a material adverse effect on our business, results of operations, financial condition and liquidity, other than anticipated professional fees.

Future Uses of Liquidity

Our cash requirements for the 12 months commencing January 1, 2008 are primarily expected to consist of funding for operations, including our investments in R&D, and the following items:

•  cash contributions for pension, post retirement and post employment funding of approximately $350;

•  capital expenditures of approximately $200;

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•  costs related to workforce reductions and real estate actions in connection with the 2007 and prior restructuring plans of approximately $130

•  costs related to workforce reductions and other restructuring activities for all 2008 restructuring plans of approximately $157;

•  costs associated with ongoing contractual commitments related to the divestiture of our manufacturing operations to Flextronics of approximately $70;

•  outstanding principal amount of 4.25% Notes due 2008 of up to $675, if not refinanced in whole or in part; and

•  an earn-out payment to LGE, of approximately $51 based on the 2007 performance of LG-Nortel.

Also, from time to time, we may purchase or redeem our outstanding debt securities and/or convertible notes and may enter into acquisitions or joint ventures as opportunities arise.

Contractual cash obligations

	Payments Due												Total
Contractual Cash Obligations(a)	2008		2009		2010		2011		2012		Thereafter		Obligations
Long-term debt(b)	$	28	$	26	$	26	$	1,027	$	29	$	1,533	$	2,669
Interest on Long-term debt(c)		219		219		219		176		124		497		1,454
Operating leases(d)		105		93		83		70		59		276		686
Purchase obligations		28		9		3		—		—		—		40
Outsourcing contracts		11		10		—		—		—		—		21
Obligations under special charges		51		35		44		40		33		168		371
Pensions, post-retirement benefits and post-employment		350		—		—		—		—		—		350
obligations(e)
Other long-term liabilities reflected on the balance sheet(f)		28		4		5		5		4		119		165
Total contractual cash obligations	$	820	$	396	$	380	$	1,318	$	249	$	2,593	$	5,756

(a)	Amounts represent our known, undiscounted, minimum contractual payment obligations under our long-term obligations and include amounts identified as contractual obligations in current liabilities of the accompanying audited consolidated financial statements as of December 31, 2007.
(b)	Includes principal payments due on long-term debt and $296 of capital lease obligations. For additional information, see note 10, “Long-term debt”, to the accompanying audited consolidated financial statements.
(c)	Amounts represent interest obligations on our long-term debt excluding capital leases as at December 31, 2007. As described in note 11, “Financial instruments and hedging activities”, to the accompanying audited consolidated financial statements, we have entered into certain interest rate swap contracts, which swap fixed rate payments for floating rate payments. For the purposes of estimating our future payment obligations with regards to floating rate payments, we have used the floating rate in effect as at December 31, 2007.
(d)	For additional information, see note 13, “Commitments”, to the accompanying audited consolidated financial statements.
(e)	Represents our estimate of our 2008 pension, post-retirement and post-employment obligations only. We will continue to have funding obligations in each future period; however, we are not currently able to estimate those amounts.

(f)  Includes asset retirement obligations, deferred compensation and tax liabilities under FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes. $21 has been classified as current and therefore reflected in 2008 and $71 in “thereafter” as we are unable to reasonably project the ultimate amount or timing of settlement of our reserves for income taxes. See note 7, Income taxes, in the notes to consolidated financial statements for further discussion.

Purchase obligations

Purchase obligation amounts in the above table represent the minimum obligation under our supply arrangements related to products and/or services entered into in the normal course of our business. Where the arrangement specifies quantity, pricing and timing information, we have included that arrangement in the amounts presented above. In certain cases, these arrangements define an end date of the contract, but do not specify timing of payments between December 31, 2007 and the end date of the agreement. In those cases, we have estimated the timing of the payments based on forecasted usage rates.

Outsourcing contracts

Outsourcing contract amounts in the table above represent our minimum contractual obligation for services provided to us for a portion of our information services function. The amount payable under these outsourcing contracts is variable to the extent that our hardware volumes and workforce fluctuates from the baseline levels contained in the contracts and our

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contractual obligation could increase above such baseline amount. If our hardware volumes or workforce were to fall below the baseline levels in the contracts, we would be required to make the minimum payments included above.

Obligations under special charges

Obligations under special charges in the above table reflect undiscounted amounts related to contract settlement and lease costs and are expected to be substantially drawn down by the end of 2022. Included in the December 31, 2007 balance sheet is a provision in the amount of $229 reflecting the discounted balances of the obligations under special charges net of estimated sublease rentals. Balance sheet provisions of $51 for workforce reduction costs, included in restructuring in current liabilities in the accompanying audited consolidated financial statements, have not been reflected in the contractual cash obligations table above.

Pension and post-retirement obligations

During 2007, we made cash contributions to our defined benefit pension plans of $338 and to our post-retirement benefit plans of $38. In 2008, we expect to make cash contributions of approximately $270 to our defined benefit pension plans and approximately $80 to our post-retirement and post-employment benefit plans.

Other long-term liabilities reflected on the balance sheet

Other long-term liabilities reflected on the balance sheet relate to asset retirement obligations and deferred compensation accruals. Payment information related to our asset retirement obligations has been presented based on the termination date after the first renewal period of the associated lease contracts. Payment information related to our deferred compensation accruals has been presented based on the anticipated retirement dates of the employees participating in the programs.

Future Sources of Liquidity

In recent years, our operating results have generally not produced significant cash flow from operations due in large part to our inability to reduce operating expenses as a percentage of revenue and the negative impact on gross profit due to competitive pressures, product mix and other factors discussed above under “Results of Operations”. In addition, we have made significant cash payments related to our restructuring programs and pension plans. Our ability to generate sustainable cash from operations will depend on our ability to generate profitable revenue streams, reduce our operating expenses and continue to improve our working capital management.

As of December 31, 2007, our primary source of liquidity was cash. We believe our cash will be sufficient to fund our business model (see “Executive Overview — Our Business and Strategy”) and investments in our business and meet our customer commitments for at least the 12 month period commencing January 1, 2008, including the cash expenditures outlined under “Future Uses of Liquidity” above.

Available support facility

On February 14, 2003, we entered into a $750 support facility with Export Development Canada, or the EDC Support Facility. As of December 31, 2007, the EDC Support Facility provided for up to $750 in support including:

•  $300 of committed revolving support for performance bonds or similar instruments with individual amounts of up to $25, of which $89 was outstanding; and

•  $450 of uncommitted revolving support for performance bonds or similar instruments and/or receivables sales and/or securitizations, of which $57 was outstanding.

The EDC Support Facility provides that EDC may suspend its obligation to issue any additional support to us if events occur that would have a material adverse effect on our business, financial position or results of operation. In addition, the EDC Support Facility can be suspended or terminated if an event of default has occurred and is continuing under the EDC Support Facility or if our senior unsecured long-term corporate debt rating by Moody’s Investors Service, or Moody’s, has been downgraded to less than B3 or if its debt rating by Standard & Poor’s, or S&P, has been downgraded to less than B-.

EDC has also agreed to provide future support under the EDC Support Facility on an unsecured basis and without the guarantees of our subsidiaries provided that should we or our subsidiaries incur liens on our assets securing certain indebtedness, or should any of our subsidiaries incur or guarantee certain indebtedness in the future above agreed thresholds, equal and ratable security and/or guarantees of our obligations under the EDC Support Facility would be required at that time.

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During the first half of 2006, our obligations under the EDC Support Facility were equally and ratably secured with the 2006 Credit Facility and our 6.875% notes due September 2023 by a pledge of substantially all of our and NNC’s U.S. and Canadian personal property and the U.S. personal property of NNI. Our obligations under the EDC Support Facility also were guaranteed by NNC and NNI at such time. These guarantees and security agreements were terminated on July 5, 2006 with the repayment of the 2006 Credit Facility. In connection with the offering of the July 2006 Notes, we, NNI and EDC entered into a new guarantee agreement dated July 4, 2006 by which NNI agreed to guarantee our obligations under the EDC Support Facility during such time that the July 2006 Notes are guaranteed by NNI.

On March 9, 2007, we obtained a waiver from EDC relating to the breach of certain provisions of our EDC Support Facility related to the restatement by us of certain of our prior period results. As a result of this waiver, EDC will abstain from the right to refuse to issue additional support and to terminate its commitments under the Support Facility. The waiver was valid only for the breach resulting from the restatement of our results covered in NNC’s press release dated March 1, 2007.

Effective December 14, 2007, we and EDC amended the EDC Support Facility to (i) extend the termination date of the facility to December 31, 2011, (ii) provide for automatic annual renewal of the facility each following year, unless either party provides written notice to the other of its intent to terminate, (iii) increase the maximum size of individual bonds supported under the committed portion of the facility from $10 to $25, (iv) provide support for individual bonds with expiry dates of up to four years and (v) limit the restriction on the ability to secure indebtedness to apply only to us, NNI and Nortel Networks Capital Corporation at any time that our senior long-term debt is rated as investment grade.

Short-form registration of securities

In June 2007, we again became eligible to make use of short-form registration statements for the registration of our securities with the SEC. Although we filed a shelf registration statement with the SEC in 2002, the information contained in that shelf-registration statement is not current. In order to make use of a short-form registration statement for issuance of securities, we would need to either update the information contained in that shelf registration statement or file a new shelf registration statement and a new base shelf prospectus containing current, updated information.

Credit Ratings

	Moody’s		S&P
NNL’s Corporate Family Rating/Corporate Credit Rating		B3		B−
NNL’s $2.0B High-Yield Notes		B3		B−
NNC’s $1.8B Convertible Notes due 2008		B3		B−
NNC’s $1.15B Convertible Notes due 2012 and 2014		B3		B−
NNL’s $200 Notes due 2023		B3		CCC
Nortel Networks Capital Corporation’s $150 Notes due 2026		B3		CCC
NNL Preferred Shares:
Series 5		Caa3		CCC−
Series 7		Caa3		CCC−

On March 22, 2007, S&P affirmed its B– long-term credit rating with an outlook of stable. On March 22, 2007, Moody’s affirmed the B3 Corporate Family Rating on NNC and our stable outlook. There can be no assurance that our credit ratings will not be lowered or that these ratings agencies will not issue adverse commentaries about us or NNC, potentially resulting in higher financing costs and reduced access to capital markets or alternative financing arrangements. A reduction in our credit ratings may also affect our ability, and the cost, to securitize receivables, obtain bid, performance related and other bonds, access the EDC Support Facility and/or enter into normal course derivative or hedging transactions.

Off-Balance Sheet Arrangements

Bid, Performance Related and Other Bonds

During the normal course of business, we provide bid, performance, warranty and other types of bonds, which we refer to collectively as bonds, via financial intermediaries to various customers in support of commercial contracts, typically for the supply of telecommunications equipment and services. If we fail to perform under the applicable contract, the customer may be able to draw upon all or a portion of the bond as a remedy for our failure to perform. An unwillingness

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or inability to issue bid and performance related bonds could have a material negative impact on our revenues and gross margin. The contracts which these bonds support generally have terms ranging from one to five years. Bid bonds generally have a term of less than twelve months, depending on the length of the bid period for the applicable contract. Performance-related and other bonds generally have a term of twelve months and are typically renewed, if required, over the term of the applicable contract. Historically, we have not made, and we do not anticipate that we will be required to make, material payments under these types of bonds.

The following table provides information related to these types of bonds as of:

	For the Years Ended December 31,
	2007		2006
Bid and performance related bonds(a)	$	155	$	231
Other bonds(b)		54		30
Total bid, performance related and other bonds	$	209	$	261

(a)	Net of restricted cash and cash equivalents amounts of $5 and $7 as of December 31, 2007 and December 31, 2006, respectively.
(b)	Net of restricted cash and cash equivalents amounts of $27 and $33 as of December 31, 2007 and December 31, 2006, respectively.

The EDC Support Facility is used to support bid and performance bonds with varying terms, including those with at least 365 day terms. Any bid or performance related bonds with terms that extend beyond December 31, 2011 are generally not eligible for the support provided by this facility. If the facility is not further extended beyond December 31, 2011, we would likely need to utilize cash collateral to support bid, performance related and other related bonding obligations.

Application of Critical Accounting Policies and Estimates

Our accompanying audited consolidated financial statements are based on the selection and application of accounting policies generally accepted in the U.S., which require us to make significant estimates and assumptions. We believe that the following accounting policies and estimates may involve a higher degree of judgment and complexity in their application and represent our critical accounting policies and estimates: revenue recognition, provisions for doubtful accounts, provisions for inventory, provisions for product warranties, income taxes, goodwill valuation, pension and post-retirement benefits, special charges and other contingencies.

In general, any changes in estimates or assumptions relating to revenue recognition, provisions for doubtful accounts, provisions for inventory and other contingencies (excluding legal contingencies) are directly reflected in the results of our reportable operating segments. Changes in estimates or assumptions pertaining to our tax asset valuations, our pension and post-retirement benefits and our legal contingencies are generally not reflected in our reportable operating segments, but are reflected on a consolidated basis.

We have discussed the application of these critical accounting policies and estimates with the Audit Committee of our Board of Directors.

Revenue Recognition

Our material revenue streams are the result of a wide range of activities, from custom design and installation over a period of time to a single delivery of equipment to a customer. Our networking solutions also cover a broad range of technologies and are offered on a global basis. As a result, our revenue recognition policies can differ depending on the level of customization within the solution and the contractual terms with the customer. Newer technologies within one of our reporting segments may also have different revenue recognition implications depending on, among other factors, the specific performance and acceptance criteria within the applicable contract. Therefore, management must use significant judgment in determining how to apply the current accounting standards and interpretations, not only based on the networking solution, but also within networking solutions based on reviewing the level of customization and contractual terms with the customer. As a result, our revenues may fluctuate from period to period based on the mix of solutions sold and the geographic region in which they are sold.

We regularly enter into multiple contractual agreements with the same customer. These agreements are reviewed to determine whether they should be evaluated as one arrangement in accordance with AICPA Technical Practice Aid, or TPA 5100.39, “Software Revenue recognition for multiple-element arrangements”.

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When a customer arrangement involves multiple deliverables where the deliverables are governed by more than one authoritative standard, we evaluate all deliverables to determine whether they represent separate units of accounting based on the following criteria:

•  whether the delivered item has value to the customer on a stand-alone basis;

•  whether there is objective and reliable evidence of the fair value of the undelivered item(s); and

•  if the contract includes a general right of return relative to the delivered item, delivery or performance of the undelivered item(s) is considered probable and is substantially in our control.

Our determination of whether deliverables within a multiple element arrangement can be treated separately for revenue recognition purposes involves significant estimates and judgment, such as whether fair value can be established for undelivered obligations and/or whether delivered elements have stand-alone value to the customer. Changes to our assessment of the accounting units in an arrangement and/or our ability to establish fair values could significantly change the timing of revenue recognition.

If objective and reliable evidence of fair value exists for all units of accounting in the contract, revenue is allocated to each unit of accounting or element based on relative fair values. In situations where there is objective and reliable evidence of fair value for all undelivered elements, but not for delivered elements, the residual method is used to allocate the contract consideration. Under the residual method, the amount of revenue allocated to delivered elements equals the total arrangement consideration less the aggregate fair value of any undelivered elements. Each unit of accounting is then accounted for under the applicable revenue recognition guidance. If sufficient evidence of fair value cannot be established for an undelivered element, revenue and related cost for delivered elements are deferred until the earlier of when fair value is established or all remaining elements have been delivered. Once there is only one remaining element to be delivered within the unit of accounting, the deferred revenue and costs are recognized based on the revenue recognition guidance applicable to the last delivered element. For instance, where postcontract customer support is the last delivered element within the unit of accounting, the deferred revenue and costs are recognized ratably over the remaining postcontract customer support term once postcontract customer support is the only undelivered element.

Our assessment of which revenue recognition guidance is appropriate to account for a deliverable also can involve significant judgment. For instance, the determination of whether software is more than incidental to hardware can impact whether the hardware product is accounted for under software revenue recognition under AICPA Statement of Position, or SOP, 97-2, “Software Revenue Recognition”, or SOP 97-2, or based on general revenue recognition guidance. This assessment could significantly impact the amount and timing of revenue recognition.

Many of our products are integrated with software that is embedded in our hardware at delivery and where the software is essential to the functionality of the hardware. In those cases where indications are that software is more than incidental to the product, such as where the transaction includes software upgrades or enhancements, we apply software revenue recognition rules to determine the amount and timing of revenue recognition. The assessment of whether software is more than incidental to the hardware requires significant judgment and may change over time as our product offerings evolve. A change in this assessment, whereby software becomes more than incidental to the hardware product may have a significant impact on the timing of recognition of revenue and related costs.

For elements related to customized network solutions and certain network build-outs, revenues are recognized in accordance with SOP 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts, or SOP 81-1 generally using the percentage-of-completion method. In using the percentage-of-completion method, revenues are generally recorded based on the percentage of costs incurred to date on a contract relative to the estimated total expected contract costs. Profit estimates on these contracts are revised periodically based on changes in circumstances and any losses on contracts are recognized in the period that such losses become known. In circumstances where reasonably dependable cost estimates cannot be made for a customized network solution or build-out, or for which inherent hazards make estimates doubtful, all revenues and related costs are deferred until completion of the solution or element, or the completed contract method. Generally, the terms of SOP 81-1 contracts provide for progress billings based on completion of certain phases of work. Unbilled SOP 81-1 contract revenues recognized are accumulated in the contracts in progress account included in accounts receivable — net. Billings in excess of revenues recognized to date on these contracts are recorded as advance billings in excess of revenues recognized to date on contracts within other accrued liabilities until recognized as revenue. This classification also applies to billings in advance of revenue recognized on combined units of accounting under EITF 00-21 that contain both SOP 81-1 and non SOP 81-1 elements. Significant judgment is also required when estimating total contract costs and progress to completion on the arrangements as well as whether a loss is expected to be incurred on the contract. Management uses historical experience, project plans and an assessment of the risks and uncertainties inherent in the arrangement to establish these estimates. Uncertainties include implementation

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delays or performance issues that may or may not be within our control. Changes in these estimates could result in a material impact on revenues and net earnings (loss).

Revenue for hardware that does not require significant customization, and where any software is considered incidental, is recognized under SEC Staff Accounting Bulletin 104, Revenue Recognition, or SAB 104. Under SAB 104, revenue is recognized provided that persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee is fixed or determinable and collectibility is reasonably assured.

For hardware, delivery is considered to have occurred upon shipment provided that risk of loss, and in certain jurisdictions, legal title, has been transferred to the customer. For arrangements where the criteria for revenue recognition have not been met because legal title or risk of loss on products did not transfer to the buyer until final payment had been received or where delivery had not occurred, revenue is deferred to a later period when title or risk of loss passes either on delivery or on receipt of payment from the customer. For arrangements where the customer agrees to purchase products but we retain possession until the customer requests shipment, or “bill and hold” arrangements, revenue is not recognized until delivery to the customer has occurred and all other revenue recognition criteria have been met.

Software revenue is generally recognized under SOP 97-2. For software arrangements involving multiple elements, we allocate revenue to each element based on the relative fair value or the residual method, as applicable using vendor specific objective evidence to determine fair value, which is based on prices charged when the element is sold separately. Software revenue accounted for under SOP 97-2 is recognized when persuasive evidence of an arrangement exists, the software is delivered in accordance with all terms and conditions of the customer contracts, the fee is fixed or determinable and collectibility is probable. Revenue related to postcontract customer support, or PCS, including technical support and unspecified when-and-if available software upgrades, is recognized ratably over the PCS term.

Under SOP 97-2 or under Emerging Issues Task Force, or EITF, Issue No 00-21, “Revenue Arrangements with Multiple Deliverables” or EITF 00-21, if fair value does not exist for any undelivered element, revenue is not recognized until the earlier of when (i) the undelivered element is delivered or (ii) fair value of the undelivered element is established, unless the undelivered element is a service, in which case revenue is recognized as the service is performed once the service is the only undelivered element.

We make certain sales through multiple distribution channels, primarily resellers and distributors. These customers are generally given certain rights of return. For products sold through these distribution channels, revenue is recognized from product sales at the time of shipment to the distribution channel when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectibility is reasonably assured. Accruals for estimated sales returns and other allowances and deferrals are recorded as a reduction of revenue at the time of revenue recognition. These provisions are based on contract terms and prior claims experience and involve significant estimates. If these estimates are significantly different from actual results, our revenue could be impacted.

We provide extended payment terms on certain software contracts and may sell these receivables to third parties. The fees on these contracts are considered fixed or determinable if the contracts are similar to others for which we have a standard business practice of providing extended payment terms and have a history of successfully collecting under the original payment terms without making concessions. If fees are not considered fixed or determinable at the outset of the arrangement, revenue for delivered products is deferred until the fees become legally due and payable and therefore estimates and judgment in this area can impact the timing of revenue recognition.

The collectibility of trade and notes receivables is also critical in determining whether revenue should be recognized. As part of the revenue recognition process, we determine whether trade or notes receivables are reasonably assured of collection and whether there has been deterioration in the credit quality of our customers that could result in our inability to collect the receivables. We will defer revenue but recognize related costs if we are uncertain about whether we will be able to collect the receivable. As a result, our estimates and judgment regarding customer credit quality could significantly impact the timing and amount of revenue recognition.

We have a significant deferred revenue balance relative to our consolidated revenue. Recognition of this deferred revenue over time can have a material impact on our consolidated revenue in any period and result in significant fluctuations.

The complexities of our contractual arrangements result in the deferral of revenue for a number of reasons, the most significant of which are discussed below:

•  Complex arrangements that involve multiple deliverables such as future software deliverables, and/or post contractual customer support which remain undelivered generally result in the deferral of revenue because, in most cases, we have not established fair value for the undelivered elements. We estimate that these arrangements account

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for approximately 50% of our deferred revenue balance and will be recognized upon delivery of the final undelivered elements and over time.

•  In many instances our contractual billing arrangements do not match the timing of the recognition of revenue. Often this occurs in contracts accounted for under SOP 81-1 where we generally recognize the revenue based on a measure of the percentage of costs incurred to date relative to the estimated total expected contract costs. We estimate that approximately 10% of our deferred revenue balance relates to contractual arrangements where billing milestones preceded revenue recognition.

The impact of the deferral of revenues on our liquidity is discussed in “Liquidity and Capital Resources — Operating Activities” above.

The following table summarizes our deferred revenue balances:

	As at December 31,
	2007		2006		$ Change			% Change
Deferred revenue	$	1,619	$	2,046	$	(427	)		(21	)
Advance billings		1,490		1,352		138			10
Total deferred revenue	$	3,109	$	3,398	$	(289	)		(9	)

Deferred revenues decreased by $289 in 2007 as a result of reductions related to the net release to revenue of approximately $367 and other adjustments of $6, offset by increase due to foreign exchange of $84. The release of deferred revenue to revenue is net of the additional deferrals recorded during 2007.

Provisions for Doubtful Accounts

In establishing the appropriate provisions for trade, notes and long-term receivables due from customers, we make assumptions with respect to their future collectibility. Our assumptions are based on an individual assessment of a customer’s credit quality as well as subjective factors and trends. Generally, these individual credit assessments occur prior to the inception of the credit exposure and at regular reviews during the life of the exposure and consider:

•  age of the receivables;

•  customer’s ability to meet and sustain its financial commitments;

•  customer’s current and projected financial condition;

•  collection experience with the customer;

•  historical bad debt experience with the customer;

•  the positive or negative effects of the current and projected industry outlook; and

•  the economy in general.

Once we consider all of these individual factors, an appropriate provision is then made, which takes into consideration the likelihood of loss and our ability to establish a reasonable estimate.

In addition to these individual assessments, regional accounts past due provision is established for outstanding trade accounts receivable amounts based on a review of balances greater than six months past due. A regional trend analysis, based on past and expected write-off activity, is performed on a regular basis to determine the likelihood of loss and establish a reasonable estimate.

The following table summarizes our accounts receivable and long-term receivable balances and related reserves as of:

	As at December 31,
	2007			2006
Gross accounts receivable	$	3,767		$	3,797
Provision for doubtful accounts		(62	)		(88	)
Accounts receivable — net	$	3,705		$	3,709
Accounts receivable provision as a percentage of gross accounts receivable		2	%		2	%
Gross long-term receivables	$	44		$	39
Provision for doubtful accounts		(35	)		(34	)
Net long-term receivables	$	9		$	5
Long-term receivables provision as a percentage of gross long-term receivables		80	%		87	%

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Provisions for Inventories

Management must make estimates about the future customer demand for our products when establishing the appropriate provisions for inventory.

When making these estimates, we consider general economic conditions and growth prospects within our customers’ ultimate marketplace, and the market acceptance of our current and pending products. These judgments must be made in the context of our customers’ shifting technology needs and changes in the geographic mix of our customers. With respect to our provisioning policy, in general, we fully reserve for surplus inventory in excess of our 365 day demand forecast or that we deem to be obsolete. Generally, our inventory provisions have an inverse relationship with the projected demand for our products. For example, our provisions usually increase as projected demand decreases due to adverse changes in the conditions mentioned above. We have experienced significant changes in required provisions in recent periods due to changes in strategic direction, such as discontinuances of product lines, as well as declining market conditions. A misinterpretation or misunderstanding of any of these conditions could result in inventory losses in excess of the provisions determined to be appropriate as of the balance sheet date.

Our inventory includes certain direct and incremental deferred costs associated with arrangements where title and risk of loss was transferred to customers but revenue was deferred due to other revenue recognition criteria not being met. We have not recorded excess and obsolete provisions against this type of inventory.

The following table summarizes our inventory balances and other related reserves as of:

	As at December 31,
	2007			2006
Gross inventory	$	3,118		$	3,415
Inventory provisions		(907	)		(1,007	)
Inventories — net(a)	$	2,211		$	2,408
Inventory provisions as a percentage of gross inventory		29	%		29	%
Inventory provisions as a percentage of gross inventory excluding deferred costs(b)		64	%		69	%

(a)	Includes the long-term portion of inventory related to deferred costs of $209 and $419 as of December 30, 2007 and December 31, 2006, respectively, which is included in other assets.
(b)	Calculated excluding deferred costs of $1,698 and $1,952 as of December 30, 2007 and December 31, 2006, respectively.

Inventory provisions decreased by $100 primarily as a result of $251 of scrapped inventory and $111 due to sale of inventory, partially offset by $152 of additional inventory provisions, foreign exchange adjustments of $82 and a reclassification of $28. In the future, we may be required to make significant adjustments to these provisions for the sale and/or disposition of inventory that was provided for in prior periods.

Provisions for Product Warranties

Provisions are recorded for estimated costs related to warranties given to customers on our products to cover defects. These provisions are calculated based on historical return rates as well as on estimates that take into consideration the historical material costs and the associated labor costs to correct the product defect. Known product defects are specifically provided for as we become aware of such defects. Revisions are made when actual experience differs materially from historical experience. These provisions for product warranties are part of the cost of revenues and are accrued when the product is delivered and recognized in the same period as the related revenue. They represent the best possible estimate, at the time the sale is made, of the expenses to be incurred under the warranty granted. Warranty terms generally range from one to six years from the date of sale depending upon the product. Warranty related costs incurred prior to revenue being recognized are capitalized and recognized as an expense when the related revenue is recognized.

We accrue for warranty costs as part of our cost of revenues based on associated material costs and labor costs. Material cost is estimated based primarily upon historical trends in the volume of product returns within the warranty period and the cost to repair or replace the product. Labor cost is estimated based primarily upon historical trends in the rate of customer warranty claims and projected claims within the warranty period.

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The following table summarizes the accrual for product warranties that was recorded as part of other accrued liabilities in the consolidated balance sheets as of:

	As at December 31,
	2007			2006
Balance at the beginning of the year	$	214		$	204
Payments		(181	)		(267	)
Warranties issued		261			281
Revisions		(88	)		(4	)
Balance at the end of the year	$	206		$	214

We engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers. Our estimated warranty obligation is based upon warranty terms, ongoing product failure rates, historical material costs and the associated labor costs to correct the product defect. If actual product failure rates, material replacement costs, service or labor costs differ from our estimates, revisions to the estimated warranty provision would be required. If we experience an increase in warranty claims compared with our historical experience, or if the cost of servicing warranty claims is greater than the expectations on which the accrual is based, our gross margin could be negatively affected.

Income Taxes

Tax Asset Valuation

As of December 31, 2007, our deferred tax asset balance was $6,472, against which we have recorded a valuation allowance of $3,149, resulting in a net deferred tax asset of $3,323. As of December 31, 2006, our net deferred tax asset was $4,042. The reduction of $719 is primarily attributable to a write down of the Canadian deferred tax asset through an increase in valuation allowance partially offset by the effects of foreign exchange translation, the reclassification of certain deferred tax liabilities into a long-term liability in accordance with FIN 48 and by the normal changes in deferred tax assets for profitable jurisdictions resulting from operations in the ordinary course of business. We currently have deferred tax assets resulting from net operating loss carryforwards, tax credit carryforwards and deductible temporary differences, which are available to reduce future income taxes payable in our significant tax jurisdictions (namely Canada, the U.S., the U.K. and France).

During the second and fourth quarters of 2007, the Canadian government enacted reductions in the federal income tax rate of 0.5% and 3.5%, respectively. The overall reduction of 4% will be phased in through 2012, at which time the federal income tax rate will be 15%. As a result of this rate change, our gross deferred tax asset was reduced by approximately $108 with a corresponding decrease in the amount of valuation allowance established against the gross deferred tax asset. In addition, because the reduction in federal income tax rates increased the time periods over which we expect to utilize the tax asset, those rate changes contributed to an additional change in management’s assessment of the expected realization of the deferred tax assets as discussed in the “Canada” section below.

During the third and fourth quarters of 2007, the German, U.K., and Chinese governments enacted income tax rate changes. As a result of these changes, our gross deferred tax assets were reduced by $29 with a corresponding charge to tax expense of the same amount.

We adopted FIN 48 effective January 1, 2007. As a result of the adoption, we recognized an approximately $1 increase to reserves for uncertain tax positions. This increase was accounted for as an increase to the January 1, 2007 accumulated deficit. Additionally, as a result of adoption, we reduced our gross deferred tax assets by approximately $775, including $620 related to the capital losses. This reduction had no impact on our reported net deferred tax asset. At December 31, 2007, our gross unrecognized tax benefit was $566.

We assess the expected realization of these deferred tax assets quarterly to determine whether an income tax valuation allowance is required. Based on available evidence, both positive and negative, we determine whether it is more likely than not that all or a portion of the remaining net deferred tax assets will be realized. The main factors that we believe provide evidence about the realizability of our net deferred tax asset are discussed in further detail below and include the following:

•  the amount of, and trends related to, cumulative earnings or losses realized over the most recent 12 quarters;

•  our current period net earnings (loss) and its impact on our strong history of earnings prior to 2001;

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•  future earnings projections as determined through the use of internal forecasts, including the impact of sales backlog and existing contracts;

•  our ability to carry forward our tax losses and investment tax credits, including tax planning strategies to accelerate utilization of such assets;

•  industry, business, or other circumstances that may adversely affect future operations, and the nature of the future income required to realize our deferred tax asset.

In evaluating the positive and negative evidence, the weight we assign each type of evidence is proportionate to the extent to which it can be objectively verified.

In the third quarter of 2002, primarily as a result of significant operating losses incurred in 2001 and 2002 and the impact of those losses on our measure of cumulative losses over the 12 preceding quarters, we recorded a valuation allowance against a portion of the deferred tax assets in certain of our significant jurisdictions (namely Canada, the U.S., and France).

Management has concluded that the appropriate length of time for measuring cumulative losses is the most recent three years results, inclusive of the current year.

The establishment of this valuation allowance coincided with an overall economic shift and significant downturn in the telecommunications industry. The establishment of a valuation allowance against only a portion of our deferred tax assets in certain of our significant jurisdictions was indicative of our expectation that the telecommunications industry and our results would improve in the near future. Our expectations of improvement were met in 2003, as we returned to profitability during that year.

In the third quarter of 2002, we placed significant weight on the negative evidence related to our cumulative losses. However, we also placed significant weight on the positive evidence of our strong earnings history, as we had operated at a consistent, cumulative profit prior to 2001.

Since the third quarter of 2002, through the third quarter of 2007, we have not significantly adjusted the level of our net deferred tax assets in Canada, the U.S., or France other than to present the changes in our deferred tax assets related to foreign currency translation, and the additions of certain refundable tax credits in France. Thus, we have provided valuation allowances against the deferred tax benefit related to our losses and other temporary differences in these jurisdictions for the applicable periods since establishing the valuation allowance.

In each reporting period since 2002, we have considered the factors listed above to determine if any further adjustments need to be made to the net deferred tax asset on a jurisdictional basis. As discussed below, we evaluate cumulative earnings (loss) within each jurisdiction. Relative to 2002, the factors we consider have generally trended favorably year over year as our jurisdictional cumulative losses have decreased substantially or have become cumulative profits since 2002 for most of our jurisdictions. We have operated near break-even since 2002, and the results in the U.S. have improved substantially over the same period relative to 2001 and 2002. We have concluded that there have not been sufficient changes to our profitability to warrant additional significant changes to the net deferred tax asset in the U.S. Since our last assessment of the valuation allowance at September 30, 2007, there have been a number of events that have had a negative effect on the amount of our deferred tax assets in Canada and the time over which we expect to realize them, and as a result, we have adjusted our net deferred tax asset accordingly.

We view the 2001 and 2002 results as anomalies and believe a strong history of earnings prior to 2001 in most of our significant jurisdictions (namely Canada, the U.S., and the U.K.), in combination with recent trends in and current projections of future profitability provide sufficient positive evidence to overcome the primary piece of negative evidence, cumulative losses over the most recent 12 quarters in Canada.

In the 10 years prior to 2001, our taxable earnings in the significant jurisdictions of Canada, the U.S. and the U.K. were in excess of $9,000 ($5,100 in the U.S., $3,600 in Canada, and $300 in the U.K.). We discuss the earnings history, recent trends in profitability and the cumulative earnings/(loss) position of each jurisdiction in more detail below. Because we believe that the future profitability of our significant jurisdictions will closely track our global trend over time, our forecast and future projections of profitability are discussed below rather than in each of the jurisdictional analyses provided later. See the Risk Factors section of this report for certain risks that could affect the realizability of our deferred tax assets.

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Future Projections of Profitability

The ultimate realization of our net deferred tax asset is dependent on the generation of future pre-tax income sufficient to realize the underlying tax deductions and credits. We currently have a significant sales backlog exceeding $5,000 for which revenue and margin will be recognized in the future (including deferred revenue and advance billings). We expect the associated margins of this sales backlog to be consistent with our recent historical margins.

In addition to the amounts attributable to the recognition of our deferred revenue and sales backlog, we expect future pre-tax income will be realized through increasing revenues and reductions to our existing cost structure. Our expectations about future pre-tax income are based on a detailed forecast for 2008 including assumptions about market growth rates, segment analysis and cost reduction initiatives. Revenue growth rates inherent in that forecast are based on input from internal and external market intelligence research sources that compare factors such as growth in global economies, regional trends in the telecommunications industry and product evolutions from a technological segment basis. Macro economic factors such as changes in economies, product evolutions, industry consolidation and other changes beyond our control could have a positive or negative impact on achieving our targets. We are continuing to take actions through our Business Transformation initiatives, such as exiting products where we cannot achieve adequate market share as well as adjusting our cost base in order to achieve our objective of becoming profitable in the future.

The detailed forecast is our view on future earnings potential. This forecast provides an expectation of sufficient future income to fully utilize the net deferred tax assets in Canada and the U.S. However, there are certain risks to this long range forecast that we considered in our assessment of the valuation allowances. If we do not achieve forecasted results on a jurisdictional basis in the future, an increase to the valuation allowance may be necessary.

At December 31, 2006 we indicated that should certain events occur, the weight that we ascribe to our strong earnings history and our ability to achieve forecasted results would decrease and an increase to the valuation allowance would likely be necessary in Canada. These were a decline in revenue of greater than 10% of the 2007 forecast that is not offset by additional cost reductions or not being able to achieve 80% of our projected cost reductions by the end of 2008. We did not have a decline in revenue of greater than 10% of the 2007 forecast and there is no indication at this point in time that we will not achieve our projected cost reductions by the end of 2008. However, due to the occurrence of other significant events, management has determined that an increase to the valuation allowance in Canada is appropriate.

In recent years, we have restated earnings multiple times, had significant turnover of senior management, and initiated a complete overhaul of our financial systems and processes. In the process of restating the financial statements, we have implemented a more appropriate and rigorous revenue recognition process which has required an extensive learning process for financial, legal and operating personnel. Primarily as a result of these events, we have performed at a level below previous forecasts and projections. We have stabilized a number of these factors and assembled a rigorous forecast based on a thorough understanding of the revenue recognition model with which we now operate.

The significant majority of our net deferred tax asset is recorded in the U.S. and Canada. We are currently in a cumulative profit position in the U.S. and a cumulative loss position in Canada. We consider the potential impairment of our net deferred tax assets in these jurisdictions to be subject to significant judgment, and changes in certain assumptions regarding the realization of the deferred tax assets could have a material effect on our operating performance and financial condition.

The following table provides the breakdown of our net deferred tax asset, by significant jurisdiction as of December 31, 2007:

			Net		Other		Gross
	Tax Benefit		Investment		Temporary		Deferred		Valuation			Net Deferred
	of Losses		Tax Credits		Differences		Tax Asset		Allowance			Tax Asset
Canada	$	913	$	1,038	$	513	$	2,464	$	(1,290	)	$	1,174
United States		759		362		915		2,036		(474	)		1,562
United Kingdom		449		—		214		663		(337	)		326
France		437		42		122		601		(525	)		76
Other		439		—		269		708		(523	)		185
Total	$	2,997	$	1,442	$	2,033	$	6,472	$	(3,149	)	$	3,323

The jurisdictional analysis below provides further information about the positive and negative evidence we believe is most relevant to each significant jurisdiction, including a discussion of the significant assumptions related to our quarterly

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assessment and a discussion of the types and magnitude of changes in the factors that might indicate a further adjustment of the net deferred tax asset balance is required.

During a review of our cumulative profits calculations during the fourth quarter of 2007, we identified and corrected certain errors arising from a failure to accurately take into account the impact of transfer pricing allocations as a result of our restatements, which resulted in additional cumulative losses being applied to Canada of $43 and additional earnings being applied to the U.S. of approximately $300 as of December 31, 2006. We have updated our assessment of the deferred tax asset valuations as at December 31, 2006 and concluded that the identified errors would not have impacted our ultimate conclusions of the established valuation allowances at that time.

Canada

As of December 31, 2007, we have operated at a cumulative loss of $358 over the most recent 12 quarters. Prior to the incurrence of significant losses in 2001 and 2002, which led to the establishment of the valuation allowance against a portion of the deferred tax assets in Canada, we had a strong history of earnings. While our earnings since 2002 have been mixed including several quarters of earnings and several quarters with losses, the trend relative to 2001 and 2002 is clearly positive, which is reflected in the substantial decrease in our cumulative losses since 2002.

In 2002, amidst significant operating and cumulative losses driven by a widespread decline in technology spending, we concluded that it was more likely than not that not all of our deferred tax assets would be realized and as a result, we established a partial valuation allowance. Subsequent to 2002, we have maintained a constant level of net deferred tax asset measured in Canadian Dollars and evaluated the impact of changed circumstances to determine whether a revised measurement of the deferred tax asset was warranted. Prior to the fourth quarter of 2007, we concluded that noted changes in net circumstances were not significant, either individually or cumulatively, to warrant a comprehensive re-measurement of the deferred tax asset. Up to and including the third quarter of 2007, we considered our circumstances to be marginally improved relative to 2002 (namely a reduced level of cumulative losses and increased carry forward periods) though the improvement was not sufficient to warrant any reduction in the established valuation allowance.

Since our last assessment of the valuation allowance at September 30, 2007, there have been a number of events that have had a negative effect on the time over which we expect to realize our deferred tax assets, which include a significant tax rate reduction in the fourth quarter of 2007, continued strengthening of the Canadian Dollar relative to the U.S. Dollar and on-going uncertainty related to potential outcomes of our transfer pricing negotiations.

Considering the convergence of these recent developments (i.e., tax rate reduction, foreign currency movements and transfer pricing discussions) and the direction and cumulative weight of previous changes in circumstance (including rate reductions and currency movements) we have concluded that a comprehensive remeasurement of the level of deferred tax assets expected to be realized is warranted as of December 31, 2007. As a result, we have recorded additional valuation allowance in the fourth quarter of 2007 of approximately $1,064 for a total valuation allowance in Canada relating to NNL of $1,290.

While we have recorded additional valuation allowance, these deferred tax assets are still available for use to offset future taxes payable. The significant majority of our gross deferred tax asset at NNL of $2,464 relates to loss and investment tax credit carryforwards. Absent tax-planning strategies that permit the conversion of these losses and investment tax credit carryforwards into discretionary deductible expenses with an unlimited carryforward period, these deferred tax assets generally have between 10 and 20 year carryforward periods.

While this tax planning strategy as it relates to investment tax credits is impacted by newly enacted legislation in Canada such that a significant amount of our investment tax credits may expire unused, there is additional recently announced proposed legislation in Canada that would reduce the amount of expiring investment tax credits to an immaterial amount. While we currently have plans to implement these tax planning strategies in an effort to accelerate the utilization of our investment tax credits and loss carryforwards in Canada, the ultimate decision on whether or not we will implement these strategies will be made annually as tax returns are filed. These tax planning strategies are permissible based on existing Canadian tax law. We place significant weight on our ability to execute these planning strategies in order to fully utilize all of our deferred tax assets and ensure that carryforward periods are not a limiting factor to realizing the deferred tax asset. However whether or not we determine to execute these tax planning strategies, we believe that we have provided adequate valuation allowance for the impact of any expiring investment tax credits. Tax credit carryforward amounts of approximately $477 with respect to the years from 1994 to 1997 have expired and are not included in the balance of gross deferred tax assets. We can restore a significant amount of the deferred tax asset for these credits by executing a certain tax planning strategy that involves filing amended tax returns.

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U.S.

As of December 31, 2007, we have operated at a cumulative profit of approximately $215 in the U.S. over the most recent 12 quarters. Prior to the incurrence of significant losses in 2001 and 2002, which led to the establishment of the valuation allowance against a portion of the deferred tax assets in the U.S., we had a strong history of earnings.

The significant majority of our $1,562 net deferred tax assets in the U.S. relates to loss and credit carryforwards which have a 20 year carryforward period. Over 93% of our research tax credits do not begin to expire until 2019 and none of our operating loss carryforwards begin to expire until 2022. As a result, we do not expect that a significant portion of our carryforwards will expire prior to utilization given our projections of future earnings. Unlike our carryforwards in Canada, we do not rely upon any planning strategies to support the realization of the U.S. losses and credits within the carryforward period, as we believe we will have sufficient earnings without the use of any planning strategies.

U.K.

Like Canada and the U.S., our operations in the U.K. have a strong history of earnings exclusive of the losses from 2001 and 2002 which created the current carryforwards in the U.K. The U.K. has exhibited strong earnings since 2002 and has cumulative profits over the most recent 12 quarters. We have provided a valuation allowance against a capital loss in the U.K. as such loss may only offset future capital gains, and we have provided a valuation allowance against certain losses from a now dormant entity. Otherwise, we have determined the remaining deferred tax assets in the U.K. will more likely than not be realized in future years.

France

Our operations in France have operated at a cumulative loss in recent years and over the most recent 12 quarters. In addition, unlike our other significant jurisdictions, France does not have a strong history of earnings. As there is currently insufficient positive evidence to support deferred tax asset realization, we have provided a valuation allowance against all of the deferred tax assets, with the exception of certain credits and losses that may be redeemed for cash in future years.

Transfer Pricing

We have considered the potential impact on our deferred tax assets that may result from settling our existing application for an Advance Pricing Arrangement, or APA. We have requested the APA currently under negotiation apply to the 2001 through 2005 taxation years. This APA is currently being negotiated by the pertinent taxing authorities (the U.S., Canada, and the U.K.). We anticipate filing new bilateral APA requests for tax years 2007 through at least 2010, with a request for rollback to 2006 in Canada and the U.S., following methods generally similar to those under negotiation for 2001 through 2005. Tax filings for 2006 included the methodology employed in the new pending APA, resulting in an increase to deferred tax assets in the U.K. and a $12 tax benefit recorded in the third quarter of 2007. In other jurisdictions, changes resulting from the new methodology impacted the level of deferred tax assets with a corresponding offset to valuation allowance with no impact to tax expense.

We are not a party to the APA negotiations, but we do not believe the result of the negotiations will have an adverse impact on us or any further adverse impact on our deferred tax assets. However, it is possible that the result of the APA negotiations could cause a material shift in historical earnings between our various entities. Such a shift in historical earnings could materially adjust the cumulative earnings (loss) calculation used as part of the analysis of positive and negative evidence associated with the valuation allowance. The years included in the APA negotiations are primarily tax loss years. As such, the APA settlement could result in a reallocation of losses from one jurisdiction to another (with Canada and the U.S. being the two primary jurisdictions for such reallocation).

The impact of the APA negotiations and ultimate settlement cannot be quantified by us at this time due to the uncertainties inherent in the negotiations between the tax authorities. As such, this ultimate settlement position could have a substantial impact on our transfer pricing methodology for future years. We continue to monitor the progress of the APA negotiations and will analyze the existence of new evidence, when available, as it relates to the APA. We may make adjustments to the valuation allowance assessments, as appropriate, as additional evidence becomes available in future quarters.

Valuation Allowance

As of December 31, 2007, our gross income tax valuation allowance decreased to $3,149 compared to $3,413 as of December 31, 2006. The $264 decrease was largely the result of three events: the adoption of FIN 48 on January 1, 2007,

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a settlement with the U.K. tax authorities relative to capital losses and an increase to the Canadian valuation allowance. Through the adoption of FIN 48 (see note 7, “Income Taxes” to the accompanying consolidated financial statements), $620 of the decrease relates to the removal of a portion of valuation allowance associated with a capital loss in the U.K. Additionally, $555 of the decrease relates to further removal of a portion of valuation allowance associated with a capital loss in the U.K. (with an offsetting reduction to the deferred tax asset), resulting from the settlement of our related FIN 48 position during the second quarter of 2007. These decreases are offset by an increase to the valuation allowance specifically relating to Canada of $1,064 (see separate discussion above under “Canada”) based on the reassessment of the level of deferred tax assets expected to be realized in Canada as well as an increase of $213 related to certain operating losses from prior years that were added to our financial statements with an offsetting valuation allowance. The remaining decrease to the valuation allowance relates to the impacts of foreign exchange rates offset by additional valuation allowances recorded against the tax benefit of current period losses in certain jurisdictions, and additional decreases to the valuation allowance as a result of decreases in the deferred tax assets in conjunction with the FIN 48 implementation. We assessed positive evidence including forecasts of future taxable income to support realization of the net deferred tax assets across jurisdictions, and negative evidence including our cumulative loss position, and concluded, after the adjustments discussed below, that the overall valuation allowance as of December 31, 2007 was appropriate.

In several of our non-material jurisdictions it was determined that, based on all available evidence, it was appropriate to release valuation allowance to properly reflect the more likely than not realizability of certain jurisdictional deferred tax assets. Based on cumulative profits, future forecasted earnings and the utilization of deferred tax assets, we determined releases were appropriate in Germany, Shanghai, Ireland and Poland.

We continue to review all available positive and negative evidence in each jurisdiction and our valuation allowance may need to be adjusted in the future as a result of this ongoing review. Given the magnitude of our valuation allowance, future adjustments to this allowance based on actual results could result in a significant adjustment to our net earnings (loss).

Tax Contingencies

We are subject to ongoing examinations by certain taxation authorities of the jurisdictions in which we operate. We regularly assess the status of these examinations and the potential for adverse outcomes to determine the adequacy of the provision for income and other taxes. We believe that we have adequately provided for tax adjustments that we believe are more likely than not to be realized as a result of any ongoing or future examination.

Specifically, the tax authorities in Brazil have completed an examination of prior taxable years and have issued assessments in the amount of $86. We are currently in the process of appealing these assessments and believe that we have adequately provided for tax adjustments that are more likely than not to be realized as a result of the outcome of the ongoing appeals process.

Likewise, the tax authorities in Colombia have issued an assessment relating to the 2002 and 2003 tax years proposing adjustments to increase taxable income resulting in an additional tax liability of $19 inclusive of penalties and interest. At December 31, 2007, we have provided an income tax liability for this entire amount.

In addition, tax authorities in France have issued notices of assessment in respect of the 2001, 2002 and 2003 taxation years. These assessments collectively propose adjustments to increase taxable income of approximately $1,236, additional income tax liabilities of $49, inclusive of interest, as well as certain adjustments to withholding and other taxes of approximately $81 plus applicable interest and penalties. Other than the withholding and other taxes, we have sufficient loss carry-forwards to offset the majority of the proposed assessment. However, no amount has been provided for these assessments since we believe that the proposed assessments are without merit and any potential tax adjustments that could result from these ongoing examinations cannot be quantified at this time. We did not receive a similar assessment from the French tax authorities for the 2004 tax year. In 2006, we discussed settling the audit adjustment without prejudice at the field agent level for the purpose of accelerating the process to either the courts or Competent Authority proceedings under the Canada-France tax treaty. We withdrew from the discussions during the first quarter of 2007 and are in the process of entering Mutual Agreement Procedures with competent authority under the Canada-France tax treaty. We believe we have adequately provided for tax adjustments that are more likely than not to be realized as a result of any ongoing or future examinations.

We had previously entered into APAs with the taxation authorities of the U.S. and Canada in connection with our intercompany transfer pricing and cost sharing arrangements between Canada and the U.S. These arrangements expired in 1999 and 2000. In 2002, we filed APA requests with the taxation authorities of the U.S., Canada and the U.K. that applied

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to the taxation years 2001 through 2005. The APA requests are currently under consideration and the tax authorities are in the process of negotiating the terms of the arrangement. We continue to monitor the progress of these negotiations; however, we are not a party to these negotiations. We have applied the transfer pricing methodology proposed in the APA requests in preparing our tax returns and accounts from 2001 through 2005.

The outcome of the APA applications is uncertain and possible reallocation of losses as they relate to the APA negotiations cannot be determined at this time. If this matter is resolved unfavorably, it could have a material adverse effect on our consolidated financial position, results of operations or cash flows. However, we do not believe it is more likely than not that the ultimate resolution of these negotiations will have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Goodwill Valuation

We test goodwill for possible impairment on an annual basis as of October 1 of each year and at any other time if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Circumstances that could trigger an impairment test between annual tests include, but are not limited to:

•  a significant adverse change in the business climate or legal factors;

•  an adverse action or assessment by a regulator;

•  unanticipated competition;

•  loss of key personnel;

•  the likelihood that a reporting unit or a significant portion of a reporting unit will be sold or disposed of;

•  a change in reportable segments;

•  results of testing for recoverability of a significant asset group within a reporting unit; and

•  recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit.

The impairment test for goodwill is a two-step process. Step one consists of a comparison of the fair value of a reporting unit with its carrying amount, including the goodwill allocated to the reporting unit. Measurement of the fair value of a reporting unit is based on one or more fair value measures. These measures involve significant management judgment and as a result are subject to change.

If the carrying amount of the reporting unit exceeds the fair value, step two requires the fair value of the reporting unit to be allocated to the underlying assets and liabilities of that reporting unit, resulting in an implied fair value of goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss equal to the excess is recorded in net earnings (loss).

The fair value of each reporting unit is determined by allocating our total fair value among our reporting units using an average of three valuation models; a discounted cash flow, or DCF, model which is based on estimated 2007 revenue multiples, or the Revenue Multiple model, and a model based on a multiple of estimated 2007 earnings before interest, taxes, depreciation and amortization, or EBITDA, Multiple model. All of these valuation models involve significant assumptions regarding our future operating performance. The following are the significant assumptions involved in each model:

•  DCF model: assumptions regarding revenue growth rates, gross margin percentages, discount rates and terminal growth rates;

•  Revenue Multiple model: estimates of 2007 revenue growth and the selection of comparable companies to determine an appropriate multiple; and

•  EBITDA Multiple model: 2007 projected EBITDA and the selection of comparable companies to determine an appropriate multiple.

The carrying value of goodwill was $2,381 as of December 31, 2007 and $2,351 as of December 31, 2006. The increase of $30 is due to $18 due to the finalization of the purchase price adjustment with respect to the LG-Nortel business venture and $12 due to changes in foreign exchange recorded to cumulative translation adjustment. Effective January 1, 2007, we began reporting revenues from network services consisting of network planning and installation within GS. Goodwill has been reallocated from ES, CN and MEN to GS based on a fair value allocation method for management reporting purposes.

Our four reportable segments and NGS comprise our reporting units. As of our annual measurement date, the excess of fair value over the carrying value for each of our reporting units ranged from 9% for NGS to in excess of 74% for CN.

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Pension and Post-retirement Benefits

We maintain various pension and post-retirement benefit plans for our employees globally. These plans include significant pension and post-retirement benefit obligations which are calculated based on actuarial valuations. Key assumptions are made in determining these obligations and related expenses, including expected rates of return on plan assets and discount rates.

For 2007, the expected long-term rate of return on plan assets used to estimate pension expenses was 7.1% on a weighted average basis, which was the rate determined at September 30, 2006. This rate is down slightly from the rate of 7.2% used in 2006. The discount rates used to estimate the net pension obligations and expenses for 2007 were 5.8% and 5.1%, respectively, on a weighted average basis, compared to 5.1% and 5.1%, respectively, in 2006.

The key assumptions used to estimate the post-retirement benefit costs for 2007 were discount rates of 5.8% and 5.4% for the obligations and costs, respectively, both on a weighted average basis, compared to 5.4% and 5.4%, respectively, in 2006.

The difference between the discount rate reported for the net pension obligations and expenses and discount rate reported for the net post-retirement benefit obligations and costs is due to the weighted-average calculation as a result of the number of countries in which we offer either pension or pension and post-retirement benefits. In developing these assumptions, we evaluated, among other things, input from our actuaries and matched the plans’ expected benefit payments to spot rates of high quality corporate bond yield curves.

Changes in net periodic pension and post-retirement benefit expense may occur in the future due to changes in our expected rate of return on plan assets and discount rate resulting from economic events. The following table highlights the sensitivity of our pension and post-retirement benefit expense to changes in these assumptions, assuming all other assumptions remain constant:

				Effect on 2007
	Effect on 2007			Pre-Tax
	Pre-Tax			Post-Retirement
Change in Assumption	Pension Expense			Benefit Expense
	Increase/(decrease)			Increase/(decrease)
1 percentage point increase in the expected return on assets	$	(71	)		N/A
1 percentage point decrease in the expected return on assets		74			N/A
1 percentage point increase in discount rate		(83	)		—
1 percentage point decrease in discount rate		94			1

For 2008, we are maintaining our expected rate of return on plan assets at 7.1% for defined benefit pension plans. Also for 2008, our discount rate on a weighted-average basis for pension expenses will increase from 5.1% to 5.8% for the defined benefit pension plans and from 5.4% to 5.8% for post-retirement benefit plans. We will continue to evaluate our expected long-term rates of return on plan assets and discount rates at least annually and make adjustments as necessary, which could change the pension and post-retirement obligations and expenses in the future.

Plan assets were primarily comprised of debt and equity securities. Included in the equity securities of the defined benefit plan were common shares of Nortel Networks Corporation, held directly or through pooled funds, with an aggregate market value of $2 (0.02% of total plan assets) as of December 31, 2007 and $4 (0.06% of total plan assets) as of December 31, 2006.

At December 31, 2007, we had net actuarial losses, before taxes, included in Accumulated Other Comprehensive Income/Loss related to the defined benefit plans of $816, which could result in an increase to pension expense in future years depending on several factors, including whether such losses exceed the corridor in accordance with SFAS No. 87, “Employers’ Accounting for Pensions” and whether there is a change in the amortization period. The post-retirement benefit plans had actuarial losses, before taxes, of $16 included in accumulated other comprehensive loss at the end of 2007. Actuarial gains and losses included in accumulated other comprehensive loss in excess of the corridor are being recognized over approximately an 11 year period, which represents the weighted-average expected remaining service life of the active employee group. Actuarial gains and losses arise from several factors including experience and assumption changes in the obligations and from the difference between expected returns and actual returns on assets.

In the second quarter of 2006, we announced changes to our North American pension and post-retirement plans effective January 1, 2008. We moved employees currently enrolled in our defined benefit pension plans to defined contribution plans. In addition, we eliminated post-retirement healthcare benefits for employees who are not age 50 with five years of service as of July 1, 2006.

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For the 2007 year-end measurement, the favorable impact of increases in discount rates, pension asset returns, and our contributions made to the plans more than offset unfavorable foreign currency exchange impact driven by the strengthening of the British Pound and Canadian Dollar against the US Dollar and other accounting assumptions. As a result, the unfunded status of our defined benefit plans and post-retirement plans decreased from $2,741 as of the measurement date of September 30, 2006 to $1,937 as of the measurement date of September 30, 2007. The effect of this adjustment and the related foreign currency translation adjustment was to decrease accumulated other comprehensive loss including foreign currency translation adjustment (before tax) by $759,and decrease pension liabilities by $759.

SFAS 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit pension and post-retirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. SFAS 158 also requires an employer to measure the funded status of a plan as of the date of its year end statement of financial position, with limited exceptions. We are required to initially recognize the funded status of our defined benefit pension and post-retirement plans and to provide the required disclosures as of December 31, 2006. The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year end statement of financial position is effective for us for our fiscal year ending December 31, 2008. The effect of the initial adoption of SFAS 158 was as follows:

	As at December 31, 2006
	Before Application						After Application
	of SFAS 158			Adjustment			of SFAS 158
Intangible assets — net	$	262		$	(21	)	$	241
Other assets — long term		677			3			680
Deferred tax asset — long term		3,803			60			3,863
Payroll and benefit liabilities — current		(865	)		228			(637	)
Other liabilities — long term		(3,716	)		(412	)		(4,128	)
Accumulated other comprehensive loss		466			142			608

During 2007, we made cash contributions to our defined benefit pension plans of $338 and to our post-retirement benefit plans of $38. In 2008, we expect to make cash contributions of approximately $270 to our defined benefit pension plans and approximately $80 to our post-retirement and post-employment benefit plans. If the actual results of the plans differ from the assumptions, we may be required to make additional contributions. If we are required to make significant contributions to fund the defined benefit plans, reported results could be materially and adversely affected and our cash flow available for other uses may be significantly reduced.

Special Charges

We record provisions for workforce reduction costs and exit costs when they are probable and estimable. Severance paid under ongoing benefit arrangements is recorded in accordance with SFAS No. 112, “Employers’ Accounting for Post-employment Benefits”. One-time termination benefits and contract settlement and lease costs are recorded in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”.

At each reporting date, we evaluate our accruals related to workforce reduction charges, contract settlement and lease costs and plant and equipment write downs to ensure that these accruals are still appropriate. As of December 31, 2007, we had $51 in accruals related to workforce reduction charges and $229 in accruals related to contract settlement and lease costs, which included significant estimates, primarily related to sublease income over the lease terms and other costs for vacated properties. In certain instances, we may determine that these accruals are no longer required because of efficiencies in carrying out our restructuring work plan. Adjustments to workforce reduction accruals may also be required when employees previously identified for separation do not receive severance payments because they are no longer employed by us or were redeployed due to circumstances not foreseen when the original plan was initiated. In these cases, we reverse any related accrual to earnings when it is determined it is no longer required. Alternatively, in certain circumstances, we may determine that certain accruals are insufficient as new events occur or as additional information is obtained. In these cases, we would increase the applicable existing accrual with the offset recorded against earnings. Increases or decreases to the accruals for changes in estimates are classified within special charges in the statement of operations.

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Other Contingencies

We are subject to the possibility of various loss contingencies arising in the ordinary course of business. As a result, we consider the likelihood of loss or impairment of an asset or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss, in determining loss contingencies. We recognize a provision for an estimated loss contingency when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. We regularly evaluate current information available to us to determine whether such accruals should be adjusted.

We are also subject to proceedings, lawsuits, investigations and other claims (some of which may involve substantial dollar amounts), including proceedings under laws and government regulations related to securities, income and other taxes, environmental, labor, product and other matters which are in the normal course of business. Our restatements of our consolidated financial statements and related events have caused us to be subject to ongoing criminal investigations and pending civil litigation actions in the U.S. and Canada. We are required to assess the likelihood of any adverse judgments or outcomes in any of these matters, as well as potential ranges of probable losses. A determination of the amount of provision required, if any, for these contingencies is based on an analysis of each individual issue. The required reserves may change in the future due to new developments in each matter or changes in approach such as a change in settlement strategy in dealing with these matters.

Accounting Changes and Recent Accounting Pronouncements

Accounting Changes

Our financial statements are based on the selection and application of accounting policies based on accounting principles generally accepted in the U.S. Please see note 3 “Accounting changes” to the accompanying audited consolidated financial statements for a summary of the accounting changes that we have adopted on or after January 1, 2007. The following summarizes the accounting changes and pronouncements we have adopted in 2007:

•  Accounting for Certain Hybrid Financial Instruments — In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments — an amendment to FASB Statements No. 133 and 140, or SFAS 155. SFAS 155 simplifies the accounting for certain hybrid financial instruments containing embedded derivatives. SFAS 155 allows fair value measurement, at the option of the entity, for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation under SFAS 133. In addition, it amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, to eliminate certain restrictions on passive derivative financial instruments that a qualifying special-purpose entity can hold. SFAS 155 is effective for all financial instruments acquired, issued or subject to a re-measurement event occurring after the beginning of an entity’s first fiscal year that begins after September 15, 2006. Pursuant to SFAS 155, we have not elected to measure our hybrid instruments at fair value.

•  Accounting for Servicing of Financial Assets In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets — an amendment of FASB Statement No. 140, or SFAS 156. SFAS 156 simplifies the accounting for assets and liabilities arising from loan servicing contracts. SFAS 156 requires that servicing rights be valued initially at fair value and subsequently either (i) accounted for at fair value or (ii) amortized over the period of estimated net servicing income (loss), with an assessment for impairment or increased obligation each reporting period. We adopted SFAS 156 on January 1, 2007. The adoption of SFAS 156 has not had a material impact on our results of operations and financial condition.

•  Accounting for Uncertainty In Income Taxes — In June 2006, the FASB issued FIN 48, clarifying the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes, or SFAS 109. The interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides accounting guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The evaluation of tax positions under FIN 48 is a two-step process, whereby (1) we determine whether it is more likely than not that the tax positions will be sustained based on the technical merits of each position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we would recognize the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the related tax authority. The adoption of FIN 48 resulted in an

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increase of $1 to opening accumulated deficit as at January 1, 2007. For additional information, see note 7 to the accompanying audited consolidated financial statements.

On May 2, 2007, the FASB issued FASB Staff Position, or FSP, FIN 48-1, Definition of Settlement in FASB Interpretation 48, or FSP FIN 48-1. FSP FIN 48-1 amends FIN 48 to provide guidance on how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. We applied the provisions of FSP FIN 48-1 effective January 1, 2007. The adoption of FSP FIN 48-1 has not had a material impact on our results of operations and financial condition.

•  Accounting for Sabbatical Leave and Other Similar Benefits — In June 2006, the EITF reached a consensus on EITF Issue No. 06-2, Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43, Accounting for Compensated Absences, or EITF 06-2. EITF 06-2 provides clarification surrounding the accounting for benefits in the form of compensated absences, whereby an employee is entitled to paid time off after working for a specified period of time. EITF 06-2 is effective for fiscal years beginning after December 15, 2006. The adoption of EITF 06-2 has not had a material impact on our results of operations and financial condition.

•  How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement — In June 2006, the EITF reached a consensus on EITF Issue No. 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross Versus Net Presentation), or EITF 06-3. EITF 06-3 provides guidance on how taxes directly imposed on revenue-producing transactions between a seller and customer that are remitted to governmental authorities should be presented in the income statement (i.e. gross versus net presentation). We elected to follow our existing policy of net presentation allowed by EITF 06-3 and, therefore, its adoption of EITF 06-3 has not had an impact on our results of operations and financial condition.

•  Share-Based Payment — On January 1, 2006, we adopted SFAS No. 123 (Revised 2004), Share-Based Payment, or SFAS 123R. We previously elected to account for employee share-based compensation using the fair value method prospectively for all awards granted or modified on or after January 1, 2003, in accordance with SFAS No. 148, “Accounting for Share-based Compensation — Transition and Disclosure”. SAB No. 107, “Share-Based Payment” (“SAB 107”), was issued by the SEC in March 2005 and provides supplemental SFAS 123R application guidance based on the views of the SEC. As a result of the adoption of SFAS 123R in the first quarter of 2006, we recorded a gain of $9 as a cumulative effect of an accounting change. There were no other material impacts on our results of operations and financial condition as a result of the adoption of SFAS 123R. For additional disclosure related to SFAS 123R, see note 18 to the accompanying audited consolidated financial statements.

•  Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an Amendment of FASB Statements No. 87, 88, 106, and 132(R). In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an Amendment of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS 158”). Based on the funded status of our pension and post-retirement benefit plans as of the measurement date of September 30, the adoption of SFAS 158 has had the effect of increasing our net liabilities for pension and post-retirement benefits and decreasing shareholders’ equity by approximately $142, net of taxes, as of December 31, 2006.

We use a measurement date of September 30 to measure plan assets and benefit obligations annually for the pension plans and other post-retirement benefit plans that make up the majority of plan assets and obligations.

SFAS 158 also requires an employer to measure the funded status of a plan as of the date of its year end statement of financial position, with limited exceptions. SFAS 158 provides two approaches for an employer to transition to a fiscal year end measurement date, both of which apply to us for our fiscal year ending December 31, 2008. Under the first approach, an employer remeasures plan assets and benefit obligations as of the beginning of the fiscal year that the measurement date provisions are applied. Under the second approach, an employer continues to use the measurements determined for the prior fiscal year end reporting to estimate the effects of the change. Net periodic benefit cost for the period between the earlier measurement date and the end of the fiscal year that the measurement date provisions are applied, exclusive of any curtailment or settlement gain or loss, shall be allocated proportionately between amounts to be recognized as an adjustment of retained earnings and net periodic benefit cost for the fiscal year that the measurement date provisions are applied. We have elected to adopt the second approach to transition to a fiscal year end measurement date for our fiscal year ending December 31, 2008 and our currently assessing the impact on our results of operations and financial condition.

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For additional information on Nortel’s pension and post-retirement plans, see note 8 to the accompanying audited financial statements.

Recent Accounting Pronouncements

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115”, or SFAS 159. SFAS 159 allows the irrevocable election of fair value as the initial and subsequent measurement attribute for certain financial assets and liabilities and other items on an instrument-by-instrument basis. Changes in fair value would be reflected in earnings as they occur. The objective of SFAS 159 is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. For us, SFAS 159 is effective as of January 1, 2008. We have elected not to apply the fair value option for any of our eligible financial instruments and other items.

In June 2007, the EITF reached a consensus on EITF Issue No. 06-11, “Accounting for Income Tax Benefits on Dividends on Share-Based Payment Awards”, or EITF 06-11. EITF 06-11 provides accounting guidance on how to recognize the realized tax benefits associated with the payment of dividends under a share-based payment arrangement. EITF 06-11 requires that the realized tax benefits associated with dividends on unvested share-based payments be charged to equity as an increase in additional paid-in capital and included in the pool of excess tax benefits available to absorb potential future tax deficiencies on share-based payment awards. We adopted the provisions of EITF 06-11 on January 1, 2008. The adoption of EITF 06-11 is not expected to have a material impact on our results of operations and financial condition.

In June 2007, the EITF reached a consensus on EITF Issue No. 07-3, “Accounting for Advance Payments for Goods or Services to be Received for Use in Future Research and Development Activities”, EITF 07-3. EITF 07-3 provides clarification surrounding the accounting for non-refundable research and development advance payments, whereby such payments should be recorded as an asset when the advance payment is made and recognized as an expense when the research and development activities are performed. We adopted the provisions of EITF 07-3 on January 1, 2008. The implementation of EITF 07-3 is not expected to have a material impact on our results of operations and financial condition.

In April 2007, the FASB issued FSP FIN 39-1, an amendment to paragraph 10 of FIN 39, “Offsetting of Amounts Related to Certain Contracts”, or FSP FIN 39-1. FSP FIN 39-1 replaces the terms “conditional contract” and “exchange contracts” in FIN 39 with the term “derivative instruments” as defined in SFAS No. 133, Accounting for Derivatives Instruments and Hedging Activities, or SFAS 133. FSP FIN 39-1 also amends FIN 39 to allow for the offsetting of fair value amounts recognized for the right to reclaim cash collateral (a receivable), or the obligation to return cash collateral (a payable) against fair value amounts recognized for derivative instruments executed with the same counterparty under the same master netting arrangement. We adopted the provisions of FSP FIN 39-1 on January 1, 2008. The implementation of FSP FIN 39-1 is not expected to have a material impact on our results of operations and financial condition.

In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements”, or SFAS 157. SFAS 157 establishes a single definition of fair value and a framework for measuring fair value in U.S. GAAP and requires expanded disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We partially adopted the provisions of SFAS 157 on January 1, 2008. The effective date for SFAS 157 as it relates to fair value measurements for non-financial assets and liabilities that are not measured at fair value on a recurring basis is expected to be deferred to fiscal years beginning after December 15, 2008. We plan to adopt the deferred portion of SFAS 157 on January 1, 2009. We currently do not expect the adoption of SFAS 157 to have a material impact on our results of operations and financial conditions; however, we will continue to assess the evolving guidance.

In September 2007, the EITF reached a consensus on EITF Issue No. 07-1 “Collaborative Arrangements”, or EITF 07-1. EITF 07-1 addresses the accounting for arrangements in which two companies work together to achieve a common commercial objective, without forming a separate legal entity. The nature and purpose of a company’s collaborative arrangements are required to be disclosed, along with the accounting policies applied and the classification and amounts for significant financial activities related to the arrangements. We will adopt the provisions of EITF 07-1 on January 1, 2009. The adoption of EITF 07-1 is not expected to have a material impact on our results of operations and financial condition.

In December 2007, the FASB issued SFAS 141R, “Business Combinations”, or SFAS 141R, replacing SFAS 141, “Business Combinations”. SFAS 141R revises existing accounting guidance for how an acquirer recognizes and measures

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in its financial statements the identifiable assets, liabilities, any noncontrolling interests, and the goodwill acquired. SFAS 141R is effective for fiscal years beginning after December 15, 2008. We plan to adopt the provisions of SFAS 141R on January 1, 2009. The adoption of SFAS 141R will impact the accounting for business combinations completed by us on or after January 1, 2009.

In December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in Consolidated Financial Statements — An Amendment of ARB 51”, or SFAS 160. SFAS 160 establishes accounting and reporting standards for the treatment of noncontrolling interests in a subsidiary. Noncontrolling interests in a subsidiary should be reported as a component of equity in the consolidated financial statements and any retained noncontrolling equity investment upon deconsolidation of a subsidiary is initially measured at fair value. SFAS 160 is effective for fiscal years beginning after December 15, 2008. We plan to adopt the provisions of SFAS 160 on January 1, 2009. The adoption of SFAS 160 will result in the reclassification of minority interest to shareholders’ equity. We are currently assessing any further impacts on our results of operations and financial condition.

Outstanding Share Data

As of February 19, 2008, Nortel Networks Limited had 1,460,978,638 outstanding common shares.

Market Risk

Market risk represents the risk of loss that may impact our consolidated financial statements through adverse changes in financial market prices and rates. Our market risk exposure results primarily from fluctuations in interest rates and foreign exchange rates. Disclosure of market risk is contained in the Quantitative and Qualitative Disclosures About Market Risk section of this report.

Environmental Matters

We are exposed to liabilities and compliance costs arising from our past generation, management and disposal of hazardous substances and wastes. As of December 31, 2007, the accruals on the consolidated balance sheet for environmental matters were $26. Based on information available as of December 31, 2007, management believes that the existing accruals are sufficient to satisfy probable and reasonably estimable environmental liabilities related to known environmental matters. Any additional liabilities that may result from these matters, and any additional liabilities that may result in connection with other locations currently under investigation, are not expected to have a material adverse effect on our business, results of operations, financial condition and liquidity.

We have remedial activities under way at 12 sites which are either currently or previously owned or occupied facilities. An estimate of our anticipated remediation costs associated with all such sites, to the extent probable and reasonably estimable, is included in the environmental accruals referred to above in an approximate amount of $26.

We are also listed as a potentially responsible party under the U.S. Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, at four Superfund sites in the U.S. (at three of the Superfund sites, we are considered a de minimis potentially responsible party). A potentially responsible party within the meaning of CERCLA is generally considered to be a major contributor to the total hazardous waste at a Superfund site (typically 1% or more, depending on the circumstances). A de minimis potentially responsible party is generally considered to have contributed less than 1% (depending on the circumstances) of the total hazardous waste at a Superfund site. An estimate of our share of the anticipated remediation costs associated with such Superfund sites is expected to be de minimis and is included in the environmental accruals of $26 referred to above.

Liability under CERCLA may be imposed on a joint and several basis, without regard to the extent of our involvement. In addition, the accuracy of our estimate of environmental liability is affected by several uncertainties such as additional requirements which may be identified in connection with remedial activities, the complexity and evolution of environmental laws and regulations, and the identification of presently unknown remediation requirements. Consequently, our liability could be greater than our current estimate.

For a discussion of environmental matters, see note 19, “Contingencies” to the accompanying consolidated financial statements.

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Legal Proceedings

For additional information related to our legal proceedings, see the Legal Proceedings section of this report.

Cautionary Notice Regarding Forward-Looking Information

Actual results or events could differ materially from those contemplated in forward-looking statements as a result of the following: (i) risks and uncertainties relating to Nortel’s business including: significant competition, competitive pricing practice, cautious capital spending by customers as a result of factors including current economic uncertainties, industry consolidation, rapidly changing technologies, evolving industry standards, frequent new product introductions and short product life cycles, and other trends and industry characteristics affecting the telecommunications industry; any material, adverse affects on Nortel’s performance if its expectations regarding market demand for particular products prove to be wrong; the sufficiency of recently announced restructuring actions; any negative developments associated with Nortel’s suppliers and contract manufacturing agreements including our reliance on certain suppliers for key optical networking solutions components; potential penalties, damages or cancelled customer contracts from failure to meet delivery and installation deadlines and any defects or errors in Nortel’s current or planned products; fluctuations in foreign currency exchange rates; potential higher operational and financial risks associated with Nortel’s efforts to expand internationally; potential additional valuation allowances for all or a portion of Nortel’s deferred tax assets if market conditions deteriorate or future results of operations are less than expected; a failure to protect Nortel’s intellectual property rights, or any adverse judgments or settlements arising out of disputes regarding intellectual property; any negative effect of a failure to maintain integrity of Nortel’s information systems; changes in regulation of the telecommunications industry or other aspects of the industry; any failure to successfully operate or integrate strategic acquisitions, or failure to consummate or succeed with strategic alliances; Nortel’s potential inability to attract or retain the personnel necessary to achieve its business objectives or to maintain an effective risk management strategy; (ii) risks and uncertainties relating to Nortel’s liquidity, financing arrangements and capital including: any inability of Nortel to manage cash flow fluctuations to fund working capital requirements or achieve its business objectives in a timely manner or obtain additional sources of funding; high levels of debt, limitations on Nortel capitalizing on business opportunities because of senior notes covenants, or on obtaining additional secured debt pursuant to the provisions of indentures governing certain of Nortel’s public debt issues; Nortel’s below investment grade credit rating; any increase of restricted cash requirements for Nortel if it is unable to secure alternative support for obligations arising from certain normal course business activities, or any inability of Nortel’s subsidiaries to provide it with sufficient funding; any negative effect to Nortel of the need to make larger defined benefit plans contributions in the future or exposure to customer credit risks or inability of customers to fulfill payment obligations under customer financing arrangements; or any negative impact on Nortel’s ability to make future acquisitions, raise capital, issue debt and retain employees arising from stock price volatility and any declines in the market price of Nortel’s publicly traded securities; and (iii) risks and uncertainties relating to Nortel’s prior restatements and related matters including: legal judgments, fines, penalties or settlements, related to the ongoing criminal investigations of Nortel in the U.S. and Canada; the significant dilution of Nortel’s existing equity positions resulting from the approval of its class action settlement; any significant pending or future civil litigation actions not encompassed by Nortel’s class action settlement; For additional information with respect to certain of these and other factors, see the “Risk Factors” section of this report and other securities filings with the SEC. Unless otherwise required by applicable securities laws, Nortel disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

ITEM 7A.   Quantitative and Qualitative Disclosures About Market Risk

Market Risk

Market risk represents the risk of loss that may impact our consolidated financial statements through adverse changes in financial market prices and rates. Our market risk exposure results primarily from fluctuations in interest rates and foreign exchange rates. To manage the risk from these fluctuations, we enter into various derivative-hedging transactions in accordance with our policies and procedures. We maintain risk management control systems to monitor market risks and counterparty risks. These systems rely on analytical techniques including both sensitivity analysis and value-at-risk estimations. We do not hold or issue financial instruments for trading purposes.

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Additional disclosure of our financial instruments is included in note 11, “Financial instruments and hedging activities” to the accompanying audited consolidated financial statements.

We manage foreign exchange exposures using forward and option contracts to hedge sale and purchase commitments. Our most significant foreign exchange exposures are in the Canadian Dollar, the British Pound and the Euro. We enter into U.S. to Canadian Dollar forward and option contracts intended to hedge the U.S. to Canadian Dollar exposure on future revenues and expenditure streams. In accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, or SFAS 133, we recognize the gains and losses on the effective portion of these contracts in earnings when the hedged transaction occurs. As at December 31, 2007, no cash flow hedges have met the criteria for hedge accounting and therefore are considered non-designated hedging strategies in accordance with SFAS 133. As such any gains and losses related to these contracts is recognized in earnings immediately.

We expect to continue to expand our business globally and, as such, expect that an increasing proportion of our business may be denominated in currencies other than U.S. Dollars. As a result, fluctuations in foreign currencies may have a material impact on our business, results of operations and financial condition. We try to minimize the impact of such currency fluctuations through our ongoing commercial practices and by attempting to hedge our major currency exposures. In attempting to manage this foreign exchange risk, we identify operations and transactions that may have exposure based upon the excess or deficiency of foreign currency receipts over foreign currency expenditures. Given our exposure to international markets, we regularly monitor all of our material foreign currency exposures. Our significant currency flows for the year ended December 31, 2007 were in U.S. Dollars, Canadian Dollars, British Pounds and Euros. The net impact of foreign exchange fluctuations resulted in a gain of $180 in 2007, a loss of $18 in 2006 and a gain of $63 in 2005. We cannot predict whether we will incur foreign exchange gains or losses in the future. However, if significant foreign exchange losses are experienced, they could have a material adverse effect on our business, results of operations and financial condition.

We use sensitivity analysis to measure our foreign currency risk by computing the potential decrease in cash flows that may result from adverse changes in foreign exchange rates. The balances are segregated by source currency and a hypothetical unfavorable variance in foreign exchange rates of 10% is applied to each net source currency position using year-end rates to determine the potential decrease in cash flows over the next year. The sensitivity analysis includes all foreign currency-denominated cash, short-term and long-term debt, and derivative instruments that will impact cash flows over the next year that are held at December 31, 2007 and 2006. The underlying cash flows that relate to the hedged firm commitments are not included in the analysis. The analysis is performed at the reporting date and assumes no future changes in the balances or timing of cash flows from the year-end position. Further, the model assumes no correlation in the movement of foreign exchange rates. Based on a one-year time horizon, a 10% adverse change in exchange rates would have resulted in a potential decrease in after-tax earnings (increase of loss) of $116 as of December 31, 2007 and a potential decrease in after-tax earnings (increase of loss) of $120 as of December 31, 2006. This potential decrease would result primarily from our exposure to the Canadian Dollar, the British Pound and the Euro.

A portion of our long-term debt is subject to changes in fair value resulting from changes in market interest rates. We have hedged a portion of this exposure to interest rate volatility using fixed for floating interest rate swaps on the 2013 Fixed Rate Notes and 2016 Fixed Rate Notes. As the swaps for the 2013 Fixed Rate Notes have passed the hedge designation criteria in accordance with SFAS 133, the change in fair value of those swaps are recognized in earnings with offsetting amounts related to the change in the fair value of the hedged debt attributable to interest rate changes. Any ineffective portion of the swaps is recognized in income immediately. The interest rate swap hedging the 2016 Notes has not met the hedge effectiveness criteria and remains a non-designated hedging strategy as of December 31, 2007. We record net settlements on these swap instruments as adjustments to interest expense. Historically, we have managed interest rate exposures, as they relate to interest expense, using a diversified portfolio of fixed and floating rate instruments denominated in several major currencies. We use sensitivity analysis to measure our interest rate risk. The sensitivity analysis includes cash, our outstanding floating rate long-term debt and any outstanding instruments that convert fixed rate long-term debt to floating rate. A 100 basis point adverse change in interest rates would have resulted in a potential decrease in after-tax earnings (increase of loss) of $55 as of December 31, 2007 and a potential decrease in after-tax earnings (increase of loss) of $55 as of December 31, 2006.

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Equity Price Risk

The values of our equity investments in several publicly traded companies are subject to market price volatility. These investments are generally in companies in the technology industry sector and are classified as available for sale. We typically do not attempt to reduce or eliminate the market exposure on these investment securities. We also hold certain derivative instruments or warrants that are subject to market price volatility because their value is based on the common share price of a publicly traded company. These derivative instruments are generally acquired in connection with OEM arrangements with strategic partners, or acquired through business acquisitions or divestitures. In addition, derivative instruments may also be purchased to hedge exposure to certain compensation obligations that vary based on future Nortel Networks Corporation common share prices. We do not hold equity securities or derivative instruments for trading purposes.

As of December 31, 2007, a hypothetical 20% adverse change in the stock prices of our publicly traded equity securities and the related underlying stock prices of publicly traded equity securities for certain of our derivative instruments would result in a loss in their aggregate fair value of $11.

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ITEM 8.   Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Report of Independent Registered Public Accounting Firm		82
Report of Independent Registered Chartered Accountants		83
Consolidated Statements of Operations		84
Consolidated Balance Sheets		85
Consolidated Statements of Changes in Equity and Comprehensive Income (Loss)		86
Consolidated Statements of Cash Flows		87
Notes to Consolidated Financial Statements		88
************
Quarterly Financial Data (Unaudited)		160
Report of Independent Registered Chartered Accountants		161
Schedule II — Valuation and Qualifying Accounts and Reserves		162

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders

Nortel Networks Limited:

We have audited the accompanying consolidated balance sheet of Nortel Networks Limited and subsidiaries as of December 31, 2007, and the related consolidated statements of operations, changes in equity and comprehensive income (loss) and cash flows for the year then ended. In connection with our audits of the consolidated financial statements, we also have audited the consolidated financial statement schedule II. These consolidated financial statements and financial statement schedule are the responsibility of Nortel Networks Limited’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audit.

We conducted our audit in accordance with and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Nortel Networks Limited and subsidiaries as of December 31, 2007, and the results of its operations and its cash flows for the year then ended in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule II, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 3 to the consolidated financial statements, the company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109”, effective January 1, 2007.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Nortel Networks Limited’s internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 27, 2008 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP

Chartered Accountants, Licensed Public Accountants

Toronto, Canada

February 27, 2008

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REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS

To the Shareholders and Board of Directors of Nortel Networks Limited

We have audited the accompanying consolidated balance sheet of Nortel Networks Limited and subsidiaries (“Nortel”) as of December 31, 2006 and the related consolidated statements of operations, changes in equity and comprehensive income (loss) and cash flows for each of the two years in the period ended December 31, 2006. These financial statements are the responsibility of Nortel’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Nortel as of December 31, 2006 and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP

Independent Registered Chartered Accountants

Licensed Public Accountants

Toronto, Canada

March 15, 2007, except as to notes 4, 5, 6 and 21, which are as of September 7, 2007

COMMENTS BY INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS ON CANADA-UNITED STATES OF AMERICA REPORTING DIFFERENCE

The standards of the Public Company Accounting Oversight Board (United States) require the addition of an explanatory paragraph (following the opinion paragraph) when there are changes in accounting principles that have a material effect on the comparability of the Company’s financial statements, such as the changes described in Note 3 to the financial statements. Our report to the Shareholders and Board of Directors of Nortel dated March 15, 2007 (except as to notes 4, 5, 6 and 21, which are as of September 7, 2007) with respect to the consolidated financial statements is expressed in accordance with Canadian reporting standards which do not require a reference to such changes in accounting principles in the auditors’ report when the change is properly accounted for and adequately disclosed in the financial statements.

/s/ Deloitte & Touche LLP

Independent Registered Chartered Accountants

Licensed Public Accountants

Toronto, Canada

March 15, 2007, except as to notes 4, 5, 6 and 21, which are as of September 7, 2007

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NORTEL NETWORKS LIMITED

Consolidated Statements of Operations for the years ended December 31

	2007			2006			2005
	(Millions of U.S. Dollars)
Revenues:
Products	$	9,654		$	10,158		$	9,338
Services		1,294			1,260			1,171
Total Revenues		10,948			11,418			10,509
Cost of revenues:
Products		5,637			6,276			5,629
Services		684			712			641
Total cost of revenues		6,321			6,988			6,270
Gross profit		4,627			4,430			4,239
Selling, general and administrative expense		2,486			2,491			2,417
Research and development expense		1,723			1,940			1,874
Amortization of intangible assets		50			26			17
In-process research and development expense		—			22			—
Special charges		210			105			169
Loss (gain) on sales of businesses and assets(a)		(31	)		(206	)		47
Other operating income — net (note 4)		(35	)		(13	)		(23	)
Operating earnings (loss)		224			65			(262	)
Other income — net (note 4)		444			186			272
Interest expense
Long-term debt		(257	)		(187	)		(124	)
Other		(24	)		(22	)		(6	)
Earnings (loss) from continuing operations before income taxes, minority interests and equity in net earnings (loss) of associated companies		387			42			(120	)
Income tax (expense) benefit		(1,114	)		(60	)		81
		(727	)		(18	)		(39	)
Minority interests — net of tax		(73	)		(21	)		(12	)
Equity in net earnings (loss) of associated companies — net of tax		2			(2	)		3
Net loss from continuing operations		(798	)		(41	)		(48	)
Net earnings from discontinued operations — net of tax		—			—			1
Net loss before cumulative effect of accounting change		(798	)		(41	)		(47	)
Cumulative effect of accounting change — net of tax (note 3)		—			9			—
Net loss		(798	)		(32	)		(47	)
Dividends on preferred shares		42			38			26
Net loss applicable to common shares	$	(840	)	$	(70	)	$	(73	)

(a) Includes related costs.

The accompanying notes are an integral part of these consolidated financial statements

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NORTEL NETWORKS LIMITED

Consolidated Balance Sheets as of December 31

	2007			2006
	(Millions of U.S. Dollars)
ASSETS
Current assets
Cash and cash equivalents	$	3,526		$	3,487
Restricted cash and cash equivalents		66			44
Accounts receivable — net		3,705			3,709
Inventories — net		2,002			1,989
Deferred income taxes — net		487			276
Other current assets		467			512
Total current assets		10,253			10,017
Investments		194			204
Plant and equipment — net		1,530			1,526
Goodwill		2,381			2,351
Intangible assets — net		213			241
Deferred income taxes — net		2,868			3,863
Other assets		534			680
Total assets	$	17,973		$	18,882
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Trade and other accounts payable	$	1,229		$	1,124
Payroll and benefit-related liabilities		689			637
Contractual liabilities		272			243
Restructuring liabilities		100			97
Other accrued liabilities (note 4)		3,799			3,756
Long-term debt due within one year		23			18
Total current liabilities		6,112			5,875
Long-term debt		2,666			2,646
Deferred income taxes — net		17			97
Other liabilities (note 4)		2,874			4,128
Total liabilities		11,669			12,746
Minority interests in subsidiary companies		294			243
Guarantees, commitments, contingencies and subsequent events (notes 12, 13, 19 and 20, respectively)
SHAREHOLDERS’ EQUITY
Preferred shares, without par value — Authorized shares: unlimited; Issued and outstanding shares: 30,000,000 and 30,000,000 for 2007 and 2006, respectively		536			536
Common shares, without par value — Authorized shares: unlimited; Issued and outstanding shares: 1,460,978,638 and 1,460,978,638 for 2007 and 2006, respectively		1,211			1,211
Additional paid-in capital		22,401			22,298
Accumulated deficit		(18,385	)		(17,544	)
Accumulated other comprehensive income (loss)		247			(608	)
Total shareholders’ equity		6,010			5,893
Total liabilities and shareholders’ equity	$	17,973		$	18,882

The accompanying notes are an integral part of these consolidated financial statements

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Consolidated Statements of Changes in Equity and Comprehensive Income (Loss)

	2007			2006			2005
	(Millions of U.S. Dollars)
Preferred shares
Balance at the beginning of the year	$	536		$	536		$	536
Balance at the end of the year		536			536			536
Common shares
Balance at the beginning of the year		1,211			1,211			1,211
Balance at the end of the year		1,211			1,211			1,211
Additional paid-in capital
Balance at the beginning of the year		22,298			22,193			22,107
Stock option compensation		76			93			84
Restricted stock units		23			8			1
Performance stock units		6			2			—
Other		(2	)		2			1
Balance at the end of the year		22,401			22,298			22,193
Accumulated deficit
Balance at the beginning of the year		(17,544	)		(17,474	)		(17,401	)
Net loss		(798	)		(32	)		(47	)
Dividends on preferred shares		(42	)		(38	)		(26	)
Adoption of FIN 48 — (note 3)		(1	)		—			—
Balance at the end of the year		(18,385	)		(17,544	)		(17,474	)
Accumulated other comprehensive income (loss)
Balance at the beginning of the year		(608	)		(833	)		(504	)
Foreign currency translation adjustment		298			282			(147	)
Unrealized gain (loss) on investments — net		(13	)		8			(2	)
Unrealized derivative gain (loss) on cash flow hedges — net		10			(17	)		(11	)
Minimum pension liability adjustment — net		—			94			(169	)
Change in unamortized pension and post-retirement actuarial losses and prior service cost		560			—			—
Other comprehensive income (loss)		855			367			(329	)
Adoption of FASB Statement No. 158 — net (see note 8)		—			(142	)		—
Balance at the end of the year		247			(608	)		(833	)
Total shareholders’ equity	$	6,010		$	5,893		$	5,633
Total comprehensive income (loss) for the year
Net loss	$	(798	)	$	(32	)	$	(47	)
Other comprehensive income (loss)		855			367			(329	)
Total comprehensive income (loss) for the year	$	57		$	335		$	(376	)

The accompanying notes are an integral part of these consolidated financial statements

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Consolidated Statements of Cash Flows for the years ended December 31

	2007			2006			2005
	(Millions of U.S. Dollars)
Cash flows from (used in) operating activities
Net loss	$	(798	)	$	(32	)	$	(47	)
Adjustments to reconcile net loss to net cash from (used in) operating activities of continuing operations:
Amortization and depreciation		328			290			301
Non-cash portion of special charges		13			3			38
In-process research and development expense		—			22			—
Equity in net (earnings) loss of associated companies		(2	)		2			(3	)
Share-based compensation expense		105			112			86
Deferred income taxes		1,019			31			(114	)
Net loss (earnings) from discontinued operations		—			—			(1	)
Cumulative effect of accounting change		—			(9	)		—
Pension and other accruals		276			345			299
Loss (gain) on sales and write downs of investments, businesses and assets — net		(26	)		(200	)		(20	)
Minority interests		73			21			12
Other — net		(210	)		127			119
Change in operating assets and liabilities		(585	)		(995	)		(842	)
Net cash from (used in) operating activities of continuing operations		193			(283	)		(172	)
Cash flows from (used in) investing activities
Expenditures for plant and equipment		(235	)		(316	)		(256	)
Proceeds on disposals of plant and equipment		90			143			10
Change in restricted cash and cash equivalents		(22	)		36			3
Acquisitions of investments and businesses — net of cash acquired		(85	)		(146	)		(651	)
Proceeds from the sales of investments and businesses and assets — net		75			600			470
Net cash from (used in) investing activities of continuing operations		(177	)		317			(424	)
Cash flows from (used in) financing activities
Dividends paid, including paid by subsidiaries to minority interests		(52	)		(60	)		(43	)
Increase in notes payable		76			105			70
Decrease in notes payable		(81	)		(79	)		(83	)
Proceeds from issuance of long-term debt		—			3,300			—
Repayments of long-term debt		—			(2,725	)		—
Debt issuance costs		—			(42	)		—
Increase in capital leases payable		—			1			—
Repayments of capital leases payable		(24	)		(17	)		(9	)
Net cash from (used in) financing activities of continuing operations		(81	)		483			(65	)
Effect of foreign exchange rate changes on cash and cash equivalents		104			94			(102	)
Net cash from (used in) continuing operations		39			611			(763	)
Net cash from (used in) operating activities of discontinued operations		—			—			33
Net increase (decrease) in cash and cash equivalents		39			611			(730	)
Cash and cash equivalents at beginning of year		3,487			2,876			3,606
Cash and cash equivalents at end of year	$	3,526		$	3,487		$	2,876

The accompanying notes are an integral part of these consolidated financial statements

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Notes to Consolidated Financial Statements

(Millions of U.S. Dollars, except per share amounts, unless otherwise stated)

1.   Nortel Networks Limited

Nortel Networks Limited (“Nortel”) is a global supplier of end-to-end networking products and solutions serving both service providers and enterprise customers. Nortel’s technologies span access and core networks and support multimedia and business-critical applications. Nortel’s networking solutions consist of hardware, software and services. Nortel designs, develops, engineers, markets, sells, licenses, installs, services and supports these networking solutions worldwide.

Nortel is the principal direct operating subsidiary of Nortel Networks Corporation (“NNC”). NNC holds all of Nortel Networks Limited’s outstanding common shares but none of Nortel Networks Limited’s outstanding preferred shares. NNC’s common shares are publicly traded on the New York Stock Exchange (“NYSE”) and Toronto Stock Exchange (“TSX”) under the symbol “NT”. Nortel Networks Limited’s Cumulative Redeemable Class A Preferred Shares Series 5 and Non-cumulative Redeemable Class A Preferred Shares Series 7 are traded on the TSX under the symbols “NTL.PR.F” and “NTL.PR.G”, respectively. Acquisitions involving any share consideration are completed by NNC, while acquisitions involving only cash consideration are generally completed by Nortel.

2.   Significant accounting policies

Basis of presentation

The consolidated financial statements of Nortel have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) for the preparation of financial statements. Although Nortel is headquartered in Canada, the consolidated financial statements are expressed in U.S. Dollars as the greater part of the financial results and net assets of Nortel are denominated in U.S. Dollars. Certain prior year amounts have been reclassified to conform to Nortel’s current presentation, as set out in note 4.

(a)   Principles of consolidation

The financial statements of entities which are controlled by Nortel through voting equity interests, referred to as subsidiaries, are consolidated into Nortel’s results. Entities which are controlled jointly with another entity, referred to as joint ventures, and entities which are not controlled by Nortel but over which Nortel has the ability to exercise significant influence, referred to as associated companies, are accounted for using the equity method. Variable Interest Entities (“VIEs”) (which include, but are not limited to, special purpose entities, trusts, partnerships, certain joint ventures and other legal structures), as defined by the Financial Accounting Standards Board (“FASB”) in FASB Interpretation No. (“FIN”) 46 (revised December 2003), “Consolidation of Variable Interest Entities — an Interpretation of Accounting Research Bulletin No. 51” (“FIN 46R”), are entities in which equity investors generally do not have the characteristics of a “controlling financial interest” or there is not sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. VIEs are consolidated by Nortel when it is determined that it will, as the primary beneficiary, absorb the majority of any of the VIEs’ expected losses and/or expected residual returns. Intercompany accounts and transactions are eliminated upon consolidation and unrealized intercompany gains and losses are eliminated when accounting under the equity method.

(b)   Use of estimates

Nortel makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. Estimates are used when accounting for items and matters such as revenue recognition and accruals for losses on contracts, allowances for uncollectible accounts receivable and customer financing, receivables sales, inventory provisions, product warranties, estimated useful lives of intangible assets and equipment, asset valuations, impairment assessments, employee benefits including pensions, taxes and related valuation allowances and provisions, restructuring and other provisions, share-based compensation and contingencies.

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(c)   Translation of foreign currencies

Nortel’s consolidated financial statements are presented in U.S. Dollars. The financial statements of Nortel’s operations whose functional currency is not the U.S. Dollar (except for highly inflationary economies as described below) are translated into U.S. Dollars at the exchange rates in effect at the balance sheet dates for assets and liabilities, and at average rates for the period for revenues and expenses. The unrealized translation gains and losses on Nortel’s net investment in these operations, including those on long-term intercompany advances that have been designated to form part of the net investment, are accumulated as a component of other comprehensive income (loss) (“OCI”).

The financial statements of Nortel’s operations whose functional currency is the U.S. Dollar, but where the underlying transactions are in a different currency, are translated into U.S. Dollars at the exchange rate in effect at the balance sheet date with respect to monetary assets and liabilities. Non-monetary assets and liabilities of these operations, and related amortization and depreciation expenses, are translated at the historical exchange rate. Revenues and expenses, other than amortization and depreciation, are translated at the average rate for the period in which the transaction occurred.

Transactions and financial statements for Nortel’s operations in countries considered to have highly inflationary economies use the U.S. Dollar as their functional currency. Resulting translation gains or losses are reflected in net earnings (loss).

(d)   Revenue recognition

Nortel’s products and services are generally sold pursuant to a contract and the terms of the contract, taken as a whole, determine the appropriate revenue recognition methods to be applied. Product revenue includes revenue from arrangements that include services such as installation, engineering and network planning where the services could not be separated from the arrangement because the services are essential or fair value could not be established. Where services are not bundled with product sales, services revenue is reported in the consolidated statements of operations as revenue of Nortel’s Global Services segment.

Depending on the terms of the contract and types of products and services sold, Nortel recognizes revenue under American Institute of Certified Public Accountants Statement of Position (“SOP”) 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” (“SOP 81-1”), SOP 97-2, “Software Revenue Recognition” (“SOP 97-2”), SEC Staff Accounting Bulletin (“SAB”) 104, “Revenue Recognition” (“SAB 104”), and FASB Emerging Issues Task Force (“EITF”) 01-09, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products)” (“EITF 01-09”). Revenues are reduced for returns, allowances, rebates, discounts and other offerings in accordance with the agreement terms.

Nortel regularly enters into multiple contractual agreements with the same customer. These agreements are reviewed to determine whether they should be evaluated as one arrangement in accordance with AICPA Technical Practice Aid (“TPA”) 5100.39, “Software Revenue recognition for multiple-element arrangements”.

For arrangements with multiple deliverables entered into after June 30, 2003, where the deliverables are governed by more than one authoritative accounting standard, Nortel generally applies EITF Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”), and evaluates each deliverable to determine whether it represents a separate unit of accounting based on the following criteria: (a) whether the delivered item has value to the customer on a stand-alone basis, (b) whether there is objective and reliable evidence of the fair value of the undelivered item(s), and (c) if the contract includes a general right of return relative to the delivered item, delivery or performance of the undelivered item(s) is considered probable and substantially in the control of Nortel. If objective and reliable evidence of fair value exists for all units of accounting in the arrangement, revenue is allocated to each unit of accounting or element based on relative fair values. In situations where there is objective and reliable evidence of fair value for all undelivered elements, but not for delivered elements, the residual method is used to allocate the contract consideration. Under the residual method, the amount of revenue allocated to delivered elements equals the total arrangement consideration less the aggregate fair value of any undelivered elements. Each unit of accounting is then accounted for under the applicable revenue recognition guidance. So long as elements otherwise governed by separate authoritative accounting standards cannot be treated as separate units of accounting under the guidance in EITF 00-21, the elements are combined into a single unit of accounting for revenue recognition purposes. In this case, revenue allocated to the unit of accounting is deferred until all combined elements have been delivered or, once there is only one remaining element to be delivered, based on the revenue recognition guidance applicable to the last delivered element within the unit of accounting.

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For arrangements that include hardware and software where software is considered more than incidental to the hardware, provided that the software is not essential to the functionality of the hardware and the hardware and software represent separate units of accounting, revenue related to the software element is recognized under SOP 97-2 and revenue related to the hardware element is recognized under SOP 81-1 or SAB 104. For arrangements where the software is considered more than incidental and essential to the functionality of the hardware, or where the hardware is not considered a separate unit of accounting from the software deliverables, revenue is recognized for the software and the hardware as a single unit of accounting pursuant to SOP 97-2 for off-the-shelf products and pursuant to SOP 81-1 for customized products. Revenue for hardware that does not require significant customization, and where any software is considered incidental, is recognized under SAB 104.

For elements related to customized network solutions and certain network build-outs, revenues are recognized in accordance with SOP 81-1, generally using the percentage-of-completion method. In using the percentage-of-completion method, revenues are generally recorded based on the percentage of costs incurred to date on a contract relative to the estimated total expected contract costs. Profit estimates on these contracts are revised periodically based on changes in circumstances and any losses on contracts are recognized in the period that such losses become known. In circumstances where reasonably dependable cost estimates cannot be made for a customized network solution or build-out, or for which inherent hazards make estimates doubtful, all revenues and related costs are deferred until completion of the solution or element (the “completed contract method”). Generally, the terms of SOP 81-1 contracts provide for progress billings based on completion of certain phases of work. Unbilled SOP 81-1 contract revenues recognized are accumulated in the contracts in progress account included in accounts receivable — net. Billings in excess of revenues recognized to date on these contracts are recorded as advance billings in excess of revenues recognized to date on contracts within other accrued liabilities until recognized as revenue. This classification also applies to billings in advance of revenue recognized on combined units of accounting under EITF 00-21 that contain both SOP 81-1 and non SOP 81-1 elements.

Revenue is recognized under SAB 104 when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee is fixed or determinable and collectibility is reasonably assured. For hardware, delivery is considered to have occurred upon shipment provided that risk of loss, and in certain jurisdictions legal title, has been transferred to the customer.

For arrangements where the criteria for revenue recognition have not been met because legal title or risk of loss on products does not transfer to the customer until final payment has been received or where delivery has not occurred, revenue is deferred to a later period when legal title or risk of loss passes either on delivery or on receipt of payment from the customer. For arrangements where the customer agrees to purchase products but Nortel retains possession until the customer requests shipment (“bill and hold arrangements”), revenue is not recognized until delivery to the customer has occurred and all other revenue recognition criteria have been met.

Services revenue is generally recognized according to the proportional performance method. The proportional performance method is used when the provision of services extends beyond an accounting period with more than one performance act, and permits the recognition of revenue ratably over the services period when no other pattern of performance is discernable. The nature of the service contract is reviewed to determine which revenue recognition method best reflects the nature of services performed. Provided all other revenue recognition criteria have been met, the revenue recognition method selected reflects the pattern in which the obligations to the customers have been fulfilled. Engineering and installation revenues are generally recognized as the services are performed.

Nortel makes certain sales through multiple distribution channels, primarily resellers and distributors. These customers are generally given certain rights of return. For products sold through these distribution channels, revenue is recognized from product sale at the time of shipment to the distribution channel when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collectibility is reasonably assured. Accruals for estimated sales returns and other allowances are recorded at the time of revenue recognition and are based on contract terms and prior claims experience.

Software revenue is generally recognized under SOP 97-2. For software arrangements involving multiple elements, Nortel allocates revenue to each element based on the relative fair value or the residual method, as applicable using vendor specific objective evidence to determine fair value, which is based on prices charged when the element is sold separately. Software revenue accounted for under SOP 97-2 is recognized when persuasive evidence of an arrangement exists, the

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software is delivered in accordance with all terms and conditions of the customer contracts, the fee is fixed or determinable and collectibility is probable. Revenue related to post-contract customer support (“PCS”), including technical support and unspecified when-and-if available software upgrades, is recognized ratably over the PCS term.

Under SAB 104 or SOP 97-2, if fair value does not exist for any undelivered element, revenue is not recognized until the earlier of (i) delivery of such element or (ii) when fair value of the undelivered element is established, unless the undelivered element is a service, in which case revenue is recognized as the service is performed once the service is the only undelivered element.

Deferred costs are presented as current or long-term in the consolidated balance sheet, consistent with the classification of the related deferred revenues.

(e)   Research and development

Research and development (“R&D”) costs are charged to net earnings (loss) in the periods in which they are incurred. However, costs incurred pursuant to specific contracts with third parties for which Nortel is obligated to deliver a product, are charged to cost of revenues in the same period as the related revenue is recognized. Related investment tax credits are deducted from the income tax provision.

(f)   Income taxes

Nortel provides for income taxes using the asset and liability method. This approach recognizes the amount of taxes payable or refundable for the current year as well as deferred tax assets and liabilities for the future tax consequence of events recognized in the consolidated financial statements and tax returns. Deferred income taxes are adjusted to reflect the effects of changes in tax laws or enacted tax rates.

In establishing the appropriate income tax valuation allowances, Nortel assesses its net deferred tax assets quarterly and based on all available evidence, both positive and negative, determines whether it is more likely than not that the remaining net deferred tax assets or a portion thereof will be realized.

In accordance with FIN 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”), Nortel classifies interest and penalties associated with income tax positions in income tax expense.

(g)   Cash and cash equivalents

Cash and cash equivalents consist of cash on hand, balances with banks and short-term investments with original maturities of three months or less. The amounts presented in the consolidated financial statements approximate the fair value of cash and cash equivalents.

(h)   Restricted cash and cash equivalents

Cash and cash equivalents are considered restricted when they are subject to contingent rights of a third party customer in the normal course of business. From time to time, Nortel may be required to post cash and cash equivalents as collateral to a third party as a result of the general economic and industry environment and Nortel’s and NNC’s credit ratings.

(i)   Provision for doubtful accounts

The provision for doubtful accounts for trade, notes and long-term receivables due from customers is established based on an assessment of a customer’s credit quality, as well as subjective factors and trends, including the aging of receivable balances. Generally, these credit assessments occur prior to the inception of the credit exposure and at regular reviews during the life of the exposure.

Customer financing receivables are receivables from customers with deferred payment terms. Customer financing receivables are considered impaired when they are classified as non-performing, payment arrears exceed 90 days or a major credit event such as a material default has occurred, and management determines that collection of amounts due according to the contractual terms is doubtful. Provisions for impaired customer financing receivables are recorded based on the expected recovery of defaulted customer obligations, being the present value of expected cash flows, or the

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realizable value of the collateral if recovery of the receivables is dependent upon a liquidation of the assets. Nortel recognizes recoveries on non-performing receivables once cash payment has been received. Interest income on impaired customer finance receivables is recognized as the cash payments are collected.

(j)   Inventories

Inventories are valued at the lower of cost (calculated generally on a first-in, first-out basis) or market value. The cost of finished goods and work in process is comprised of material, labor and manufacturing overhead. Provisions for inventory are based on estimates of future customer demand for products, including general economic conditions, growth prospects within the customer’s ultimate marketplaces and market acceptance of current and pending products. Full provisions are generally recorded for surplus inventory in excess of one year’s forecast demand or inventory deemed obsolete. In addition, Nortel records a liability for inventory purchase commitments with contract manufacturers and suppliers for quantities in excess of its future demand forecasts in accordance with Nortel’s excess and obsolete inventory policies.

Inventory includes certain direct and incremental deferred costs associated with arrangements where title and risk of loss were transferred to customers but revenue was deferred due to other revenue recognition criteria not being met.

(k)   Receivables sales

Transfers of accounts receivable that meet the criteria for surrender of control under FASB Statement of Financial Accounting Standard (“SFAS”) No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, are accounted for as sales. Generally, Nortel retains servicing rights and, in some cases, provides limited recourse when it sells receivables. A gain or loss is recorded as an operating expense (recovery) within selling, general and administrative (“SG&A”) at the date of the receivables sale. The gain or loss is based upon, in part, the previous carrying amount of the receivables involved in the transfer allocated between the assets sold and the retained interests based on their relative fair values at the date of the transfer. Fair value is generally estimated based on the present value of the estimated future cash flows expected under management’s assumptions, including discount rates assigned commensurate with risks.

(l)   Investments

Investments in publicly traded equity securities of companies over which Nortel does not exert significant influence are classified as available for sale and carried at fair value, based on quoted market prices. Unrealized holding gains and losses related to these securities are excluded from net earnings (loss) and are included in OCI until such gains or losses are realized or an other-than-temporary impairment is determined to have occurred. Gains and losses are realized when the securities are sold.

Investments in equity securities of private companies over which Nortel does not exert significant influence are accounted for using the cost method. Investments in associated companies and joint ventures are accounted for using the equity method. An impairment loss is recorded when there has been a loss in value of the investment that is other-than-temporary.

Nortel monitors its investments for factors indicating other-than-temporary impairment and records a charge to net earnings (loss) when appropriate.

(m)   Plant and equipment

Plant and equipment are stated at cost less accumulated depreciation. Depreciation is generally calculated on a straight-line basis over the expected useful lives of the plant and equipment. The expected useful life of a building is twenty to forty years, machinery and equipment including related capital leases is three to ten years, and capitalized software is three to ten years.

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(n)   Software development and business re-engineering costs

Software development costs

Costs to develop, acquire or modify software solely for Nortel’s internal use are capitalized pursuant to SOP No. 98-1, “Accounting for Costs of Computer Software Developed or Obtained for Internal Use” (“SOP 98-1”). SOP 98-1 requires qualified internal and external costs related to such software incurred during the application development stage to be capitalized and any preliminary project costs related to such software and post-implementation costs to be expensed as incurred.

Business re-engineering costs

Internal and external costs of business process re-engineering activities are expensed pursuant to EITF Issue No. 97-13, “Accounting for Costs Incurred in Connection with a Consulting Contract or an Internal Project that Combines Business Process Reengineering and Information Technology Transformation” (“EITF 97-13”). Information technology transformation projects typically involve implementation of enterprise software packages whereby entities must re-engineer their business processes to connect into the software rather than modify the software to connect into their existing business processes. Software development costs relating to the information technology transformation are capitalized under SOP 98-1 as described above.

(o)   Impairment or disposal of long-lived assets

Long-lived assets held and used

Nortel tests long-lived assets or asset groups held and used for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable. Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset or asset group; significant adverse changes in the business climate or legal factors; the accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history of losses or a forecast of continuing losses associated with the use of the asset; and a current expectation that the asset will more likely than not be sold or disposed of significantly before the end of its previously estimated useful life.

Recoverability is assessed based on the carrying amount of the asset or asset group and the sum of the undiscounted cash flows expected to result from the use and the eventual disposal of the asset or asset group. An impairment loss is recognized when the carrying amount is not recoverable and exceeds the fair value of the asset or asset group. The impairment loss is measured as the amount by which the carrying amount exceeds fair value.

Long-lived assets held for sale

Long-lived assets are classified as held for sale when certain criteria are met, which include: management’s commitment to a plan to sell the assets; the assets are available for immediate sale in their present condition; an active program to locate buyers and other actions to sell the assets have been initiated; the sale of the assets is probable and their transfer is expected to qualify for recognition as a completed sale within one year; the assets are being actively marketed at reasonable prices in relation to their fair value; and it is unlikely that significant changes will be made to the plan to sell the assets or that the plan will be withdrawn.

Nortel measures long-lived assets held for sale at the lower of carrying amount or fair value, less cost to sell. These assets are not depreciated.

Long-lived assets to be disposed of other than by sale

Nortel classifies assets that will be disposed of other than by sale as held and used until the disposal transaction occurs. The assets continue to be depreciated based on revisions to their estimated useful lives until the date of disposal or abandonment.

Recoverability is assessed based on the carrying amount of the asset or asset group and the sum of the undiscounted cash flows expected to result from the remaining period of use and the eventual disposal of the asset or asset group. An

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impairment loss is recognized when the carrying amount is not recoverable and exceeds the fair value of the asset or asset group. The impairment loss is measured as the amount by which the carrying amount exceeds fair value.

Fair value for the purposes of measuring impairment or a planned disposal of long-lived assets is determined using quoted market prices or the anticipated cash flows discounted at a rate commensurate with the risk involved.

(p)   Goodwill

Goodwill represents the excess of the purchase price of an acquired business over the fair value of the identifiable assets acquired and liabilities assumed. Nortel tests for impairment of goodwill on an annual basis as of October 1, and at any other time if events occur or circumstances change that would indicate that it is more likely than not that the fair value of a reporting unit has been reduced below its carrying amount.

Circumstances that could trigger an impairment test include: a significant adverse change in the business climate or legal factors; an adverse action or assessment by a regulator; unanticipated competition; the loss of key personnel; a change in reportable segments; the likelihood that a reporting unit or significant portion of a reporting unit will be sold or otherwise disposed of; the results of testing for recoverability of a significant asset group within a reporting unit; and the recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit.

The impairment test for goodwill is a two-step process. Step one consists of a comparison of the fair value of a reporting unit with its carrying amount, including the goodwill allocated to the reporting unit. Measurement of the fair value of a reporting unit is based on one or more fair value measures including present value techniques of estimated future cash flows and estimated amounts at which the unit as a whole could be bought or sold in a current transaction between willing parties. Nortel also considers its market capitalization as of the date of the impairment test. If the carrying amount of the reporting unit exceeds its fair value, step two requires the fair value of the reporting unit to be allocated to the underlying assets and liabilities of that reporting unit, resulting in an implied fair value of goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss equal to the excess is recorded in net earnings (loss).

(q)   Intangible assets

Intangible assets consist of acquired technology and other intangible assets. Acquired technology represents the value of the proprietary know-how that was technologically feasible as of the acquisition date. Intangible assets are amortized to net earnings (loss) on a straight-line basis over their estimated useful lives, generally two to ten years, or based on the expected pattern of benefit to future periods using estimates of undiscounted cash flows.

(r)   Warranty costs

As part of the normal sale of product, Nortel provides its customers with product warranties that extend for periods generally ranging from one to six years from the date of sale. A liability for the expected cost of warranty-related claims is established when the product is delivered and completed. In estimating warranty liability, historical material replacement costs and the associated labor costs to correct the product defect are considered. Revisions are made when actual experience differs materially from historical experience. Warranty related costs incurred before revenue is recognized are capitalized and recognized as an expense when the related revenue is recognized. Known product defects are specifically accrued for as Nortel becomes aware of such defects.

(s)   Pension, post-retirement and post-employment benefits

Pension expense, based on management’s assumptions, consists of: actuarially computed costs of pension benefits in respect of the current year’s service; imputed returns on plan assets and imputed interest on pension obligations; and straight-line amortization under the corridor approach of experience gains and losses, assumption changes and plan amendments over the expected average remaining service life of the employee group.

The expected costs of post-retirement and certain post-employment benefits, other than pensions, for active employees are accrued in the consolidated financial statements during the years employees provide service to Nortel. These costs are

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recorded based on actuarial methods and assumptions. Other post-employment benefits are recognized when the event triggering the obligation occurs.

The over-funded or under-funded status of defined benefit pension and post-retirement plans is recognized as an asset or liability, respectively, on the consolidated balance sheet.

(t)   Derivative financial instruments

Nortel records derivatives as assets and liabilities measured at fair value. The accounting for changes in the fair value depends on whether a derivative has been designated as a hedge under hedge accounting, and the type of hedging relationship designated. For a derivative designated as a fair value hedge, changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in net earnings (loss) in the period in which the changes occur. For a derivative designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in OCI and are recognized in net earnings (loss) when the hedged item affects net earnings (loss). The ineffective portion of changes in the fair value of the derivative in a cash flow hedge are recognized in other income (expense) — net in the period in which the changes occur. If the derivative has not been designated as a hedging instrument for accounting purposes or if a designated hedging relationship is no longer highly effective, changes in the fair value of the derivative are recognized in net earnings (loss) in the period in which the changes occur.

When a fair value hedging relationship is terminated because the derivative is sold or the hedge relationship is de-designated, the fair value basis adjustment recorded on the hedged item is recognized in the same manner as the other components of the hedged item. For a cash flow hedge that is terminated because the derivative is sold, expired, or the relationship is de-designated, the amount in OCI is to be realized when the hedged item affects net earnings (loss). If a cash flow or fair value hedging relationship is terminated because the underlying hedged item is repaid or is sold, or it is no longer probable that the hedged forecasted transaction will occur, the accumulated balance in OCI or the fair value basis adjustment recorded on the hedged item is recorded immediately in net earnings (loss).

Nortel’s policy is to formally document the terms of the relationships between derivative instruments and hedged items to which hedge accounting will be applied. This documentation includes Nortel’s risk management objectives and strategy for undertaking various hedge transactions. Where hedge accounting will be applied, this process includes linking all derivatives to specific assets and liabilities on the consolidated balance sheet or to specific firm commitments or forecasted transactions. Nortel also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in designated hedging relationships are highly effective in offsetting changes in fair values or cash flows of hedged items.

Nortel may also invest in warrants to purchase securities of other companies as a strategic investment or receive warrants in various transactions. Warrants that relate to publicly traded companies or that can be net share settled are deemed to be derivative financial instruments. Such warrants, however, are generally not eligible to be designated as hedging instruments. In addition, Nortel may enter into certain commercial contracts containing embedded derivative financial instruments. Generally for these embedded derivatives, the economic characteristics and risks are not clearly and closely related to the economic characteristics and risks of the host contract, and therefore the embedded derivatives are separated from the host contract and the changes in fair value each period are recorded in net earnings (loss).

(u)   Share-based compensation

Nortel employees and directors have been issued share-based awards from a number of share-based compensation plans that are described in note 17.

Effective January 1, 2006, Nortel adopted SFAS No. 123R, “Share-Based Payment” (“SFAS 123R”), which revises SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Nortel adopted SFAS 123R using the modified prospective transition approach and, accordingly, the results of prior periods have not been restated. Under the modified prospective transition approach, the provisions of SFAS 123R are generally applied only to share-based awards granted, modified, repurchased or cancelled on January 1, 2006 and thereafter. Nortel voluntarily adopted fair value accounting for share-based awards effective January 1, 2003 (under SFAS 123, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an Amendment of SFAS 123”), using the prospective method. Under this method, Nortel measured the cost of share-based awards granted or modified on or after January 1,

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2003 using the fair value of the award and began recognizing that cost in the consolidated statements of operations over the vesting period. Nortel will recognize the remaining previously unrecognized cost of these awards over the remaining service period following the provisions of SFAS 123R. Nortel recognizes compensation expense for stock options and Restricted Stock Units (“RSUs”) over the requisite service period. The requisite service period for a stock option or RSU is equal to the vesting period of the awards, as they vest solely based on employee service. Performance Stock Units (“PSUs”) have an employee service condition and a market condition, both of which are based on a three-year period. As such, the requisite service period for PSUs is also equal to its vesting period.

Employees of Nortel are granted awards under NNC’s share-based compensation plans. Nortel Networks Corporation common shares, deliverable upon the settlement or exercise of awards issued under NNC’s share-based compensation plans, may be new shares issued from treasury or shares purchased in privately negotiated transactions or in the open market.

The accounting for NNC’s significant share-based compensation plans under the fair value based method is as follows:

Stock options

The fair value at grant date of stock options is estimated using the Black-Scholes-Merton option-pricing model. Compensation expense is recognized on a straight-line basis over the stock option vesting period of the entire award based on the estimated number of stock options that are expected to vest. When exercised, stock options are settled through the issuance of shares and are therefore treated as equity awards.

RSUs

RSUs are settled with Nortel Networks Corporation common shares and are valued on the grant date using the grant date market price of the underlying shares. This valuation is not subsequently adjusted for changes in the market price of the shares prior to settlement of the award. Each RSU granted under the SIP (as defined in note 17) represents one Nortel Networks Corporation common share. Compensation expense is recognized on a straight-line basis over the vesting period of the entire award based on the estimated number of RSU awards that are expected to vest. RSUs awarded to executive officers beginning in 2005, and employees from January 1, 2007, prospectively vest in equal installments on the first three anniversary dates of the grant of the award. All RSUs currently granted have been classified as equity instruments as their terms require that they be settled in shares.

PSUs

PSUs are settled with Nortel Networks Corporation common shares and are valued using a Monte Carlo simulation model. The extent to which PSUs vest and settle at the end of a three year performance period will depend upon the level of achievement of certain market performance criteria based on the total shareholder return on the Nortel Networks Corporation common shares compared to the total shareholder return on the common shares of a comparative group of companies included in the Dow Jones Technology Titans Index (the “Technology Index”). The number of awards expected to be earned based on achievement of the PSU market condition, is factored into the grant date Monte Carlo valuation of the PSU award. The grant date fair value is not subsequently adjusted regardless of the eventual number of awards that are earned based on the market condition. Compensation expense is recognized on a straight-line basis over the three-year vesting period. Compensation expense is reduced for estimated PSU awards that will not vest due to not meeting continued employment vesting conditions. All PSUs currently granted have been classified as equity instruments as their terms require that they be settled in shares.

Stock appreciation rights (“SARs”)

Stand-alone SARs or SARs in tandem with options may be granted under the SIP (as defined in note 17). As of December 31, 2007, no tandem SARs have been granted under the SIP. SARs that are settled in cash are accounted for as liability awards and SARs that are settled in Nortel Networks Corporation common shares are accounted for as equity awards. Upon the exercise of a vested stand-alone SAR, a holder will be entitled to receive payment, in cash, Nortel Networks Corporation common shares or any combination thereof of an amount equal to the excess of the market value of a Nortel Networks Corporation common share on the date of exercise over the subscription or base price under the SAR.

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Stand-alone SARs awarded under the SIP generally vest in equal installments on the first four anniversary dates of the grant date of the award. All SARs currently granted will be settled in cash at the time of vesting and as such have been classified as liability awards based on this cash settlement provision. The fair value of outstanding SARs is remeasured each period through the date of settlement. Compensation expense is amortized over the requisite service period (generally the vesting period) of the award based on the proportionate amount of the requisite service that has been rendered to date.

Employee stock purchase plans (“ESPPs”)

NNC has stock purchase plans for eligible Nortel employees to facilitate the acquisition of Nortel Networks Corporation common shares at a discount. The discount is such that the plans are considered compensatory under the fair value based method. NNC’s contribution to the ESPPs is recorded as compensation expense on a quarterly basis as the obligation to contribute is incurred.

Pro forma disclosure required due to a change in accounting policy

Had Nortel applied the fair value based method to all share-based awards in all periods, reported net earnings (loss) and earnings (loss) per common share would have been adjusted to the pro forma amounts indicated below for the following year ended December 31:

	2005
Net loss — reported	$	(47	)
Share-based compensation — reported		89
Share-based compensation — pro forma(i)		(96	)
Net loss — pro forma	$	(54	)

(i)  Share-based compensation — pro forma expense for the year ended December 31, 2005 was net of tax of nil.

(v)   Guarantees

Nortel has entered into agreements which contain features that meet the definition of a guarantee under FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Other” (“FIN 45”). These arrangements create two types of obligations for Nortel:

(i)	Nortel has a non-contingent and immediate obligation to stand ready to make payments if certain future triggering events occur. For certain guarantees, a liability must be recognized for the stand ready obligation at the inception of the guarantee; and
(ii)	Nortel has an obligation to make future payments if those certain future triggering events do occur. A liability must be recognized when it becomes probable that one or more future events will occur, triggering the requirement to make payments under the guarantee and when the payment can be reasonably estimated.

Nortel’s requirement to make payments (either in cash, financial instruments, other assets, Nortel Networks Corporation common shares or through the provision of services) to a third party will be triggered as a result of changes in an underlying economic characteristic (such as interest rates or market value) that is related to an asset, a liability or an equity security of the guaranteed party or a third party’s failure to perform under a specified agreement.

(w)   Recent accounting pronouncements

(i)     In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 allows the irrevocable election of fair value as the initial and subsequent measurement attribute for certain financial assets and liabilities and other items on an instrument-by-instrument basis. Changes in fair value would be reflected in earnings as they occur. The objective of SFAS 159 is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. For Nortel, SFAS 159 is effective as of January 1, 2008. Nortel has elected not to apply the fair value option for any of its eligible financial instruments and other items.

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(ii)	In June 2007, the EITF reached a consensus on EITF Issue No. 06-11, “Accounting for Income Tax Benefits on Dividends on Share-Based Payment Awards” (“EITF 06-11”). EITF 06-11 provides accounting guidance on how to recognize the realized tax benefits associated with the payment of dividends under a share-based payment arrangement. EITF 06-11 requires that the realized tax benefits associated with dividends on unvested share-based payments be charged to equity as an increase in additional paid-in capital and included in the pool of excess tax benefits available to absorb potential future tax deficiencies on share-based payment awards. Nortel will adopt the provisions of EITF 06-11 on January 1, 2008. The adoption of EITF 06-11 is not expected to have a material impact on Nortel’s results of operations and financial condition.
(iii)	In June 2007, the EITF reached a consensus on EITF Issue No. 07-3, “Accounting for Advance Payments for Goods or Services to be Received for Use in Future Research and Development Activities” (“EITF 07-3”). EITF 07-3 provides clarification surrounding the accounting for non-refundable research and development advance payments, whereby such payments should be recorded as an asset when the advance payment is made and recognized as an expense when the research and development activities are performed. Nortel will adopt the provisions of EITF 07-3 on January 1, 2008. The implementation of EITF 07-3 is not expected to have a material impact on Nortel’s results of operations and financial condition.
(iv)	In April 2007, the FASB issued FASB Staff Position (“FSP”), FIN 39-1, an amendment to paragraph 10 of FIN 39, “Offsetting of Amounts Related to Certain Contracts” (“FSP FIN 39-1”). FSP FIN 39-1 replaces the terms “conditional contract” and “exchange contracts” in FIN 39 with the term “derivative instruments” as defined in SFAS No. 133, “Accounting for Derivatives Instruments and Hedging Activities” (“SFAS 133”). FSP FIN 39-1 also amends FIN 39 to allow for the offsetting of fair value amounts recognized for the right to reclaim cash collateral (a receivable), or the obligation to return cash collateral (a payable) against fair value amounts recognized for derivative instruments executed with the same counterparty under the same master netting arrangement. Nortel will adopt the provisions of FSP FIN 39-1 on January 1, 2008. The implementation of FSP FIN 39-1 is not expected to have a material impact on Nortel’s results of operations and financial condition.
(v)	In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 establishes a single definition of fair value and a framework for measuring fair value in U.S. GAAP and requires expanded disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. Nortel plans to partially adopt the provisions of SFAS 157 on January 1, 2008. The effective date for SFAS 157 as it relates to fair value measurements for non-financial assets and liabilities that are not measured at fair value on a recurring basis has been deferred to fiscal years beginning after December 15, 2008. Nortel plans to adopt the deferred portion of SFAS 157 on January 1, 2009. Nortel does not currently expect the adoption of SFAS 157 to have a material impact on its results of operations and financial conditions, but will continue to assess the evolving guidance.
(vi)	In September 2007, the EITF reached a consensus on EITF Issue No. 07-1, “Collaborative Arrangements” (“EITF 07-1”). EITF 07-1 addresses the accounting for arrangements in which two companies work together to achieve a common commercial objective, without forming a separate legal entity. The nature and purpose of a company’s collaborative arrangements are required to be disclosed, along with the accounting policies applied and the classification and amounts for significant financial activities related to the arrangements. Nortel will adopt the provisions of EITF 07-1 on January 1, 2009. The adoption of EITF 07-1 is not expected to have a material impact on Nortel’s results of operations and financial condition.
(vii)	In December 2007, the FASB issued SFAS 141R, “Business Combinations” (“SFAS 141R”), replacing SFAS 141, “Business Combinations”. SFAS 141R revises existing accounting guidance for how an acquirer recognizes and measures in its financial statements the identifiable assets, liabilities, any noncontrolling interests, and the goodwill acquired. SFAS 141R is effective for fiscal years beginning after December 15, 2008. Nortel plans to adopt the provisions of SFAS 141R on January 1, 2009. The adoption of SFAS 141R will impact the accounting for business combinations completed by Nortel on or after January 1, 2009.
(viii)	In December 2007, the FASB issued SFAS 160, “Noncontrolling Interests in Consolidated Financial Statements — An Amendment of ARB 51” (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for the treatment of noncontrolling interests in a subsidiary. Noncontrolling interests in a subsidiary should be reported as a

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component of equity in the consolidated financial statements and any retained noncontrolling equity investment upon deconsolidation of a subsidiary is initially measured at fair value. SFAS 160 is effective for fiscal years beginning after December 15, 2008. Nortel plans to adopt the provisions of SFAS 160 on January 1, 2009. The adoption of SFAS 160 will result in the reclassification of minority interests to shareholders’ equity. Nortel is currently assessing any further impacts on its results of operations and financial condition.

3.  Accounting changes

(a)   Accounting for Certain Hybrid Financial Instruments

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments — an amendment to FASB Statements No. 133 and 140” (“SFAS 155”). SFAS 155 simplifies the accounting for certain hybrid financial instruments containing embedded derivatives. SFAS 155 allows fair value measurement, at the option of the entity, for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation under SFAS 133. In addition, it amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, to eliminate certain restrictions on passive derivative financial instruments that a qualifying special-purpose entity can hold. SFAS 155 is effective for all financial instruments acquired, issued or subject to a re-measurement event occurring after the beginning of an entity’s first fiscal year that begins after September 15, 2006. Pursuant to SFAS 155, Nortel has not elected to measure its hybrid instruments at fair value.

(b)   Accounting for Servicing of Financial Assets

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets — an amendment of FASB Statement No. 140” (“SFAS 156”). SFAS 156 simplifies the accounting for assets and liabilities arising from loan servicing contracts. SFAS 156 requires that servicing rights be valued initially at fair value and subsequently either (i) accounted for at fair value or (ii) amortized over the period of estimated net servicing income (loss), with an assessment for impairment or increased obligation each reporting period. Nortel adopted SFAS 156 on January 1, 2007. The adoption of SFAS 156 has not had a material impact on Nortel’s results of operations and financial condition.

(c)   Accounting for Uncertainty in Income Taxes

In June 2006, the FASB issued FIN 48, clarifying the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes” (“SFAS 109”). The interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides accounting guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The evaluation of tax positions under FIN 48 is a two-step process, whereby (1) Nortel determines whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, Nortel would recognize the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the related tax authority. The adoption of FIN 48 resulted in an increase of $1 to opening accumulated deficit as at January 1, 2007. For additional information, see note 7.

On May 2, 2007, the FASB issued FSP FIN 48-1, “Definition of Settlement in FASB Interpretation 48” (“FSP FIN 48-1”). FSP FIN 48-1 amends FIN 48 to provide guidance on how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. Nortel applied the provisions of FSP FIN 48-1 effective January 1, 2007. The adoption of FSP FIN 48-1 has not had a material impact on Nortel’s results of operations and financial condition.

(d)   Accounting for Sabbatical Leave and Other Similar Benefits

In June 2006, the EITF reached a consensus on EITF Issue No. 06-2, “Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43, Accounting for Compensated Absences” (“EITF 06-2”). EITF 06-2 provides clarification surrounding the accounting for benefits in the form of compensated absences, whereby an employee is entitled to paid time off after working for a specified period of time. EITF 06-2 is effective for fiscal years beginning

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after December 15, 2006. The adoption of EITF 06-2 has not had a material impact on Nortel’s results of operations and financial condition.

(e)   How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement

In June 2006, the EITF reached a consensus on EITF Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross Versus Net Presentation)” (“EITF 06-3”). EITF 06-3 provides guidance on how taxes directly imposed on revenue-producing transactions between a seller and customer that are remitted to governmental authorities should be presented in the income statement (i.e. gross versus net presentation). Nortel elected to follow its existing policy of net presentation allowed by EITF 06-3 and, therefore, its adoption of EITF 06-3 has not had any impact on Nortel’s results of operations and financial condition.

(f)   Share-Based Payment

On January 1, 2006, Nortel adopted SFAS 123R. Nortel previously elected to account for employee share-based compensation using the fair value method prospectively for all awards granted or modified on or after January 1, 2003, in accordance with SFAS No. 148, “Accounting for Share-based Compensation — Transition and Disclosure”. SAB No. 107, “Share-Based Payment” (“SAB 107”), was issued by the SEC in March 2005 and provides supplemental SFAS 123R application guidance based on the views of the SEC. As a result of the adoption of SFAS 123R in the first quarter of 2006, Nortel recorded a gain of $9 as a cumulative effect of an accounting change. There were no other material impacts on Nortel’s results of operations and financial condition as a result of the adoption of SFAS 123R. For additional disclosure related to SFAS 123R, see note 17.

(g)   Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an Amendment of FASB Statements No. 87, 88, 106, and 132(R)

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an Amendment of FASB Statements No. 87, 88, 106, and 132(R)” (“SFAS 158”). SFAS 158 requires an employer to recognize the overfunded or underfunded status of a defined benefit pension and post-retirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. Based on the funded status of Nortel’s pension and post-retirement benefit plans as of the measurement date of September 30, the adoption of SFAS 158 has had the effect of increasing Nortel’s net liabilities for pension and post-retirement benefits and decreasing shareholders’ equity by approximately $142, net of taxes, as of December 31, 2006.

Nortel uses a measurement date of September 30 to measure plan assets and benefit obligations annually for the pension plans and other post-retirement benefit plans that make up the majority of plan assets and obligations.

SFAS 158 also requires an employer to measure the funded status of a plan as of the date of its year end statement of financial position, with limited exceptions. SFAS 158 provides two approaches for an employer to transition to a fiscal year end measurement date, both of which apply to Nortel for its fiscal year ending December 31, 2008. Under the first approach, an employer remeasures plan assets and benefit obligations as of the beginning of the fiscal year that the measurement date provisions are applied. Under the second approach, an employer continues to use the measurements determined for the prior fiscal year end reporting to estimate the effects of the change. Net periodic benefit cost for the period between the earlier measurement date and the end of the fiscal year that the measurement date provisions are applied, exclusive of any curtailment or settlement gain or loss, shall be allocated proportionately between amounts to be recognized as an adjustment of retained earnings and net periodic benefit cost for the fiscal year that the measurement date provisions are applied. Nortel has elected to adopt the second approach to transition to a fiscal year end measurement date for its fiscal year ending December 31, 2008 and is currently assessing the impact on its results of operations and financial condition.

For additional information on Nortel’s pension and post-retirement plans, see note 8.

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4.   Consolidated financial statement details

The following tables provide details of selected items presented in the consolidated statements of operations and cash flows for each of the three years ended December 31, 2007, 2006 and 2005, and the consolidated balance sheets as of December 31, 2007 and 2006.

Consolidated statements of operations

Cost of revenues:

In August 2004, Nortel entered into a contract with Bharat Sanchar Nigam Limited to establish a wireless network in India. Nortel’s commitments for orders received as of December 31, 2007, 2006 and 2005 under this contract have resulted in estimated project losses in each of these years of approximately $39, $13 and $148, respectively, which were recorded as a charge to cost of revenues and accrued within contractual liabilities in the years ended December 31, 2007, 2006 and 2005.

Selling, general and administrative expense:

SG&A expense includes bad debt (expense) recoveries of ($2), ($5) and $10 in the years ended December 31, 2007, 2006 and 2005, respectively.

Research and development expense:

	2007		2006		2005
R&D expense	$	1,723	$	1,940	$	1,874
R&D costs incurred on behalf of others(a)		7		16		28
Total	$	1,730	$	1,956	$	1,902

(a)  These costs included R&D costs charged to customers of Nortel pursuant to contracts that provided for full recovery of the estimated costs of development, material, engineering, installation and other applicable costs, which were accounted for as contract costs.

Other operating income — net:

	2007			2006			2005
Royalty license income — net	$	(29	)	$	(21	)	$	(13	)
Litigation charges (recovery)		(2	)		9			(10	)
Other — net		(4	)		(1	)		—
Other operating income — net(a)	$	(35	)	$	(13	)	$	(23	)

(a)  Includes items that were previously reported as non-operating and have been reclassified from “Other income — net” to conform to current presentation.

Other income — net:

	2007			2006			2005
Interest and dividend income	$	228		$	122		$	112
Gain (loss) on sales and write downs of investments		(5	)		(6	)		67
Currency exchange gains (losses) — net		180			(18	)		63
Other — net		41			88			30
Other income — net	$	444		$	186		$	272

Hedge ineffectiveness related to designated hedging relationships that were accounted for in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, had no material impact on the net loss for the year ended December 31, 2007 or 2006, and was reported within Other Income — net in the consolidated statements of operations.

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Consolidated balance sheets

Cash and cash equivalents:

	2007		2006		2005
Cash on hand and balances with banks	$	811	$	747	$	761
Short-term investments		2,715		2,740		2,115
Cash and cash equivalents at end of year	$	3,526	$	3,487	$	2,876

Accounts receivable — net:

	2007			2006
Trade receivables	$	2,271		$	2,464
Notes receivable		12			7
Notes receivable from NNC and its subsidiaries		1,127			924
Contracts in process		357			402
		3,767			3,797
Less: provisions for doubtful accounts		(62	)		(88	)
Accounts receivable — net	$	3,705		$	3,709

Inventories — net:

	2007			2006
Raw materials	$	610		$	725
Work in process		10			11
Finished goods		800			727
Deferred costs		1,698			1,952
		3,118			3,415
Less: provision for inventories		(907	)		(1,007	)
Inventories — net		2,211			2,408
Less: long-term deferred costs(a)		(209	)		(419	)
Current inventories — net	$	2,002		$	1,989

(a)  Long-term portion of deferred costs is included in other assets.

Other current assets:

	2007		2006
Prepaid expenses	$	152	$	175
Income taxes recoverable		77		63
Current investments		15		51
Other		223		223
Other current assets	$	467	$	512

Investments:

Investments included balances of $101 and $97 as of December 31, 2007 and 2006, respectively, related to long-term investment assets held in an employee benefit trust in Canada, and restricted as to its use in operations by Nortel.

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Plant and equipment — net:

	2007			2006
Cost:
Land	$	38		$	35
Buildings		1,137			1,185
Machinery and equipment		2,167			2,038
Assets under capital lease		215			215
Sale lease-back assets		97			92
		3,654			3,565
Less accumulated depreciation:
Buildings		(395	)		(444	)
Machinery and equipment		(1,601	)		(1,482	)
Assets under capital lease		(107	)		(96	)
Sale lease-back assets		(21	)		(17	)
		(2,124	)		(2,039	)
Plant and equipment — net(a)	$	1,530		$	1,526

(a)  There are no material assets held for sale as of December 31, 2007. As of December 31, 2006, assets were held for sale with a carrying value of $52, related to owned facilities that were being actively marketed for sale. These assets were written down in previous periods to their estimated fair values less estimated costs to sell. The write downs were included in special charges. Nortel disposed of all the assets held for sale in 2007, with such disposition having no material impact on net earnings (loss). The assets held for sale had gross and net book values of approximately $168 and $56, respectively, as of the date of their disposition.

Goodwill:

The following table outlines goodwill by reportable segment:

							Metro
	Enterprise			Carrier			Ethernet			Global
	Solutions			Networks			Networks			Services			Other		Total
Balance — as of December 31, 2005(a)	$	449		$	165		$	606		$	1,015		$	171	$	2,406
Change:
Additions(b)		9			—			14			20			—		43
Disposals(c)		(8	)		(10	)		(14	)		(22	)		—		(54	)
Foreign exchange		3			4			3			5			—		15
Other(d)		(6	)		(15	)		(11	)		(27	)		—		(59	)
Balance — as of December 31, 2006	$	447		$	144		$	598		$	991		$	171	$	2,351
Change:
Additions(e)		2			5			3			8			—		18
Disposals		—			—			—			—			—		—
Foreign exchange		1			3			2			6			—		12
Balance — as of December 31, 2007	$	450		$	152		$	603		$	1,005		$	171	$	2,381

(a)	Opening balances for Enterprise Solutions, Carrier Networks and Metro Ethernet Networks have been decreased by $26, $25 and $104, respectively, and the opening balance for Global Services has been increased by $155, to reflect the reclassification of Nortel’s network implementation services to Global Services, as described in note 5.
(b)	The addition of $43 relates to the goodwill acquired as a result of the acquisition of Tasman Networks Inc. (“Tasman Networks”) in 2006. See note 9 for additional information.
(c)	Includes a disposal of $42 related to the transfer of Nortel’s Calgary manufacturing plant assets to Flextronics Telecom Systems Ltd. (“Flextronics”) in 2006. See note 9 for additional information.
(d)	Relates primarily to reclassifications in goodwill previously recorded as a result of the finalization of the purchase price allocation for Nortel Government Solutions Incorporated (“NGS”), and LG-Nortel (as defined in note 9). See note 9 for additional information.
(e)	The addition of $18 relates to the finalization of the purchase price adjustment with respect to the LG-Nortel (as defined in note 9) joint venture. See note 9 for additional information.

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Intangible assets — net:

	2007			2006
Cost(a)	$	338		$	307
Less accumulated amortization		(125	)		(66	)
Intangible assets — net	$	213		$	241

(a)  Intangible assets are being amortized over a weighted-average period of approximately six years ending in 2013. Amortization expense for each of the next five years commencing in 2008 is expected to be $58, $52, $37, $22 and $18, respectively. The majority of amortization expense is denominated in a foreign currency and may fluctuate due to changes in foreign exchange rates.

Other assets:

	2007		2006
Long-term deferred costs	$	209	$	419
Long-term inventories		27		—
Debt issuance costs		41		45
Hedge assets		77		64
Financial assets		62		60
Other		118		92
Other assets	$	534	$	680

Other accrued liabilities:

	2007		2006
Outsourcing and selling, general and administrative related provisions	$	306	$	399
Customer deposits		52		78
Product related provisions		126		93
Warranty provisions (note 12)		206		214
Deferred revenue		1,219		1,127
Miscellaneous taxes		30		73
Income taxes payable		93		71
Deferred income taxes		15		—
Tax uncertainties		21		—
Interest payable		77		87
Advance billings in excess of revenues recognized to date on contracts(a)		1,490		1,352
Other		164		262
Other accrued liabilities	$	3,799	$	3,756

(a)  Includes amounts which may be recognized beyond one year due to the duration of certain contracts.

Other liabilities:

	2007		2006
Pension benefit liabilities	$	1,109	$	1,965
Post-employment and post-retirement benefit liabilities		893		794
Restructuring liabilities (note 6)		180		177
Deferred revenue		400		919
Tax uncertainties (note 7)		71		—
Other long-term provisions		221		273
Other liabilities	$	2,874	$	4,128

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Consolidated statements of cash flows

Change in operating assets and liabilities:

	2007			2006			2005
Accounts receivable — net	$	4		$	(496	)	$	(334	)
Inventories — net		(66	)		(42	)		285
Deferred costs		223			97			(538	)
Income taxes		18			(18	)		(57	)
Accounts payable		94			(80	)		188
Payroll, accrued and contractual liabilities		(107	)		(252	)		(356	)
Deferred revenue		(424	)		(229	)		161
Advance billings in excess of revenues recognized to date on contracts		149			120			102
Restructuring liabilities		(7	)		(21	)		(149	)
Other		(469	)		(74	)		(144	)
Change in operating assets and liabilities	$	(585	)	$	(995	)	$	(842	)

Acquisitions of investments and businesses — net of cash acquired:

	2007			2006			2005
Cash acquired	$	—		$	(1	)	$	(26	)
Total net assets acquired other than cash		(85	)		(146	)		(651	)
Total purchase price		(85	)		(147	)		(677	)
Less:
Cash acquired		—			1			26
Acquisitions of investments and businesses — net of cash acquired	$	(85	)	$	(146	)	$	(651	)

Interest and taxes paid:

	2007		2006		2005
Cash interest paid	$	288	$	167	$	122
Cash taxes paid	$	91	$	39	$	48

5.   Segment information

Segment descriptions

In the first quarter of 2007, Nortel changed the name of its Mobility and Converged Core Networks segment to Carrier Networks (“CN”). Additionally, revenues from network implementation services consisting of engineering, installation and project management services bundled in customer contracts and previously included with sales in each of its CN, Enterprise Solutions (“ES”) and Metro Ethernet Networks (“MEN”) segments have been reallocated to its Global Services (“GS”) segment for management reporting purposes beginning in 2007. The segments are described below. The amounts reallocated to the GS segment were based primarily on the stated value of the services in the respective bundled customer arrangements. Prior period segment information has been recast to conform to the current segment presentation.

•  CN provides mobility networking solutions using (i) Code Division Multiple Access (“CDMA”), Global System for Mobile Communication (“GSM”), and Universal Mobile Telecommunication System (“UMTS”) radio access technologies, and fixed and mobile networking solutions using Worldwide Interoperability for Microwave Access (“WiMAX”) radio access technology, and (ii) carrier circuit and packet voice solutions. Mobility networking refers to communications networks that enable end users to be mobile while they send and receive voice and data communications using wireless devices such as cellular telephones, personal digital assistants, laptops and other computing and communications devices. These networks use specialized network access equipment and specialized core networking equipment that enable an end user to be connected and identified when not in a fixed location and to roam globally. In addition, Nortel’s carrier circuit and packet voice solutions provide a broad range of voice

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solutions to its service provider customers for business and residential subscribers, traditional, full featured voice services as well as internet-based voice and multimedia communications services using either circuit or packet-based switching technologies. These service provider customers include local and long distance telephone companies, wireless service providers, cable operators and other communication service providers. Increasingly, CN addresses customers who want to provide services across both wireless as well as wired devices.

•  ES provides Unified Communications (“UC”) solutions to enterprise customers using (i) Business Optimized Communications and (ii) Business Optimized Networking. Business Optimized Communications comprised of enterprise circuit and packet voice solutions, software solutions for multi-media messaging, conferencing and contact centers and Service Oriented Architecture based communications enabled applications. Business Optimized Networking solutions are inclusive of data networking, wireless LAN, datacenter, and security, Nortel’s UC solutions transform an enterprise’s existing communications to deliver a unified, real time, multi-media experience including voice, video, email and instant messaging. Nortel’s ES customers consist of a broad range of enterprises around the world, including large businesses at their headquarters, data centers, call centers and branch offices, small and medium-size businesses and home offices, as well as government agencies, educational and other institutions and utility organizations.

•  GS provides a broad range of services to address the requirements of Nortel’s carrier and enterprise customers throughout the entire lifecycle of their networks. The GS portfolio is organized into four main service product groups: (i) network implementation services, including network integration, planning, installation, optimization and security services, (ii) network support services, including technical support, hardware maintenance, equipment spares logistics and on-site engineers, (iii) network managed services, including services related to the monitoring and management of customer networks and providing a range of network managed service options, and (iv) network application services, including applications development, integration and communications-enabled application solutions and hosted multimedia services. Nortel’s GS market mirrors that of its carrier and enterprise markets along with a broad range of customers in all geographic regions where Nortel conducts business, including wireline and wireless carriers, cable operators, small and medium-size businesses, large global enterprises and all levels of government.

•  MEN combines Nortel’s optical networking solutions and the carrier portion of its data networking solutions to transform its carrier and large enterprise customers’ networks to be more scalable and reliable for the high speed delivery of diverse multi-media communications services. By combining Nortel’s optical expertise and data knowledge, Nortel creates carrier Ethernet solutions that help service providers and enterprises better manage increasing bandwidth demands. Nortel differentiates its MEN solutions by using technology innovation such as Provider Backbone Bridges, Provider Backbone Transport, and 40G Dual Polarization Quadrature Phase Shift Keying to deliver increased network capacity at lower cost per bit and with a simpler operations paradigm. Both metropolitan, or metro, and long haul networks are key focus areas as bandwidth demands are increasing as a result of the growth of network-based broadcast and on-demand video delivery, wireless “backhaul” for a variety of data services including video, as well as traditional business, internet, and private line and voice services.

•  Other miscellaneous business activities and corporate functions, including the operating results of NGS, do not meet the quantitative criteria to be disclosed separately as reportable segments and have been reported in “Other”. Costs associated with shared services, such as general corporate functions, that are managed on a common basis are allocated to Nortel’s reportable segments based on usage determined generally by headcount. A portion of other general and miscellaneous corporate costs and expenses are allocated based on a fixed charge established annually. Costs not allocated to the reportable segments include employee share-based compensation, differences between actual and budgeted employee benefit costs, interest attributable to its long-term debt and other non-operational activities, and are included in “Other”.

Nortel’s president and chief executive officer (the “CEO”) has been identified as the Chief Operating Decision Maker in assessing segment performance and in deciding how to allocate resources to the segments. The primary financial measures used by the CEO in assessing performance and allocating resources to the segments are management earnings (loss) before income taxes (“Management EBT”) and operating margin. Management EBT is a measure that includes the cost of revenues, SG&A expense, R&D expense, interest expense, other operating income — net, other income — net, minority interests — net of tax and equity in net earnings (loss) of associated companies — net of tax. Interest attributable to long-

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term debt is not allocated to a reportable segment and is included in “Other”. Nortel believes that Management EBT is determined in accordance with the measurement principles most consistent with those used by Nortel in measuring the corresponding amounts in its consolidated financial statements. The accounting policies of the reportable segments are the same as those applied to the consolidated financial statements. The CEO does not review asset information on a segmented basis in order to assess performance and allocate resources.

Segments

The following tables set forth information by segment for the years ended December 31:

	2007			2006			2005
Revenues
Carrier Networks	$	4,493		$	5,157		$	4,915
Enterprise Solutions		2,620			2,292			2,061
Global Services		2,087			2,132			2,040
Metro Ethernet Networks		1,525			1,591			1,347
Total reportable segments		10,725			11,172			10,363
Other		223			246			146
Total revenues	$	10,948		$	11,418		$	10,509
Management EBT
Carrier Networks	$	783		$	455		$	343
Enterprise Solutions		39			(2	)		141
Global Services		381			342			474
Metro Ethernet Networks		(14	)		69			(78	)
Total reportable segments		1,189			864			880
Other		(644	)		(898	)		(776	)
Total Management EBT		545			(34	)		104
Amortization of intangible assets		(50	)		(26	)		(17	)
In-process research and development expense		—			(22	)		—
Special charges		(210	)		(105	)		(169	)
Gain (loss) on sales of businesses and assets		31			206			(47	)
Income tax benefit (expense)		(1,114	)		(60	)		81
Net loss from continuing operations before cumulative effect of accounting change	$	(798	)	$	(41	)	$	(48	)

Product and service revenues

The following table sets forth external revenues by product and service for the years ended December 31:

	2007		2006		2005
CDMA solutions	$	2,425	$	2,311	$	1,972
GSM and UMTS solutions		1,373		2,021		2,248
Circuit and packet voice solutions		2,418		2,443		2,159
Optical networking solutions		1,185		1,128		954
Data networking and security solutions		1,237		1,137		990
Global services		2,087		2,132		2,040
Other		223		246		146
Total	$	10,948	$	11,418	$	10,509

Nortel had one customer, Verizon Communications Inc., that generated revenues of approximately $1,149 and $1,416 or 11% and 12% of total consolidated revenues for the years ended December 31, 2007 and 2006 , respectively. The revenues

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from this customer for the years ended December 31, 2007 and 2006 did not relate specifically to one of Nortel’s reportable segments, but rather were generated throughout all of Nortel’s reportable segments. For the year ended December 31, 2005, no customer generated revenues greater than 10% of consolidated revenues.

Geographic information:

The following table sets forth external revenues by geographic region based on the location of the customer for the years ended December 31:

	2007		2006		2005
U.S.	$	4,974	$	5,092	$	5,203
Europe, Middle East and Africa (“EMEA”)		2,740		3,239		2,704
Canada		822		720		571
Asia		1,768		1,736		1,422
Caribbean and Latin America (“CALA”)		644		631		609
Total	$	10,948	$	11,418	$	10,509

Long-lived assets:

The following table sets forth long-lived assets representing plant and equipment — net, by geographic region as of December 31:

	2007		2006
U.S.	$	439	$	506
EMEA		206		213
Canada		690		627
Other regions(a)		195		181
Total	$	1,530	$	1,527

(a)  The Asia and CALA regions.

6.   Special charges

During the first quarter of 2007, as part of its continuing efforts to increase competitiveness by improving profitability and overall business performance, Nortel announced a restructuring plan that includes workforce reductions of approximately 2,900 positions and shifting an additional 1,000 positions from higher-cost locations to lower-cost locations. During the year ended December 31, 2007, approximately 150 additional positions were identified and incorporated into the plan with associated costs of approximately $15. Other revisions to the original workforce plan included a change in strategy regarding shared services, resulting in approximately 300 fewer position reductions with associated costs of approximately $18. The revised net positions reduction is therefore expected to be 2,750. The reductions will occur through both voluntary and involuntary terminations. In addition to the workforce reductions, Nortel announced steps to achieve additional cost savings by efficiently managing its various business locations and consolidating real estate requirements. Collectively, these efforts are referred to as the “2007 Restructuring Plan”. Nortel originally estimated the total charges to earnings and cash outlays associated with the 2007 Restructuring Plan would be approximately $390 and $370, respectively, to be incurred over fiscal 2007 and 2008. As a result of higher voluntary terminations and redeployment of employees, Nortel previously revised the total estimated charges to earnings and cash outlays to be approximately $350 and $330, respectively. As of the year ended December 31, 2007, Nortel now expects total charges to earnings and cash outlays to be approximately $340 and $320, respectively. Nortel currently expects that workforce reductions and shifting of positions will account for $260 of the estimated expense, and $80 will relate to real estate consolidation. The workforce reductions are expected to be completed by the end of the first quarter in 2009 and the charges for ongoing lease costs are to be substantially incurred by the end of 2024. Approximately $171 of the total charges relating to the 2007 Restructuring Plan have been incurred in 2007.

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During the second quarter of 2006, in an effort to increase competitiveness by improving profitability and overall business performance, Nortel announced a restructuring plan that included workforce reductions of approximately 1,900 employees (the “2006 Restructuring Plan”). The workforce reductions were expected to include approximately 350 middle management positions throughout Nortel, with the balance of the reductions to occur primarily in the U.S. and Canada and span all of Nortel’s segments. During the third quarter of 2007, Nortel revised the estimated number of workforce reduction, which included both voluntary and involuntary reductions, to 1,750 employees compared to the original estimate of 1,900 employees. The change in the estimated workforce reduction is primarily due to a reduction in the number of affected middle management positions. Nortel originally estimated the total charges to earnings and cash outlays associated with the 2006 Restructuring Plan to be approximately $100. During the third quarter of 2007, Nortel revised the total costs expected down to $91 as a result of the change in the estimated workforce reduction. During the fourth quarter 2007, the program was determined to be substantially complete resulting in a revised total cost of $85. During 2007, Nortel incurred the remaining $17 resulting in total charges of $85 for the 2006 Restructuring Plan. The cost revisions were primarily due to higher voluntary attrition reducing the number of involuntary actions requiring benefits.

During 2004 and 2001, Nortel implemented work plans to streamline operations through workforce reductions and real estate optimization strategies (the “2004 Restructuring Plan” and the “2001 Restructuring Plan”). All of the charges with respect to the workforce reductions have been incurred and the remainder of the charges for ongoing lease costs are to be substantially incurred by the end of 2016 for the 2004 Restructuring Plan and the end of 2013 for the 2001 Restructuring Plan.

During the years ended December 31, 2007, 2006 and 2005, Nortel continued to implement these restructuring work plans. Provision balances recorded for each of the restructuring plans have been summarized below as of December 31, 2007:

			Contract
			Settlement		Plant and
	Workforce		and Lease		Equipment
	Reduction		Costs		Write Downs		Total
2007 Restructuring Plan	$	43	$	25	$	—	$	68
2006 Restructuring Plan		8		—		—		8
2004 Restructuring Plan		—		51		—		51
2001 Restructuring Plan		—		153		—		153
Provision balance as of December 31, 2007(a)	$	51	$	229	$	—	$	280

(a)  As of December 31, 2007 and 2006, the short-term provision balances were $100 and $97, respectively, and the long-term provision balances were $180 and $177, respectively.

The following table summarizes the total special charges incurred for each of Nortel’s restructuring plans:

	2007		2006		2005			Total
Special charges by Restructuring Plan:
2007 Restructuring Plan	$	171	$	—	$	—		$	171
2006 Restructuring Plan		17		68		—			85
2004 Restructuring Plan		9		20		180			209
2001 Restructuring Plan		13		17		(11	)		19
Total	$	210	$	105	$	169		$	484

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Notes to Consolidated Financial Statements — (Continued)

Regular full-time (“RFT”) employee notifications resulting in special charges for all three restructuring plans were as follows:

	Employees (approximate)
	Direct(a)		Indirect(b)		Total
RFT employee notifications by period:
During 2005		61		893		954
During 2006		22		512		534
During 2007		217		1,654		1,871
RFT employee notifications for the three years ended December 31, 2007		300		3,059		3,359

(a)	Direct employees includes employees performing manufacturing, assembly, test and inspection activities associated with the production of Nortel’s products.
(b)	Indirect employees includes employees performing management, sales, marketing, research and development and administrative activities.

2007 Restructuring Plan

Year ended December 31, 2007

For the year ended December 31, 2007, Nortel recorded special charges of $131 including revisions of ($6), related to severance and benefit costs associated with a workforce reduction of approximately 1,500 employees, of which approximately 1,450 were notified of termination during the year ended December 31, 2007. This portion of the workforce reduction was primarily in the U.S., Canada, and EMEA. The real estate initiative referred to above resulted in costs of $32 during the year ended December 31, 2007. Cash expenditures related to real estate initiatives of $7 were incurred during the year ended December 31, 2007. Approximately half of the total restructuring expense related to the 2007 Restructuring Plan was incurred by the end of 2007.

2007 Restructuring Plan — detail:

The following table outlines special charges incurred by segment related to the 2007 Restructuring Plan for the year ended December 31, 2007:

			Contract
			Settlement		Plant and
	Workforce		and Lease		Equipment
	Reduction		Costs		Write Downs		Total
2007 Restructuring Plan
Carrier Networks	$	80	$	20	$	5	$	105
Enterprise Solutions		18		4		1		23
Global Services		21		5		1		27
Metro Ethernet Networks		12		3		1		16
Total special charges for the year ended December 31, 2007	$	131	$	32	$	8	$	171

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Notes to Consolidated Financial Statements — (Continued)

Special charges recorded for the 2007 Restructuring Plan for the year ended December 31, 2007 were as follows:

				Contract
				Settlement			Plant and
	Workforce			and Lease			Equipment
	Reduction			Costs			Write Downs			Total
2007 Restructuring Plan
Provision balance as of January 1, 2007	$	—		$	—		$	—		$	—
Other special charges		137			32			8			177
Revisions to prior accruals		(6	)		—			—			(6	)
Cash drawdowns		(90	)		(7	)		—			(97	)
Non-cash drawdowns		(2	)		—			(8	)		(10	)
Foreign exchange and other adjustments		4			—			—			4
Provision balance as of December 31, 2007	$	43		$	25		$	—		$	68

2006 Restructuring Plan

Year ended December 31, 2007

For the year ended December 31, 2007, Nortel recorded special charges of $17, including revisions of ($8), related to severance and benefit costs associated with a workforce reduction of approximately 934 employees, of which approximately 400 were notified of termination during the year ended December 31, 2007. Nortel incurred total cash costs related to the 2006 Restructuring Plan of approximately $48 during the year ended December 31, 2007. The provision balance for the 2006 Restructuring Plan was drawn down to $8 during the year ended December 31, 2007.

Year ended December 31, 2006

Special charges of $68, including revisions of ($1) related to severance and benefit costs associated with a workforce reduction of approximately 902 employees, of which 534 were notified of termination during the year ended December 31, 2006. The workforce reduction was primarily in the U.S. and Canada and extended across all of Nortel’s segments, with the majority of the reductions occurring in the CN and ES business segments.

2006 Restructuring Plan — detail:

The following table outlines special charges incurred by segment related to the 2006 Restructuring Plan for each of the years ended December 31, 2007 and 2006:

			Plant and
	Workforce		Equipment
	Reduction		Write Downs		Total
2006 Restructuring Plan
Carrier Networks	$	35	$	1	$	36
Enterprise Solutions		14		—		14
Global Services		5		—		5
Metro Ethernet Networks		7		—		7
Other		6		—		6
Total special charges for the year ended December 31, 2006	$	67	$	1	$	68
Carrier Networks	$	6	$	—	$	6
Enterprise Solutions		2		—		2
Global Services		7		—		7
Metro Ethernet Networks		2		—		2
Other		—		—		—
Total special charges for the year ended December 31, 2007	$	17	$	—	$	17

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Notes to Consolidated Financial Statements — (Continued)

Special charges recorded for the 2006 Restructuring Plan from January 1, 2006 to December 31, 2007 were as follows:

				Contract
				Settlement		Plant and
	Workforce			and Lease		Equipment
	Reduction			Costs		Write Downs			Total
2006 Restructuring Plan
Provision balance as of January 1, 2006	$	—		$	—	$	—		$	—
Other special charges		68			—		1			69
Revisions to prior accruals		(1	)		—		—			(1	)
Cash drawdowns		(28	)		—		—			(28	)
Non-cash drawdowns		—			—		(1	)		(1	)
Foreign exchange and other adjustments		(1	)		—		—			(1	)
Provision balance as of December 31, 2006	$	38		$	—	$	—		$	38
Other special charges	$	25		$	—	$	—		$	25
Revisions to prior accruals		(8	)		—		—			(8	)
Cash drawdowns		(48	)		—		—			(48	)
Non-cash drawdowns		(1	)		—		—			(1	)
Foreign exchange and other adjustments		2			—		—			2
Provision balance as of December 31, 2007	$	8		$	—	$	—		$	8

2004 Restructuring Plan

Year ended December 31, 2007

During the year ended December 31, 2007, the provision balance for workforce reduction was drawn down to nil for the 2004 Restructuring Plan. The provision balance for contract settlement and lease costs was drawn down by cash payments of $11 for the 2004 Restructuring Plan during the year ended December 31, 2007. For the 2004 Restructuring Plan, the remaining provision, which is net of approximately $43 in estimated sublease income, is expected to be substantially drawn down by the end of 2016. Tax relief affecting vacated properties in the United Kingdom (“U.K.”) has been repealed effective April 2008 resulting in a charge of $2.

Year ended December 31, 2006

During the year ended December 31, 2006, Nortel recorded revisions of $20 related to prior accruals.

Contract settlement and lease costs included revisions to prior accruals of $8 for the year ended December 31, 2006, and consisted of negotiated settlements to cancel or renegotiate contracts, and net lease charges related to leased facilities (comprised of office space) and leased furniture that were identified as no longer required. These revisions occurred primarily in the U.S. and EMEA and primarily in the CN segment. The lease costs component, net of anticipated sublease income, included costs relating to non-cancelable lease terms from the date leased facilities ceased to be used and any termination penalties. During the year ended December 31, 2006, the provision balance for workforce reduction and contract settlement and lease costs was drawn down by cash payments of $21 and $21, respectively.

Year ended December 31, 2005

Workforce reduction charges of $70 including revisions to prior accruals of $2 were related to severance and benefit costs associated with 954 employees notified of termination during the year ended December 31, 2005. The workforce reduction was primarily in the U.S., Canada and EMEA, and extended across all of Nortel’s segments.

Contract settlement and lease costs of $79 included revisions to prior accruals of $7 and consisted of negotiated settlements to cancel or renegotiate contracts and net lease charges related to leased facilities (comprised of office space) and leased furniture that were identified as no longer required primarily in the U.S. and EMEA and in the CN and ES segments. These lease costs, net of anticipated sublease income, included costs relating to non-cancelable lease terms from the date leased facilities ceased to be used and termination penalties.

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Notes to Consolidated Financial Statements — (Continued)

Plant and equipment charges of $31 were related to current period write downs to fair value less costs to sell owned facilities and plant and manufacturing related equipment.

2004 Restructuring Plan — detail:

The following table outlines special charges incurred by segment for each of the years ended December 31, 2007, 2006 and 2005:

				Contract
				Settlement		Plant and
	Workforce			and Lease		Equipment
	Reduction			Costs		Write Downs		Total
2004 Restructuring Plan
Carrier Networks	$	47		$	53	$	21	$	121
Enterprise Solutions		10			12		5		27
Metro Ethernet Networks		9			10		4		23
Global Services		4			4		1		9
Other		—			—		—		—
Total special charges for the year ended December 31, 2005	$	70		$	79	$	31	$	180
Carrier Networks	$	(1	)	$	4	$	5	$	8
Enterprise Solutions		—			1		2		3
Metro Ethernet Networks		—			3		5		8
Global Services		—			—		1		1
Other		—			—		—		—
Total special charges for the year ended December 31, 2006	$	(1	)	$	8	$	13	$	20
Carrier Networks	$	—		$	3	$	1	$	4
Enterprise Solutions		—			2		—		2
Metro Ethernet Networks		—			1		—		1
Global Services		—			2		—		2
Other		—			—		—		—
Total special charges for the year ended December 31, 2007	$	—		$	8	$	1	$	9

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Notes to Consolidated Financial Statements — (Continued)

Special charges recorded for the 2004 Restructuring Plan from January 1, 2005 to December 31, 2007 were as follows:

				Contract
				Settlement			Plant and
	Workforce			and Lease			Equipment
	Reduction			Costs			Write Downs			Total
2004 Restructuring Plan
Provision balance as of January 1, 2005	$	124		$	—		$	—		$	124
Other special charges		68			72			30			170
Revisions to prior accruals		2			7			1			10
Cash drawdowns		(167	)		(13	)		—			(180	)
Non-cash drawdowns		—			—			(30	)		(30	)
Foreign exchange and other adjustments		(4	)		(4	)		(1	)		(9	)
Provision balance as of December 31, 2005	$	23		$	62		$	—		$	85
Other special charges	$	—		$	—		$	—		$	—
Revisions to prior accruals		(1	)		8			13			20
Cash drawdowns		(21	)		(21	)		—			(42	)
Non-cash drawdowns		—			—			(13	)		(13	)
Foreign exchange and other adjustments		2			4			—			6
Provision balance as of December 31, 2006	$	3		$	53		$	—		$	56
Other special charges	$	—		$	—		$	—		$	—
Revisions to prior accruals		—			8			1			9
Cash drawdowns		(3	)		(11	)		—			(14	)
Non-cash drawdowns		—			—			(1	)		(1	)
Foreign exchange and other adjustments		—			1			—			1
Provision balance as of December 31, 2007	$	—		$	51		$	—		$	51

2001 Restructuring Plan

Year ended December 31, 2007

During the year ended December 31, 2007, the provision balance for the workforce reduction was drawn down to nil for the 2001 Restructuring Plan. The provision balance for contract settlement and lease costs was drawn down by cash payments of $41 during the year ended December 31, 2007. The remaining provision, net of approximately $155 in estimated sublease income, is expected to be substantially drawn down by the end of 2013. Tax relief affecting vacated properties in the U.K. has been repealed effective April 2008 resulting in a charge of $5.

Year ended December 31, 2006

During the year ended December 31, 2006, Nortel recorded revisions of $16 for contract settlements and lease costs.

Year ended December 31, 2005

Revisions of ($3) were recorded during the period related to prior contract settlement and lease costs. The provision balance for contract settlement and lease costs was drawn down by cash payments of $107.

No new plant and equipment charges were incurred during 2005. Revisions of ($3) to prior write downs of assets held for sale related primarily to adjustments to original plans or estimated amounts for certain facility closures.

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Notes to Consolidated Financial Statements — (Continued)

2001 Restructuring Plan — detail:

The following table outlines special charges incurred by segment for each of the years ended December 31, 2007, 2006 and 2005:

				Contract
				Settlement			Plant and
	Workforce			and Lease			Equipment
	Reduction			Costs			Write Downs			Total
2001 Restructuring Plan
Carrier Networks	$	(2	)	$	(1	)	$	2		$	(1	)
Enterprise Solutions		(3	)		(2	)		3			(2	)
Metro Ethernet Networks		—			—			(8	)		(8	)
Global Services		—			—			—			—
Total special charges for the year ended December 31, 2005	$	(5	)	$	(3	)	$	(3	)	$	(11	)
Carrier Networks	$	1		$	10		$	—		$	11
Enterprise Solutions		—			3			—			3
Metro Ethernet Networks		—			2			—			2
Global Services		—			1			—			1
Total special charges for the year ended December 31, 2006	$	1		$	16		$	—		$	17
Carrier Networks	$	(1	)	$	6		$	1		$	6
Enterprise Solutions		(1	)		3			—			2
Metro Ethernet Networks		—			2			—			2
Global Services		—			3			—			3
Total special charges for the year ended December 31, 2007	$	(2	)	$	14		$	1		$	13

Special charges recorded for the 2001 Restructuring Plan from January 1, 2005 to December 31, 2007 were as follows:

				Contract
				Settlement			Plant and
	Workforce			and Lease			Equipment
	Reductions			Costs			Write Downs			Total
2001 Restructuring Plan
Provision balance as of January 1, 2005	$	15		$	324		$	—		$	339
Revisions to prior accruals		(5	)		(3	)		(3	)		(11	)
Cash drawdowns		(6	)		(107	)		—			(113	)
Non-cash drawdowns		—			—			3			3
Foreign exchange and other adjustments		(1	)		(5	)		—			(6	)
Provision balance as of December 31, 2005	$	3		$	209		$	—		$	212
Revisions to prior accruals	$	1		$	16		$	—		$	17
Cash drawdowns		(1	)		(53	)		—			(54	)
Non-cash drawdowns		—			—			—			—
Foreign exchange and other adjustments		(1	)		6			—			5
Provision balance as of December 31, 2006	$	2		$	178		$	—		$	180
Revisions to prior accruals	$	(2	)	$	14		$	1		$	13
Cash drawdowns		—			(41	)		—			(41	)
Non-cash drawdowns		—			—			(1	)		(1	)
Foreign exchange and other adjustments		—			2			—			2
Provision balance as of December 31, 2007	$	—		$	153		$	—		$	153

115

NORTEL NETWORKS LIMITED

Notes to Consolidated Financial Statements — (Continued)

As described in note 5, segment Management EBT does not include special charges. A significant portion of Nortel’s provisions for workforce reductions and contract settlement and lease costs are associated with shared services. These costs have been allocated to the segments in the tables by segment above based generally on headcount.

7.   Income taxes

During the year ended December 31, 2007, Nortel recorded a tax expense of $1,114 on earnings from operations before income taxes, minority interests and equity in net earnings (loss) of associated companies of $387. The tax expense of $1,114 is composed of several significant items, including $1,036 of net valuation allowance increase including an increase of $1,064 in Canada, offset by releases in Europe and Asia, $74 of income taxes on profitable entities in Asia and Europe, including a reduction of Nortel’s deferred tax assets in EMEA, $29 of income taxes relating to tax rate reductions enacted during 2007 in EMEA and Asia, and other taxes of $17 primarily related to taxes on preferred share dividends in Canada. This tax expense is partially offset by a $25 benefit derived from various tax credits, primarily R&D related incentives, and a $17 benefit resulting from true up of prior year tax estimates including a $14 benefit in EMEA as a result of transfer pricing adjustments.

During the year ended December 31, 2006, Nortel recorded a tax expense of $60 on earnings from operations before income taxes, minority interests and equity in net earnings (loss) of associated companies of $42. The tax expense of $60 is largely comprised of $69 of income taxes resulting from a reduction of Nortel’s deferred tax assets in EMEA, $28 of various corporate, minimum and withholding taxes including $15 of income taxes on preferred share dividends in Canada and $13 resulting from true up of prior year tax estimates including a $12 tax expense in EMEA as a result of transfer pricing adjustments. This tax expense is partially offset by $41 benefit derived from various tax credits, primarily R&D related incentives and $19 benefit resulting from valuation allowance reductions in EMEA and Asia.

As of December 31, 2007, Nortel’s net deferred tax assets were $3,323 reflecting temporary differences between the financial reporting and tax treatment of certain current assets and liabilities and non-current assets and liabilities, in addition to the tax benefit of net operating loss carryforwards and tax credit carryforwards.

As a result of having adopted FIN 48, Nortel recognized approximately a $1 increase to reserves for uncertain tax positions. This increase was accounted for as a $1 increase to the January 1, 2007 accumulated deficit. Additionally, Nortel reduced its gross deferred tax assets by approximately $775 including $620 related to capital losses.

Nortel had approximately $992 of total gross unrecognized tax benefits as of the adoption of FIN 48 at January 1, 2007. As of December 31, 2007, Nortel’s gross unrecognized tax benefit was $566. Of this total, $60 represented the amount of unrecognized tax benefits that would favorably affect the effective income tax rate in future periods, if recognized. The decrease since adoption of $426 resulted from a $638 decrease related to settlements, offset by an increase of $86 for new uncertain tax positions arising in 2007, combined with an increase of $126 resulting from changes to measurement of existing uncertain tax positions for changes to foreign exchange rates, tax rates and other measurement criteria. Included in the $638 of settlements is $620 related to an agreed reduction of Nortel’s capital loss carryforward in the U.K., $9 related to resolution of previous uncertain tax position in Korea, and $9 related to statute expiration in Brazil of which $6 has favorably impacted the effective tax rate for 2007.

The following is a tabular reconciliation of Nortel’s change in uncertain tax position under FIN 48:

	Total Gross
	Unrecognized
	Tax Benefits
Balance as at January 1, 2007	$	992
Increases related to current year tax positions		20
Increases related to prior year tax positions		75
Decreases related to prior year tax positions		(9	)
Expiration of statute of limitations for assessment of taxes		(9	)
Settlement of tax positions		(629	)
Foreign exchange		65
Other		61
Balance as at December 31, 2007	$	566

116

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Notes to Consolidated Financial Statements — (Continued)

During the year ended December 31, 2007, Nortel recognized approximately $6 in interest and penalties. Nortel had approximately $26 and $32 accrued for the payment of interest and penalties as of January 1, 2007 and December 31, 2007, respectively. There was a $7 decrease in interest accrual directly related to positions settled during the year ended December 31, 2007, offset by an increase of $13 of interest and penalties accrued on existing positions during the year.

Nortel believes it is reasonably possible that $130 of its gross unrecognized tax benefit will decrease during the twelve months ending December 31, 2008. Of this amount, $57 will result from the potential resolution of current advance pricing negotiations, $61 will result from including unrecognized tax benefits on amended income tax returns, and $7 will result from the potential settlement of an audit exposure in South America. It is anticipated that these potential decreases in unrecognized tax benefits would not materially impact Nortel’s effective tax rate with the exception of the potential $7 settlement of audit exposure.

Nortel is subject to tax examinations in all major taxing jurisdictions in which it operates and currently has examinations open in Canada, the U.S., France, Australia, Germany and Brazil. In addition, Nortel has ongoing audits in other smaller jurisdictions including, but not limited to, Italy, Poland, Colombia, the Philippines and Puerto Rico. Nortel’s 2000 through 2007 tax years remain open in most of these jurisdictions primarily as a result of ongoing negotiations regarding Advance Pricing Arrangements (“APAs”) affecting these periods.

Nortel regularly assesses the status of tax examinations and the potential for adverse outcomes to determine the adequacy of the provision for income and other taxes. Specifically, the tax authorities in Brazil have completed an examination of prior taxation years and have issued assessments in the amount of $86 for the taxation years of 1999 and 2000. In addition, the tax authorities in France issued assessments in respect of the 2001, 2002 and 2003 taxation years. These assessments collectively propose adjustments to increase taxable income of approximately $1,236, additional income tax liabilities of $49 inclusive of interest, as well as certain increases to withholding and other taxes of approximately $81 plus applicable interest and penalties. Nortel withdrew from discussions at the tax auditor level during the first quarter of 2007 and is in the process of entering into Mutual Agreement Procedures with competent authority under the Canada-France tax treaty to settle the dispute. Nortel believes that it has adequately provided for tax adjustments that are more likely than not to be realized as a result of any ongoing or future examinations.

In accordance with SFAS 109, Nortel reviews all available positive and negative evidence to evaluate the recoverability of its deferred tax assets. This includes a review of such evidence as the carry forward periods of the significant tax assets, Nortel’s history of generating taxable income in its significant tax jurisdictions (namely Canada, the U.S., the U.K. and France), Nortel’s cumulative profits or losses in recent years, and Nortel’s projections of earnings in its significant jurisdictions. On a jurisdictional basis, Nortel is in a cumulative loss position in certain of its significant jurisdictions. For these jurisdictions, Nortel continues to maintain a valuation allowance against a portion of its deferred income tax assets. Nortel has concluded that it is more likely than not that the remaining deferred tax assets in these jurisdictions will be realized.

Nortel had previously entered into APAs with the taxation authorities of the U.S. and Canada in connection with its intercompany transfer pricing and cost sharing arrangements between Canada and the U.S. These arrangements expired in 1999 and 2000. In 2002, Nortel filed APA requests with the taxation authorities of the U.S., Canada and the U.K. that applied to the taxation years beginning in 2001. The APA requests are currently under consideration and the tax authorities are in the process of negotiating the terms of the arrangements. Although Nortel continues to monitor the progress, it is not a party to these negotiations. Nortel has applied the transfer pricing methodology proposed in the APA requests in preparing its tax returns and accounts beginning in 2001.

Nortel has requested that the APAs apply to the 2001 through 2005 taxation years. Nortel is also in the initial stages of preparing a new APA request which Nortel anticipates will be filed to include tax years 2007 through at least 2010 following methods generally similar to those under negotiation for 2001 through 2005, with a request for rollback to 2006. Nortel continues to apply the transfer pricing methodology proposed in the APAs to its current year financial statements and has filed its 2006 corporate income tax returns consistent with the methodology described in its new APA request.

The outcome of the APA application requests is uncertain and possible reallocation of losses, as they relate to the APA negotiations, cannot be determined at this time. However, Nortel believes that, more likely than not, the ultimate resolution of these negotiations will not have a material adverse effect on its consolidated financial position, results of operations or

117

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Notes to Consolidated Financial Statements — (Continued)

cash flows. Despite Nortel’s current belief, if this matter is resolved unfavorably, it could have a material adverse effect on Nortel’s consolidated financial position, results of operations and cash flows.

The following is a reconciliation of income taxes, calculated at the Canadian combined federal and provincial income tax rate, to the income tax benefit (expense) included in the consolidated statements of operations for each of the years ended December 31:

	2007			2006			2005
Income taxes at Canadian rates (2007 — 34.0%, 2006 — 34.0%, 2005 — 34.5%)	$	(132	)	$	(14	)	$	41
Difference between Canadian rates and rates applicable to subsidiaries in the U.S. and other jurisdictions		55			1			34
Valuation allowances on tax benefits		(979	)		(109	)		(141	)
Tax effect of tax rate changes		(29	)		—			—
Utilization of losses		—			36			16
Tax benefit of investment tax credits, net of valuation allowance		29			47			39
Adjustments to provisions and reserves		(10	)		(2	)		140
Foreign withholding and other taxes		(23	)		(23	)		(23	)
Corporate minimum taxes		(1	)		(2	)		(14	)
Impact of non-taxable (non-deductible) items and other differences		(24	)		6			(11	)
Income tax benefit (expense)	$	(1,114	)	$	(60	)	$	81
Details of Nortel’s income (loss):
Earnings (loss) from continuing operations before income taxes, minority interests and equity in net loss of associated companies:
Canadian, excluding gain (loss) on sales of businesses and assets	$	(638	)	$	(514	)	$	(91	)
U.S. and other, excluding gain (loss) on sale of businesses and assets		994			350			18
Gain (loss) on sales of businesses and assets		31			206			(47	)
	$	387		$	42		$	(120	)
Income tax benefit (expense):
Canadian, excluding gain (loss) on sales of businesses and assets	$	(1,070	)	$	16		$	10
U.S. and other, excluding gain (loss) on sales of businesses and assets		(44	)		(73	)		71
Gain (loss) on sales of businesses and assets		—			(3	)		—
	$	(1,114	)	$	(60	)	$	81
Income tax benefit (expense):
Current	$	(95	)	$	(29	)	$	(33	)
Deferred		(1,019	)		(31	)		114
Income tax benefit (expense)	$	(1,114	)	$	(60	)	$	81
Details of movement in valuation allowance
Opening valuation allowance	$	(3,413	)	$	(3,184	)	$	(3,517	)
Implementation of FIN 48, net of current period activity		913			—			—
Amounts charged to income tax benefit (expense)		(1,036	)		(73	)		(132	)
Amounts charged to other comprehensive loss		103			66			(58	)
U.K. capital loss settlement, net of FIN 48 implementation		555			—			—
Other (additions) deductions(a)		(271	)		(222	)		523
Closing valuation allowance	$	(3,149	)	$	(3,413	)	$	(3,184	)

(a)  The significant component of other (additions) deductions for 2007 includes an increase of ($213) related to certain operating losses in EMEA for prior years that were added to Nortel’s deferred tax asset, partially offset by the effects of enacted tax rate changes of $108 with the remainder relating to foreign exchange and reclassifications.

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Notes to Consolidated Financial Statements — (Continued)

The following table shows the significant components included in deferred income taxes as of December 31:

	2007			2006
Assets:
Tax benefit of loss carryforwards	$	3,042		$	4,264
Investment tax credits, net of deferred tax liabilities		1,442			1,344
Other tax credits		169			117
Deferred revenue		347			269
Provisions and reserves		299			180
Post-retirement benefits other than pensions		279			288
Plant and equipment		231			215
Pension plan liabilities		309			622
Deferred compensation		93			153
Other		293			165
		6,504			7,617
Valuation allowance		(3,149	)		(3,413	)
		3,355			4,204
Liabilities:
Provisions and reserves		—			104
Plant and equipment		—			35
Unrealized foreign exchange and other		32			23
		32			162
Net deferred income tax assets	$	3,323		$	4,042

Nortel has not provided for foreign withholding taxes or deferred income tax liabilities for temporary differences related to the undistributed earnings of foreign subsidiaries since Nortel does not currently expect to repatriate earnings that would create any material tax consequences. It is not practical to reasonably estimate the amount of additional deferred income tax liabilities or foreign withholding taxes that may be payable should these earnings be distributed in the future.

Nortel is in the process of amending a number of previously filed tax returns as a result of the restatements of our financial statements. While most of the significant unamended tax returns reflected tax losses and Nortel does not expect any material impact to either tax expense or deferred tax liabilities, Nortel’s Canadian provincial tax returns could result in an additional expense, when completed. Additionally, tax credit carryforward amounts of approximately $477 in respect of the 1994 through to 1997 taxation years have expired, and are not included in the deferred tax assets as of December 31, 2007. Nortel can restore a significant amount of the deferred tax assets by executing a certain tax planning strategy that involves filing amended tax returns.

As of December 31, 2007, Nortel had the following net operating and capital loss carryforwards and tax credits which are scheduled to expire in the following years:

	Net
	Operating		Capital		Tax
	Losses		Losses(a)		Credits(b)
2008 - 2010	$	27	$	26	$	533
2011 - 2013		53		10		303
2014 - 2019		28		19		234
2020 - 2027		1,907		—		353
Indefinitely		6,373		1,169		19
	$	8,388	$	1,224	$	1,442

(a)	The capital losses related primarily to the U.K. and may only be used to offset future capital gains. Nortel has recorded a full valuation allowance against this future tax benefit.
(b)	Global investment tax credits of $29, $47 and $39 have been applied against the income tax provision in 2007, 2006 and 2005, respectively. Unused tax credits can be utilized to offset deferred taxes payable primarily in Canada.

119

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Notes to Consolidated Financial Statements — (Continued)

8.   Employee benefit plans

Nortel maintains various retirement programs covering substantially all of its employees, consisting of defined benefit, defined contribution and investment plans.

Nortel has multiple capital accumulation and retirement programs: defined contribution and investment programs available to substantially all of its North American employees; the flexible benefits plan, which includes a group personal pension plan (the “Flexible Benefits Plan”), available to substantially all of its employees in the U.K.; and traditional defined benefit programs that are closed to new entrants. Although these programs represent Nortel’s major retirement programs and may be available to employees in combination and/or as options within a program, Nortel also has smaller pension plan arrangements in other countries.

Nortel also provides other benefits, including post-retirement benefits and post-employment benefits. Employees previously enrolled in the capital accumulation and retirement programs offering post-retirement benefits are eligible for company sponsored post-retirement health care and/or death benefits, depending on age and/or years of service. Substantially all other employees have access to post-retirement benefits by purchasing a Nortel-sponsored retiree health care plan at their own cost.

Nortel’s policy is to fund defined benefit pension and other post-retirement and post-employment benefits based on accepted actuarial methods as permitted by regulatory authorities. The funded amounts reflect actuarial assumptions regarding compensation, interest and other projections. Pension and other post-retirement and post-employment benefit costs reflected in the consolidated statements of operations are based on the projected benefit method of valuation. A measurement date of September 30 is used annually to determine pension and other post-retirement benefit measurements for the pension plans and other post-retirement benefit plans that make up the majority of plan assets and obligations.

In the second quarter of 2006, Nortel announced changes to its North American pension and post-retirement plans effective January 1, 2008. Nortel reallocated employees enrolled in its traditional defined benefit pension plans to defined contribution plans. In addition, Nortel eliminated post-retirement health care benefits for employees who were not age 50 with five years of service as of July 1, 2006.

For the 2007 year end measurement, the favorable impact of increases in discount rates, pension asset returns, and contributions made to the plans more than offset the unfavorable foreign currency exchange impact driven by the strengthening of the British Pound and Canadian Dollar against the U.S. Dollar and other actuarial assumptions. As a result, the unfunded status of Nortel’s defined benefit plans and post-retirement plans decreased from $2,741 as of the measurement date of September 30, 2006 to $1,937 as of the measurement date of September 30, 2007.

In September 2006, the FASB issued SFAS No. 158, which requires an employer to recognize the overfunded or underfunded status of a defined benefit pension and post-retirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. SFAS 158 also requires an employer to measure the funded status of a plan as of the date of its year end statement of financial position, with limited exceptions. Nortel is required to initially recognize the funded status of its defined benefit pension and post-retirement plans and to provide the required disclosures as of December 31, 2006. The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year end statement of financial position is effective for Nortel for its fiscal year ending December 31, 2008.

The effect of the initial adoption of SFAS 158 was as follows:

	Before						After
	Application						Application
	of SFAS 158			Adjustment			of SFAS 158
Intangible assets — net	$	262		$	(21	)	$	241
Other assets — long term	$	677		$	3		$	680
Deferred tax assets — long term	$	3,803		$	60		$	3,863
Payroll and benefit related liabilities — current	$	(865	)	$	228		$	(637	)
Other liabilities — long term	$	(3,716	)	$	(412	)	$	(4,128	)
Accumulated other comprehensive loss	$	466		$	142		$	608

120

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Notes to Consolidated Financial Statements — (Continued)

The following details the unfunded status of the defined benefit plans and post-retirement benefits other than pensions, and the associated amounts recognized in the consolidated balance sheets as of December 31:

	Defined Benefit Plans						Post-Retirement Benefits
	2007			2006			2007			2006
Change in benefit obligation:
Benefit obligation — beginning	$	9,210		$	8,952		$	670		$	883
Service cost		117			130			3			6
Interest cost		479			462			37			42
Plan participants’ contributions		7			6			10			10
Plan amendments		1			—			—			(63	)
Actuarial loss (gain)		(664	)		40			(7	)		(170	)
Special and contractual termination benefits(a)		4			13			—			—
Curtailments(a)		(1	)		(337	)		—			—
Benefits paid		(594	)		(599	)		(46	)		(42	)
Foreign exchange		706			543			78			4
Benefit obligation — ending	$	9,265		$	9,210		$	745		$	670
Change in plan assets:
Fair value of plan assets — beginning	$	7,139		$	6,456		$	—		$	—
Actual return on plan assets		562			551			—			—
Employer contributions		353			323			37			32
Plan participants’ contributions		7			6			10			10
Benefits paid		(594	)		(599	)		(47	)		(42	)
Foreign exchange		606			402			—			—
Fair value of plan assets — ending	$	8,073		$	7,139		$	—		$	—
Funded status of the plans	$	(1,192	)	$	(2,071	)	$	(745	)	$	(670	)
Contributions after measurement date		56			71			11			9
Net amount recognized	$	(1,136	)	$	(2,000	)	$	(734	)	$	(661	)
Amounts recognized in the accompanying
consolidated balance sheets consist of:
Other liabilities — long-term	$	(1,109	)	$	(1,965	)	$	(692	)	$	(625	)
Other liabilities — current		(49	)		(40	)		(42	)		(36	)
Other assets		22			5			—			—
Net amount recognized	$	(1,136	)	$	(2,000	)	$	(734	)	$	(661	)
Amounts recognized in accumulated other comprehensive income (loss) — before tax — consists of:
Prior service cost (credit)	$	12		$	13		$	(80	)	$	(71	)
Net actuarial loss (gain)		816			1,475			16			(2	)
Net amount recognized	$	828		$	1,488		$	(64	)	$	(73	)

(a)  Curtailments and special and contractual termination benefits resulted from the 2006 and 2007 Restructuring Plan activity, as set out in note 6.

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The accumulated benefit obligation for all defined benefit plans was $9,032 and $8,930 at December 31, 2007 and 2006, respectively. The following details selected information for defined benefit plans, all of which have accumulated benefit obligations in excess of the fair value of plan assets as of December 31:

	2007		2006
Projected benefit obligation	$	6,858	$	9,194
Accumulated benefit obligation	$	6,656	$	8,914
Fair value of plan assets	$	5,648	$	7,117

The following details the amounts recognized in other comprehensive income (loss), including foreign currency translation adjustments, for the years ended December 31:

	Defined Benefit Pension Plans						Post-Retirement Benefits
	2007			2006			2007			2006
Prior service cost (credit)	$	1		$	—		$	—		$	—
Amortization of prior service credit (cost)		(4	)		—			14			—
Net actuarial loss (gain)		(750	)		—			(10	)		—
Amortization of net actuarial loss		(105	)		—			—			—
Increase (decrease) in minimum pension liability adjustment included in other comprehensive income (loss)		—			(130	)		—			—
Net recognized in other comprehensive income	$	(858	)	$	(130	)	$	4		$	—

The amounts in accumulated other comprehensive income (loss) that are expected to be recognized as components of pension expense (credit) during the next fiscal year are as follows:

	Defined Benefit		Post-Retirement
	Pension Plan		Benefits			Total
Prior service cost (credit)	$	4	$	(10	)	$	(6	)
Net actuarial loss (gain)	$	41	$	—		$	41

The following details the components of net pension expense, all related to continuing operations, and the underlying assumptions for the defined benefit plans for the years ended December 31:

	2007			2006			2005
Pension expense:
Service cost	$	117		$	130		$	123
Interest cost		479			462			458
Expected return on plan assets		(504	)		(457	)		(405	)
Amortization of prior service cost		4			2			2
Amortization of net losses		105			130			118
Curtailment losses (gains)		(1	)		(6	)		12
Special and contractual termination benefits		4			13			21
Net pension expense	$	204		$	274		$	329
Weighted-average assumptions used to determine benefit obligations as of December 31:
Discount rate		5.8	%		5.1	%		5.1	%
Rate of compensation increase		4.5	%		4.5	%		4.4	%
Weighted-average assumptions used to determine net pension expense for years ended December 31:
Discount rate		5.1	%		5.1	%		5.7	%
Expected rate of return on plan assets		7.1	%		7.2	%		7.4	%
Rate of compensation increase		4.5	%		4.4	%		4.5	%

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The following details the net cost components, all related to continuing operations, and underlying assumptions of post-retirement benefits other than pensions for the years ended December 31:

	2007			2006			2005
Post-retirement benefit cost:
Service cost	$	3		$	6		$	8
Interest cost		37			42			44
Amortization of prior service cost		(14	)		(5	)		(4	)
Amortization of net losses (gains)		—			1			3
Curtailment losses (gains)		—			(29	)		—
Net post-retirement benefit cost	$	26		$	15		$	51
Weighted-average assumptions used to determine benefit obligations as of December 31:
Discount rate		5.8	%		5.4	%		5.4	%
Weighted-average assumptions used to determine net post-retirement benefit cost for years ended December 31:
Discount rate		5.4	%		5.4	%		5.9	%
Weighted-average health care cost trend rate		6.6	%		8.0	%		7.8	%
Weighted-average ultimate health care cost trend rate		4.7	%		4.8	%		4.8	%

Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. A one percentage point change in assumed health care cost trend rates would have the following effects for the years ended December 31:

	2007			2006			2005
Effect on aggregate of service and interest costs
1% increase	$	3		$	4		$	5
1% decrease	$	(2	)	$	(3	)	$	(4	)
Effect on accumulated post-retirement benefit obligations
1% increase	$	43		$	43		$	86
1% decrease	$	(36	)	$	(36	)	$	(70	)

As of December 31, 2007, the expected benefit payments for the next ten years for the defined benefit plans and the post-retirement benefits other than pensions are as follows, along with the expected reimbursement amounts related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “MPDIM Act”):

	Defined Benefit		Post-Retirement		Expected MPDIM Act Subsidy
	Plans		Benefit Plans		(Post-Retirement Benefit Plans)
2008	$	540	$	53	$	2
2009	$	543	$	53	$	2
2010	$	552	$	54	$	2
2011	$	564	$	55	$	3
2012	$	579	$	55	$	3
2013-2017	$	3,076	$	273	$	20

The target investment allocation percentages for plan assets and the year end percentages based on actual asset balances of the defined benefit plans as of December 31 are as follows:

	2007						2006
	Target			Actual			Target			Actual
Debt instruments		46	%		44	%		43	%		43	%
Equity securities		52	%		53	%		56	%		54	%
Other		2	%		3	%		1	%		3	%

The primary investment performance objective is to obtain competitive rates of return on investments at or above their assigned benchmarks while minimizing risk and volatility by maintaining an appropriately diversified portfolio. The

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benchmarks selected are industry-standard and widely-accepted indices. The defined benefit plans maintain a long-term perspective in regard to investment philosophy and return expectations which are reflective of the fact that the liabilities of the defined benefit plans mature over an extended period of time. The investments have risk characteristics consistent with underlying defined benefit plan demographics and liquidity requirements, and are consistent and compliant with all regulatory standards.

The primary method of managing risk within the portfolio is through diversification among and within asset categories, and through the utilization of a wide array of active and passive investment managers. Broadly, the assets are allocated between debt and equity instruments. Included within the debt instruments are government and corporate fixed income securities, money market securities, mortgage-backed securities and inflation indexed securities. Generally, these debt instruments are considered investment grade. Included in equity securities are developed and emerging market stocks of companies at a variety of capitalization levels. The securities are predominantly publicly traded. The amount of employer and related-party securities that the defined benefit plans may hold is governed by the statutory limitations of the jurisdictions of the applicable plans. Included in equity securities of the defined benefit plans are Nortel Networks Corporation common shares, held directly or through pooled funds, with an aggregate market value of $2 (0.02% of total plan assets) and $4 (0.06% of total plan assets) as of December 31, 2007 and 2006, respectively.

As a policy, assets within the defined benefit plans are reviewed to the target allocations at least on a quarterly basis and adjustments made as appropriate. The plans commission periodic asset and liability studies to determine the optimal allocation of the portfolio’s assets. These studies consider a variety of the plan characteristics, including membership, benefits and liquidity needs, and utilize mean-variance analysis of historic and projected investment returns to develop a range of acceptable asset mixes among a variety of asset classes.

To develop the expected long-term rate of return on assets assumption, Nortel considered the weighted-average historical returns and the future expectations for returns for each asset class.

Nortel expects to make cash contributions of approximately $270 in 2008 to the defined benefit plans and approximately $50 in 2008 to the post-retirement benefit plans.

Under the terms of certain defined contribution plans, eligible employees may contribute a portion of their compensation to an investment plan. Based on the specific program in which the employee is enrolled, Nortel matches a percentage of the employee’s contributions up to a certain limit. In certain other defined contribution plans, Nortel contributes a fixed percentage of employees’ eligible earnings to a defined contribution plan arrangement. The cost of these investment plans was $97, $99 and $87 for the years ended December 31, 2007, 2006 and 2005, respectively.

9.   Acquisitions, divestitures and closures

Acquisitions

Tasman Networks Inc.

On February 24, 2006, Nortel completed the acquisition of Tasman Networks, an established communication equipment provider that sells secure, high performance, wide area network IP routers and converged service routers, for approximately $99 in cash and assumed liabilities. The acquisition of Tasman Networks gives Nortel access to low-latency technology to handle packets in secure enterprise environments.

Under the acquisition agreement, Nortel acquired 100% of the common and preferred shares of Tasman Networks and the working capital, property and equipment, contractual rights, licenses, operating leases, intellectual property and employees related to Tasman Networks’ business. The purchase price allocation of $99 includes approximately $58 of intangible assets acquired and $2 in net liabilities assumed, with the remaining $43 (including $6 of acquisition costs) allocated to goodwill. The allocation of the purchase price is based on management’s valuation of the assets acquired and liabilities assumed.

In connection with the acquisition, Nortel acquired technology that has been incorporated into certain of its existing router products. Tasman Networks’ existing technology was valued to reflect the present value of the operating cash flows expected to be generated by the existing software technology after taking into account the cost to realize revenue from the technology, the relative risks of the product, and an appropriate discount rate to reflect the time value of invested capital.

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The fair value of the existing technology was determined to be $35. Tasman Networks had a new router product under development at the date of acquisition. Based on the stage of development of the product at the time of the valuation, and the expected applications of the router, Nortel valued this technology under development separately at $16 based on its expected cash flows, taking into account the cost to realize the revenue from the technology, the relative risk of the product and an appropriate discount rate to reflect the time value of invested capital. The fair value of the non-contractual and contractual customer relationships was similarly determined to be $7.

Certain other intangibles, such as non-competition agreements, trade names, patents and copyrights, were considered and concluded to not exist. None of the goodwill, intangibles or in-process research and development amounts is expected to be deductible for tax purposes.

The following table sets out the purchase price allocation information for Tasman Networks:

Purchase price	$	99
Assets acquired:
Other assets — net	$	6
Intangible assets — net		58
Goodwill		43
		107
Less liabilities assumed:
Trade and other accounts payable		3
Other accrued liabilities		5
		8
Fair value of net assets acquired	$	99

The fair values and amortization periods of the intangible assets acquired are as follows:

				Amortization
	Fair Value			Period (Years)
Existing router technology	$	19			10
Access router technology		16			7
In-process research and development (“IPR&D”)		16	(a)		—
Non-contractual customer relationships		7			8
Total intangible assets	$	58

(a)  Nortel expensed $16 for in-process research and development in the second quarter of 2006.

The results of operations of Tasman Networks have been consolidated into Nortel’s results of operations as of February 24, 2006, and were not material to Nortel’s consolidated results of operations.

LG-Nortel Co. Ltd. business venture

On November 3, 2005, Nortel entered into a business venture with LG Electronics Inc. (“LGE”), named LG-Nortel Co. Ltd. (“LG-Nortel”). Certain assets of Nortel’s South Korean distribution and services business were combined with the service business and certain assets of LGE’s telecommunications infrastructure business. In exchange for a cash contribution of $155 paid to LGE, Nortel received 50% plus one share of the equity in LG-Nortel. LGE received 50% less one share of the equity in the business venture. The purpose of the business venture is to create a world-class telecommunications systems and related solutions supplier that leverages the product portfolio, quality, reputation, and global brands of Nortel and LGE. The business venture focuses primarily on providing solutions to the Korean carrier and enterprise market as well as leveraging LGE’s technologies and products on a global scale. In conjunction with the formation of the business venture, certain related party agreements were entered into between LG-Nortel and Nortel, including those for product distribution, trademark licences and R&D services. As a result of the finalization of the purchase price adjustment, a net deferred tax liability of $8 was recognized due to differences between the adjusted value of the assets acquired and liabilities assumed and LG-Nortel’s tax basis in those assets and liabilities.

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The following table sets out the purchase price allocation information for LG-Nortel as at December 31, 2006:

Purchase price	$	155
Assets acquired:
Accounts receivable — net	$	165
Other current assets		26
Investments		14
Plant and equipment — net		17
Intangible assets — net		126
Deferred income taxes — net		2
Other assets — net		24
		374
Less liabilities assumed:
Trade and other accounts payable		25
Payroll and benefit-related liabilities		12
Other accrued liabilities		11
Deferred income taxes — net		10
Other liabilities		61
Minority interest		100
		219
Fair value of net assets acquired	$	155

The estimated fair values and amortization periods of other intangible assets are as follows:

			Amortization
	Fair Value		Period (Years)
Customer relationships	$	56		5 to 9
Patents		29		10
Existing technologies		11		2 to 7
Trademark licensing agreement		9		5
Goodwill		8		—
IPR&D		5		1
Other		8		5
Total intangible assets	$	126

Intangible assets acquired by Nortel relating to the business venture consisted of existing technology and related rights, customer contracts and relationships, in-process research and development, patents and trademark licensing agreements. Upon valuation of this acquisition, existing technology and customer relationships have been valued at $11 and $56, respectively, under the income approach which reflects the present value of the operating cash flows generated after taking into account the cost to realize the revenue from the product, the relative risks of the product, and an appropriate discount rate to reflect the time value of invested capital. In-process research and development, which comprised a total of six projects expected to continue at the acquisition date was valued under the cost approach at $5. Patents were valued at an appraisal value of $29 under the income approach. There were two trademark licensing agreements granted to LG-Nortel: one from Nortel which allows the worldwide non-exclusive use of the ‘Nortel’ trademark and the other from LGE which allows the worldwide non-exclusive use of the ‘LG’ trademark. The expected value of the benefits of selling products under the LG-Nortel trademark was established at $9 using the differential licensing fee approach. This difference in licensing rates was tax-affected and the after-tax cash flows were discounted at an appropriate rate.

Separately, LGE is entitled to payments from Nortel over a two-year period based on the achievement by LG-Nortel of certain business goals related to the 2006 and 2007 fiscal years, of up to a maximum of $80. Nortel and LGE agreed that the payment related to the 2006 fiscal year was $29 and this amount was recognized and paid in 2007. Nortel has accrued $51 with respect to the balance of its obligations. As at December 31, 2007, this resulted in additional goodwill of $18.

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The consolidated financial statements of Nortel include LG-Nortel’s operating results from the date of Nortel’s acquisition of its interest in the business venture. Previously, Nortel disclosed LG-Nortel as a VIE under FIN 46R. This initial determination was based on a preliminary assessment that the manufacturing agreement between LG-Nortel and LGE contained below-market pricing, which was considered to be additional subordinated financial support under FIN 46R. Upon finalization of the valuations performed during 2006, it was determined that the pricing terms in this agreement are at fair value. Therefore, LG-Nortel is not a VIE, and accordingly is being consolidated under Accounting Research Bulletin No. 51, “Consolidated Financial Statements”, based on Nortel’s voting interests.

Nortel Government Solutions Incorporated

On June 3, 2005, Nortel Networks Inc. (“NNI”), an indirect subsidiary of Nortel, indirectly acquired approximately 26,693,725 shares of NGS, representing approximately 95.6% of the outstanding shares of common stock of NGS, through a cash tender offer at a price of $15.50 per share. The aggregate cash consideration in connection with the acquisition of NGS (including $33 paid on June 9, 2005, with respect to stock options) was approximately $449, including estimated costs of acquisition of $8. Nortel acquired more than 90% of the outstanding shares of NGS pursuant to the tender offer. Any shares that were not purchased in the tender offer ceased to be outstanding and were converted into the right to receive cash in the amount of $15.50 per share.

NGS provides professional technology services that enable government entities to use the Internet to enhance productivity and improve services to the public. NGS’s primary customers are executive agencies and departments of the U.S. Federal Government, the U.S. Federal Judiciary and prime contractors to the U.S. government. Nortel expects the NGS acquisition to allow Nortel to pursue opportunities in areas that complement Nortel’s existing products and to increase its competitiveness in the government market. In order to comply with the U.S. National Industrial Security Program and to mitigate foreign ownership, control or influence, voting control of NGS must be vested in citizens of the U.S. Accordingly, proxy holders for Nortel’s shares of NGS have been appointed and approved by the U.S. Defense Security Service. In accordance with a proxy agreement executed in July 2005, the proxy holders exercise all prerogatives of ownership with complete freedom to act independently and have assumed full responsibility for the voting stock. Notwithstanding, for accounting purposes, Nortel has determined that NGS is a VIE and Nortel is the primary beneficiary (see note 14).

This acquisition was accounted for using the purchase method. Nortel has recorded approximately $278 of non-amortizable intangible assets associated with the acquisition of NGS, which assets consist solely of goodwill. The goodwill of NGS is not deductible for tax purposes, and has been allocated to Nortel’s “Other” and “Enterprise Solutions” reportable segments.

The allocation of the purchase price presented below is based on management’s best estimate of the relative values of the assets acquired and liabilities assumed in the NGS acquisition.

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The following table sets out the purchase price allocation information for the NGS acquisition:

Purchase price	$	449
Assets acquired:
Cash and cash equivalents	$	26
Accounts receivable — net		65
Other current assets		34
Investments		8
Plant and equipment — net		32
Intangible assets — net		84
Goodwill		278
Other assets		5
		532
Less liabilities assumed:
Trade and other accounts payable		6
Payroll and benefit-related liabilities		24
Other accrued liabilities		17
Long-term debt		33
Other liabilities		3
		83
Fair value of net assets acquired	$	449

As a result of the acquisition of NGS, a net deferred tax liability of $23 was recognized due to differences between the estimated fair value of assets acquired and liabilities assumed, and NGS’s tax basis in those assets and liabilities. This deferred tax liability is fully offset, however, by an adjustment to Nortel’s deferred tax valuation allowance because Nortel will be able to offset the tax liability by drawing down previously unrecognized loss carryforwards.

The estimated fair values and amortization periods of other intangible assets are as follows:

			Amortization
	Fair Value		Period (Years)
Trade name	$	3		1
Software licenses		1		5
Customer contracts and relationships		80		10
Total other intangible assets	$	84

The consolidated financial statements of Nortel include NGS’s operating results from the date of the acquisition. The following unaudited pro forma information presents a summary of consolidated results of operations of Nortel and NGS as if the acquisition had occurred on January 1, 2005, with pro forma adjustments to give effect to amortization of intangible assets and certain other adjustments:

	2005
Revenues	$	10,618
Net earnings (loss)	$	(56	)

Divestitures

UMTS access business divestiture

On December 31, 2006, Nortel completed the sale of substantially all its assets and liabilities related to its UMTS access products and services to Alcatel-Lucent. The sale, structured as an asset and share transaction, resulted in gross proceeds of $320, adjusted primarily for warranty liabilities, for net proceeds of $306 all of which were received in the fourth quarter of 2006. In addition, Nortel provided Alcatel-Lucent with a $23 promissory note in lieu of transferring working

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capital, which was paid in the first quarter of 2007. The proceeds are subject to post-closing adjustments for the finalization of the book value of the assets transferred and liabilities assumed by Alcatel-Lucent which are not expected to be significant.

As a result of the sale, Nortel transferred $65 in net assets comprised primarily of fixed assets and inventory, substantially all existing UMTS access contracts, intellectual property, and approximately 1,700 employees attributed to the UMTS access products. Additionally, Nortel wrote off net assets of $18 related primarily to unbilled receivables, goodwill, prepaid assets and deferred revenue and costs, and additional liabilities of $26 were recorded, relating to transaction costs payable to Alcatel-Lucent. Nortel retained its existing LG-Nortel UMTS access customer contracts and will source the UMTS access products and services from Alcatel-Lucent.

Nortel and Alcatel-Lucent have also agreed to provide certain transitional services to each other in order to facilitate the various aspects of the divesture. Nortel has committed to provide R&D, manufacturing and real estate transition services in addition to providing Alcatel-Lucent the right to use all proprietary intellectual property used in Nortel UMTS access products and services which are also common to other Nortel products and services. In addition, Alcatel-Lucent has options to extend its license rights to other Nortel Long Term Evolution related and GSM technology for consideration of $50 and $15, respectively. These options expire on December 31, 2008 and December 31, 2010, respectively.

Nortel recorded a net gain of $166 and deferred income of $5 primarily due to contingent liabilities related to a loss-sharing arrangement based on the 2007 operating results for Alcatel-Lucent.

As a result of post-closing adjustments during 2007, Nortel recorded an adjustment to the net assets transferred of $3 and realized an additional net gain of $10.

Manufacturing operations

In 2004, Nortel entered into an agreement with Flextronics for the divestiture of substantially all of Nortel’s remaining manufacturing operations and related activities, including certain product integration, testing, repair operations, supply chain management, third party logistics operations and design assets. Nortel and Flextronics have also entered into a four-year supply agreement for manufacturing services (whereby after completion of the transaction, Flextronics manages in excess of $2,000 of Nortel’s annual cost of revenues) and a three-year supply agreement for design services. Commencing in the fourth quarter of 2004 and throughout 2005, Nortel completed the transfer to Flextronics of certain of Nortel’s optical design activities in Ottawa, Canada and Monkstown, Northern Ireland and its manufacturing activities in Montreal and Calgary in Canada and Chateaudun in France.

The sale agreement with Flextronics resulted in the transfer of approximately 2,100 employees to Flextronics. Nortel has received $599 of gross proceeds as of December 31, 2007. On October 18, 2006, Nortel signed amendments to various agreements with Flextronics, including the sale agreement, and the supply and design services agreements to restructure Nortel’s purchase commitments and increase Nortel’s obligation to reimburse Flextronics for certain costs associated with the transaction. Nortel received the final payment of $79 from Flextronics during 2006, which has been offset by cash outflows attributable to direct transaction costs and other costs associated with the transaction.

As of December 31, 2007, Nortel had transferred approximately $404 of inventory and equipment to Flextronics relating to the transfer of the optical design activities in Monkstown, Northern Ireland and Ottawa, Canada and the manufacturing activities in Montreal and Calgary in Canada and Chateaudun, France. Flextronics had the ability to exercise its unilateral rights to return certain inventory and equipment to Nortel after the expiration of a specified period following each respective transfer date of the activities at the aforementioned facilities (up to fifteen months). Flextronics has exercised all of its rights with respect to the inventory and equipment as at December 31, 2007, and as a result, Nortel retained $10 of inventory and equipment. Nortel has recognized a gain of $21 on this transaction as of December 31, 2007 as a result of the expiration and satisfaction of the rights held by Flextronics described above.

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10.   Long-term debt

Long-term debt

The following table shows the components of long-term debt as of December 31:

	2007		2006
LIBOR + 4.25% Floating Rate Notes due July 15, 2011	$	1,000	$	1,000
10.125% Fixed Rate Notes due July 15, 2013		550		550
10.75% Fixed Rate Notes due July 15, 2016		450		450
6.875% Notes due September 1, 2023		200		200
7.875% Notes due June 15, 2026(a)		150		150
Other long-term debt with various repayment terms and a weighted-average interest rate of 7.17% for 2007 and 4.77% for 2006		4		5
Fair value adjustment attributable to hedged debt obligations		20		(1	)
Obligation associated with a consolidated VIE with interest rate of 4.60% for 2007 and 3.7% for 2006		92		87
Obligations under capital leases and sale leasebacks with a weighted-average interest rate of 9.16% for 2007 and 8.48% for 2006		223		223
		2,689		2,664
Less: Long-term debt due within one year		23		18
Long-term debt	$	2,666	$	2,646

(a) Notes were issued by Nortel Networks Capital Corporation, an indirect wholly owned finance subsidiary of NNL, and are fully and unconditionally guaranteed by NNL.

As of December 31, 2007, the amounts of long-term debt payable for each of the years ending December 31 consisted of:

2008	$	23
2009		23
2010		24
2011		1,024
2012		26
Thereafter		1,569	(a)
Total long-term debt payable	$	2,689

(a) Includes $70 of long-term debt related to sale lease-backs with continuing involvement. See note 13 for additional information.

Credit facility

On February 14, 2006, Nortel’s indirect subsidiary, NNI, entered into a one-year credit facility in the aggregate principal amount of $1,300 (the “2006 Credit Facility”). This facility consisted of (i) a senior secured one-year term loan facility in the amount of $850, and (ii) a senior unsecured one-year term loan facility in the amount of $450. On July 5, 2006, the total amount owing under the 2006 Credit Facility was repaid using the net proceeds from the issuance of the July 2006 Notes (as defined below) and the facility, the guarantee agreement and all of the collateral arrangements securing it and Nortel’s and NNC’s public debt were terminated.

Senior notes offering

On July 5, 2006, Nortel completed an offering of $2,000 aggregate principal amount of senior notes (the “July 2006 Notes”) to qualified institutional buyers pursuant to Rule 144A and to persons outside the U.S. pursuant to Regulation S under the U.S. Securities Act of 1933, as amended (the “Securities Act”). The July 2006 Notes consist of $450 of senior fixed rate notes due 2016 (the “2016 Fixed Rate Notes”), $550 of senior fixed rate notes due 2013 (the “2013 Fixed Rate Notes”) and $1,000 of floating rate senior notes due 2011 (the “ 2011 Floating Rate Notes”). The 2016 Fixed Rate Notes bear interest at a rate per annum of 10.75% payable semi-annually, the 2013 Fixed Rate Notes bear interest at a rate per

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annum of 10.125%, payable semi-annually and the 2011 Floating Rate Notes bear interest at a rate per annum, reset quarterly, equal to the reserve-adjusted LIBOR plus 4.25%, payable quarterly. As of December 31, 2007, the 2011 Floating Rate Notes had an interest rate of 9.4925% per annum.

Nortel may redeem all or a portion of the 2016 Fixed Rate Notes at any time on or after July 15, 2011, at specified redemption prices ranging from 105.375% to 100% of the principal amount thereof plus accrued and unpaid interest. In addition, Nortel may redeem all or a portion of the 2013 Fixed Rate Notes at any time and, prior to July 15, 2011, all or a portion of the 2016 Fixed Rates Notes, at a price equal to 100% of the principal amount thereof plus a “make-whole” premium. On or prior to July 15, 2009, Nortel may also redeem up to 35% of the original aggregate principal amount of any series of July 2006 Notes with proceeds of certain equity offerings at a redemption price equal to (i) in the case of the 2016 Fixed Rate Notes, 110.750% of the principal amount thereof, (ii) in the case of the 2013 Fixed Rate Notes, 110.125% of the principal amount thereof and (iii) in the case of the 2011 Floating Rate Notes, 100% of the principal amount so redeemed plus a premium equal to the interest rate per annum of such 2011 Floating Rate Notes applicable on the date of redemption, in each case plus accrued and unpaid interest, if any. In the event of certain changes in applicable withholding taxes, Nortel may redeem each series of July 2006 Notes in whole, but not in part.

Upon a change of control, Nortel is required within 30 days to make an offer to purchase the July 2006 Notes then outstanding at a purchase price equal to 101% of the principal amount of the July 2006 Notes plus accrued and unpaid interest. A “change of control” is defined in the indenture governing the July 2006 Notes (the “Note Indenture”) as, among other things, the filing of a Schedule 13D or Schedule TO under the Securities Exchange Act of 1934, as amended, by any person or group unaffiliated with Nortel disclosing that such person or group has become the beneficial owner of a majority of the voting stock of NNC or has the power to elect a majority of the members of the Board of Directors of NNC, or NNC ceasing to be the beneficial owner of 100% of the voting power of the common stock of Nortel.

In connection with the issuance of the July 2006 Notes, Nortel, NNC and NNI entered into a registration rights agreement with the initial purchasers of the July 2006 Notes and are obligated under that agreement to use their reasonable best efforts to file with the SEC, and cause to become effective, a registration statement relating to the exchange of the July 2006 Notes within certain time periods, failing which holders of the July 2006 Notes would have been entitled to payment of certain additional interest. Nortel filed a registration statement on Form S-4 with the SEC on September 11, 2007, which was declared effective on December 21, 2007.

The Note Indenture and related guarantees contain various covenants that limit Nortel’s and NNC’s ability to (i) create liens (other than certain permitted liens) against assets of Nortel, NNC and its restricted subsidiaries to secure funded debt in excess of certain permitted amounts without equally and ratably securing the July 2006 Notes and (ii) merge, consolidate and sell or otherwise dispose of substantially all of the assets of any of Nortel, NNC and, so long as NNI is a guarantor of the July 2006 Notes, NNI unless the surviving entity or purchaser of such assets assumes the obligations of Nortel, NNC or NNI, as the case may be, under the July 2006 Notes and related guarantees and no default exists under the Note Indenture after giving effect to such merger, consolidation or sale.

In addition, the Note Indenture and related guarantees contain covenants that, at any time that the July 2006 Notes do not have an investment grade rating, limit Nortel’s ability to incur, assume, issue or guarantee additional funded debt (including capital leases) and certain types of preferred stock, or repurchase, redeem, retire or pay any dividends in respect of any Nortel Networks Corporation common shares or Nortel’s preferred stock, in excess of certain permitted amounts or incur debt that is subordinated to any other debt of Nortel, NNC or NNI, without having that new debt be expressly subordinated to the July 2006 Notes and the guarantees. At any time that the July 2006 Notes do not have an investment grade rating, Nortel’s ability to incur additional indebtedness is tied to an Adjusted EBITDA to fixed charges ratio of at least 2.00 to 1.00, except that Nortel may incur certain debt and make certain restricted payments without regard to the ratio up to certain permitted amounts. “Adjusted EBITDA” is generally defined as consolidated earnings before interest, taxes, depreciation and amortization, adjusted for certain restructuring charges and other one-time charges and gains that will be excluded from the calculation of Adjusted EBITDA. “Fixed charges” is defined in the Note Indenture as consolidated interest expense plus dividends paid on certain preferred stock.

Following the issuance of the July 2006 Notes, Nortel entered into interest rate swaps to convert the fixed interest rate exposure under the 2016 Fixed Rate Notes and the 2013 Fixed Rate Notes to a floating rate (see note 11 for further details).

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Nortel used $1,300 of the net proceeds from the issuance of the July 2006 Notes to repay the 2006 Credit Facility and used the remainder for general corporate purposes, including to replenish cash outflows of $150 used to repay at maturity the outstanding aggregate principal amount of the 7.40% notes due June 15, 2006, and $575, plus accrued interest, deposited into escrow on June 1, 2006, pursuant to NNC’s Global Class Action Settlement (as defined in note 19).

11.   Financial instruments and hedging activities

Risk management

Nortel’s net earnings (loss) and cash flows may be negatively impacted by fluctuation in interest rates, foreign exchange rates and equity prices. To effectively manage these market risks, Nortel enters into foreign currency forwards, foreign currency swaps, foreign currency option contracts, interest rate swaps and equity forward contracts. Nortel does not hold or issue derivative financial instruments for trading purposes.

Foreign currency risk

Nortel enters into option contracts to limit its exposure to exchange fluctuations on future revenue or expenditure streams expected to occur within the next twelve months, and forward contracts, which are denominated in various currencies, to limit its exposure to exchange fluctuations on existing assets and liabilities and on future revenue or expenditure streams expected to occur within the next twelve months. If option and forward contracts meet specified criteria they are designated as cash flow hedges to hedge currency exposures in future revenue or expenditure streams. Option and forward contracts that do not meet the criteria for hedge accounting are also used to economically hedge the impact of fluctuations in exchange rates on existing assets and liabilities and on future revenue and expenditure streams.

As at December 31, 2007, no cash flow hedges have met the criteria for hedge accounting and therefore are considered non-designated hedging strategies in accordance with SFAS 133.

The following table provides the total notional amounts of the purchase and sale of currency options and forward contracts as of December 31:

	2007(a)							2006(b)
					Net							Net
	Buy		Sell		Buy / (Sell)			Buy		Sell		Buy / (Sell)
Options(c):
Canadian Dollar	$	27	$	27	$	0		$	0	$	0	$	0
Forwards(c):
Canadian Dollar	$	130	$	398	$	(268	)	$	395	$	427	$	(32	)
British Pound		£745		£262		£483			£626		£24		£602
Euro	22€		5€		17€			22€		44€		(22€		)
Other (U.S. Dollar)	$	0	$	14	$	(14	)	$	0	$	33	$	(33	)

(a)	All notional amounts of option and forward contracts will mature no later than the end of 2008.
(b)	All notional amounts of option and forward contracts matured no later than the end of 2007.
(c)	All amounts are stated in source currency.

Nortel did not execute any foreign currency swaps in 2007 and had no such agreements in place as of December 31, 2007.

Interest rate risk

Nortel enters into interest rate swap contracts to minimize the impact of interest rate fluctuations on the fair value of its long-term debt. These contracts swap fixed interest rate payments for floating rate payments and certain swaps are designated as fair value hedges. The fair value adjustment related to the effective portion of interest rate swaps and the corresponding fair value adjustment to the hedged debt obligation included within long-term debt are recorded to interest expense within the consolidated statements of operations. These swap contracts have remaining terms to maturity of up to nine years.

A portion of Nortel’s long-term debt is subject to changes in fair value resulting from changes in market interest rates. Nortel has hedged a portion of this exposure to interest rate volatility using fixed for floating interest rate swaps. On July 5, 2006, Nortel entered into interest rate swaps to convert the fixed interest rate exposure under the 2016 Fixed Rate

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Notes and the 2013 Fixed Rate Notes to a floating rate equal to LIBOR plus 4.9% and LIBOR plus 4.4%, respectively. Nortel entered into these interest rate swaps to minimize the impact of interest rate volatility on the consolidated statements of operations. Nortel is assessing hedge effectiveness in accordance with SFAS 133. Nortel has concluded that this hedging strategy is effective at offsetting changes in the fair value of the 2013 Fixed Rate Notes. The interest rate swap hedging the 2016 Fixed Rate Notes has not met the hedge effectiveness criteria and remained a non-designated hedging strategy as of December 31, 2007. The cumulative impact to net earnings was a $16 gain for the year ended December 31, 2007.

The following table provides a summary of interest rate swap contracts and their aggregated weighted-average rates as of December 31:

	2007			2006
Interest rate swap contracts:
Received-fixed swaps — notional amount	$	1,000		$	1,000
Average fixed rate received		10.4	%		10.4	%
Average floating rate paid		8.9	%		10.0	%

Equity price risk

From time to time, NNC enters into equity forward contracts to hedge the variability in future cash flows associated with certain compensation obligations that vary based on future NNC common share prices. As of December 31, 2007, NNC did not have any equity forward contracts outstanding.

Fair value

The estimated fair values of Nortel’s outstanding financial instruments approximate amounts at which they could be exchanged in a current transaction between willing parties. The fair values are based on estimates using present value and other valuation techniques that are significantly affected by the assumptions used concerning the amount and timing of estimated future cash flows and discount rates that reflect varying degrees of risk. Specifically, the fair value of interest rate swaps and forward contracts reflected the present value of the expected future cash flows if settlement had taken place on December 31, 2007 and 2006; the fair value of option contracts reflected the cash flows due to or by Nortel if settlement had taken place on December 31, 2007 and 2006; and the fair value of long-term debt instruments reflected a current yield valuation based on observed market prices as of December 31, 2007 and 2006. Accordingly, the fair value estimates are not necessarily indicative of the amounts that Nortel could potentially realize in a current market exchange.

The following table provides the carrying amounts and fair values for financial assets and liabilities for which fair value differed from the carrying amount and fair values recorded for derivative financial instruments in accordance with SFAS 133 as of December 31:

	2007						2006
	Carrying			Fair			Carrying		Fair
	Amount			Value			Amount		Value
Financial liabilities:
Long-term debt due within one year	$	23		$	23		$	18	$	17
Long-term debt	$	2,666		$	2,603		$	2,646	$	2,745
Derivative financial instruments net asset (liability) position:
Interest rate swap contracts(a)	$	61		$	61		$	23	$	23
Forward and option contracts(b)	$	(17	)	$	(17	)	$	26	$	26
Other
Warrants	$	5		$	5		$	11	$	11

(a)	Recorded in other assets.
(b)	Comprised of other assets of $14 and other liabilities of $31 as of December 31, 2007, and other assets of $41 and other liabilities of $15 as of December 31, 2006.

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Concentrations of risk

Nortel from time to time uses derivatives (“financial instruments”) to limit exposures related to foreign currency, interest rate and equity price risk. Credit risk on these financial instruments arises from the potential for counterparties to default on their contractual obligations to Nortel. Nortel is exposed to credit risk in the event of non-performance, but does not anticipate non-performance by any of the counterparties to its financial instruments. Nortel limits its credit risk by dealing with counterparties that are considered to be of reputable credit quality. The maximum potential loss on all financial instruments may exceed amounts recognized in the consolidated financial statements of $77, due to the risk associated with such financial instruments. Nortel’s maximum exposure to credit loss in the event of non-performance by a counterparty to a financial instrument is limited to those financial instruments that had a positive fair value of $106 as of December 31, 2007. Nortel’s cash and cash equivalents are maintained with several financial institutions in the form of short term money market instruments, the balances of which, at times, may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with financial institutions with reputable credit and therefore are expected to bear minimal credit risk. Nortel seeks to mitigate such risks by spreading its risk across multiple counterparties and monitoring the risk profiles of these counterparties.

Nortel performs ongoing credit evaluations of its customers and, with the exception of certain financing transactions, does not require collateral from its customers. Nortel’s customers are primarily in the enterprise and service provider markets. Nortel’s global orientation has resulted in a large number of diverse customers which minimizes concentrations of credit risk.

Nortel receives certain of its components from sole suppliers. Additionally, Nortel relies on a limited number of contract manufacturers and suppliers to provide manufacturing services for its products. The inability of a contract manufacturer or supplier to fulfill supply requirements of Nortel could materially impact future operating results.

Transfers of receivables

In 2007, 2006 and 2005, Nortel entered into various agreements to transfer certain of its receivables. These receivables were transferred at discounts of $2, $12 and $19 from book value for the years ended December 31, 2007, 2006 and 2005, respectively, at annualized discount rates of approximately 0% to 8%, 0% to 8% and 2% to 8% for the years ended December 31, 2007, 2006 and 2005, respectively. Certain receivables have been sold with limited recourse for each of the years ended December 31, 2007, 2006 and 2005.

Under certain agreements, Nortel has continued as servicing agent and/or has provided limited recourse. The fair value of these servicing obligations is based on the market value of servicing the receivables, historical payment patterns and appropriate discount rates as applicable. Generally, trade receivables that are sold do not experience prepayments. Also, Nortel has not historically experienced significant credit losses with respect to receivables sold with limited recourse and, as such, no liability was recognized.

As of December 31, 2007 and 2006, total accounts receivable transferred and under Nortel’s management were $45 and $204, respectively.

There is a possibility that the actual performance of receivables or the cost of servicing the receivables will differ from the assumptions used to determine fair values at the transfer date and at each reporting date. Assuming hypothetical, simultaneous, unfavorable variations of up to 20% in credit losses, discount rate used and cost of servicing the receivables, the pre-tax impact on the value of the retained interests and servicing assets would not be significant.

Proceeds from receivables for the years ended December 31 were as follows:

	2007			2006			2005
Proceeds from new transfers of financial assets	$	43		$	202		$	298
Proceeds from collections reinvested in revolving period transfers	$	12		$	189		$	260
Repurchases of receivables	$	(39	)	$	(26	)	$	—

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12.   Guarantees

Nortel has entered into agreements that contain features which meet the definition of a guarantee under FIN 45 as described in note 2. As of December 31, 2007, Nortel had accrued $1 in respect of its non-contingent obligations associated with these agreements and $9 with respect to its contingent obligations that are considered probable to occur. A description of the major types of Nortel’s outstanding guarantees as of December 31, 2007 is provided below:

(a)   Business sale and business combination agreements

(i)  In connection with agreements for the sale of portions of its business, including certain discontinued operations, Nortel has typically retained the liabilities that relate to business events occurring prior to the sale, such as tax, environmental, litigation and employment matters. Nortel generally indemnifies the purchaser of a Nortel business in the event that a third party asserts a claim against the purchaser that relates to a liability retained by Nortel. Some of these types of guarantees have indefinite terms while others have specific terms extending to January 2012.

Nortel has also entered into guarantees related to the escrow of shares in business combinations in prior periods. These types of agreements generally include terms that require Nortel to indemnify counterparties for losses incurred from litigation that may be suffered by counterparties arising under such agreements. These types of indemnities apply over a specified period of time from the date of the business combinations and do not provide for any limit on the maximum potential amount.

Nortel is unable to estimate the maximum potential liability for these types of indemnification guarantees as the business sale agreements generally do not specify a maximum amount and the amounts are dependent upon the outcome of future contingent events, the nature and likelihood of which cannot be determined. As of December 31, 2007, no liability has been accrued in the consolidated financial statements with respect to these indemnification agreements.

Historically, Nortel has not made any significant payments under such indemnification agreements.

(ii)  In conjunction with the sale of a certain subsidiary to a third party, Nortel guaranteed to the purchaser that specified annual sales volume levels would be achieved by the business sold over a ten-year period ending December 31, 2007. The maximum amount that Nortel may be required to pay under the volume guarantee as of December 31, 2007 is $10. Nortel’s guarantee to the purchaser was governed by the laws of the purchaser’s jurisdiction. As such, the purchaser has the right to claim such payments under the volume guarantee, for a period of ten years, or until January 31, 2018, under the statute of limitations of such jurisdiction. A liability of $9 has been accrued in the consolidated financial statements as of December 31, 2007 with respect to the contingent obligation associated with this guarantee.

Historically, Nortel has not made any significant payments under such indemnification agreements.

(b)   Intellectual property indemnification obligations

Nortel has periodically entered into agreements with customers and suppliers which include intellectual property indemnification obligations that are customary in the industry. These types of guarantees typically have indefinite terms; however, under some agreements Nortel has provided specific terms extending out to September 2009. These agreements generally require Nortel to compensate the other party for certain damages and costs incurred as a result of third party intellectual property claims arising from these transactions.

The nature of the intellectual property indemnification obligations generally prevents Nortel from making a reasonable estimate of the maximum potential amount it could be required to pay to its customers and suppliers. As of December 31, 2007, no liability has been accrued in the consolidated financial statements with respect to Nortel’s intellectual property indemnification obligations.

Historically, Nortel has not made any significant indemnification payments under such agreements.

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(c)   Lease agreements

Nortel has entered into agreements with its lessors to guarantee the lease payments of certain assignees of its facilities. Generally, these lease agreements relate to facilities Nortel vacated prior to the end of the term of its lease. These lease agreements require Nortel to make lease payments throughout the lease term if the assignee fails to make scheduled payments. Most of these lease agreements also require Nortel to pay for facility restoration costs at the end of the lease term if the assignee fails to do so. These lease agreements have expiration dates through June 2015. The maximum amount that Nortel may be required to pay under these types of agreements is estimated to be $42 as of December 31, 2007. Nortel generally has the ability to attempt to recover such lease payments from the defaulting party through rights of subrogation.

Historically, Nortel has not made any significant payments under these types of guarantees.

(d)   Other indemnification agreements

(i)  Nortel has agreed to indemnify the banks and their agents under its credit facilities against costs or losses resulting from changes in laws and regulations which would increase the banks’ costs or reduce their return and from any legal action brought against the banks or their agents related to the use of loan proceeds.

On February 14, 2003, Nortel entered into an agreement with Export Development Canada (“EDC”) regarding arrangements to provide support for certain performance-related obligations arising out of normal course business (the “EDC Support Facility”). Nortel has also agreed to indemnify EDC under the EDC Support Facility against any legal action brought against EDC that relates to the provision of support under the EDC Support Facility. This indemnification generally applies to issues that arise during the term of the EDC Support Facility. As of December 31, 2007, there was approximately $146 of outstanding support utilized under the EDC Support Facility, approximately $89 of which was outstanding under the revolving small bond sub-facility, with the remaining balance outstanding under the revolving large bond sub-facility. Effective December 14, 2007, Nortel and EDC amended and restated the EDC Support Facility, among other things to extend the maturity date to December 31, 2011 and to provide for automatic renewal each subsequent year, unless either party provides written notice to the other of its intent to terminate.

Nortel is unable to estimate the maximum potential liability for these types of indemnification guarantees as the agreements typically do not specify a maximum amount and the amounts are dependent upon the outcome of future contingent events, the nature and likelihood of which cannot be determined at this time. As of December 31, 2007, no liability has been accrued in the consolidated financial statements with respect to these indemnification agreements.

Historically, Nortel has not made any significant indemnification payments under such agreements.

(ii)  Nortel has agreed to indemnify certain of its counterparties in certain receivables securitization transactions. The indemnifications provided to counterparties in these types of transactions may require Nortel to compensate counterparties for costs incurred as a result of changes in laws and regulations (including tax legislation) or in the interpretations of such laws and regulations, or as a result of regulatory penalties that may be suffered by the counterparty as a consequence of the transaction. Certain receivables securitization transactions include indemnifications requiring the repurchase of the receivables, under certain conditions, if the receivable is not paid by the obligor. As of December 31, 2007, Nortel had approximately $45 of securitized receivables which were subject to repurchase, in which case Nortel would assume from the purchaser of the receivables all rights to collect such receivables. The indemnification provisions generally expire upon the earlier of either the expiration of the securitization agreements, which extend through 2008, or collection of the receivable amounts by the purchaser.

As of December 31, 2007, no amount has been accrued in the consolidated financial statements with respect to these indemnification agreements.

Nortel has made payments of $39 and $26 in the years ended December 31, 2007 and December 31, 2006, respectively, under such agreements relating to the repurchase of certain receivables.

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(iii)  Nortel has also entered into other agreements that provide indemnifications to counterparties in certain transactions including investment banking agreements, guarantees related to the administration of capital trust accounts, guarantees related to the administration of employee benefit plans, indentures for its outstanding public debt and asset sale agreements (in addition to the business sale agreements noted above). These indemnification agreements generally require Nortel to indemnify the counterparties for costs incurred as a result of changes in laws and regulations (including tax legislation) or in the interpretations of such laws and regulations and/or as a result of losses from litigation that may be suffered by the counterparties arising from the transactions. These types of indemnification agreements normally extend over an unspecified period of time from the date of the transaction and do not typically provide for any limit on the maximum potential payment amount. In addition, Nortel has entered into indemnification agreements with certain of its directors and officers for the costs reasonably incurred in any proceeding in which they become involved by reason of their position as directors or officers to the extent permitted under applicable law.

The nature of such agreements prevents Nortel from making a reasonable estimate of the maximum potential amount it could be required to pay to its counterparties and directors and officers. The difficulties in assessing the amount of liability result primarily from the unpredictability of future changes in laws, the inability to determine how laws apply to counterparties and the lack of limitations on the potential liability. As of December 31, 2007, no liability has been accrued in the consolidated financial statements with respect to these indemnification agreements.

Historically, Nortel has not made any significant indemnification payments under such agreements.

(iv)  Nortel has identified specified price trade-in rights in certain customer arrangements that qualify as guarantees. These types of guarantees generally apply over a specified period of time and extend through to June 2010. Nortel is unable to estimate the maximum potential liability for these types of indemnification guarantees as the agreements typically do not specify a maximum amount and the amounts are dependent upon the outcome of future contingent events, the nature and likelihood of which cannot be determined at this time. As of December 31, 2007, no significant liability has been accrued in the consolidated financial statements with respect to these indemnification agreements.

Historically, Nortel has not made any significant indemnification payments under such agreements.

(v)  On March 17, 2006, in connection with the Global Class Action Settlement (as defined in note 19), NNC announced that it had reached an agreement with the lead plaintiffs on the related insurance and corporate governance matters, including NNC’s insurers agreeing to pay $229 in cash towards the settlement and NNC agreeing with its insurers to certain indemnification obligations. NNC believes that these indemnification obligations would be unlikely to materially increase its total cash payment obligations under the Global Class Action Settlement. NNC is aware of three claims made to the insurers by former officers, but based on information available at this time NNC is unable to make a reasonable estimate of the amount for which NNC may be liable. As a result, NNC has not recorded a contingent liability as of December 31, 2007 with respect to its indemnification obligations. The insurers’ payments would not reduce the amounts payable by NNC for the Global Class Action Settlement, as disclosed in note 19.

Nortel has not made any significant payments as at December 31, 2007 for its guarantees related to the Global Class Action Settlement.

Product warranties

The following summarizes the accrual for product warranties that was recorded as part of other accrued liabilities in the consolidated balance sheets as of December 31:

	2007			2006
Balance at the beginning of the year	$	214		$	204
Payments		(181	)		(267	)
Warranties issued		261			281
Revisions		(88	)		(4	)
Balance at the end of the year	$	206		$	214

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13.   Commitments

Bid, performance-related and other bonds

Nortel has entered into bid, performance-related and other bonds associated with various contracts. Bid bonds generally have a term of less than twelve months, depending on the length of the bid period for the applicable contract. Other bonds primarily relate to warranty, rental, real estate and customs contracts. Performance-related and other bonds generally have a term of twelve months and are typically renewed, as required, over the term of the applicable contract. The various contracts to which these bonds apply generally have terms ranging from one to five years. Any potential payments which might become due under these bonds would be related to Nortel’s non-performance under the applicable contract. Historically, Nortel has not had to make material payments under these types of bonds and does not anticipate that any material payments will be required in the future.

The following table sets forth the maximum potential amount of future payments under bid, performance related and other bonds, net of the corresponding restricted cash and cash equivalents, as of December 31:

	2007		2006
Bid and performance related bonds(a)	$	155	$	231
Other bonds(b)		54		30
Total bid, performance related and other bonds	$	209	$	261

(a)	Net of restricted cash and cash equivalent amounts of $5 and $7 as of December 31, 2007 and 2006, respectively.
(b)	Net of restricted cash and cash equivalent amounts of $27 and $33 as of December 31, 2007 and 2006, respectively.

Venture capital financing

Nortel has entered into agreements with selected venture capital firms where the venture capital firms make and manage investments in start-up businesses and emerging enterprises. The agreements require Nortel to fund requests for additional capital up to its commitments when and if requests for additional capital are solicited by any of the venture capital firms. Nortel had remaining commitments, if requested, of $23 as of December 31, 2007. These commitments expire at various dates through to 2017.

Purchase commitments

Nortel has entered into purchase commitments with certain suppliers under which it commits to buy a minimum amount or percentage of designated products or services in exchange for price guarantees or similar concessions. In certain of these agreements, Nortel may be required to acquire and pay for such products or services up to the prescribed minimum or forecasted purchases. As of December 31, 2007, Nortel had aggregate purchase commitments of $40 compared with $83 as of December 31, 2006. In accordance with Nortel’s agreements with certain of its inventory suppliers, Nortel records a liability for firm, noncancelable, and unconditional purchase commitments for quantities purchased in excess of future demand forecasts.

The following table sets forth the expected purchase commitments to be made over the next several years:

									Total
	2008		2009		2010		Thereafter		Obligations
Purchase commitments	$	28	$	9	$	3	$	—	$	40

Amounts paid by Nortel under the above purchase commitments during the years ended December 31, 2007, 2006 and 2005 were $31, $470 and $1,134, respectively.

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Operating leases and other commitments

As of December 31, 2007, the future minimum payments under operating leases, sale lease-backs with continuing involvement, outsourcing contracts, special charges related to lease commitments accrued for as part of restructuring contract settlement and lease costs and related sublease recoveries under contractual agreements consisted of:

	Operating		Sale		Outsourcing		Special		Sublease
	Leases		Lease-Backs		Contracts		Charges		Income
2008	$	105	$	8	$	11	$	51	$	(28	)
2009		93		8		10		35		(28	)
2010		83		8		—		44		(27	)
2011		70		7		—		40		(20	)
2012		59		8		—		33		(10	)
Thereafter		276		31		—		168		(32	)
Total future minimum payments	$	686	$	70	$	21	$	371	$	(145	)

Rental expense on operating leases for the years ended December 31, 2007, 2006 and 2005, net of applicable sublease income, amounted to $326, $195 and $173, respectively.

Expenses related to outsourcing contracts for the years ended December 31, 2007, 2006 and 2005 amounted to $133, $93 and $96, respectively, and were for services provided to Nortel primarily related to a portion of its information services function. The amount payable under Nortel’s outsourcing contracts is variable to the extent that Nortel’s workforce fluctuates from the baseline levels contained in the contracts. The table above shows the minimum commitment contained in the outsourcing contracts.

Nortel and Microsoft Corporation Alliance

In the third quarter of 2006, Nortel and Microsoft Corporation (“Microsoft”) entered into a four-year agreement, with provisions for extension, to form a strategic alliance to jointly develop, market and sell communications solutions. Under the agreement, Nortel and Microsoft agreed to form joint teams to collaborate on product development spanning enterprise, mobile and wireline carrier solutions. The agreement engages the companies at the technology, marketing and business levels and includes joint product development, solutions and systems integration and go-to-market initiatives. Both companies will invest resources in marketing, business development and delivery.

Microsoft will make available to Nortel up to $52 in marketing and telephony systems integration funds to be offset against marketing costs incurred by Nortel, and up to $40 in research and development funds over the initial four year term of the agreement. Payments are received by Nortel upon Nortel achieving certain mutually agreed upon performance metrics. Microsoft will recoup its payment of research and development funds by receiving payments from Nortel of 5% of revenue over a mutually agreed upon enterprise voice and application business base plan. Any research and development funds that have not been recouped must be repaid in full by Nortel to Microsoft by March 31, 2012. As of December 31, 2007, Nortel has not received any of the research and development funds from Microsoft.

Microsoft and Nortel will each retain all revenues from sales or licenses of each party’s respective software, sales or leasing of each party’s respective hardware and delivery of services to customers and partners in accordance with separate agreements with each parties’ respective channel partners and/or customers.

14.   Financing arrangements and variable interest entities

Customer financing

Generally, Nortel facilitates customer financing agreements through customer loans, and Nortel’s commitment to extend future financing is generally subject to conditions related to funding, fixed expiration or termination dates, specific interest rates and qualified purposes. Nortel only provides direct customer financing where a compelling strategic customer or technology purpose supports such financing.

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Notes to Consolidated Financial Statements — (Continued)

Total customer financing as of December 31, 2007 and 2006 was $6 and $10, respectively, which included undrawn commitments of nil and $1, respectively. During the years ended December 31, 2007 and 2006, Nortel reduced undrawn customer financing commitments by $1 and $49, respectively, as a result of the expiration or cancellation of commitments and changing customer business plans.

During the years ended December 31, 2007, 2006 and 2005, Nortel recorded net customer financing bad debt expense of $4, $4 and $4, respectively, as a result of settlements and adjustments to other existing provisions. The recoveries and expense were included in the consolidated statements of operations within SG&A expense.

During the years ended December 31, 2007 and 2006, Nortel did not enter into any new agreements to restructure and/or settle customer financing and related receivables. During the year ended December 31, 2005, Nortel entered into certain agreements to restructure and/or settle various customer financing and related receivables, including rights to accrued interest. As a result of these transactions, Nortel received cash consideration of approximately $112 ($36 of the proceeds was included in discontinued operations) to settle outstanding receivables of approximately $102 with a net carrying value of $101 ($33 of the net carrying value was included in discontinued operations).

Consolidation of variable interest entities

Certain lease financing transactions of Nortel were structured through single transaction VIEs that did not have sufficient equity at risk, as defined in FIN 46R. Effective July 1, 2003, Nortel prospectively began consolidating two VIEs for which Nortel was considered the primary beneficiary following the guidance of FIN 46, on the basis that Nortel retained certain risks associated with guaranteeing recovery of the unamortized principal balance of the VIEs debt, which represented the majority of the risks associated with the respective VIEs activities. The amount of the guarantees will be adjusted over time as the underlying debt matures. During 2004, the debt related to one of the VIEs was extinguished and as a result consolidation of this VIE was no longer required. As of December 31, 2007, Nortel’s consolidated balance sheet included $92 of long-term debt (see note 10) and $91 of plant and equipment — net related to the remaining VIE. These amounts represented both the collateral and maximum exposure to loss as a result of Nortel’s involvement with the VIE.

On June 3, 2005, Nortel acquired NGS, a VIE for which Nortel is considered the primary beneficiary under FIN 46R. The consolidated financial results of Nortel include NGS’s financial statements consolidated from the date of the acquisition (see note 9).

Nortel consolidates certain assets and liabilities held in certain employee benefit and life insurance trusts in Canada and the U.K., VIEs for which Nortel is considered the primary beneficiary under FIN 46R.

Nortel has other financial interests and contractual arrangements which would meet the definition of a variable interest under FIN 46R, including investments in other companies and joint ventures, customer financing arrangements, and guarantees and indemnification arrangements. As of December 31, 2007 and 2006, none of these other interests or arrangements were considered significant variable interests and, therefore, are not disclosed in Nortel’s financial statements.

15.   Capital stock

Preferred shares

Nortel Networks Limited is authorized to issue an unlimited number of Class A preferred shares, which rank senior to the Class B preferred shares and the Nortel Networks Corporation common shares upon a distribution of capital or assets, and an unlimited number of Class B preferred shares, which rank junior to the Class A preferred shares and senior to the Nortel Networks Corporation common shares upon a distribution of capital or assets, in each case without nominal or par value. Each of the Class A and Class B preferred shares is issuable in one or more series, each series having such rights, restrictions and provisions as determined by the Board of Directors of Nortel at the time of issue. Class A preferred shares of Nortel has been issued for consideration denominated in Canadian Dollars and are presented in U.S. Dollars after translation at the exchange rate in effect at the date of original issue. Each series of Class A preferred shares ranks in

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parity with every other series of Class A preferred shares. As of December 31, 2007 and 2006, the following outstanding Class A preferred shares were included in shareholders’ equity:

	Number
	of shares
	(thousands)		$
Series 5, issued November 26, 1996 for consideration of Canadian (“C”) $400		16,000	$	294
Series 7, issued November 28, 1997 for consideration of C $350		14,000	$	242

In addition, as of December 31, 2000, 200 shares of Cumulative Redeemable Class A Preferred Shares Series 4 (“Series 4 Shares”) were outstanding and included in shareholders’ equity at a value of $73. During the year ended December 31, 2001, the holders of all 200 Series 4 Shares of Nortel Networks Limited exercised their right to exchange their Series 4 Shares for common shares of Nortel Networks Corporation. Nortel Networks Corporation issued in aggregate approximately 9,035,000 common shares to the former holders of Series 4 Shares. As a result, pursuant to an agreement in respect of the Series 4 Shares exchange rights, Nortel Networks Limited issued approximately 4,090,000 common shares to NNC.

The Cumulative Redeemable Class A Preferred Shares Series 5 (“Series 5 Shares”) are presented net of tax effected issue costs of approximately $4. Until November 30, 2001, holders of Series 5 Shares were entitled to an annual fixed cumulative preferential cash dividend of Canadian $1.275 per share (5.1 percent), payable, if declared, quarterly. As of December 1, 2001, holders of Series 5 Shares are entitled to, if declared, a monthly floating cumulative preferential cash dividend, which will float in relation to the average of the prime commercial lending rates of two designated Canadian chartered banks during the relevant month, as adjusted by the weighted-average trading price of Series 5 Shares during such month, up to a maximum of 100 percent of such prime rate. Holders of Series 5 Shares have the right to convert their shares into Cumulative Redeemable Class A Preferred Shares Series 6 (“Series 6 Shares”), subject to certain conditions, as of December 1, 2006, and on December 1 of every fifth year thereafter. On December 1, 2006, no holder of Series 5 shares converted to Series 6 shares. No Series 6 Shares have been issued. Holders of Series 6 Shares will have a similar right to convert back into Series 5 Shares every five years. In certain circumstances, conversions may be automatic and mandatory. Series 5 Shares are redeemable at any time after December 1, 2001, at Nortel’s option, at Canadian $25.50 per share together with accrued and unpaid dividends up to, but excluding, the date of redemption. If issued on December 1, 2006, the Series 6 Shares will be redeemable at Nortel’s option at Canadian $25 per share, together with accrued and unpaid dividends up to but excluding, the date of redemption, on December 1, 2011, and on December 1 of every fifth year thereafter.

The Non-cumulative Redeemable Class A Preferred Shares Series 7 (“Series 7 Shares”) are presented net of tax effected issue costs of approximately $4. Holders of the Series 7 Shares were, until November 30, 2002, entitled to an annual fixed non-cumulative preferential cash dividend of Canadian $1.225 per share (4.9 percent), payable, if declared, quarterly on the first day of March, June, September and December. From December 1, 2002, holders of the Series 7 Shares are entitled to, if declared, a monthly floating non-cumulative preferential cash dividend. Holders of Series 7 Shares have the right to convert their shares into Non-cumulative Redeemable Class A Preferred Shares Series 8 (“Series 8 Shares”), subject to certain conditions, on December 1, 2007 and on December 1 of every fifth year thereafter. No Series 8 shares have been issued. Holders of the Series 8 Shares will have a similar right to convert back into Series 7 Shares every five years and, in certain circumstances conversions may be automatic and mandatory. Series 7 Shares are redeemable at any time after December 1, 2002 at Nortel’s option, at Canadian $25.50 per share together with declared and unpaid dividends up to, but excluding, the date of redemption. If issued, on December 1, 2007, Series 8 Shares will also be redeemable at Nortel’s option at Canadian $25 per share, together with declared and unpaid dividends up to, but excluding, the date of redemption, on December 1, 2012, and on December 1 of every fifth year thereafter.

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Common shares

Nortel is authorized to issue an unlimited number of common shares without nominal or par value. The outstanding number of common shares included in shareholders’ equity consisted of the following as of December 31:

	2007				2006
	Number				Number
	of Shares		$		of Shares		$
	(number of shares in thousands)
Balance at beginning of year		1,460,979	$	1,211		1,460,979	$	1,211
Balance at end of year		1,460,979	$	1,211		1,460,979	$	1,211

16.   Accumulated other comprehensive income (loss)

The components of accumulated other comprehensive income (loss), net of tax, were as follows:

	2007			2006			2005
Accumulated foreign currency translation adjustment
Balance at the beginning of the year	$	495		$	213		$	360
Change in foreign currency translation adjustment(a)		298			282			(147	)
Balance at the end of the year		793			495			213
Unrealized gain (loss) on investments — net
Balance at the beginning of the year		39			31			33
Change in unrealized gain (loss) on investments(b)		(13	)		8			(2	)
Balance at the end of the year		26			39			31
Unrealized derivative gain (loss) on cash flow hedges — net
Balance at the beginning of the year		(10	)		7			18
Change in unrealized derivative gain (loss) on cash flow hedges(c)		10			(17	)		(11	)
Balance at the end of the year		—			(10	)		7
Minimum pension liability — net
Balance at the beginning of the year		—			(1,084	)		(915	)
Change in minimum pension liability adjustment(d)		—			94			(169	)
Adoption of FASB Statement No. 158 — net(e)		—			990			—
Balance at the end of the year		—			—			(1,084	)
Unamortized Pension and Post-Retirement Plan actuarial losses and prior service cost — net
Balance at the beginning of the year		(1,132	)		—			—
Adoption of FASB Statement No. 158 — net(e)		—			(1,132	)		—
Change in unamortized pension and post-retirement actuarial losses and prior service cost(f)		560			—			—
Balance at the end of the year		(572	)		(1,132	)		—
Accumulated other comprehensive income (loss)	$	247		$	(608	)	$	(833	)

(a)	The change in the foreign currency translation adjustment was not adjusted for income taxes since it related to indefinite term investments in non-U.S. subsidiaries.
(b)	Certain securities deemed available-for-sale by Nortel were measured at fair value. Unrealized holding gains (losses) related to these securities were excluded from net earnings (loss) and were included in accumulated other comprehensive income (loss) until realized. Unrealized gain (loss) on investments was net of tax of nil for each of the years ended December 31, 2007, 2006 and 2005. During the years ended December 31, 2007, 2006 and 2005, realized (gains) losses on investments of nil, $5 and ($9), respectively, were reclassified to other income (expense) — net in the consolidated statements of operations.
(c)	During the years ended December 31, 2007, 2006 and 2005, net derivative gains of $10, $14 and $18 were reclassified to other income (expense) — net. Unrealized derivative gain (loss) on cash flow hedges is net of tax of nil, nil and nil for the years ended December 31, 2007, 2006 and 2005, respectively.
(d)	Represents non-cash charges to shareholders’ equity related to the increase in the minimum required recognizable liability associated with Nortel’s pension plans (see note 8). The change in minimum pension liability adjustment is presented net of tax of nil, $24 and $6 for the years ended December 31, 2007, 2006 and 2005, respectively.

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(e)	Represents non-cash charges to shareholders’ equity related to the adoption of SFAS 158 (see note 8). The charge is presented net of tax of $60 for the year ended December 31, 2006.
(f)	Represents non-cash charges to shareholders’ equity related to the change in unamortized pension and post-retirement actuarial losses and prior service cost (see note 8). The charge is presented net of tax of $91 for the year ended December 31, 2007.

17.   Share-based compensation plans

Stock options

Prior to 2006, NNC granted options to employees of Nortel to purchase Nortel Networks Corporation common shares under two existing stock option plans, the NNC 2000 Stock Option Plan (the “2000 Plan”) and the NNC 1986 Stock Option Plan, as Amended and Restated (the “1986 Plan”). Under these two plans, options to purchase Nortel Networks Corporation common shares could be granted to employees of Nortel and, under the 2000 Plan, options could also be granted to directors of Nortel. The options under both plans entitle the holders to purchase one Nortel Networks Corporation common share at a subscription price of not less than 100% (as defined under the applicable plan) of the market value on the effective date of the grant. Subscription prices are stated and payable in U.S. Dollars for U.S. options and in Canadian Dollars for Canadian options. Options granted prior to 2003 generally vest 331/3% each year over a three-year period on the anniversary date of the grant. Commencing in 2003, options granted generally vest 25% each year over a four-year period on the anniversary of the date of grant. The term of an option cannot exceed ten years. The Compensation and Human Resources Committee of the Boards of Directors of NNC and NNL (the “CHRC”) administers both plans. NNC meets its obligations under both plans by issuing Nortel Networks Corporation common shares. Nortel Networks Corporation common shares remaining available for grant after December 31, 2005 under the 2000 Plan and the 1986 Plan (and including common shares that become available upon expiration or termination of options granted under such plans) have been rolled over and are available for grant under the NNC 2005 Stock Incentive Plan (the “SIP”) effective January 1, 2006.

In 2005, NNC’s shareholders approved the SIP, a share-based compensation plan, which permits grants of stock options, including incentive stock options, SARs, PSUs, and RSUs to employees of Nortel and its subsidiaries. NNC also meets its obligations under the SIP by issuing Nortel Networks Corporation common shares. On November 6, 2006, the SIP was amended and restated effective as of December 1, 2006, to adjust the number of Nortel Networks Corporation common shares available for grant thereunder to reflect the 1 for 10 consolidation of Nortel Networks Corporation issued and outstanding common shares. The subscription price for each share subject to an option shall not be less than 100% (as defined under the SIP) of the market value of Nortel Networks Corporation common shares on the date of the grant. Subscription prices are stated and payable in U.S. Dollars for U.S. options and in Canadian Dollars for Canadian options. Options granted under the SIP generally vest 25% each year over a four-year period on the anniversary of the date of grant. The CHRC also administers the SIP. Options granted under the SIP may not become exercisable within the first year (except in the event of death), and in no case shall the term of an option exceed ten years. All stock options granted have been classified as equity instruments based on the settlement provisions of the share-based compensation plans.

In January 1995, a key contributor stock option program (the “Key Contributor Program”) was established and options have been granted under the 1986 Plan and the 2000 Plan in connection with this program. Under this program, a participant was granted concurrently an equal number of initial options and replacement options. The initial options and the replacement options expire ten years from the date of grant. The initial options have an exercise price equal to the market value of a Nortel Networks Corporation common share on the date of grant and the replacement options have an exercise price equal to the market value of a Nortel Networks Corporation common share on the date all of the initial options are fully exercised, provided that in no event will the exercise price be less than the exercise price of the initial options. Replacement options are generally exercisable commencing 36 months after the date all of the initial options are fully exercised, provided that the participant beneficially owns a number of Nortel Networks Corporation common shares at least equal to the number of common shares subject to the initial options less any Nortel Networks Corporation common shares sold to pay for options costs, applicable taxes and brokerage costs associated with the exercise of the initial options. No Key Contributor Program options were granted for the years ended December 31, 2007, 2006 and 2005.

NNC also assumed stock option plans in connection with the acquisition of various companies. Nortel Networks Corporation common shares are issuable upon the exercise of options under the assumed stock option plans, although no further options may be granted under the assumed plans. The vesting periods for options granted under these assumed

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stock option plans may differ from the SIP, 2000 Plan and 1986 Plan, but the assumed plans are not considered significant to Nortel’s overall use of share-based compensation.

Deferred share units (“DSUs”)

Under the Nortel Networks Corporation Directors’ Deferred Share Compensation Plan and the Nortel Networks Limited Directors’ Deferred Share Compensation Plan, non-employee directors can elect to receive all or a portion of their compensation for services rendered as a director of NNC or NNL, any committees thereof, and as board or committee chairperson, in share units, in cash or a combination of share units and cash. DSUs are credited on a quarterly basis, and the number of share units received is equal to the amount of fees expressed in U.S. Dollars, converted to Canadian Dollars, divided by the market value expressed in Canadian Dollars of Nortel Networks Corporation common shares on the last trading day of the quarter. Generally, the share units are settled on the fourth trading day following the release of NNC’s financial results after the director ceases to be a member of the boards of directors of NNC and NNL, and each share unit entitles the holder to receive one Nortel Networks Corporation common share. The value of the DSU and the related compensation expense is determined and recorded based on the current market price of the underlying Nortel Networks Corporation common shares on the date of the grant. Common shares are purchased on the open market to settle outstanding share units. As of December 31, 2007 and 2006, the number of share units outstanding and the DSU expense were not material to Nortel’s results of operations and financial condition.

Limited share purchase plan (“LSPP”)

In November 2007, NNC adopted a limited share purchase plan as a vehicle to enable certain executive officers of NNC and NNL to purchase Nortel Networks Corporation common shares. The plan allows certain executives to satisfy share ownership guidelines while continuing to comply with an exemption from the SEC short survey market rules. Under the LSPP, the officers purchase Nortel Networks Corporation common shares at a market price, which is calculated based on the five day weighted average share price to the purchase request date. There are 450,000 Nortel Networks Corporation common shares available for purchase under the LSPP. As of December 31, 2007, the number of shares outstanding and the related compensation expense was not material to Nortel’s results of operations and financial condition.

Employee stock purchase plans

NNC has ESPPs to facilitate the acquisition of Nortel Networks Corporation common shares by eligible employees of Nortel. On June 29, 2005, the shareholders of NNC approved three new stock purchase plans, the NNC Global Stock Purchase Plan, the NNC U.S. Stock Purchase Plan and the NNC Stock Purchase Plan for Members of the Savings and Retirement Program, each of which have been launched in jurisdictions throughout the world.

The ESPPs are designed to have four offering periods each year, with each offering period beginning on the first day of each calendar quarter. Eligible employees are permitted to have up to 10% of their eligible compensation deducted from their pay during each offering period to contribute towards the purchase of Nortel Networks Corporation common shares. The Nortel Networks Corporation common shares are purchased by an independent broker through the facilities of the TSX and/or NYSE, and held by a custodian on behalf of the plan participants.

For eligible employees, Nortel Networks Corporation common shares were purchased on the TSX at fair market value but employees effectively paid only 85% of that price as a result of NNC contributing the remaining 15% of the price.

The purchases under the ESPPs for the years ended December 31 are shown below:

	2007		2006(b)		2005(b)
	(Number of shares in thousands)
Nortel Networks Corporation common shares purchased(a)		1,286		294		78
Weighted-average price of shares purchased	$	20.26	$	25.43	$	30.68

(a)	Compensation expense was recognized for NNC’s portion of the contributions. NNC contributed an amount equal to the difference between the market price and the employee purchase price.
(b)	During the periods of March 10, 2004 to June 1, 2005, and March 10, 2006 to June 6, 2006, purchases under the ESPPs were suspended due to NNC and NNL not being in compliance with certain reporting requirements of U.S. and Canadian securities regulators.

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Share-based compensation

Effective January 1, 2006, Nortel adopted SFAS 123R, as set out in note 2.

In accordance with SFAS 123R, Nortel did not accelerate the recognition of expense for those awards that applied to retirement-eligible employees prior to the adoption of the new guidance, but rather expensed those awards over the vesting period. Therefore, an expense of approximately $4 was recognized during the year ended December 31, 2006 that would not have been recognized had Nortel accelerated recognition of the expense prior to January 1, 2006, the adoption date of SFAS 123R.

SFAS 123R requires forfeitures to be estimated at the time of grant in order to estimate the amount of share-based awards that will ultimately vest. Since share-based compensation expense recognized in the consolidated statements of operations, for the year ended December 31, 2006, is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Prior to the adoption of SFAS 123R, Nortel recognized forfeitures as they occurred. In the year ended December 31, 2006, Nortel recorded a gain of $9 as a cumulative effect of an accounting change as a result of the change in accounting for forfeitures under SFAS 123R. In Nortel’s pro forma information required under SFAS 123 for the periods prior to fiscal 2006, Nortel accounted for forfeitures as they occurred.

In November 2005, the FASB issued FASB FSP No. 123R-3, “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards” (“FSP FAS 123R-3”). Nortel elected to adopt the alternative transition method to SFAS 123R in accounting for the tax effects of share-based payment awards to employees. The elective method comprises a computational component that establishes a beginning balance of the Additional Paid In Capital (“APIC”) pool related to employee compensation and a simplified method to determine the subsequent impact on the APIC pool of employee awards that are fully vested and outstanding upon the adoption of SFAS 123R. As of December 31, 2006, the APIC balance was nil, and there were no other material impacts as a result of the adoption of FSP FAS 123R-3.

Share-based compensation charged by NNC to Nortel recorded during the years ended December 31 was as follows:

	2007		2006			2005
Share-based compensation:
Stock option expense	$	76	$	93	(b)	$	87
RSU expense(a)		23		8			1
PSU expense		6		2			—
DSU expense(a)		—		—			1
Total share-based compensation reported — net of tax	$	105	$	103		$	89

(a)	Compensation related to employer portion of RSUs and DSUs was net of tax of nil in each period.
(b)	Includes a reduction of stock option expense of approximately $9, recognized during the first quarter of 2006, to align Nortel’s recognition of stock option forfeitures with the adoption of SFAS 123R.

NNC estimates the fair value of stock options and SARs using the Black-Scholes-Merton option-pricing model, consistent with the provisions of SFAS 123R and SAB 107. The key input assumptions used to estimate the fair value of stock options and SARs include the grant price of the options, the expected term of the options, the volatility of NNC’s stock, the risk-free interest rate and NNC’s dividend yield. NNC believes that the Black-Scholes-Merton option-pricing model sufficiently captures the substantive characteristics of the option and SAR awards and is appropriate to calculate the fair values of NNC’s stock options.

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The following ranges of assumptions were used in computing the fair value of stock options and SARs for purposes of expense recognition by Nortel, for the following years ended December 31:

	2007			2006			2005
Black-Scholes Merton assumptions
Expected dividend yield		0.00	%		0.00%			0.00%
Expected volatility(a)		41.39% - 53.56	%		60.08% - 73.66	%		85.35% - 87.01%
Risk-free interest rate(b)		3.07% - 4.92	%		4.57% - 5.04	%		3.70% - 4.44%
Expected option life in years(c)		3.39 - 4.00			4.00			4.00
Range of fair value per unit granted		$2.41 - $11.86			$9.97 - $12.26			$17.87 - $21.22

(a)	The expected volatility of NNC’s stock is estimated using the daily historical stock prices over a period equal to the expected term.
(b)	NNC used the five-year U.S. government treasury bill rate to approximate the four-year risk free rate.
(c)	The expected term of the stock options is estimated based on historical grants with similar vesting periods.

The fair value of RSU awards is calculated using an average of the high and low stock prices from the highest trading volume of either the NYSE or the TSX on the date of the grant. NNC estimates the fair value of PSU awards using a Monte Carlo simulation model. Certain assumptions used in the model include (but are not limited to) the following:

	2007			2006
Monte Carlo assumptions
Beta (range)		1.20 - 1.88			2.0 - 2.1
Risk-free interest rate (range)(a)		3.37% - 4.66	%		4.79% - 5.10	%
Equity risk premium		—			5.00	%

(a)  The risk-free interest rate used was the three-year U.S. government treasury bill rate.

As of December 31, 2007, the annual forfeiture rates applied to NNC’s stock option plans, SARs, RSU and PSU awards were 18.12%, 18.12%, 15.60%, and 14.49%, respectively.

The total income tax benefit recognized in the statements of operations for share-based award compensation was nil for each of the years ended December 31, 2007, 2006 and 2005.

As of December 31, 2007, there was $92 of total unrecognized compensation cost related to NNC’s stock option plans that is expected to be recognized by NNL over a weighted-average period of 1.9 years. As of December 31, 2007, there was $45 of total unrecognized compensation cost related to NNC’s RSU awards granted which is expected to be recognized over a weighted-average period of 2.2 years. As of December 31, 2007, there was $9 of total unrecognized compensation cost related to NNC’s PSU awards granted to Nortel employees which is expected to be recognized over a weighted-average period of 1.5 years.

Cash received from exercise under all share-based payment arrangements was $10, $2 and $6 for the years ended December 31, 2007, 2006 and 2005, respectively. Tax benefits realized by Nortel related to these exercises were nil for each of the years ended December 31, 2007, 2006, and 2005.

18.   Related party transactions

In the ordinary course of business, Nortel engages in transactions with certain of its equity-owned investees and certain other business partners. These transactions are sales and purchases of goods and services under usual trade terms and are measured at their exchange amounts.

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Transactions with related parties for the years ended December 31 are summarized as follows:

	2007		2006		2005
Revenues:
LGE(a)	$	22	$	27	$	—
Vertical Communications, Inc. (“Vertical”)(b)		14		22		2
Other		11		5		3
Total	$	47	$	54	$	5
Purchases:
LGE(a)	$	287	$	238	$	41
Sasken Communications Technology Ltd. (“Sasken”)(c)		28		34		18
GNTEL Co., Ltd (“GNTEL”)(d)		95		74		10
Other		15		39		21
Total	$	425	$	385	$	90

(a)	LGE holds a minority interest in LG-Nortel. Nortel’s sales and purchases relate primarily to certain inventory-related items. As of December 31, 2007, accounts payable to LGE was net $31, compared to $76 as at December 31, 2006.
(b)	LG-Nortel currently owns a minority interest in Vertical. Vertical supports LG-Nortel’s efforts to distribute Nortel’s products to the North American market.
(c)	Nortel currently owns a minority interest in Sasken. Nortel’s purchases from Sasken relate primarily to software and other software development-related purchases. As of December 31, 2007, accounts payable to Sasken was $1, compared to $2 as at December 31, 2006.
(d)	Nortel holds a minority interest in GNTEL through its business venture LG-Nortel. Nortel’s purchases from GNTEL relate primarily to installation and warranty services. As of December 31, 2007, accounts payable to GNTEL was net $31, compared to net $17 as at December 31, 2006.

Balances with related parties were as follows:

	2007			2006
Consolidated balance sheets
Owing from NNC	$	990		$	847
Owing from NNC subsidiaries		90			77
Other related parties		(61	)		(84	)
Related party receivables	$	1,019		$	840

19.   Contingencies

Subsequent to NNC’s announcement on February 15, 2001, in which it provided revised guidance for its financial performance for the 2001 fiscal year and the first quarter of 2001, NNC and certain of its then-current officers and directors were named as defendants in several purported class action lawsuits in the U.S. and Canada (collectively, the “Nortel I Class Actions”). These lawsuits in the U.S. District Court for the Southern District of New York, where all the U.S. lawsuits were consolidated, the Ontario Superior Court of Justice, the Supreme Court of British Columbia and the Quebec Superior Court were filed on behalf of shareholders who acquired securities of Nortel during certain periods between October 24, 2000 and February 15, 2001. The lawsuits alleged, among other things, violations of U.S. federal and Canadian provincial securities laws. These matters also have been the subject of review by Canadian and U.S. securities regulatory authorities.

Subsequent to NNC’s announcement on March 10, 2004, in which it indicated it was likely that NNC would need to revise its previously announced unaudited results for the year ended December 31, 2003 and the results reported in certain of its quarterly reports in 2003, and to restate its previously filed financial results for one or more earlier periods, NNC and certain of its then-current and former officers and directors were named as defendants in several purported class action lawsuits in the U.S. and Canada (collectively, the “Nortel II Class Actions”). These lawsuits in the U.S. District Court for the Southern District of New York, the Ontario Superior Court of Justice and the Quebec Superior Court were filed on behalf of shareholders who acquired securities of NNC during certain periods between February 16, 2001 and July 28, 2004. The lawsuits alleged, among other things, violations of U.S. federal and Canadian provincial securities laws, negligence, misrepresentations, oppressive conduct, insider trading and violations of Canadian corporation and

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competition laws in connection with certain of NNC’s financial results. These matters are also the subject of investigations by Canadian and U.S. securities regulatory and criminal investigative authorities.

During 2006, NNC entered into agreements to settle all of the Nortel I Class Actions and Nortel II Class Actions (the “Global Class Action Settlement”) concurrently, except one related Canadian action described below. In December 2006 and January 2007, the Global Class Action Settlement was approved by the courts in New York, Ontario, British Columbia and Quebec, and became effective on March 20, 2007.

Under the terms of the Global Class Action Settlement, NNC agreed to pay $575 in cash plus accrued interest and issue approximately 62,866,775 Nortel Networks Corporation common shares (representing approximately 14.5% of Nortel Networks Corporation common shares outstanding as of February 7, 2006, the date an agreement in principle was reached with the plaintiffs in the U.S. class action lawsuits). Nortel will also contribute to the plaintiffs one-half of any recovery from its ongoing litigation against certain of its former senior officers who were terminated for cause in 2004, which seeks the return of payments made to them in 2003 under NNC’s bonus plan. The total settlement amount includes all plaintiffs’ court-approved attorneys’ fees. On June 1, 2006, NNC placed $575 plus accrued interest of $5 into escrow and classified this amount as restricted cash. As a result of the Global Class Action Settlement, NNC established a litigation reserve and recorded a charge in the amount of $2,474 to its full-year 2005 financial results, $575 of which related to the cash portion of the Global Class Action Settlement, while $1,899 related to the equity component. The equity component of the litigation reserve was adjusted each quarter from February 2006 through March 20, 2007 to reflect the fair value of the Nortel Networks Corporation common shares issuable.

The effective date of the Global Class Action Settlement was March 20, 2007, on which date the number of Nortel Networks Corporation common shares issuable in connection with the equity component was fixed. As such, a final measurement date occurred for the equity component of the settlement and the value of the shares issuable was fixed at their fair value of $1,626 on the effective date.

NNC recorded a shareholder litigation settlement recovery of $54 during the first quarter of 2007 as a result of the final fair value adjustment for the equity component of the Global Class Action Settlement made on March 20, 2007. In addition, the litigation reserve related to the equity component was reclassified to additional paid-in capital within NNC’s shareholders’ equity on March 20, 2007 as the number of issuable Nortel Networks Corporation common shares was fixed on that date. The reclassified amount will be further reclassified to Nortel Networks Corporation common shares as the shares are issued. On the effective date of March 20, 2007, NNC also removed the restricted cash and corresponding litigation reserve related to the cash portion of the settlement, as the funds became controlled by the escrow agents and Nortel’s obligation has been extinguished. The administration of the settlement will be a complex and lengthy process. Plaintiffs’ counsel will submit lists of claims approved by the claims administrator to the appropriate courts for approval. Once all the courts have approved the claims, the process of distributing cash and share certificates to claimants will begin. Although NNC cannot predict how long the process will take, approximately 4% of the settlement shares have been issued, and NNC currently expects the issuance of the balance to commence in the first half of 2008.

NNC’s insurers have agreed to pay $229 in cash toward the settlement and NNC has agreed to certain indemnification obligations with them. NNC believes that it is unlikely that these indemnification obligations will materially increase its total cash payment obligations under the Global Class Action Settlement. See note 12 for additional information.

Under the terms of the Global Class Action Settlement, NNC also agreed to certain corporate governance enhancements. These enhancements included the codification of certain of Nortel’s current governance practices in the written mandate for its Board of Directors and the inclusion in its Statement of Corporate Governance Practices contained in Nortel’s annual proxy circular and proxy statement of disclosure regarding certain other governance practices.

In August 2006, NNC reached a separate agreement in principle to settle a class action lawsuit in the Ontario Superior Court of Justice that is not covered by the Global Class Action Settlement, subject to court approval (the “Ontario Settlement”). In February 2007, the court approved the Ontario Settlement. The settlement did not have a material impact on Nortel’s financial condition and an accrued liability was recorded in the third quarter of 2006 for the related settlement, which was paid in the first quarter of 2007.

Nortel and NNC had been under investigation by the SEC since April 2004 in connection with previous restatements of their consolidated financial statements. As a result of discussions with the Enforcement Staff of the SEC for purposes of

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resolving the investigation, NNC recorded an accrual in its condensed consolidated financial statements in the second quarter of 2007 in the amount of $35, which it believed represented the best estimate for the liability associated with this matter at that time. In October 2007, Nortel and NNC reached a settlement on all issues with the SEC in connection with its investigation of the previous restatements of Nortel and NNC’s financial results. As part of the settlement, Nortel and NNC agreed to pay a civil penalty of $35 and a disgorgement in the amount of one U.S. Dollar, and Nortel and NNC consented to be restrained and enjoined from future violations of the antifraud, reporting, books and records and internal control provisions of U.S. federal securities laws. Further, Nortel and NNC are required to provide to the SEC quarterly written reports detailing the progress in implementing Nortel and NNC’s remediation plan and actions to address their remaining weakness relating to revenue recognition. This reporting requirement began following the filing of the Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 and is expected to end following the filing of this report and the delivery of the corresponding remediation progress report, based upon the elimination of Nortel’s remaining material weakness and full implementation of Nortel’s remediation plan.

In April 2004, NNC also announced that it was under investigation by the Ontario Securities Commission (the “OSC”) in connection with the same matters as the SEC investigation. In May 2007, Nortel and NNC entered into a settlement agreement with the Staff of the OSC in connection with its investigation. On May 22, 2007, the OSC issued an order approving the settlement agreement, which fully resolves all issues with the OSC. Under the terms of the OSC order, Nortel and NNC are required to deliver to the OSC Staff quarterly and annual written reports detailing, among other matters, their progress in implementing their remediation plan. This reporting obligation began following the filing of the Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 and is expected to end following the filing of this report and delivery of the corresponding remediation progress report, based upon the elimination of its remaining material weakness relating to revenue recognition and the completion of their remediation plan. The OSC order did not impose any administrative penalty or fine. However, NNC has made a payment to the OSC in the amount CAD $1 million as a contribution toward the cost of its investigation.

In May 2004, NNC received a federal grand jury subpoena for the production of certain documents, including financial statements and corporate, personnel and accounting records, in connection with an ongoing criminal investigation being conducted by the U.S. Attorney’s Office for the Northern District of Texas, Dallas Division. In August 2005, NNC received an additional federal grand jury subpoena seeking additional documents, including documents relating to the Nortel Retirement Income Plan and the Nortel Long-Term Investment Plan. This investigation is ongoing. A criminal investigation into Nortel’s financial accounting situation by the Integrated Market Enforcement Team of the Royal Canadian Mounted Police is also ongoing.

Beginning in December 2001, NNC, together with certain of its then-current and former directors, officers and employees, was named as a defendant in several purported class action lawsuits pursuant to the United States Employee Retirement Income Security Act. These lawsuits have been consolidated into a single proceeding in the U.S. District Court for the Middle District of Tennessee. This lawsuit is on behalf of participants and beneficiaries of the NNC Long-Term Investment Plan, who held shares of the NNC Stock Fund during the class period, which has yet to be determined by the court. The lawsuit alleges, among other things, material misrepresentations and omissions to induce participants and beneficiaries to continue to invest in and maintain investments in Nortel Networks Corporation common shares through the investment plan. The court has not yet ruled as to whether the plaintiff’s proposed class action should be certified.

In January 2005, Nortel and NNC filed a Statement of Claim in the Ontario Superior Court of Justice against Messrs. Frank Dunn, Douglas Beatty and Michael Gollogly, their former senior officers who were terminated for cause in April 2004, seeking the return of payments made to them under Nortel’s bonus plan in 2003.

In April 2006, Mr. Dunn filed a Notice of Action and Statement of Claim in the Ontario Superior Court of Justice against Nortel and NNC asserting claims for wrongful dismissal, defamation and mental distress, and seeking punitive, exemplary and aggravated damages, out-of-pocket expenses and special damages, indemnity for legal expenses incurred as a result of civil and administrative proceedings brought against him by reason of his having been an officer or director of the defendants, pre-judgment interest and costs.

In May and October 2006, respectively, Messrs. Gollogly and Beatty filed Statements of Claim in the Ontario Superior Court of Justice against NNC and Nortel asserting claims for, among other things, wrongful dismissal and seeking compensatory, aggravated and punitive damages, and pre-and post-judgment interest and costs.

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In June 2005, Ipernica Limited (formerly known as QSPX Development 5 Pty Ltd), an Australian patent holding firm, filed a lawsuit against NNC in the U.S. District Court for the Eastern District of Texas alleging patent infringement. In April 2007, the jury reached a verdict to award damages to the plaintiff in the amount of $28. Post-trial motions have been filed. The trial judge will next enter a judgment that could range from increasing the damages award against NNC to a reversal of the jury’s verdict.

Except as otherwise described herein, in each of the matters described above, the plaintiffs are seeking an unspecified amount of monetary damages. Nortel is unable to ascertain the ultimate aggregate amount of monetary liability or financial impact to Nortel or NNC of the above matters, which, unless otherwise specified, seek damages from the defendants of material or indeterminate amounts or could result in fines and penalties. With the exception of $2,474 and the related fair value adjustments, which NNC has recorded in 2006 and first quarter of 2007 financial results as a result of the Global Class Action Settlement and the accrued liability for the Ontario Settlement, neither Nortel nor NNC has made any provisions for any potential judgments, fines, penalties or settlements that may result from these actions, suits, claims and investigations. Except for the Global Class Action Settlement, NNC cannot determine whether these actions, suits, claims and proceedings will, individually or collectively, have a material adverse effect on its business, results of operations, financial condition or liquidity. Except for matters encompassed by the Global Class Action Settlement and the Ontario Settlement, NNC intends to defend these actions, suits, claims and proceedings, litigating or settling cases where in management’s judgment it would be in the best interest of shareholders to do so. Nortel and NNC will continue to cooperate fully with all authorities in connection with the regulatory and criminal investigations.

Nortel is also a defendant in various other suits, claims, proceedings and investigations which arise in the normal course of business.

Environmental matters

Nortel’s business is subject to a wide range of continuously evolving environmental laws in various jurisdictions. Nortel seeks to operate its business in compliance with these changing laws and regularly evaluates their impact on operations, products and facilities. Existing and new laws may cause Nortel to incur additional costs. In some cases, environmental laws affect Nortel’s ability to import or export certain products to or from, or produce or sell certain products in, some jurisdictions, or have caused it to redesign products to avoid use of regulated substances. Although costs relating to environmental compliance have not had a material adverse effect on the business, results of operations, financial condition or liquidity to date, there can be no assurance that such costs will not have a material adverse effect going forward. Nortel continues to evolve compliance plans and risk mitigation strategies relating to the new laws and requirements. Nortel intends to design and manufacture products that are compliant with all applicable legislation and meet its quality and reliability requirements.

Nortel has a corporate environmental management system standard and an environmental program to promote such compliance. Moreover, Nortel has a periodic, risk-based, integrated environment, health and safety audit program. Nortel’s environmental program focuses its activities on design for the environment, supply chain and packaging reduction issues. Nortel works with its suppliers and other external groups to encourage the sharing of non-proprietary information on environmental research.

Nortel is exposed to liabilities and compliance costs arising from its past generation, management and disposal of hazardous substances and wastes. As of December 31, 2007, the accruals on the consolidated balance sheet for environmental matters were $26. Based on information available as of December 31, 2007 and 2006, management believes that the existing accruals are sufficient to satisfy probable and reasonably estimable environmental liabilities related to known environmental matters. Any additional liabilities that may result from these matters, and any additional liabilities that may result in connection with other locations currently under investigation, are not expected to have a material adverse effect on the business, results of operations, financial condition and liquidity of Nortel.

Nortel has remedial activities under way at 12 sites which are either currently or previously owned or occupied facilities. An estimate of Nortel’s anticipated remediation costs associated with all such sites, to the extent probable and reasonably estimable, is included in the environmental accruals referred to above in an approximate amount of $26.

Nortel is also listed as a potentially responsible party under the U.S. Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) at four Superfund sites in the U.S. (at three of the Superfund sites, Nortel is

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considered a de minimis potentially responsible party). A potentially responsible party within the meaning of CERCLA is generally considered to be a major contributor to the total hazardous waste at a Superfund site (typically 1% or more, depending on the circumstances). A de minimis potentially responsible party is generally considered to have contributed less than 1% (depending on the circumstances) of the total hazardous waste at a Superfund site. An estimate of Nortel’s share of the anticipated remediation costs associated with such Superfund sites is expected to be de minimis and is included in the environmental accruals of $26 referred to above.

Liability under CERCLA may be imposed on a joint and several basis, without regard to the extent of Nortel’s involvement. In addition, the accuracy of Nortel’s estimate of environmental liability is affected by several uncertainties such as additional requirements which may be identified in connection with remedial activities, the complexity and evolution of environmental laws and regulations, and the identification of presently unknown remediation requirements. Consequently, Nortel’s liability could be greater than its current estimate.

20.   Subsequent events

2008 Restructuring Plan

On February 27, 2008, as part of its further efforts to increase competitiveness by improving profitability and overall business performance, Nortel announced a restructuring plan that includes workforce reductions of approximately 2,100 positions and shifting an additional approximate 1,000 positions from higher-cost locations to lower-cost locations. The reductions will occur through both voluntary and involuntary terminations. In addition to the workforce reductions, Nortel announced steps to achieve additional cost savings by efficiently managing its various business locations and further consolidating real estate requirements. Collectively, these efforts are referred to as the “2008 Restructuring Plan”. Nortel expects total charges to earnings and cash outlays related to workforce reductions to be approximately $205, which will be substantially incurred over fiscal 2008 and 2009. Nortel expects total charges to earnings related to consolidating real estate to be approximately $70 including approximately $25 related to fixed asset write downs, to be incurred over fiscal 2008 and 2009, and cash outlays of approximately $45 to be incurred through 2024.

21.   Supplemental condensed consolidating financial information

On July 5, 2006, NNL completed an offering of the July 2006 Notes to qualified institutional buyers pursuant to Rule 144A and to persons outside the United States pursuant to Regulation S under the Securities Act. The July 2006 Notes consist of the 2016 Fixed Rate Notes, the 2013 Fixed Rate Notes and the 2011 Floating Rate Notes. The July 2006 Notes are fully and unconditionally guaranteed by NNC and initially guaranteed by NNI.

On March 28, 2007, Nortel completed an offering of $1,150 aggregate principal amount of Convertible Notes to qualified institutional buyers pursuant to Rule 144A under the Securities Act and in Canada to qualified institutional buyers that are also accredited investors pursuant to applicable Canadian private placement exemptions. The Convertible Notes consist of $575 principal amount of the 2012 Notes and $575 principal amount of the 2014 Notes. The Convertible Notes are fully and unconditionally guaranteed by Nortel and initially guaranteed by NNI. See note 10 for more information.

The guarantee by NNI of the July 2006 Notes or the Convertible Notes will be released if the July 2006 Notes or the Convertible Notes, as applicable, are rated Baa3 or higher by Moody’s and BBB- or higher from Standard & Poor’s, in each case, with no negative outlook.

The following supplemental condensed consolidating financial data has been prepared in accordance with Rule 3-10 of Regulation S-X promulgated by the SEC and illustrates, in separate columns, the composition of Nortel, NNI as the Guarantor Subsidiary of the July 2006 Notes and the Convertible Notes, the subsidiaries of Nortel that are not issuers or guarantors of the July 2006 Notes and the Convertible Notes (the “Non-Guarantor Subsidiaries”), eliminations and the consolidated total as of December 31, 2007 and December 31, 2006, and for the years ended December 31, 2007, 2006 and 2005. NNC financial information is filed separately with the SEC in the NNC 2007 Annual Report on Form 10-K for the year ended December 31, 2007.

Investments in subsidiaries are accounted for using the equity method for purposes of the supplemental consolidating financial data. Net earnings (loss) of subsidiaries are therefore reflected in the investment account and net earnings (loss). The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions. The

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financial data may not necessarily be indicative of the results of operations or financial position had the subsidiaries been operating as independent entities. The accounting policies applied by Nortel, NNL and the Guarantor and Non-Guarantor Subsidiaries in the condensed consolidating financial information are consistent with those set out in note 2.

Supplemental Condensed Consolidating Statements of Operations for the year ended December 31, 2007:

	Nortel						Non-
	Networks			Guarantor			Guarantor
	Limited			Subsidiary			Subsidiaries			Eliminations			Total
	(Millions of U.S. Dollars)
Revenues	$	3,124		$	5,020		$	5,221		$	(2,417	)	$	10,948
Cost of revenues		1,908			3,236			3,594			(2,417	)		6,321
Gross profit		1,216			1,784			1,627			—			4,627
Selling, general and administrative expense		520			921			1,045			—			2,486
Research and development expense		839			677			207			—			1,723
Amortization of intangible assets		—			8			42			—			50
Special charges		21			70			119			—			210
Loss (gain) on sale of businesses and assets		(8	)		4			(27	)		—			(31	)
Other operating expenses (income) — net		(19	)		(9	)		(7	)		—			(35	)
Operating earnings (loss)		(137	)		113			248			—			224
Other income (expense) — net		509			(97	)		282			(250	)		444
Interest expense — net
Long-term debt		(219	)		(10	)		(28	)		—			(257	)
Other		—			(73	)		63			(14	)		(24	)
Earnings (loss) from operations before income taxes, minority interests and equity in net earnings (loss) of associated companies		153			(67	)		565			(264	)		387
Income tax benefit (expense)		(1,076	)		(2	)		(36	)		—			(1,114	)
		(923	)		(69	)		529			(264	)		(727	)
Minority interests — net of tax		—			—			(73	)		—			(73	)
Equity in net earnings (loss) of associated companies — net of tax		125			78			4			(205	)		2
Net earnings (loss) before cumulative effect of accounting change		(798	)		9			460			(469	)		(798	)
Cumulative effect of accounting change — net of tax		—			—			—			—			—
Net earnings (loss)		(798	)		9			460			(469	)		(798	)
Dividends on preferred shares		42			—			—			—			42
Net earnings (loss) applicable to common shares	$	(840	)	$	9		$	460		$	(469	)	$	(840	)

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Supplemental Condensed Consolidating Statements of Operations for the year ended December 31, 2006:

	Nortel						Non-
	Networks			Guarantor			Guarantor
	Limited			Subsidiary			Subsidiaries			Eliminations			Total
	(Millions of U.S. Dollars)
Revenues	$	3,067		$	5,137		$	5,959		$	(2,745	)	$	11,418
Cost of revenues		2,006			3,564			4,163			(2,745	)		6,988
Gross profit		1,061			1,573			1,796			—			4,430
Selling, general and administrative expense		419			998			1,074			—			2,491
Research and development expense		896			679			365			—			1,940
Amortization of intangible assets		—			3			23			—			26
In-process research and development expense		—			16			6			—			22
Special charges		25			47			33			—			105
Loss (gain) on sale of businesses and assets		(11	)		(81	)		(114	)		—			(206	)
Other operating income — net		(9	)		(4	)		—			—			(13	)
Operating earnings (loss)		(259	)		(85	)		409			—			65
Other income (expense) — net		29			61			144			(48	)		186
Interest expense — net
Long-term debt		(126	)		(37	)		(24	)		—			(187	)
Other		(22	)		(76	)		70			6			(22	)
Earnings (loss) from operations before income taxes, minority interests and equity in net earnings (loss) of associated companies		(378	)		(137	)		599			(42	)		42
Income tax benefit (expense)		(12	)		1			(49	)		—			(60	)
		(390	)		(136	)		550			(42	)		(18	)
Minority interests — net of tax		—			—			(21	)		—			(21	)
Equity in net earnings (loss) of associated companies — net of tax		357			80			—			(439	)		(2	)
Net earnings (loss) before cumulative effect of accounting change		(33	)		(56	)		529			(481	)		(41	)
Cumulative effect of accounting change — net of tax		1			5			3			—			9
Net earnings (loss)		(32	)		(51	)		532			(481	)		(32	)
Dividends on preferred shares		38			—			—			—			38
Net earnings (loss) applicable to common shares	$	(70	)	$	(51	)	$	532		$	(481	)	$	(70	)

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Supplemental Condensed Consolidating Statements of Operations for the year ended December 31, 2005:

	Nortel						Non-
	Networks			Guarantor			Guarantor
	Limited			Subsidiary			Subsidiaries			Eliminations			Total
	(Millions of U.S. Dollars)
Revenues	$	3,606		$	5,579		$	4,805		$	(3,481	)	$	10,509
Cost of revenues		1,893			4,263			3,595			(3,481	)		6,270
Gross profit		1,713			1,316			1,210			—			4,239
Selling, general and administrative expense		655			898			864			—			2,417
Research and development expense		808			717			349			—			1,874
Amortization of intangible assets		—			—			17			—			17
Special charges		28			54			87			—			169
Loss (gain) on sale of businesses and assets		42			4			1			—			47
Other operating expenses (income) — net		(8	)		(20	)		5			—			(23	)
Operating earnings (loss)		188			(337	)		(113	)		—			(262	)
Other income — net		152			67			45			8			272
Interest expense — net
Long-term debt		(84	)		(12	)		(28	)		—			(124	)
Other		(8	)		(63	)		64			1			(6	)
Earnings (loss) from operations before income taxes, minority interests and equity in net earnings (loss) of associated companies		248			(345	)		(32	)		9			(120	)
Income tax benefit (expense)		(4	)		83			2			—			81
		244			(262	)		(30	)		9			(39	)
Minority interests — net of tax		—			—			(12	)		—			(12	)
Equity in net earnings (loss) of associated companies  — net of tax		(295	)		(86	)		(1	)		385			3
Net earnings (loss) from continuing operations		(51	)		(348	)		(43	)		394			(48	)
Net earnings (loss) from discontinued operations  — net of tax		4			—			(3	)		—			1
Net earnings (loss) before cumulative effect of accounting change		(47	)		(348	)		(46	)		394			(47	)
Cumulative effect of accounting change — net of tax		—			—			—			—			—
Net earnings (loss)		(47	)		(348	)		(46	)		394			(47	)
Dividends on preferred shares		26			—			—			—			26
Net earnings (loss) applicable to common shares	$	(73	)	$	(348	)	$	(46	)	$	394		$	(73	)

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Supplemental Condensed Consolidating Balance Sheets as of December 31, 2007:

	Nortel				Non-
	Networks		Guarantor		Guarantor
	Limited		Subsidiary		Subsidiaries			Eliminations			Total
	(Millions of U.S. Dollars)
ASSETS
Current assets
Cash and cash equivalents	$	329	$	1,128	$	2,069		$	—		$	3,526
Restricted cash and cash equivalents		34		8		24			—			66
Accounts receivable — net		2,394		1,828		3,120			(3,637	)		3,705
Inventories — net		100		505		1,397			—			2,002
Deferred income taxes — net		32		318		137			—			487
Other current assets		86		120		262			(1	)		467
Total current assets		2,975		3,907		7,009			(3,638	)		10,253
Investments		6,616		3,563		(88	)		(9,897	)		194
Plant and equipment — net		528		406		596			—			1,530
Goodwill		—		1,877		504			—			2,381
Intangible assets — net		18		34		161			—			213
Deferred income taxes — net		1,128		1,245		495			—			2,868
Other assets		171		118		260			(15	)		534
Total assets	$	11,436	$	11,150	$	8,937		$	(13,550	)	$	17,973
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Trade and other accounts payable	$	1,486	$	998	$	2,382		$	(3,637	)	$	1,229
Payroll and benefit-related liabilities		134		259		296			—			689
Contractual liabilities		17		47		208			—			272
Restructuring liabilities		11		46		43			—			100
Other accrued liabilities		463		1,246		2,091			(1	)		3,799
Long-term debt due within one year		1		12		10			—			23
Total current liabilities		2,112		2,608		5,030			(3,638	)		6,112
Long-term debt		2,243		94		329			—			2,666
Deferred income taxes — net		—		—		17			—			17
Other liabilities		1,071		716		1,102			(15	)		2,874
Total liabilities		5,426		3,418		6,478			(3,653	)		11,669
Minority interests in subsidiary companies		—		—		294			—			294
Shareholders’ equity		6,010		7,732		2,165			(9,897	)		6,010
Total liabilities and shareholders’ equity	$	11,436	$	11,150	$	8,937		$	(13,550	)	$	17,973

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Supplemental Condensed Consolidating Balance Sheets as of December 31, 2006:

	Nortel				Non-
	Networks		Guarantor		Guarantor
	Limited		Subsidiary		Subsidiaries		Eliminations			Total
	(Millions of U.S. Dollars)
ASSETS
Current assets
Cash and cash equivalents	$	626	$	1,145	$	1,716	$	—		$	3,487
Restricted cash and cash equivalents		18		19		50		(43	)		44
Accounts receivable — net		—		3,081		12,225		(11,597	)		3,709
Inventories — net		145		547		1,311		(14	)		1,989
Deferred income taxes — net		45		225		6		—			276
Other current assets		128		110		274		—			512
Total current assets		962		5,127		15,582		(11,654	)		10,017
Investments		6,629		5,239		3,266		(14,930	)		204
Plant and equipment — net		490		446		590		—			1,526
Goodwill		—		1,878		473		—			2,351
Intangible assets — net		—		45		196		—			241
Deferred income taxes — net		1,847		1,338		678		—			3,863
Other assets		246		364		725		(655	)		680
Total assets	$	10,174	$	14,437	$	21,510	$	(27,239	)	$	18,882
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Trade and other accounts payable	$	8	$	3,763	$	8,950	$	(11,597	)	$	1,124
Payroll and benefit-related liabilities		114		259		264		—			637
Contractual liabilities		11		59		173		—			243
Restructuring liabilities		10		52		35		—			97
Other accrued liabilities		529		1,312		1,915		—			3,756
Long-term debt due within one year		1		9		8		—			18
Total current liabilities		673		5,454		11,345		(11,597	)		5,875
Long-term debt		2,218		102		326		—			2,646
Deferred income taxes — net		—		—		97		—			97
Other liabilities		1,390		1,219		2,174		(655	)		4,128
Total liabilities		4,281		6,775		13,942		(12,252	)		12,746
Minority interests in subsidiary companies		—		—		243		—			243
Shareholders’ equity		5,893		7,662		7,325		(14,987	)		5,893
Total liabilities and shareholders’ equity	$	10,174	$	14,437	$	21,510	$	(27,239	)	$	18,882

156

NORTEL NETWORKS LIMITED

Notes to Consolidated Financial Statements — (Continued)

Supplemental Condensed Consolidating Statements of Cash Flows for the year ended December 31, 2007:

	Nortel						Non-
	Networks			Guarantor			Guarantor
	Limited			Subsidiary			Subsidiaries			Eliminations			Total
	(Millions of U.S. Dollars)
Cash flows from (used in) operating activities
Net earnings (loss)	$	(798	)	$	9		$	460		$	(469	)	$	(798	)
Adjustment to reconcile to net earnings (loss)		579			(8	)		(49	)		469			991
Net cash from (used in) operating activities		(219	)		1			411			—			193
Cash flows from (used in) investing activities
Expenditures for plant and equipment		(81	)		(64	)		(90	)		—			(235	)
Proceeds on disposals of plant and equipment		58			5			27			—			90
Change in restricted cash and cash equivalents		—			(6	)		(16	)		—			(22	)
Acquisitions of investments and businesses — net of cash acquired		(4	)		(6	)		(75	)		—			(85	)
Proceeds from the sales of investments and businesses and assets — net		(60	)		62			73			—			75
Net cash from (used in) investing activities		(87	)		(9	)		(81	)		—			(177	)
Cash flows from (used in) financing activities
Dividends paid, including paid by subsidiaries to minority interests		(42	)		—			(10	)		—			(52	)
Increase in notes payable		—			—			76			—			76
Decrease in notes payable		—			—			(81	)		—			(81	)
Repayments of capital leases payable		(3	)		(9	)		(12	)		—			(24	)
Net cash from (used in) financing activities		(45	)		(9	)		(27	)		—			(81	)
Effect of foreign exchange rate changes on cash and cash equivalents		54			—			50			—			104
Net increase (decrease) in cash and cash equivalents		(297	)		(17	)		353			—			39
Cash and cash equivalents at beginning of year		626			1,145			1,716			—			3,487
Cash and cash equivalents at end of year	$	329		$	1,128		$	2,069		$	—		$	3,526

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NORTEL NETWORKS LIMITED

Notes to Consolidated Financial Statements — (Continued)

Supplemental Condensed Consolidating Statements of Cash Flows for the year ended December 31, 2006:

	Nortel						Non-
	Networks			Guarantor			Guarantor
	Limited			Subsidiary			Subsidiaries			Eliminations			Total
	(Millions of U.S. Dollars)
Cash flows from (used in) operating activities
Net earnings (loss)	$	(32	)	$	(51	)	$	532		$	(481	)	$	(32	)
Adjustment to reconcile to net earnings (loss)		(567	)		155			(320	)		481			(251	)
Net cash from (used in) operating activities		(599	)		104			212			—			(283	)
Cash flows from (used in) investing activities
Expenditures for plant and equipment		(100	)		(122	)		(94	)		—			(316	)
Proceeds on disposals of plant and equipment		88			—			55			—			143
Change in restricted cash and cash equivalents		33			(2	)		5			—			36
Acquisitions of investments and businesses — net of cash acquired		—			(108	)		(38	)		—			(146	)
Proceeds from the sales of investments and businesses and assets		341			79			180			—			600
Net cash from (used in) investing activities		362			(153	)		108			—			317
Cash flows from (used in) financing activities
Dividends paid, including paid by subsidiaries to minority interests		(60	)		—			—			—			(60	)
Increase in notes payable		—			—			105			—			105
Decrease in notes payable		—			—			(79	)		—			(79	)
Proceeds from issuance of long-term debt		2,000			1,300			—			—			3,300
Repayments of long-term debt		(1,275	)		(1,300	)		(150	)		—			(2,725	)
Debt issuance costs		(42	)		—			—			—			(42	)
Increase in capital leases payable		—			1			—			—			1
Repayments of capital leases payable		(5	)		(8	)		(4	)		—			(17	)
Net cash from (used in) financing activities		618			(7	)		(128	)		—			483
Effect of foreign exchange rate changes on cash and cash equivalents		—			—			94			—			94
Net increase (decrease) in cash and cash equivalents		381			(56	)		286			—			611
Cash and cash equivalents at beginning of year		245			1,201			1,430			—			2,876
Cash and cash equivalents at end of year	$	626		$	1,145		$	1,716		$	—		$	3,487

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NORTEL NETWORKS LIMITED

Notes to Consolidated Financial Statements — (Continued)

Supplemental Condensed Consolidating Statements of Cash Flows for the year ended December 31, 2005:

	Nortel						Non-
	Networks			Guarantor			Guarantor
	Limited			Subsidiary			Subsidiaries			Eliminations			Total
	(Millions of U.S. Dollars)
Cash flows from (used in) operating activities
Net earnings (loss)	$	(47	)	$	(348	)	$	(45	)	$	393		$	(47	)
Adjustment to reconcile to net earnings (loss)		4			(168	)		432			(393	)		(125	)
Net cash from (used in) operating activities		(43	)		(516	)		387			—			(172	)
Cash flows from (used in) investing activities
Expenditures for plant and equipment		(42	)		(104	)		(110	)		—			(256	)
Proceeds on disposals of plant and equipment		9			1			—			—			10
Change in restricted cash and cash equivalents		4			1			(2	)		—			3
Acquisitions of investments and businesses — net of cash acquired		—			(22	)		(629	)		—			(651	)
Proceeds from the sales of investments and businesses and assets		343			107			20			—			470
Net cash from (used in) investing activities		314			(17	)		(721	)		—			(424	)
Cash flows from (used in) financing activities
Dividends paid, including paid by subsidiaries to minority interests		(43	)		—			—			—			(43	)
Increase in notes payable		—			—			70			—			70
Decrease in notes payable		—			—			(83	)		—			(83	)
Repayments of capital leases payable		(1	)		(8	)		—			—			(9	)
Net cash from (used in) financing activities		(44	)		(8	)		(13	)		—			(65	)
Effect of foreign exchange rate changes on cash and cash equivalents		1			—			(103	)		—			(102	)
Net cash from (used in) continuing operations		228			(541	)		(450	)		—			(763	)
Net cash from (used in) discontinued operations		—			—			33			—			33
Net increase (decrease) in cash and cash equivalents		228			(541	)		(417	)		—			(730	)
Cash and cash equivalents at beginning of year		17			1,742			1,847			—			3,606
Cash and cash equivalents at end of year	$	245		$	1,201		$	1,430		$	—		$	2,876

* * * * *

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Quarterly Financial Data (Unaudited)

The following is a summary of the unaudited quarterly results of operations for fiscal 2007 and fiscal 2006. The fourth quarter 2007 has not been previously reported.

Nortel believes all adjustments necessary for a fair presentation of the results for the periods presented have been made.

	4th Quarter					3rd Quarter				2nd Quarter					1st Quarter
	2007			2006		2007		2006		2007		2006			2007			2006
	(Millions of U.S. Dollars)
Revenues	$	3,198		$	3,322	$	2,705	$	2,926	$	2,562	$	2,780		$	2,483		$	2,390
Gross Profit		1,399			1,321		1,176		1,115		1,048		1,068			1,004			926
Special Charges		38			30		56		21		36		49			80			5
Other income — net		95			11		161		66		112		58			76			51
Net earnings (loss)		(824	)		180		89		17		40		(116	)		(103	)		(113	)

See notes 3, 4 and 6 to the audited consolidated financial statements for the impact of accounting changes, reclassifications and special charges, respectively, that affect the comparability of the above selected financial data. Additionally, the following significant items were recorded in the fourth quarter of 2007:

•  During the fourth quarter of 2007, Nortel incurred a non-cash charge of $1,064 to increase the valuation allowance against the Canadian deferred tax asset due to changes in the Canadian tax profile.

•  During the fourth quarter of 2007, Nortel recognized a gain in currency exchange of $40 as a result of the strengthening of the Canadian Dollar against the U.S. Dollar.

160

REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS

To the Shareholders and Board of Directors of Nortel Networks Limited

We have audited the consolidated financial statements of Nortel Networks Limited and subsidiaries (“Nortel”) as of December 31, 2006 and for each of the two years in the period ended December 31, 2006, and have issued our reports thereon dated March 15, 2007 except as to notes 4, 5, 6 and 21, which are as of September 7, 2007 (which report on the consolidated financial statements expressed an unqualified opinion and includes a separate report titled Comments by Independent Registered Chartered Accountants on Canada-United States of America Reporting Difference referring to changes in accounting principles that have a material effect on the comparability of the financial statements); such consolidated financial statements and reports are included elsewhere in this Form 10-K and are incorporated herein by reference. Our audits also included the consolidated financial statement schedule of Nortel listed in Item 15. This consolidated financial statement schedule is the responsibility of Nortel’s management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ Deloitte & Touche LLP

Independent Registered Chartered Accountants

Licensed Public Accountants

Toronto, Canada

March 15, 2007, except as to notes 4, 5, 6 and 21 to the consolidated financial statements which are as of September 7, 2007

161

Schedule II
Consolidated

NORTEL NETWORKS LIMITED
Valuation and Qualifying Accounts and Reserves
Provision For Uncollectibles^(a)

	Balance at		Charged						Balance at
	Beginning of		to Costs						End of
	Year		and Expenses			Deductions(b)			Year(c)
	U.S. GAAP
	(Millions of U.S. Dollars)
Year 2007	$	122	$	2		$	27		$	97
Year 2006	$	173	$	5		$	56		$	122
Year 2005	$	179	$	(10	)	$	(4	)	$	173

(a)	Excludes Discontinued Operations.
(b)	Includes acquisitions and disposals of subsidiaries and divisions and amounts written off, and foreign exchange translation adjustments.
(c)	Includes provisions for uncollectibles on long-term accounts receivable of $35, $34 and $33 as of December 31, 2007, 2006 and 2005, respectively.

162

ITEM 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

ITEM 9A.   Controls and Procedures

Management Conclusions Concerning Disclosure Controls and Procedures

All dollar amounts in this Item 9A are in millions of U.S. Dollars unless otherwise stated.

We carried out an evaluation under the supervision and with the participation of management, including the CEO and CFO (Mike S. Zafirovski and Paviter S. Binning, respectively), pursuant to Rule 13a-15 under the Exchange Act of the effectiveness of our disclosure controls and procedures as at December 31, 2007. Based on this evaluation, management, including the CEO and CFO, have concluded that our disclosure controls and procedures as at December 31, 2007 were effective to provide reasonable assurance that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required and that it is accumulated and communicated to our management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) under the Exchange Act. Our internal control over financial reporting is intended to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Our internal control over financial reporting includes those policies and procedures that:

•  pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

•  provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures are being made only in accordance with authorizations of management and the Board of Directors; and

•  provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In making its assessment of internal control over financial reporting, management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Management, including the CEO and CFO, assessed the effectiveness of our internal control over financial reporting, and concluded that we maintained effective internal control over financial reporting as at December 31, 2007.

Our independent registered public accounting firm that audited the financial statements in this report has issued an attestation report expressing an opinion on the effectiveness of internal control over financial reporting as at December 31, 2007, which report appears at the end of this Item 9A.

Elimination of the Material Weakness Reported in the 2006 Annual Report; Remedial Measures

For purposes of this report, the term “material weakness” means a deficiency (within the meaning in Rule 12b-5 of the Exchange Act), or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

Material Weakness Elimination

As of December 31, 2006, we reported the following material weakness in our internal control over financial reporting (a material weakness in the area of revenue was first identified by management and Deloitte & Touche over the course of the second restatement process in 2004):

Lack of sufficient cross-functional communication and coordination, including further definition of roles and responsibilities, with respect to the scope and timing of customer arrangements, insufficient segregation of duties in

163

certain areas, delayed implementation of Nortel review processes and personnel for the LG-Nortel joint venture, and insufficient controls over certain end user computing applications, all of which impact upon the appropriate application of U.S. GAAP to revenue generating transactions.

Specifically, we did not sufficiently and effectively communicate and coordinate between and among the various finance and non-finance organizations in a consistent manner across the company on the scope and terms of customer arrangements, including the proper identification of all undelivered obligations that may impact upon revenue recognition, which deficiency was compounded by the complexity of our customer arrangements, in order to ensure that related revenues were accurately recorded in accordance with U.S. GAAP. As well, we require further definition of roles and responsibilities, and further enhancement of segregation of duties, in particular with respect to the front-end processes around customer arrangements and with respect to access to computer systems, to ensure these revenues are identified and recorded in a timely and accurate manner. With regard to the LG-Nortel joint venture, which was formed in November 2005 and included in management’s assessment of internal control over financial reporting starting in January 2006, these deficiencies were compounded by delays in putting in place review processes and personnel with appropriate knowledge, experience and training in U.S. GAAP. Further, we utilize various end user computing applications (for example, spreadsheets) to support accounting for revenue generating transactions, which are not sufficiently protected from unauthorized changes and sufficiently reviewed for completeness and accuracy.

During 2007, we developed and implemented internal controls to address this material weakness. An extensive analysis of the revenue recognition-related processes was undertaken in the second quarter of 2007. Control points were created or identified leading to a better understanding of the overall process, identifying the specific areas that required improvement, in particular with respect to flow of information between different groups within Nortel necessary to ensure proper accounting treatment. The following are the key changes in internal control over financial reporting and remedial measures implemented that addressed the material weakness.

Cross-Functional Communication and Coordination

In 2007, we developed and implemented plans to put in place additional controls within the revenue recognition processes, in particular with respect to cross-functional interactions to enable information regarding customer arrangements including proper identification of all undelivered obligations to flow completely and accurately throughout the revenue cycle. In the second quarter of 2007, we instituted regular meetings between the various groups involved in the revenue process to enhance a regular flow of information including a review of key revenue recognition matters to ensure a consistent understanding of the proper accounting treatment for specific arrangements. Also in the second quarter of 2007, we put in place a quarterly communication from our Global Revenue Governance group, or GRG, that summarizes higher risk transactions or circumstances with guidance on the corresponding appropriate accounting treatment in order to assist in the identification of, and appropriate accounting for, similar circumstances. Further, to supplement the existing contract review process performed by the GRG, we implemented in the fourth quarter of 2007 a contract review process performed by our Contract Assurance group for contracts with revenue between $2 million and $5 million, to confirm the application of appropriate accounting treatment, and determine whether further review by the GRG is warranted. Additional controls established in the third quarter of 2007 include enhanced measures to validate the timing of product/service deliveries at or near a quarter end, review of significant new product/service introductions to determine which accounting guidance literature is applicable and confirmation of deliverables with sales engineers and/or technical teams for contracts above a certain threshold.

As part of the extensive process, we also considered whether the deficiencies were indicative of broader control issues and whether additional training was required on a specific aspect of revenue recognition.

New guidelines and training were developed and implemented in the second half of 2006 and throughout 2007 to improve the understanding of revenue recognition policies, procedures and applications throughout the company. We developed and deployed additional training courses and tools, such as implementation aids for revenue recognition guidelines, for employees in both finance and non-finance roles (see “Other Remedial Measures — People” below).

Segregation of Duties

The focus of the remedial measures around the segregation of duties issues involved Nortel’s corporate security policy and resolving segregation of duties conflicts within applications. In the third quarter of 2007, we implemented a semi-annual review for key finance applications in order to monitor and address segregation of duties conflicts within those applications. As well, in the third quarter of 2007, we developed segregation of duties matrices for each of these key

164

finance applications which are used by those individuals responsible for approving user access and established an annual review of these segregation of duties matrices.

LG-Nortel

During the course of 2006, we strengthened the finance function in the LG-Nortel joint venture, including installing a new leader of this function who has an extensive background with U.S. GAAP. In the second quarter of 2007, we established an LG-Nortel finance training policy, including mandatory training requirements for the LG-Nortel finance team monitored by the CFO of the joint venture. The 2007 mandatory training was aimed at providing the team with adequate knowledge in U.S. GAAP and was completed by all mandatory finance personnel. In addition, since December 31, 2006, we appointed an individual in the GRG with the appropriate U.S. GAAP knowledge and experience to be fully dedicated to the review of the joint venture contracts on a timely basis, in accordance with our revenue arrangement review policy.

End User Computing Applications

Throughout 2007, we improved controls to enhance protection against unauthorized changes to and errors in the completeness and accuracy of end user computing applications. 2006 was the first year that the new end user computing application controls were implemented across Nortel. In the second quarter of 2007, we established a corporate procedure requiring the implementation of access and change controls, as well as controls over the accuracy and completeness of end-user computing applications. Training was provided to those individuals required to execute the policy over significant end user computing applications in the revenue process.

Continuous Improvement

Management’s assessment of the remediation of the revenue related material weakness identified certain areas in our revenue recognition processes where continued enhancements to internal controls are appropriate. Areas of focus include revenue impact of post-original execution contract changes, revenue related manual journal entries, the application of our revenue recognition guidance and processes for entitling post-contract services. Nortel has developed, and is continuing to develop, specific action plans to address these areas.

Other Remedial Measures

At the recommendation of the Audit Committee, in January 2005 the Board of Directors adopted all of the recommendations for remedial measures contained in the summary of findings submitted to the Audit Committee in January 2005 by WilmerHale and Huron Consulting Services LLC, or the Independent Review Summary, included in Item 9A of the 2003 Annual Report on Form 10-K. Those governing remedial principles were designed to prevent recurrence of the inappropriate accounting conduct found in the Independent Review Summary, to rebuild a finance environment based on transparency and integrity, and to ensure sound financial reporting and comprehensive disclosure. The governing remedial principles included:

•  establishing standards of conduct to be enforced through appropriate discipline;

•  infusing strong technical skills and experience into the Finance organization;

•  requiring comprehensive, ongoing training on increasingly complex accounting standards;

•  strengthening and improving internal controls and processes;

•  establishing a compliance program throughout the Company that is appropriately staffed and funded;

•  requiring management to provide clear and concise information, in a timely manner, to the Board of Directors to facilitate its decision-making; and

•  implementing an information technology platform that improves the reliability of financial reporting and reduces the opportunities for manipulation of results.

See the Independent Review Summary for further information concerning these governing principles as they relate to three identified categories — people, processes and technology.

During 2007, we continued to build on the remedial actions undertaken in 2005 and 2006 and continued to implement the recommendations for remedial measures in the Independent Review Summary. The following are the key remedial measures implemented throughout 2007 that, in addition to the remedial measures outlined in our 2006 Annual Report on Form 10-K, resulted in our fully addressing the recommendations in the Independent Review Summary.

165

People

In 2007, we undertook a review of skill sets and training of individuals in key Finance positions. We established core competencies for each position and completed verification process to determine whether individuals occupying those positions have the necessary skill sets and training. Results and action plans were reflected in individuals’ professional development plans.

During 2007, our Global Finance Training and Communications Team (“GFCT”) continued to develop and offer (on a mandatory basis for targeted employee populations as appropriate) ongoing training, including both courses offered prior to 2007 and new offerings. The new course offerings included the following areas of focus: common complexities within Nortel revenue arrangements and their related impact on revenue recognition, roles and responsibilities for verification of global orders and reconciliation requirements, criteria to establish objective and reliable evidence of fair value for elements offered in revenue arrangements, and revenue recognition for order management. The GFCT together with Finance leaders regularly reviews and revises as appropriate the mandatory Finance and non-Finance employees for training. In 2007, we continued to have in place minimum annual training thresholds for our Finance employees based on job complexity levels. We track training completion through a training registration system and provides quarterly progress reporting to our Finance leadership team.

Technology

In an effort to improve our financial reporting systems and capabilities, to simplify our multiple accounting systems, and to reduce the number of manual journal entries, we retained an outside consulting firm to advise on the appropriateness of implementing a global software platform from software vendor SAP that would consolidate many of our systems into a single integrated financial software system. Based on that advice, we adopted the SAP platform to integrate processes and systems, and undertook an assessment of existing financial systems and processes to determine the most effective implementation of standard SAP software. We completed the finance design and build for the initial scope of the SAP system, including general ledger functionality, by August 2006, and deployed the initial scope including functionality for the general ledger, inter-company accounts, consolidation, direct accounts payable and accounts receivable, in May 2007. The second quarter of 2007 financial close process was the first on the SAP system. In August 2007, we deployed additional functionalities on the SAP system for direct tax, indirect purchasing, fixed assets and treasury activities, which included a solution to bring research and development project cost data into the system. We conducted extensive training on the use of the SAP system.

Conclusion

As at December 31, 2007, management, in considering the remedial measures and other actions to improve internal control over financial reporting described above, has concluded that the material weakness has been eliminated and that the recommendations in the Independent Review Summary have been fully implemented.

Changes in Internal Control Over Financial Reporting

Apart from actions related to the remedial measures described above, during the fiscal quarter ended December 31, 2007, the following additional change occurred in our internal control over financial reporting that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

•  On October 1st, 2007, SAP was implemented in the Guangdong Nortel (GDNT) joint venture. This implementation resulted in the automation of a number of controls in several financial processes including, accounts receivable, accounts payable, intercompany, manual journal entries, revenue recognition, foreign exchange, U.S. GAAP translation and financial close processes.

166

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders

Nortel Networks Limited:

We have audited Nortel Networks Limited’s internal control over financial reporting as of December 31, 2007, based on criteria established in “Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Nortel Networks Limited’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in Item 9A to the Annual Report on Form 10-K. Our responsibility is to express an opinion on Nortel Networks Limited’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Nortel Networks Limited maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Nortel Networks Limited as of December 31, 2007, and the related consolidated statements of operations, changes in equity and comprehensive income (loss) and cash flows for the year then ended, and our report dated February 27, 2008 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

Chartered Accountants, Licensed Public Accountants

Toronto, Canada

February 27, 2008

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ITEM 9B.   Other Information

Not Applicable.

168

PART III

In this Part III, reference to “NNL” or the “Company” means Nortel Networks Limited; reference to “NNC” means Nortel Networks Corporation; reference to “Nortel” means NNC or NNC and its subsidiaries, including NNL, as applicable; and except in the Voting Shares section of this report, reference to “common shares” means Nortel Networks Corporation common shares. While references to dollar amounts in other Parts of this report are in millions of U.S. Dollars, dollar amounts in this Part III are as stated herein.

ITEM 10.   Directors, Executive Officers and Corporate Governance

Board of Directors

Set out below is information concerning the individuals who have been nominated to be elected as directors of NNC at its 2008 annual meeting of shareholders to be held on May 7, 2008. NNC’s directors are also our directors. Board meetings are generally held as combined meetings of the Nortel boards.

Jalynn H. Bennett, C.M.

Age: 64

Residence: Toronto, Ontario, Canada

Director Since: June 29, 2005

Independent⁽¹⁾

Jalynn H. Bennett, C.M. has been President of Jalynn H. Bennett and Associates Ltd., a consulting firm in strategic planning and organizational development in both the public and private sectors, since 1989. Prior to establishing that firm, Mrs. Bennett was associated for nearly 25 years with Manulife Financial. Mrs. Bennett is a member of the Lawrence National Centre for Policy and Management Advisory Council, Richard Ivey School of Business, the Canada Millennium Scholarship Foundation, the Toronto Society of Financial Analysts, the Toronto Association of Business Economists, the Governance Leadership Council of the Ontario Hospital Association, Canada’s Outstanding CEO of the Year — National Advisory Board and the Trinity College Endowment Campaign Cabinet. She is also a Director of Cadillac Fairview Corporation and the Sick Kids Foundation, a Fellow of the Institute of Corporate Directors in Canada and Vice Chair of the Public Accountants Council of Ontario. Mrs. Bennett is past Commissioner of the Ontario Securities Commission and was a member of the Toronto Stock Exchange and Canadian Institute of Chartered Accountants’ Joint Committee on Corporate Governance (The Saucier Committee).

Nortel Board/Committee Membership	Public Board Membership
Board of directors (NNC and NNL)	Canadian Imperial Bank of Commerce
Compensation and human resources committee (NNC and NNL)	Teck Cominco Ltd.
Pension fund policy committee (NNL)

Securities Held(2)
			Total Market Value of Common Shares
Common Shares	Share Units		and Share Units at Year End
(#)	(#)(3)		($)(4)
—		16,015		241,666

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Dr. Manfred Bischoff

Age: 65

Residence: Starnberg, Federal Republic of Germany

Director Since: April 29, 2004

Independent⁽¹⁾

Dr. Manfred Bischoff was appointed Chairman of the Supervisory Board of Daimler AG (previously DaimlerChrysler AG), an automotive manufacturing company, in April 2007. Previously, Dr. Bischoff was Chairman of the Board of European Aeronautic Defence and Space Company EADS N.V. from July 2000 to April 2007. He was a member of the Board of Management of DaimlerChrysler AG from May 1995 to December 2003 and President and Chief Executive Officer of DaimlerChrysler Aerospace AG from May 1995 to March 2000.

Nortel Board/Committee Membership	Public Board Membership
Board of directors (NNC and NNL)		Daimler AG
Compensation and human resources committee (NNC and NNL)		Fraport AG
Pension fund policy committee (NNL)		Royal KPN N.V.
Litigation committee (NNC)		Unicredit

Securities Held(2)
			Total Market Value of Common Shares
Common Shares	Share Units		and Share Units at Year End
(#)	(#)(3)		($)(4)
—		13,525		204,092

The Hon. James Baxter
Hunt, Jr.

Age: 70⁽⁵⁾

Residence: Lucama, North Carolina, U.S.A.

Director Since: June 29, 2005

Independent⁽¹⁾

The Hon. James Baxter Hunt, Jr. has been a member of the law firm of Womble Carlyle Sandridge & Rice, PLLC since 2001. Prior to that, he was Governor of North Carolina for four terms, 1977 to 1985 and 1993 to 2001, where he established the Microelectronics Center of North Carolina, the N.C. Biotechnology Center and the N.C. School of Science and Mathematics. He founded and chaired the National Board for Professional Teaching Standards and currently chairs the National Center for Public Policy and Higher Education, the Hunt Institute for Educational Leadership and Policy and the Institute for Emerging Issues. Mr. Hunt is a Trustee of the Carnegie Corporation of New York.

Nortel Board/Committee Membership	Public Board Membership
Board of directors (NNC and NNL)
Audit committee (NNC and NNL)
Nominating and governance committee (NNC) — Chair

Securities Held(2)
			Total Market Value of Common Shares
Common Shares	Share Units		and Share Units at Year End
(#)	(#)(3)		($)(4)
—		16,795		253,437

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Dr. Kristina M. Johnson

Age: 50

Residence: Baltimore,

Maryland, U.S.A.

Director Since:

November 6, 2006

Independent⁽¹⁾

Dr. Kristina M. Johnson was appointed Provost and Senior Vice President of Academic Affairs of Johns Hopkins University as of September 1, 2007. Previously, Dr. Johnson was Dean of Duke University’s Edmund T. Pratt, Jr., School of Engineering from July 1999 to August 2007. She joined Duke from the University of Colorado, where she served as a professor of Electrical and Computer Engineering from 1985 to 1999. Dr. Johnson has helped start several companies including ColorLink, Inc. She also currently serves on the Advisory Board of the Institute for Emerging Issues. Dr. Johnson received her B.S., M.S. (with distinction) and Ph.D. in electrical engineering from Stanford University. She completed a NATO post-doctoral fellowship at Trinity College in Dublin, Ireland, and was a Fulbright Fellow in 1991. Dr. Johnson has published more than 140 refereed papers and proceedings, holds 43 patents, and has pioneered work in liquid crystal-on-silicon (LCOS) microdisplays, a marriage of LC electro-optic materials and VLSI technology.

Nortel Board/Committee Membership	Public Board Membership
Board of directors (NNC and NNL)	Boston Scientific
Compensation and human resources committee (NNC and NNL)	AES Corporation
Pension fund policy committee (NNL)	Minerals Technologies

Securities Held(2)
			Total Market Value of Common Shares
Common Shares	Share Units		and Share Units at Year End
(#)	(#)(3)		($)(4)
—		5,733		86,511

John A. MacNaughton,
C.M.

Age: 62

Residence: Toronto, Ontario, Canada

Director Since: June 29, 2005

Independent⁽¹⁾

John A. MacNaughton, C.M. is Chairman of the Business Development Bank of Canada and Chairman of Canadian Trading and Quotation System Inc. He served as the founding President and Chief Executive Officer of the Canada Pension Plan Investment Board, a Crown corporation created by an Act of Parliament to invest the assets of the Canada Pension Plan, from 1999 to 2005. He was President of Nesbitt Burns Inc., the investment banking arm of Bank of Montreal, from 1994 to 1999. Mr. MacNaughton is Vice Chairman of the University Health Network and Vice Chairman of the Canadian International Council.

Nortel Board/Committee Membership	Public Board Membership
Board of directors (NNC and NNL)	TransCanada Corporation
Audit committee (NNC and NNL) — Chair	TransCanada Pipelines Limited
Nominating and governance committee (NNC)

Securities Held(2)
			Total Market Value of Common Shares
Common Shares	Share Units		and Share Units at Year End
(#)	(#)(3)		($)(4)
10,000		18,537		430,623

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The Hon. John P.
Manley, P.C.

Age: 58

Residence: Ottawa, Ontario, Canada

Director Since: May 26, 2004

Independent⁽¹⁾

The Hon. John P. Manley has been Counsel at the law firm of McCarthy Tétrault LLP since May 2004. Mr. Manley was previously the Member of Parliament for Ottawa South from November 1988 to June 2004. As a Member of Parliament, Mr. Manley also held various positions in the Canadian Federal Government, including Deputy Prime Minister of Canada from January 2002 to December 2003, Minister of Finance from June 2002 to December 2003, Chair of the Cabinet Committee on Public Security and Anti-Terrorism from October 2001 to December 2003, Minister of Foreign Affairs from October 2000 to January 2002 and Minister of Industry from November 1993 to October 2000. He was granted the designation C. Dir. (Chartered Director) by McMaster University in February 2006. Mr. Manley is also a Director of CARE Canada, Optosecurity Inc., The Conference Board of Canada, The Institute for Research on Public Policy, MaRS, National Arts Centre Foundation and University of Waterloo. He currently chairs the Independent Panel on Canada’s future role in Afghanistan.

Nortel Board/Committee Membership	Public Board Membership
Board of directors (NNC and NNL)	Canadian Imperial Bank of Commerce
Compensation and human resources committee (NNC and NNL)	Canadian Pacific Railway
Pension fund policy committee (NNL) — Chair

Securities Held(2)
			Total Market Value of Common Shares
Common Shares	Share Units		and Share Units at Year End
(#)	(#)(3)		($)(4)
—		17,616		265,825

Richard D. McCormick

Age: 67

Residence: Denver, Colorado, U.S.A.

Director of the Company Since: January 11, 2005

Director of NNL Since:

January 18, 2005

Independent⁽¹⁾

Richard D. McCormick served as Chairman of US WEST, Inc., a telecommunications company, from June 1998 until his retirement in May 1999. He was Chairman, President and Chief Executive Officer of US WEST, Inc. from 1992 until 1998. Since 1999, Mr. McCormick has acted as a corporate director. Mr. McCormick is also the Honorary Chairman (past Chairman) of the International Chamber of Commerce and Vice Chairman (past Chairman) of the United States Council for International Business. He is a Trustee of the Denver Art Museum. From 1994 to 2003, Mr. McCormick was also a Director of UAL Corporation, the parent holding company and sole shareholder of United Air Lines, Inc. On December 9, 2002, UAL Corporation, United Air Lines, Inc. and 26 direct and indirect wholly owned subsidiaries of UAL Corporation filed voluntary petitions to reorganize their businesses under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division.

Nortel Board/Committee Membership	Public Board Membership
Board of directors (NNC and NNL)	United Technologies Corporation
Compensation and human resources committee (NNC and NNL) — Chair	Wells Fargo and Company
Litigation committee (NNC)
Nominating and governance committee (NNC)

Securities Held(2)
			Total Market Value of Common Shares
Common Shares	Share Units		and Share Units at Year End
(#)	(#)(3)		($)(4)
10,000		18,642		432,208

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Claude Mongeau

Age: 46

Residence:

Outremont, Québec, Canada

Director Since:

June 29, 2006

Independent⁽¹⁾

Claude Mongeau has been the Executive Vice-President and Chief Financial Officer of Canadian National Railway Company, a North American railway company, since October 2000. Prior to that appointment, Mr. Mongeau was Senior Vice-President and Chief Financial Officer from October 1999. Mr. Mongeau is also Chairman of the Audit Committee and a member of the Governance Committee of SNC-Lavalin Group Inc. He also serves as a Director of Pointe-à-Callière Museum and Forces Avenir. Mr. Mongeau was also a Director of 360networks Corporation, his tenure ending shortly before that company’s application under the Companies’ Creditors Arrangement Act for creditor protection. 360networks Corporation underwent a restructuring in 2002 and its Canadian assets were sold in November 2004.

Nortel Board/Committee Membership	Public Board Membership
Board of directors (NNC and NNL)		SNC-Lavalin Group Inc.
Audit committee (NNC and NNL)
Pension fund policy committee (NNL)

Securities Held(2)
			Total Market Value of Common Shares
Common Shares	Share Units		and Share Units at Year End
(#)	(#)(3)		($)(4)
—		10,809		163,108

Harry J. Pearce

Age: 65

Residence: Bloomfield Hills, Michigan, U.S.A.

Director of the Company Since: January 11, 2005

Director of NNL Since:

January 18, 2005

Independent⁽¹⁾

Harry J. Pearce was Chairman of the Board of Hughes Electronics Corporation (now The DIRECTV Group, Inc.), a company engaged in digital television entertainment, broadband satellite and network services as well as global video and data broadcasting, from June 2001 to January 2004. He was a Director and Vice Chairman of General Motors Corporation from January 1996 to June 2001. Prior to that, he served as General Counsel of General Motors. In 2006, he was elected chairman of MDU Resources, a diversified natural resources company. He also serves as a director of Marriott International, a global hospitality services company. He is a fellow of The American College of Trial Lawyers and an emeritus member of The International Society of Barristers. Mr. Pearce has also been involved in many educational and charitable organizations.

Nortel Board/Committee Membership		Public Board Membership
	Board of directors (NNC and NNL) — Chair		Marriott International, Inc.
	Litigation committee (NNC) — Chair		MDU Resources Group, Inc.

Securities Held(2)
			Total Market Value of Common Shares
Common Shares	Share Units		and Share Units at Year End
(#)	(#)(3)		($)(4)
11,600		12,812		368,377

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John D. Watson, FCA

Age: 62

Residence: Calgary, Alberta, Canada

Director Since:

June 29, 2006

Independent⁽¹⁾

John D. Watson, FCA was Executive Vice-President and Chief Financial Officer of EnCana Corporation, an Alberta, Canada based oil and gas exploration and production company since its formation in 2002 and until his retirement in February 2006. Prior to that appointment, Mr. Watson was Vice-President, Finance and Chief Financial Officer of Alberta Energy Company Ltd., a predecessor company to EnCana, since 1987. From March through December 2006, Mr. Watson served as an executive adviser to EnCana. He recently retired from Chair of the Calgary Police Commission. In 2005, he was granted the designation of ICD.D by the Institute of Corporate Directors. Mr. Watson is a member of the board of directors of the Alberta Investment Management Corporation.

Nortel Board/Committee Membership		Public Board Membership
	Board of directors (NNC and NNL)		UTS Energy Corporation
	Audit committee (NNC and NNL)		Talisman Energy Inc.
	Nominating and governance committee (NNC)

Securities Held(2)
			Total Market Value of Common Shares
Common Shares	Share Units		and Share Units at Year End
(#)	(#)(3)		($)(4)
—		10,809		163,108

Mike S. Zafirovski

Age: 54

Residence: Toronto, Ontario, Canada

Director Since:

November 15, 2005

Management

Mike S. Zafirovski was previously employed in the telecommunications industry with Motorola, Inc. From July 2002 to February 2005, he was President and Chief Operating Officer and a Director of Motorola and from June 2000 to July 2002, he was President and Chief Executive Officer of Motorola’s mobile devices business. Prior to his tenure with Motorola, Mr. Zafirovski held a number of positions during 25 years with the General Electric Company, including 13 years as President and Chief Executive Officer of various businesses in the industrial as well as financial and insurance sectors. Mr. Zafirovski is also a Director of The Boeing Company, and is Chair of Boeing’s Finance Committee and a member of Boeing’s Audit Committee. In addition, he is a Director of the Economic Club of Chicago, a member of the National Security Telecommunications Advisory Committee and a member of Macedonia 2025.

Nortel Board/Committee Membership	Public Board Membership
Board of directors (NNC and NNL)		The Boeing Company

Common Shares and Share Units Held(2)(6)
			Total Market Value of Common Shares
Common Shares	Share Units		and Share Units at Year End
(#)	(#)(3)		($)(4)
125,029		—		1,886,688

Options Held(2)(6)
									Total Market Value of
									Unexercised Options
		Number		Exercise			Total		at Year End
Date Granted	Expiry Date	Granted		Price			Unexercised		($)(4)
November 15, 2005	November 14, 2015		500,000	$	31.00			500,000		—	(7)
June 14, 2006	June 13, 2016		167,500	$	21.20			167,500		—	(7)
March 21, 2007	March 20, 2017		269,000	$	25.82	(8)		269,000		—	(7)

Restricted Stock Units Held(2)(6)
					Total Market Value of
					Restricted Stock Units
					that have not Vested
	Number		Number of Restricted Stock Units		at Year End
Date Granted	Granted		that have not Vested		($)(4)
November 15, 2005		226,500		135,900		2,050,731

(1)	“Independent” refers to the standards of independence attached to and forming part of our Statement of Governance Guidelines, the listing standards of the NYSE and applicable SEC and Canadian Securities Administrators, or CSA, rules and policies.
(2)	Except for Mr. Zafirovski, none of the directors hold any stock options, restricted stock units or performance stock units of NNC. For detailed information on stock options, restricted stock units and performance stock units held by Mr. Zafirovski, see “Executive Compensation”.

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(3)	Represents the aggregate number of share units held under the Directors’ Deferred Share Compensation Plans of the Company and NNC, or the DSC Plans, as of December 31, 2007 rounded down to the nearest whole number. Each share unit entitles the holder to receive one common share. Share units are settled in common shares, net of taxes, when the director ceases to be a member of the Nortel boards. Mr. Zafirovski is not eligible to participate under the DSC Plans.
(4)	Based on the closing market price on the NYSE on December 31, 2007 of $15.09, rounded to the nearest dollar and assumes all vesting criteria have been satisfied, as applicable.
(5)	Governor Hunt turned 70 years of age during 2007. On May 31, 2007, the nominating and governance committee determined that, as a result of, among other things, his strong leadership qualities, Governor Hunt will be permitted to continue to serve on the Nortel boards for at least five years from the date of his first election. Governor Hunt abstained from the assessment and determination of his continued service.
(6)	Does not include the total market value of the unvested performance stock units held by Mr. Zafirovski as of December 31, 2007 as payout is based on corporate performance.
(7)	As at December 31, 2007, the exercise price of Mr. Zafirovski’s options was greater than the closing market price on NYSE of $15.09.
(8)	Canadian grant issued with an exercise price of CAN$29.90. Table reflects equivalent U.S. Dollar exercise price converted using the March 21, 2007 Bank of Canada noon rate of exchange of US$1.00=CAN$1.1578.

From May 31, 2004 until on or about June 21, 2005, certain directors, senior officers and certain current and former employees of the Company and NNC were prohibited from trading in the securities of the Company and NNC pursuant to management cease trade orders issued by the OSC and certain other provincial securities regulators in connection with the delay in the filing of certain of our financial statements. These orders did not at any time apply to Mrs. Bennett, Dr. Johnson or Messrs. Hunt, MacNaughton, Mongeau, Watson or Zafirovski as they were elected as directors after such orders were revoked. The OSC and certain other provincial securities regulators issued a further management cease trade order on April 10, 2006 in connection with the delay in filing certain 2005 financial statements prohibiting certain directors, senior officers and certain current and former employees from trading in securities of the Company and NNC. Following the filing of the required financial statements, the OSC lifted such cease trade order effective June 8, 2006, following which the other provincial securities regulators lifted the further cease trade orders. These orders did not at any time apply to Dr. Johnson or Messrs. Mongeau or Watson as they were elected or appointed as directors after such orders were revoked.

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Executive Officers and Certain Other Non-Executive Board-Appointed Officers

Our board of directors appoints, and may remove, executive officers and certain other non-executive board appointed officers of the Company. Generally, such officers hold their position until a successor is appointed or until the officer resigns. Set forth below are the names of our executive officers and non-executive board appointed officers, their ages, offices currently held and year of appointment. The executive officers and non-executive board appointed officers are also officers of NNC.

		Year of
Name and Age	Office and Position Currently Held	Appointment
Steven John Bandrowczak (47)	Chief Information Officer		2007
Alvio Silvio Barrios (40)	President, CALA		2007
Robert John Bartzokas (56)	Chief Compliance Officer		2006
Paviter Singh Binning (47)	Executive Vice-President and Chief Financial Officer		2007
Dennis James Carey (61)	Executive Vice-President, Corporate Operations		2006
Tracy Sarah Jane
Connelly McGilley (36)*	Associate General Counsel — Corporate and Assistant Secretary		2006
Gordon Allan Davies (45)	Deputy General Counsel and Corporate Secretary		2008
William John Donovan (50)*	Senior Vice-President, Business Transformation		2006
David William Drinkwater (59)	Chief Legal Officer		2005
Darryl Alexander Edwards (46)	President, EMEA		2006
Lauren Patricia Flaherty (50)	Chief Marketing Officer		2006
Joseph Gerard Flanagan (36)	Senior Vice-President, Global Operations		2007
Jesse Joel Hackney, Jr. (38)	President, Enterprise Solutions		2007
Paul Wesley Karr (52)	Controller		2005
William Joseph LaSalle (55)*	General Counsel — Operations		2005
Kimberly Susan Lechner (42)*	Assistant Controller		2005
Peter Look (50)*	Vice-President, Tax		2006
Richard Stephen Lowe (57)	President, Carrier Networks		2007
Pierre David MacKinnon (46)	Chairman, LG-Nortel JV and GM, WiMAX		2006
Michael Walton McCorkle (55)	Treasurer (interim)		2007
Philippe Morin (42)	President, Metro Ethernet Networks		2006
William Kenneth Nelson (52)	Executive Vice-President, Global Sales		2008
Michael Pangia (46)	President, Asia Region		2006
George Andrew Riedel (50)	Chief Strategy Officer		2006
John Joseph Roese (37)	Chief Technology Officer		2006
Anna Ventresca (43)*	Assistant General Counsel — Corporate and Assistant Secretary		2007
Dietmar Martin Wendt (48)	President, Global Services		2006
Mike Svetozar Zafirovski (54)	President and Chief Executive Officer		2005

*  Non-executive board appointed officers

All the above-named officers have been employed in their current position or other senior positions with Nortel during the past five years, except as described below. Mr. Zafirovski’s biography is provided under “Board of Directors” in this section of this report.

•  S.J. Bandrowczak was appointed Chief Information Officer effective July 16, 2007. Prior to joining Nortel, he was Senior Vice-President and Chief Information Officer at Lenovo Group, a global producer of PC products and value-added professional services, from 2005 to 2007 where he enacted a 24-month plan to build the company’s IT infrastructure. From 2002 to 2005, Mr. Bandrowczak was Executive Vice-President and Chief Information Officer for DHL Worldwide, a global market leader in the international express and logistics industry.

•  A.S. Barrios was appointed President, CALA Region, effective June 1, 2007. Mr. Barrios has been with Nortel for 13 years where he has held various positions of increasing responsibility within the Company’s engineering, marketing and sales organizations. Most recently, he was Vice-President responsible for some of Nortel’s largest customers and strategic accounts in the CALA region.

•  R.J. Bartzokas was appointed Chief Compliance Officer in January 2006, prior to which he was Chief Audit and Security Officer from October 2005 to January 2006 and Vice-President, Audit from July 2005 to October 2005. Mr. Bartzokas has over 30 years of accounting, auditing and compliance experience, including most recently as

176

Vice President, Audit and Compliance of Amerada Hess Corporation from January 1995 to June 2005. He previously held senior level audit positions with Getty Oil Company and Price Waterhouse & Co.

•  P.S. Binning was appointed Executive Vice-President and Chief Financial Officer effective November 12, 2007, prior to which he was Group Finance Director at Hanson PLC, a global supplier of heavy building materials to the construction industry, from January to September 2007. While at Hanson, he was responsible for leading the Hanson finance function including Group Finance, Treasury, Tax, Investor Relations, Risk Management, Internal Audit and Operational and Regional finance organizations. He also had responsibility for the Corporate Communications, IT and Strategy functions. From 2003 to 2006, Mr. Binning was Chief Financial Officer at Marconi PLC, a global telecoms equipment vendor (which was acquired by Swedish-based Ericsson), where his responsibilities included Group Finance, Investor Relations, Tax, Treasury, Group Strategy, Risk Management, Internal Audit and Operational and Regional finance functions. He previously held various finance leadership positions at Diageo PLC, global consumer goods business, from 1986 to 2003. His positions at Diageo included senior corporate and operational finance roles.

•  D.J. Carey was appointed as Executive Vice-President, Corporate Operations effective January 2006. Prior to his appointment, Mr. Carey held various leadership positions at Motorola, GE, The Home Depot and AT&T. Mr. Carey was Executive Vice-President, President and Chief Executive Officer, Integrated Electronic Systems at Motorola from November 2002 to November 2005 where he was responsible for the growth and profitability of a portfolio of eight different businesses. He also served as Vice President and General Manager for Corporate Productivity and Mergers and Acquisitions for AT&T and as Executive Vice President for Business Development, Strategy and Corporate Operations for The Home Depot after having been Executive Vice President and Chief Financial Officer.

•  T.S.J. Connelly McGilley was named Associate General Counsel — Corporate and Assistant Secretary in October 2006. She was Assistant Secretary from December 2004 to October 2006 and Counsel — Securities in the NNL legal department from July 1999 to December 2004.

•  G.A. Davies was named Deputy General Counsel effective January 18, 2008, prior to which he was General Counsel — Corporate from September 2005 to January 2008. For the period from May 1 to November 11, 2007, Mr. Davies also acted as Chief Legal Officer on an interim basis. Mr. Davies has also acted as Corporate Secretary since December 2004. Mr. Davies previously held various senior positions in the legal department in North America and Europe since 1993.

•  D.W. Drinkwater, prior to his appointment as Chief Legal Officer in December 2005, carried on a consulting business and held various corporate directorships from August 2004 to December 2005. Mr. Drinkwater was Executive Vice President and Chief Financial Officer of the Ontario Power Generation Inc., a Crown corporation for electricity generation in the Province of Ontario, from April 2003 to July 2004 and prior thereto, was Executive Vice President, Corporate Development and Legal Affairs of Ontario Power Generation Inc. from December 2000 to April 2003. Mr. Drinkwater acted as Chief Financial Officer of Nortel on an interim basis for the period from May 1 to November 11, 2007. Mr. Drinkwater’s background prior to joining Nortel includes working both as a partner in a top-tier Toronto law firm and as Vice President, Law and General Counsel with Bell Canada.

•  L.P. Flaherty was appointed Chief Marketing Officer effective May 1, 2006. Prior to joining Nortel, she gained more than 25 years experience with IBM. At IBM, she served as Vice President of Worldwide Marketing for some of IBM’s largest and most important global businesses, including Small & Medium Business Segment, On-Demand Business Unit, Software and Server Marketing, where she drove long-term business strategy, global branding and advertising, channel and product marketing, and communications including public relations, interactive/web marketing, events, demand generation and sales enablement.

•  J.G. Flanagan was appointed Senior Vice-President, Global Operations effective September 19, 2007. He joined Nortel in 2006 as Vice-President Global Order Management. Prior to joining Nortel, Mr. Flanagan had more than ten years of leadership experience at GE in general management, commercial strategy, supply chain operations and services deployment. From 2002 to 2004, Mr. Flanagan was General Manager of GE’s Industrial Controls Business, responsible for the growth and profitability of the Global IEC Industrial Controls business. Most recently prior to joining Nortel, Mr. Flanagan was General Manager, Operations GE Consumer & Industrial EMEA from 2004 to 2006 based in Budapest, Hungary. In this position, he was responsible for the customer service operations, distribution and fulfillment of GE’s Consumer & Industrial EMEA Division.

•  J.J. Hackney, Jr. was appointed as President, Enterprise Solutions effective September 19, 2007. He was Senior Vice-President, Global Operations and Quality from April 2006 to September 2007, prior to which he was Senior Vice-President, Supply Chain and Quality from December 2005 to April 2006. Prior to joining Nortel in 2005, Mr. Hackney had more than 14 years of global leadership experience at GE in roles spanning audit, supply chain, operations, product management and general management. Most recently, Mr. Hackney was Division General Manager — GE Consumer & Industrial in Barcelona, Spain from 2001 to 2006. In this position, he was responsible

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for the growth and profitability of the Global IEC Electrical Components and Systems Division, with 12 plants and more than 7,000 employees across Europe, Middle East and Africa.

•  P.W. Karr was appointed as Controller in May 2005, prior to which he was Vice-President and Financial Controller of global pharmaceutical company Bristol-Myers Squibb from November 2003 to December 2004. Prior thereto, Mr. Karr held numerous senior positions with GE from February 1994 to October 2003, most recently as Senior Vice-President and Chief Accounting Officer, GE Capital Markets Services during 2003. Prior thereto, Mr. Karr spent over 15 years with Deloitte & Touche, including as National Consultation Partner in 1992 and 1993.

•  K.S. Lechner was appointed Assistant Controller in October 2005, prior to which she was Director, Finance from 2001 to 2005.

•  P. Look was appointed as Vice-President, Tax in June 2006, prior to which he was Vice-President, Treasurer and Chief Tax Officer from March 2003 to November 2005 and Vice-President, Tax from April 2000 to March 2003 for Visteon Corporation, a spin-off of the Ford Motor Company, where he had global responsibility for funding and liquidity, capital markets, investor relations and tax compliance and planning.

•  P.D. MacKinnon was appointed as Chairman, LG-Nortel in October 2005 at the formation of the LG-Nortel joint venture. In February 2006, he was appointed President, LG-Nortel Business Unit in a full time JV role until August 2006 when he remained as Chairman, LG-Nortel JV and was appointed General Manager, WiMAX. Mr. MacKinnon was also President, GSM/UMTS from October 2004 to February 2006. MacKinnon previously served as Nortel’s Senior Vice-President Wireless Networks Americas from 2002 to 2004, responsible for product sales and marketing.

•  M.W. McCorkle was appointed Treasurer on an interim basis effective August 10, 2007, prior to which he was Assistant Treasurer since 2005. Mr. McCorkle was Director, Structured Finance, Nortel EMEA from 1999 to 2003 and Leader, Structured Finance, Nortel EMEA from 2003 to 2005.

•  P. Morin was appointed as President, Metro Ethernet Networks in May 2006. From January 2003 to May 2006, Mr. Morin held the position of General Manager, Optical Networks where he helped to ensure Nortel’s continued leadership and business momentum in optical networks.

•  W.K. Nelson was appointed as Executive Vice-President, Global Sales effective January 18, 2008. Prior to joining Nortel, Mr. Nelson was Senior Vice-President and General Manager of the Resource Management Software Group of information technology company EMC from January 2001 to January 2008 where he had global responsibility for the Resource Management Software Group and drove both business development and strategy for EMC’s global telecommunications, media and entertainment business unit.

•  M. Pangia was appointed as President, Asia Region in June 2006. During his 21 years with Nortel, he has held various senior management positions. His previous roles included Vice-President, Global Enterprise Operations and Services and Vice-President of Finance for the Optical business unit. Prior to his current assignment, he was Chief Operating Officer for the Asia Pacific region. He has worked in the U.S., Canada, Europe and the Caribbean & Latin American regions before coming to Asia.

•  G.A. Riedel was appointed Chief Strategy Officer in February 2006. From March 2003 to February 2006, he was Vice-President, Strategy and Corporate Development at Juniper Networks, an information technology company. In this role, Mr. Riedel was involved in developing and executing a growth strategy to expand Juniper’s portfolio and partnerships. He was heavily engaged in a number of Juniper’s acquisitions and strategic partnerships. Prior to his position with Juniper, Mr. Riedel held a number of positions during 15 years with the Boston-based management consulting firm McKinsey & Company, the most recent being Director, Australia and Singapore from November 1987 to December 2002.

•  J.J. Roese was appointed as Chief Technology Officer in June 2006, prior to which he was employed as Vice-President and Chief Technology Officer, Networking Technologies at semiconductor company Broadcom Corporation. At Broadcom, Mr. Roese was responsible for the long-term architecture and technical strategy for networking technologies. From 2001 to 2005, he was Vice-President and Chief Technology Officer with Enterasys Network, which specializes in network security for enterprises. At Enterasys, Mr. Roese oversaw the development of the company’s technology architectures.

•  A. Ventresca was named Assistant General Counsel — Corporate and Assistant Secretary in July 2007. She was Associate General Counsel — Corporate and Assistant Secretary from October 2006 to July 2007 and Assistant Secretary from August 2005 to October 2006. Ms. Ventresca was Counsel — Securities in the NNL legal department prior thereto.

•  D.M. Wendt was appointed President, Global Services effective May 1, 2006. Prior to joining Nortel, he gained more than 25 years experience with IBM. Most recently, Mr. Wendt was Vice President, IBM Asia Pacific Information Technology Services Transformation from January to April 2006, Vice President, IBM Systems and

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Technology Group, Asia Pacific from 2004 to 2006 and Vice President, IBM Asia Pacific Integrated Technology Services, Central Europe & Russia from 2002 to 2004.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires our directors and executive officers to file reports concerning their ownership of NNC equity securities with the SEC, the NYSE and NNC. Based solely on a review of the information received and written representations from the persons subject to Section 16(a), we believe that all of our directors and executive officers filed their required reports on a timely basis during 2007.

Code of Ethics

Our Code of Business Conduct, which is our code of ethical business conduct, provides detailed guidelines on our approach to competition in the marketplace, the standards of conduct expected of all of our directors, officers and employees and the central role integrity must play in daily conduct at Nortel, with an emphasis on honesty and compliance with all applicable laws. Our directors, officers and employees, except as of December 31, 2007, those on leave, transitioning to retirement, or who have been notified that their employment with us is ending and, due to legal requirements, those in France and Germany, are requested to read the Code of Business Conduct and electronically certify, except in the case of directors who certify on paper, that they have read, understood and will comply with the terms of the Code of Business Conduct. Members of the Executive Leadership Team have an additional certification, which was added in 2007. 2007 certification of the Code of Business Conduct has been completed by 99.9% of our employees (exclusive of those on leave, transitioning to retirement, or who have been notified, and those in France and Germany). All of the director nominees and executive officers have completed certification of the Code of Business Conduct. In addition to the certification process, we have various processes for ensuring its ethics requirements are being met, including training on the provisions of the Code of Business Conduct and communications on the need to report violations and suspected violations. In 2007, we made various amendments to its Code of Business Conduct, including requiring employees who report an allegation to escalate the complaint if they are uncomfortable with its resolution.

Our Chief Compliance Officer, Robert J. Bartzokas, is responsible for internal audit, security, business ethics and compliance, which includes: examining and evaluating the adequacy and effectiveness of Nortel’s system of management and financial controls; execution of the annual audit plan; periodically reporting to our boards regarding ethics matters; preparing periodic communications to our employees regarding ethical business practices; and developing and monitoring policies and procedures relating to business ethics. The Chief Compliance Officer reports to our President and Chief Executive Officer and the chair of the audit committees.

Nomination of Directors

The nominating and governance committee of NNC is primarily responsible for identifying candidates for election or appointment to the board of directors of NNC. The NNL board is informed of nominating and governance committee deliberations and makes determinations on our behalf.

The board of directors of NNC has directed the nominating and governance committee to seek candidates who, by virtue of their differing skills, areas of expertise, professional and personal backgrounds, industry knowledge, geographic location, and geographic or industry contacts, are best able to contribute to the direction of Nortel’s business and affairs. The committee maintains a skills matrix which outlines the competencies and skills of members of the boards, and identifies any gaps. In identifying candidates for election or appointment to the boards, the nominating and governance committee also considers the interplay of a candidate’s skills, expertise, experience and personality with those of other directors on the boards, and the extent to which a candidate would contribute to building boards that are effective, collegial and responsive to the needs of Nortel. Along with a broad range of experience (particularly with respect to organizations of similar size and complexity), business acumen and sound judgment, directors are also expected to have integrity, a strong character and reputation and to be committed to Nortel and its business plans and to building shareholder value over the long term.

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Re-Election of Directors

The nominating and governance committee annually reviews the credentials of its members for re-election to the Nortel boards. The committee also considers the following factors:

•   skills and competencies under the skills matrix

•   attendance at regularly scheduled board and committee meetings

•   public board membership •   age

•   outside interests, including any change in employment

•   length of service on the Nortel boards

Nomination of New Directors

The nominating and governance committee maintains an evergreen list of potential candidates, which it updates from time to time. In identifying potential director nominees, the nominating and governance committee considers board candidates identified through a variety of methods and sources. These include suggestions from committee members, other directors, senior management, shareholders and other interested parties in anticipation of director elections and other potential board vacancies. The committee has sole authority to retain director search firms, as well as other advisors, to assist in identifying and evaluating possible director nominees. The nominating and governance committee also considers board candidates recommended by NNC shareholders. Shareholders who wish to recommend a person for election to NNC’s board may submit such person’s name, background, qualifications, and consent to be named in NNC’s annual proxy circular and proxy statement and to serve as a director if elected, in writing to our Corporate Secretary for consideration by the nominating and governance committee. The nominating and governance committee will consider and evaluate such person as a possible nominee in the same manner as it considers all other potential candidates. The chair of the NNL board will be informed of nominating and governance committee deliberations concerning director nominees. To permit sufficient time for such consideration and evaluation, shareholders should make board candidate submissions by December 31 in each year, prior to the holding of NNC’s next shareholders’ meeting.

Prior to recommending a new director candidate for election or appointment, the chair and certain members of the nominating and governance committee meet with the candidate to discuss the candidate’s interest and ability to devote the time and commitment required to serve on the Nortel boards. The committee conducts a background check on the candidate and reviews any potential conflicts, independence concerns or disclosure issues the candidate might have.

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Audit Committee

Audit Committees of NNC and NNL

Members:

John A. MacNaughton (Chair)	Independent*
The Hon. James Baxter Hunt, Jr.	Independent*
Claude Mongeau	Independent*
John D. Watson	Independent*

*  The Nortel boards have also determined that at least one member of the audit committees meets the NYSE standard of having “accounting or related financial management expertise”, and that Messrs. Watson and Mongeau each meet the criteria required by applicable SEC rules for an “audit committee financial expert” (U.S. GAAP).

Key Responsibilities

The audit committees assist the Nortel boards in the oversight of:

•  the reliability and integrity of the accounting principles and practices, financial statements and other financial reporting, and disclosure principles and practices followed by management of Nortel;

•  the establishment by management of an adequate system of internal controls and procedures;

•  the effectiveness of the internal controls and procedures; and

•  the compliance by NNL with legal and regulatory requirements.

The audit committees also assist the Nortel boards in monitoring and reviewing our balance sheet strategy and financial structure, including the incurrence of long-term indebtedness and the issuance of additional equity or equity-related securities.

Independent Auditors

Our independent auditors report directly to our audit committees and are ultimately accountable to the audit committees and the Nortel boards as representatives of the shareholders. The audit committees have direct access to the internal auditors and independent auditors to discuss and review specific issues as appropriate. The audit committees have established complaint procedures, through our compliance group, as well as a hiring policy for current and former employees of the independent auditors. Separate executive sessions are held by the audit committees on a periodic basis with the independent auditors, the internal auditor, the controller and other members of senior management.

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ITEM 11.   Executive Compensation

Compensation Discussion and Analysis

This Compensation Discussion and Analysis describes the material elements of the compensation paid to the named executive officers, which are similar to the material elements of the compensation paid to all of our executive officers. When we refer to the “named executive officers” in this Compensation Discussion and Analysis, we are referring to the following nine individuals as a group:

Nortel’s principal executive officer	•   Mike S. Zafirovski, President and Chief Executive Officer
Each of the three individuals who acted as Nortel’s principal financial officer during 2007	•   Pavi S. Binning, Executive Vice-President and Chief Financial Officer from November 12, 2007 to present •   David W. Drinkwater, Chief Financial Officer (interim) from May 1, 2007 to November 11, 2007 •   Peter W. Currie, Executive Vice-President and Chief Financial Officer from February 14, 2005 to April 30, 2007
Nortel’s next three most highly compensated executive officers	•   Dennis J. Carey, Executive Vice-President, Corporate Operations •   Richard S. Lowe, President, Carrier Networks •   J. Joel Hackney, Jr., President, Enterprise Solutions
Two additional individuals that would have been among Nortel’s most highly compensated executive officers except that they were not serving as executive officers of Nortel as of December 31, 2007	•   Stephen F. Slattery, President, Enterprise Solutions — departure effective September 30, 2007 •   Dion C. Joannou, President, North America — departure effective August 31, 2007

The compensation and human resources committee, or CHRC, of the Nortel boards oversees Nortel’s executive officer compensation program and reports to the applicable Nortel board. For further information on the CHRC, see “Statement of Corporate Governance Practices — Board Committees” in NNC’s proxy circular and proxy statement dated February 27, 2008, or the 2008 Proxy. The CHRC retained Hewitt Associates LLC until June 30, 2007 and Hugessen Consulting Inc. effective July 1, 2007 to assist in connection with the review of current and future executive compensation and benefit programs. In determining the amount and form of executive compensation for 2007, the CHRC regularly consulted with its independent compensation consultant. For further information on the nature and scope of the respective assignments of the independent compensation consultants and the material elements of the directions given to the consultants with respect to the performance of their duties, see “Statement of Corporate Governance Practices — Compensation Consultants” in the 2008 Proxy. Also discussed under “Statement of Corporate Governance Practices — Compensation Consultants” in the 2008 Proxy is the role of the compensation consultant engaged by management during 2007, Mercer Human Resources Consulting LLC, or Mercer.

Our compensation program for the named executive officers is generally designed to award named executive officers with total target compensation at the 50th percentile range of comparator companies with which we compete for executive talent, or the comparator companies. Most of the elements of the compensation program for the named executive officers are considered “at risk” and therefore link compensation with both individual and corporate performance as well as shareholder value. We describe our philosophy on, and process with respect to, executive officer compensation below, followed by an analysis of the resulting compensation paid to each named executive officer during 2007 under “— 2007 Compensation for the Named Executive Officers”.

Objectives of Named Executive Officer Compensation Program

Competitive Compensation

We seek to offer a competitive total compensation program. In order to ensure that our named executive officers are competitively compensated, we benchmark total target compensation and each component part (base salary, short-term incentives and long-term incentives) against survey data for the comparator companies. The CHRC determines and annually reviews the comparator companies based on information provided by management. In selecting the comparator companies each year, the CHRC considers size (typically measured by annual revenues or total assets), industry (generally

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the telecommunications, technology and data industries) and business model (which includes customer base, types of customers, market segments, specific product lines and types of business). In October 2006, the CHRC reviewed the list of comparator companies and concluded that a refinement of the list was required in order to more accurately reflect the companies with which we compete for executive talent. In respect of 2007 compensation, the comparator companies were:

Accenture
Cisco Systems
Intel
Microsoft
Qualcomm
Unisys Agilent Technologies
Corning
Juniper
Motorola
Seagate Technology
Xerox Applied Materials
Electronic Data Systems
Lexmark
NCR
Sun Microsystems Avaya
EMC
Lucent
Oracle
Texas Instruments

In October 2007, Lucent was removed from the list of comparator companies as a result of its merger with Alcatel.

During 2007 when compensation decisions were being considered, survey data with respect to the compensation practices of these comparator companies for the most recently completed fiscal year was obtained by management from a composite of three market survey sources: Towers Perrin Executive Compensation Survey; Radford Executive Compensation Survey; and CHiPS Executive & Senior Management Total Compensation Survey. Management compiled survey data for benchmarking purposes and reviewed the results with Mercer. This data was then used to provide general compensation information to the CHRC. The CHRC used such data, among other things, in making compensation decisions. In addition to this survey data, proxy disclosure of the comparator companies for the most recently completed fiscal year was used when determining compensation for the president and chief executive officer, as well as the chief financial officer.

While we generally target the 50th percentile range of the comparator companies, total target compensation is not set at precisely the 50th percentile. Targeted total compensation for the named executive officers for the 2007 fiscal year was within approximately the 42nd to 61st percentile range of the comparator companies. This range is generally attributable to certain employment arrangements that were required in order to recruit qualified executive officers in 2007 and in prior years.

Align the Interests of Named Executive Officers with the Interests of Shareholders

A further objective of our compensation program for named executive officers is to align the interests of named executive officers with the interests of shareholders. Toward this objective, we seek to reward and maximize both individual performance and corporate performance. Performance-based “at risk” compensation includes cash incentives, stock options and performance-based stock units, and represents between approximately 57% and 61% of 2007 total target compensation for the named executive officers, except for Mr. Zafirovski whose performance-based “at risk” compensation represents approximately 88% of his 2007 total target compensation reflecting our intent to tie a substantial portion of his compensation directly to the performance of the Company. We also impose share ownership guidelines on named executive officers in order to further align their interests with the interests of shareholders.

Retention

We also seek to retain named executive officers in an increasingly competitive global marketplace by providing incentives for continued employment with Nortel. We have effectively met this objective by awarding a mix of long-term incentives each with a total vesting period of at least three years.

Elements of Compensation

Each element described below fulfills at least one objective of our compensation program for named executive officers.

Base Salary

Base salary reflects the job scope, complexity and responsibility of the individual’s role at Nortel, as well as the number of years over which the responsibilities have been carried out. Base salary also rewards individual performance and individual contribution to Nortel. Base salaries are benchmarked against the base salaries of executives holding similar positions at comparator companies. The CHRC reviews benchmarking results prepared annually by management; however, salary increases are not automatic. Base salary represented approximately 17% to 25% of total target compensation for the named executive officers for the 2007 fiscal year, except for Mr. Zafirovski whose base salary represented 12% of his 2007 total target compensation, which reflects our intent to more closely align his compensation with the interest of

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shareholders. Based on the market survey data we reviewed, the percentage of our named executive officers’ total target compensation represented by base salary was similar to the percentage represented by such element for executive officers of the comparator companies. For information on the base salaries of the named executive officers for 2007, see “Performance Evaluations” and “— 2007 Compensation for the Named Executive Officers” in the Executive Compensation section of this report.

Short-Term Incentives

Named executive officers are eligible for an annual cash bonus award under the Nortel Networks Limited Annual Incentive Plan, or the Incentive Plan. Bonuses under the Incentive Plan are designed to reward and maximize individual performance within the context of Nortel’s overall performance. Short-term incentives represented approximately 17% to 22% of 2007 total target compensation for the named executive officers. Based on the market survey data we reviewed, the percentage of our named executive officers’ total compensation represented by short-term incentive compensation was similar to the percentage represented by such element for executive officers of the comparator companies.

Bonuses under the Incentive Plan are based on the achievement of pre-established corporate and individual performance objectives for a given calendar year, subject to the discretion of the CHRC. The amount of an annual cash bonus award under the Incentive Plan is determined by the following formula:

Messrs. Currie, Slattery and Joannou did not receive bonuses for 2007 as a result of their departures from Nortel.

•  Target Percentage:  The target percentage for each of the named executive officers is set out below. Individual target percentages are initially determined upon commencement of employment. In setting or revising the target percentages, we benchmark against targets set by the comparator companies for executives holding similar positions. The CHRC annually reviews benchmarking results prepared by management with respect to target percentages and modifies such percentages as roles and responsibilities change.

	Target
Name	Percentage
M.S. Zafirovski		150	%
D.W. Drinkwater		80	%
R.S. Lowe		100	%
P.S. Binning		100	%
D.J. Carey		100	%
J.J. Hackney, Jr.		100	%

•  Individual Performance Factor:  The individual performance factor is determined through the annual executive review process described below based on an evaluation of the named executive officer’s performance in regard to certain criteria established at the beginning of each year. For the 2007 bonuses under the Incentive Plan, the individual performance factor for the named executive officers could have ranged from 0 to 1.5. There is no specific linear correlation between the achievement of objectives and the individual performance factor. Certain achievements may be weighted more heavily than others. However, all achievements (or lack thereof) and other subjective considerations play a part in the ultimate determination of the individual performance factor. For information on the individual performance of the named executive officers for 2007, see “— 2007 Compensation for the Named Executive Officers”.

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•  Corporate Performance Factor:  The corporate performance factor is based on certain corporate business and financial goals established at the beginning of the performance period and approved by the CHRC and the Nortel boards. The financial metrics have different weightings applied to them and in addition, there may also be certain qualitative factors such as quality and customer satisfaction that may be included in the overall assessment of corporate performance. The corporate performance factor is deemed to be 1.0. (achievement) throughout the plan period and is then adjusted by the CHRC and the Nortel boards based on their determination of corporate performance, Actual performance with respect to each financial metric will correspond to a factor (the AIP Factor) on the payout slope approved for such financial metric. An AIP Factor can be greater or less than 1.0 and the calculation for correspondence of performance to the AIP Factor can be different for each financial metric. The payout slope is designed to reflect the corporate and business goals for the particular financial metric. Each resulting AIP Factor is then multiplied by the weighting assigned to the applicable financial metric. Different combinations of actual corporate performance under each of the financial metrics could result in achieving the target corporate performance factor of 1.0 and, as a result, the achievement of any one target is not necessarily determinative in calculating a named executive officer’s bonus.

For 2007, the financial metrics and their weightings were revenue (25%), operating margin (50%) and free cash flow (25%). These financial metrics and their weightings were determined by the CHRC to best align to Nortel’s corporate priorities for 2007. While management earnings before taxes was selected as a financial metric for 2006, operating margin was selected for 2007 as it is more reflective of management’s efficiency, and also the profitability and performance of Nortel. Additionally, operating margin is tied directly to Nortel’s strategic business model. Free cash flow was selected as a financial metric for 2007 over management cash flow from 2006 as free cash flow measures the ability of Nortel to generate cash, re-invest and grow. Operating margin and free cash flow are non-U.S. GAAP. For additional information concerning operating margin, see the MD&A section of this report. Free cash flow means operating cash less capital expenditures, which can be found in the Financial Statements and Supplementary Data section of this report. There was no minimum or maximum corporate performance factor for 2007.

For 2007, the corporate performance factor was determined as follows:

	Percentage									Resulting
Financial Metric	Achieved of Target			AIP Factor			Weighting			Achievement
Revenue		98	%		90	%		25	%		0.22
Operating Margin		62	%		30	%		50	%		0.15
Free Cash Flow		0	%		0	%		25	%		0

Based on the foregoing, our corporate performance factor for 2007 would have been 0.37. On February 21, 2008, the CHRC reviewed the corporate performance factor as calculated by management based on the achievement of those metrics. The CHRC recognized the significant effort expended by our employees during 2007 in completing the second year of the five year transformation plan in a challenging market environment, which included rebuilding market momentum and restoring customer confidence, improving earnings, improving cost structure, outgrowing the market in many of our segments and rebuilding a world-class culture. The CHRC also acknowledged that annual operating margin for 2007 was a notable achievement in light of challenging market conditions encountered during 2007. Further, the CHRC acknowledged the discretion exercised by the CHRC in 2007 to limit the impact of superior cash flow performance and the corresponding decrease to the corporate performance factor for 2006 from 0.66 to 0.50. The CHRC also took into consideration certain cash outflows related to pre-2007 restatement of certain of NNC’s financial results as well as to the obligation to repurchase certain securitized receivables. The CHRC considered these factors and their impact on the achievement of the free cash flow target. Based on the foregoing, the CHRC and the Nortel boards exercised their discretion to adjust the corporate performance factor from 0.37 to 0.50 consistent with management’s recommendation.

Long-Term Incentives

Long-term incentives provide named executive officers with a proprietary future interest in Nortel and thereby encourage and reward superior performance by aligning compensation with corporate performance. Long-term incentives also promote retention, and act as a means towards achieving share ownership guidelines. Based on the intended value, long-term incentives represented approximately 56% to 66% of total target compensation for the named executive officers for the 2007 fiscal year, except for Mr. Zafirovski whose long-term incentives represented 71% of his 2007 total target compensation. The benchmarking of each component part of total target compensation, the internal comparison of roles

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and responsibilities of executive officers at similar levels and specific individual circumstances were all considered by the CHRC in determining the long-term incentive component of the 2007 executive officer compensation program. For information on the 2007 long-term incentives awarded to the named executive officers, see “— Performance Evaluations” and “— 2007 Compensation for the named Executive Officers” in the Executive Compensation Section of this report.

Existing equity ownership levels or the share ownership requirements are not considered when determining awards of long-term incentives.

Long-term incentives may be awarded to executive officers in the form of stock options, restricted stock units or performance stock units under the SIP. The material terms of the SIP, including a description of the terms and conditions of stock options, restricted stock units and performance stock units awarded under the SIP, are described under “Equity-Based Compensation Plans — Nortel 2005 Stock Incentive Plan”. See also “Approval of Amendments to the Nortel 2005 Stock Incentive Plan”.

2007 Long-Term Incentive	Objectives
Stock Options	•   To align compensation with Company performance as they become valuable to the executive only if the share price increases from the date of grant. •   Secondarily, to retain executives as they vest over time.
Restricted Stock Units	•   To encourage the retention of executive officers as they vest over time.
Performance Stock Units	•   To further link compensation with Nortel’s performance as measured by the relative total shareholder return, or rTSR. rTSR provides a transparent and straightforward calculation of Nortel’s performance.
	•   Performance stock units vest at the end of a three year performance period, subject to the CHRC determining the percentage of target payout, if any, based on the level of achievement of the performance criteria.
	•   The Dow Jones Technology Titans 30 Index (Tech Titans Index) was selected by the CHRC as the comparator of shareholder return as it presents an objective approach to performance measurement. NNC’s ranking relative to these companies will determine the percentage payout (between 0% and 200%) received by each named executive officer of his or her performance stock unit award.
	•   For the performance stock units granted in 2007, the performance period is January 1, 2007 — December 31, 2009. The CHRC will measure NNC’s total shareholder return against performance as of December 31, 2009 of the companies included in the Tech Titans Index at the start of the performance period on January 1, 2007. Index changes during the performance period will not be taken into account to avoid an upward performance bias. The Tech Titans Index on January 1, 2007 consisted of Alcatel-Lucent, Analog Devices, Apple, Applied Materials, Canon, Cisco Systems, Dell, Electronic Data Systems, EMC, Ericsson, Google, Hewlett-Packard, Hon Hai Precision Industry, IBM, Intel, Microsoft, Motorola, NEC, Nokia, Oracle, Qualcomm, Ricoh, Samsung Electronics, SAP, STMicroelectronics, Sun Microsystems, Taiwan Semiconductor, Texas Instruments, Xerox and Yahoo. When the Tech Titans Index was initially selected for these purposes in 2006, NNC was included in the index.
	•   The table below sets out percentage payouts as they correspond to different Nortel performance rankings compared to these companies. The percentage payout for the achievement of a ranking between any two of the specified rankings would be determined on a linear basis.
	•   The CHRC will measure actual performance and determine relative Nortel ranking and the associated payout to executives at the end of the third year of the performance period.

	Percentage Payment of Individual’s
Performance	Performance Stock Unit Award
Threshold performance at a rank of 22nd		50	%
Target performance at a rank of 15th		100	%
Superior performance at a rank of 8th		150	%
Maximum performance at a rank of 3rd		200	%

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The 2007 long-term incentive strategy was initially approved by the CHRC in November 2006. The CHRC approved an equity mix comprised of an equal distribution of stock options, restricted stock units and performance stock units, each representing a third of the total intended value. This distribution of long-term incentive awards was granted in order to balance a broad range of our objectives, including revenue growth, overall improvement of shareholder value and retention of our high-performing executives. For Mr. Zafirovski, the CHRC approved an equity mix comprised of an equal distribution of stock options and performance stock units, each representing one-half of the total intended value. No restricted stock units were approved for Mr. Zafirovski in order to more closely align his compensation with performance of the Company and therefore with shareholders interests.

In February 2007, management, in consultation with Mercer, completed two elements of the planning for the 2007 long-term incentive awards to be reviewed by the CHRC:

The total intended value of the long-term incentives was determined based on a combination of factors	•   Benchmarking of each component part of total target compensation (base salary, short-term incentives and long-term incentives) •   Internal comparison of roles and responsibilities of executive officers at similar levels •   Specific individual circumstances
The total intended value of the long-term incentives was then converted to the respective number of stock options, restricted stock units and performance stock units	•   Based on the twenty day average closing price of Common shares on the NYSE as at a date within one week prior to review by the CHRC •   In the case of stock options, included the Black Scholes option valuation factor

In accordance with our equity policy, all annual equity awards approved by the CHRC must have an effective grant date that is at least two complete business days after the filing by the Company and NNC with the SEC of their annual financial statements and that is otherwise during a window period as defined under applicable corporate policy. See “— Policy on Award of Equity-Based Compensation”. The filing of our 2006 financial statements was delayed in February 2007 and occurred on March 16, 2007. The number of stock options, restricted stock units and performance stock units were awarded based on a planning value established in February 2007, and the total intended value and related award levels were not adjusted to account for the delay in the timing of the award to March 2007. In approving the awards, the CHRC concluded that no adjustments were necessary given that there had not been a greater than 10% change in the share price. Similarly in 2006, there was a significant delay in the filing of certain of our 2005 financial statements. The OSC issued a management cease trade order on April 10, 2006 prohibiting our directors and certain other insiders from trading in securities of the Company and NNC. Following the receipt by the OSC of all required filings, the OSC lifted the cease trade order effective June 8, 2006. During the period when the cease trade order was in effect, we ceased granting stock options, restricted stock units and performance stock units. As a result, the long-term incentive awards that would normally have been awarded after the filing of the 2005 financial results in the first quarter were delayed until June 2006. The original number of stock options, restricted stock units and performance stock units were based on a planning value established in February 2006, and the total intended value and related award levels were not adjusted to account for the delay in the timing of the award to June 2006 as the CHRC decided not to recalculate the planning values for the entire employee population, including the named executive officers.

The total intended value of long-term incentives and related award levels for our executive officers were affected by the delay in the filing of both the 2005 and 2006 financial statements. In each year, the delivered value was not adjusted to account for the decrease in the share price which occurred from planning to granting as follows:

	Approximate						Decrease in
	Length of						Share Price
	Delay from		Share Price at		Share Price at		from Planning
	Planning		Planning		Grant		to Grant
Year	to Grant		($)		($)		($)
2007		1 month		27.93		25.82		2.11
2006		4 months		31.00		21.20		9.80

Further, no adjustments were made to the intended value of the option awards in order to reflect the decrease in the Black Scholes option valuation factor that occurred from planning to granting.

On the respective dates of the 2006 and 2007 grants, each named executive officer received the number of stock options, restricted stock units and performance stock units (in the case of Mr. Zafirovski, the number of stock options and

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performance stock units) that had been determined during the planning process notwithstanding the decreases in the share price shown in the above table or the decrease in the Black Scholes option valuation factor. The resulting effect is that executive officers received long-term incentive awards of less value than that which was originally planned. This effect was particularly great for awards made in 2006. Named executive officers were treated the same as all employees concerning the delays which occurred from planning to granting.

Another effect of these filing delays was that it made it look like there was a larger increase in the value of long-term incentives awarded from 2006 to 2007 than what was planned. As an example, the following table shows the difference between the intended value and the grant date fair market value of the stock options and performance stock units granted to Mr. Zafirovski in 2006 and 2007. The following table also shows the accounting value as reported in the “Summary Compensation Table for Fiscal Year 2007”, which reflects expense taken in the year with respect to all of the equity awards granted to Mr. Zafirovski. See also “— Reported Pay Versus Received Pay”.

			Grant Date
	Intended		Fair Market		Accounting
	Planning Value		Value		Value
Year	($)		($)		($)
2007		7,499,205		6,096,836		6,424,011
2006		7,007,938		4,617,141		4,153,218

Special One-Time Awards

In addition to the main components of our compensation program for named executive officers, the Company retains the right to make special one-time cash or equity awards as approved by the CHRC. The purpose of these special one-time awards is generally to retain key executives who have assumed added responsibilities. We also award special one-time awards to new executive officers in order to offset compensation that was forfeited by leaving former employment or in order to attract top executive talent. For information on the special one-time awards awarded to Messrs. Binning and Drinkwater during 2007, see “— 2007 Compensation for the Named Executive Officers”.

Other Compensation

Named executive officers are also provided with other compensation as reflected in the “All Other Compensation” column in the “Summary Compensation Table for Fiscal Year 2007” and as more fully described under “— Material Terms of Employment Agreements and Arrangements with Named Executive Officers”. The objective of providing other compensation is generally to provide executives with the devices to perform their duties more efficiently and thereby optimize individual performance. Where executive officers relocate in connection with their employment, we provide a relocation program in order to facilitate relocation. We may also agree to tax equalize relocated named executive officers in order to provide tax gross-ups on the taxable portion of certain amounts received by the named executive officer or paid on his behalf.

CIC Plan

The purpose of the Change in Control Plan, or the CIC Plan (previously the Executive Retention and Termination Plan) is to reinforce and encourage the continued attention and commitment of specified executives to their respective duties without distraction arising from the possibility of a change in control. As the purpose of the CIC Plan is to protect NNC and its shareholders, who might be very adversely affected if management were to be distracted, or were to depart, in the event a change in control transaction were to be proposed, it is consistent with our compensation objective of retaining qualified, high-performing executives, especially those determined by the committee to have a role critical to the business of the Company. We established the CIC Plan in order to provide certain arrangements, including cash payments, accelerated vesting of equity awards, and continuation of health and other benefits, for certain executives whose employment with Nortel is terminated as a result of change in control. In order to reinforce and encourage the continued attention and commitment of executives under potentially disruptive business circumstances, the CIC Plan provides the arrangements noted above to certain executives where both of the following conditions have been met: (i) a change in control of NNC; and (ii) the participant’s employment has been terminated or his or her roles and responsibilities have been substantially altered.

The CHRC determines eligibility for the CIC Plan based on the roles and responsibilities of each executive officer. In assessing whether an executive officer should participate under the CIC Plan, the CHRC considers, among other things, the critical nature of the individual’s role to the business of Nortel and the importance of retention of the individual. The determination of participation in the CIC Plan by the CHRC is made independent of other compensation considerations,

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including total target compensation and its component parts. Each of the named executive officers currently participates in the CIC Plan. Mr. Zafirovski participates as President and Chief Executive Officer and is eligible for benefits described for chief executive officer participation. The other named executive officers are eligible for benefits described for tier 1 executive participation. In addition to the CIC Plan, NNC has entered into arrangements with respect to benefits upon termination of employment with Messrs. Zafirovski, Binning, Carey and Hackney. NNC enters into these additional arrangements where it is necessary to recruit an individual with essential skills and experience for the particular role. For additional information, see “— Summary Compensation Table for Fiscal Year 2007 — Material Terms of Employment Agreements and Arrangements with Named Executive Officers” and “— Potential Payments upon Termination or Change in Control”.

The level of participation, terms and payout levels under the CIC Plan are periodically benchmarked against similar termination benefits of the comparator companies. Most recently in May 2007, Mercer completed a benchmarking review of the CIC Plan against the comparator companies. As a result of this benchmarking exercise, the CIC Plan was recently amended and restated in order to: (i) on a prospective basis, introduce pro rata vesting and settlement of all restricted stock units and performance stock units upon triggering of the CIC Plan, rather than full vesting; and (ii) introduce a United States Internal Revenue Code, or the Code, 280G excise tax treatment modified cap under which all payments made pursuant to the CIC Plan will be capped only if the amount the individual would receive on an after tax basis exceeds the net amount that would be received on the uncapped amounts, after both income taxes and excise taxes paid on the full amount. Certain other required amendments were also made to the CIC Plan in 2007 to ensure compliance with Section 409A of the Code, including specifying the timing and the form of payments on “Separation from Service” under the CIC Plan, adding a definition of “key employees” under the CIC Plan to match the definition under 409A of the Code. The CIC Plan was further amended in January 2008 to clarify certain amendments regarding timing of payments under the CIC Plan in accordance with Section 409A of the Code.

Pension Plans

Nortel maintains various employee pension plans in which the named executive officers are eligible to participate. Our employee pension programs have evolved over time in response to competitive market practice and while we continue to maintain a number of plans with active participants, many of these plans are closed to new entrants. In special cases, as with Mr. Zafirovski, we enter into specialized pension arrangements where we deem it necessary to attract high-performing senior executives. NNC also maintains the Supplementary Executive Retirement Plan for current participants. This plan is no longer open to new participants and none of the named executive officers participate in this plan.

Policies and Guidelines

The following policies and guidelines apply to the named executive officers, as well as to certain other executive officers and employees.

Policy on Company Aircraft

The CHRC adopted a written policy regarding travel on company aircraft on January 18, 2007, as amended March 1, 2007 and July 31, 2007. Nortel provides the company aircraft primarily for the safe and efficient travel of the president and chief executive officer and his senior management team. The president and chief executive officer is authorized to use company aircraft for any business travel, travel for commuting purposes and limited personal travel as approved by the chair of the CHRC. The president and chief executive officer (or, at his discretion, his designee) must approve the personal use of company aircraft for all employees, including the other named executive officers. The CHRC reviews company aircraft usage on an annual basis and such usage is disclosed in accordance with applicable securities laws as required. Taxable benefits that arise from travel on the company aircraft are calculated and reported in the employee’s compensation, as required. Taxable benefits related to travel on company aircraft are grossed up if required in accordance with an employment agreement, under applicable corporate policy or as approved by the CHRC.

Policy on Award of Equity-Based Compensation

On October 12, 2006, the CHRC adopted a written policy on awards of equity-based compensation. Prior to adopting the equity policy, there was an informal general practice of awarding equity substantially in accordance with the requirements of the policy. In accordance with the equity policy, all equity awards approved by the CHRC must be:

•  approved at a meeting that occurs on or prior to the grant date for the award;

•  made in accordance with the applicable equity incentive plan, securities law and stock exchange requirements; and

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•  unless otherwise determined by the CHRC: (i) for annual awards, have an effective grant date that is at least two complete business days after the filing by the Company and NNC with the SEC of their Annual Report on Form 10-K and that is otherwise during a window period under our applicable corporate policy; and (ii) for awards made for other valid business reasons, have an effective grant date that is during a window period under our applicable corporate policy.

The CHRC has also delegated authority to the president and chief executive officer to award equity awards to any employee who is not an officer of Nortel in an amount of up to 20,000 stock options and up to 10,000 restricted stock units or performance stock units in any fiscal year. Under the equity policy, such awards must also be approved on or prior to the grant date for the award, must be made in accordance with the applicable equity incentive plan, securities law and stock exchange requirements and, unless otherwise determined by the chair of the CHRC, must comply with the provisions concerning the effective grant date under the equity policy. In addition, the president and chief executive officer must report any grants made pursuant to this delegation to the CHRC on a quarterly basis.

Policy on Recoupment of Incentive Compensation

On January 18, 2007 the CHRC adopted a written policy regarding the recoupment of incentive compensation. The recoupment policy was adopted in order to establish and reserve the right of Nortel to recoup incentive compensation payments under certain conditions. This right exists in respect of plan years from January 1, 2007 and equity awards granted on or after January 1, 2007, and may be enforced against any employees who have been designated by the CHRC (initially all directors, senior executives and other reporting insiders under Canadian securities laws) in circumstances involving intentional misconduct that contributes, directly or indirectly, to an error in financial information that materially affects the value of such incentive compensation realized by the employee. If the CHRC determines that an employee committed such intentional misconduct, Nortel is entitled to issue proceedings to recover damages against that employee in respect of any losses incurred or as a result of or in connection with that intentional misconduct. Nortel may, under the recoupment policy, recoup any incentive compensation as an advance against such damages, whether or not proceedings are issued by Nortel. Incentive compensation payments that Nortel may recoup include all sales and incentive compensation, equity-based compensation, bonus payments and any matching pension plan payments made by Nortel.

Share Ownership and Shareholder Alignment

Nortel’s share ownership guidelines for executive officers and senior employees is intended to ensure that management has the same interests as shareholders in the value of NNC’s common shares. The settlement of the long-term incentive awards in common shares serves as a means for management to achieve share ownership guidelines. Executive officers and senior employees are expected to accumulate and hold, over a period of five years from the date of their appointment or the date the executive officer or senior employee enters a new salary threshold, common shares having a value proportionate to their base salary. Nortel reviews the guidelines from time to time and may adjust them to reflect market conditions and competitive practice among the comparator companies. The current guidelines, in place since July 2004, are as follows:

Base Salary Range in	Percentage
US/CDN Dollars	of Salary
Chief Executive Officer		500	%
$400,000 and up		300	%
$300,000 to $399,999		200	%
$200,000 to $299,999		100	%
$100,000 to $199,999		50	%
$0 to $99,999		0	%

On May 31, 2007, the CHRC approved the requirement that executive officers hold 50% of all settled vested equity awards (including stock options, restricted stock units and performance stock units) remaining after the payment of taxes and administrative fees associated with the award and the vesting (including the applicable exercise price) towards the maintenance and achievement of the share ownership guidelines.

The CHRC annually reviews the share ownership guidelines against the level of achievement of the executive officers. Each named executive officer, other than Mr. Lowe, has been an executive officer for less than the five year threshold under the share ownership guidelines. Further, the ability to achieve the guideline value targets has been adversely impacted by the price of NNC’s common shares for the past number of years, as well as by the fact that executive officers were prohibited from acquiring additional common shares from March 2004 to July 2005 and again from March 2006 to

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June 2006, due to the delay in the filing of certain of our financial statements. The ability to achieve the guideline value targets has also been adversely impacted by the fact that executive officers were generally not able to purchase shares in the open market as a result of the interaction between the way we settle restricted stock units and the SEC short swing profit rules. As a consequence, Nortel adopted a limited share purchase plan as a vehicle to enable certain of our executive officers to purchase common shares from NNC to satisfy share ownership guidelines and to comply with an exemption from the SEC short swing profit rules. All shares issued under the plan will be sold for fair market value determined by reference to the volume weighted average trading price of the shares for the five consecutive trading days on which at least a board lot of shares trades on each of the TSX and the NYSE, commencing on the day that a purchase order for shares is submitted under the plan, on either the TSX or the NYSE, whichever is higher. The maximum number of shares that may be purchased under the plan is 450,000 shares, representing less than 0.2% of the outstanding common shares. We recognize that it may be required that we extend the time period in which certain executives must accumulate the required number of shares.

Tax and Accounting Effects

Section 162(m) of the Code limits the deductibility from U.S. taxable income of certain types of compensation in excess of $1 paid by a “publicly held corporation” to certain of its executive officers. This limitation generally applies to all compensation other than that which is considered to be “performance-based” for purposes of the Code. This limitation does not apply to awards made under the Company’s stock option plans or certain awards under the SIP. Certain of our other programs, although based on the performance of Nortel and the individual, may not be considered “performance-based” for purposes of Section 162(m) of the Code. We have determined that it is not appropriate at this time to limit our discretion to design compensation arrangements for executive officers to qualify such compensation for exemption from the deduction limits of Section 162(m) of the Code.

Nortel has been using the fair value method to account for our long-term incentive awards in accordance with FAS 123R (disregarding the estimate of forfeitures related to service-based vesting conditions) since January 1, 2003; however, FAS 123R only became effective as of the first annual period beginning after June 15, 2005. The effective date for our adherence to FAS 123R was therefore January 1, 2006. All of our long-term incentive awards are subject to the provisions of FAS 123R.

Although the tax and accounting impacts are considered by the CHRC upon approval of compensation planning for the named executive officers, these impacts are not weighted heavily with regard to our compensation decisions.

Performance Evaluations

Nortel undertakes corporate-wide individual performance reviews each year commencing in the last fiscal quarter. The purpose of the evaluations is to evaluate and reward performance for a given fiscal year, and for compensation planning and development purposes for the next fiscal year. The CHRC, in conjunction with the president and chief executive officer, annually reviews and assesses the performance of all executive officers who report to the president and chief executive officer and reports findings and recommendations to the Nortel boards. The president and chief executive officer and his delegates review and assess the performance of all other executive officers. Recommendations based on these reviews, including with respect to base salary and short-term and long-term incentive amounts are presented to the CHRC for approval. The CHRC has full discretion to modify any compensation recommendations. In the case of the chief compliance officer, an annual performance evaluation is also conducted by the chair of the audit committees and the president and chief executive officer, and is reviewed with the audit committees and the chair of the CHRC.

The Nortel boards have directed that the president and chief executive officer’s compensation is to be determined by the independent directors of the Nortel boards, together with the CHRC, based on the CHRC’s assessment of the performance of the president and chief executive officer. The CHRC reviews and approves the corporate goals and/or performance objectives relevant to the compensation of the chief executive officer, evaluates the performance of the president and chief executive officer in light of such goals and objectives and, together with other independent directors of the Nortel boards, determines and approves the compensation of the chief executive officer based on such evaluation.

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For the main elements of the compensation paid to the named executive officers in 2007, performance evaluations factored as follows:

Base Salary	•   Evaluation of 2006 performance was a factor in determining whether to increase base salary for 2007
Short-Term Incentives	•   Individual performance objectives for the 2007 short-term incentive program were set at the beginning of 2007 •   The individual performance factor for 2007 under the Incentive Plan was determined by: •   Evaluation of 2007 performance for each named executive officer against his individual objectives •   Each named executive officer was also evaluated for relative impact on the overall business objectives of Nortel and other subjective criteria, including the personal effectiveness of the named executive officer as compared to the performance of his peers (except in Mr. Zafirovski’s case) •   On February 22, 2008, cash bonuses under the 2007 short-term incentive program were approved based on individual performance factors and the corporate performance factor
Long-Term Incentives	•   Evaluation of 2006 performance was a factor in determining the amount of long-term incentives to be awarded in 2007 •   Except for Mr. Zafirovski, the entire executive population was grouped into ten tiers for the purpose of awarding long-term incentives in 2007 •   While the actual amount of the long-term incentives awarded to each tier was based on competitive benchmarking, the tier ranking of each named executive officer was determined based on an evaluation of the impact of the named executive officer on Nortel’s overall business objectives and other subjective criteria, including the personal effectiveness of the named executive officer as compared to the performance of his peers •   Based on these assessments, the named executive officers were placed in the top three of ten tiers •   The amount of Mr. Zafirovski’s long-term incentives for 2007 was determined as a result of an evaluation of his 2006 performance and other subjective considerations, including his personal effectiveness

The Role of Management and Consultants in Nortel’s Executive Officer Compensation Program

Management prepares various presentations in advance of CHRC meetings and, at the direction of the chair of the CHRC, provides those presentations to the CHRC’s independent compensation consultant. Prior to the CHRC meetings, management meets with the CHRC’s independent compensation consultant, where required, in order to address any questions or issues raised by them.

Mr. Zafirovski attends all CHRC meetings but is not present when his own compensation is discussed or approved. Mr. Carey and certain other members of senior management are invited to attend CHRC meetings where appropriate.

As discussed above, performance evaluations for all executive officers reporting to Mr. Zafirovski, including the named executive officers, are conducted by Mr. Zafirovski and reported to the CHRC. The chair of the Nortel boards coordinates a performance evaluation by each independent director of the Nortel boards for Mr. Zafirovski.

For information on the role of consultants in Nortel’s executive officer compensation program, see “Statement of Corporate Governance Practices — Compensation Consultants” in the 2008 Proxy.

2007 Compensation for the Named Executive Officers

The major elements of compensation paid to or earned by the named executive officers in 2007 are described below. Additional information about the employment agreements between Nortel and the named executive officers is provided under “— Summary Compensation Table for Fiscal Year 2007 — Material Terms of Employment Agreements and Arrangements with Named Executive Officers”.

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Mr. Zafirovski

Mr. Zafirovski did not receive a base salary increase in 2007. The CHRC reviewed his base salary as compared to chief executive officers of the comparator companies and determined that no increase was required. Since November 13, 2006, Mr. Zafirovski’s base salary has been paid in Canadian Dollars, prior to which it was paid in U.S. Dollars. The difference in the amounts between 2006 and 2007 reflected in the “Salary” column in the “Summary Compensation Table for Fiscal Year 2007” is attributable to this currency conversion.

On March 21, 2007, the independent members of the Nortel boards awarded 269,000 stock options and 134,000 performance stock units to Mr. Zafirovski. Unlike the other named executive officers, Mr. Zafirovski’s long-term incentives for 2007 were not based on a tiered system. Further, he did not receive restricted stock units as did the other named executive officers. It was determined that this allocation of stock options and performance stock units, both considered by us to be “at risk” since such awards directly link payout with corporate performance, was an effective mix of long-term incentives from a shareholder value perspective. In setting the amount of long-term incentives for 2007, the relative long-term incentive awards for the chief executive officers of the comparator companies were also considered. Also considered were Mr. Zafirovski’s accomplishments and achievements in 2006, which included him providing a foundation to drive Nortel to profitable growth with focused business strategies, building a culture of ethics and accountability and transforming initiatives to build a more competitive business model.

During 2007, Mr. Zafirovski strengthened Nortel’s strategic direction and delivered solid progress in returning Nortel to profitability and growth. He made significant business and operational progress in completion of the second year of the five year transformation plan. Mr. Zafirovski continued to strengthen Nortel’s commitment to integrity through effective corporate governance practices, maintaining effective internal control over financial reporting and enhanced compliance.

The following objectives and assessments of their achievements were material to the determination of Mr. Zafirovski’s cash bonus of $1,288,853 under the Incentive Plan:

2007 Performance Objective	Assessment
• Strengthen Nortel’s strategic direction	• Under his leadership, Nortel’s three-pronged strategy — Transformed Enterprise, Next-Generation Mobility and Convergence, and Services — generated further market and customer momentum demonstrated by key marquee customer wins and further strengthening of Nortel’s market position for the future
	• Shaped Nortel’s portfolio to drive profitability and growth in 2007 and beyond
	• Significantly strengthened strategic partnerships augmenting Nortel’s value proposition
• Deliver solid financial progress	• Achieved full-year operating margin of $401 million, the highest annual operating margin since 2000
	• Expanded revenues in key strategic segments (e.g. Enterprise, Wireless, Optical, and Services)
• Deliver continued operational excellence	• Significantly improved Nortel’s supply chain, quality, customer support and cost structure
	• Optimized R&D investment and cost structure strengthening Nortel’s competitive position
• Build world-class management team, culture and process	• Led the settlement of regulatory investigations with the SEC and the OSC, including the strong endorsement by the SEC of the significant remedial actions undertaken by management and the Nortel boards
	• Elimination of the revenue-related material weakness in internal control over financial reporting
	• Led the continued revitalization of the Company’s leadership around organizational effectiveness to significantly improve its ability to identify and accelerate high-potential talent, improve employee engagement, mentoring and diversity
	• Accelerated organizational and people development through well instituted programs

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Mr. Binning

Mr. Binning was appointed Executive Vice-President and Chief Financial Officer effective November 12, 2007. Mr. Binning is a senior executive with more than 25 years of financial experience, including chief financial officer positions at Hanson PLC and Marconi PLC. He brings extensive expertise in operational execution and a track record of excellence. As described under “— Material Terms of Employment Agreements and Arrangements with Named Executive Officers”, the CHRC awarded Mr. Binning with a new hire long-term incentive award in order to attract a chief financial officer of Mr. Binning’s experience and effectiveness. Mr. Binning was not eligible for a cash bonus for 2007 under the terms of the Incentive Plan which require active employment on October 1 of a given plan year.

Mr. Drinkwater

Mr. Drinkwater was appointed Chief Financial Officer on an interim basis effective May 1, 2007. Upon the effective date of the appointment of Mr. Binning as Executive Vice-President and Chief Financial Officer, Mr. Drinkwater resumed his role as Chief Legal Officer, a position he previously held from December 19, 2005 to April 30, 2007. In recognition of his interim appointment as Chief Financial Officer Mr. Drinkwater was awarded a special bonus of $93,179 on February 22, 2008.

Mr. Drinkwater did not receive a base salary increase in 2007 with respect to his role as Chief Legal Officer. The CHRC reviewed his base salary as compared to similar roles of the comparator companies and determined that no increase was required. On March 21, 2007, Mr. Drinkwater was awarded 27,100 stock options, 13,500 restricted stock units and 13,500 performance stock units in connection with his role as Chief Legal Officer for which he was recognized by the CHRC for having strong leadership, technical and communication skills. Further, these long-term incentives were awarded in recognition of the role that he played in the Global Class Action Settlement as well as his role in various strategic projects.

The following objectives and assessments of their achievements were material to the determination of Mr. Drinkwater’s cash bonus of $225,494 under the Incentive Plan:

2007 Performance Objective	Assessment
• Drive successful completion of regulatory investigations	• Settlement of regulatory investigations with the SEC and OSC including the strong endorsement by the SEC of the significant remedial actions undertaken by management and the Nortel boards
• Deliver cost savings	• Completed the reorganization of legal department and met targets in 2007 budget
• Drive strong productivity	• Delivered on process improvements using Six Sigma initiatives through implementation of contract management system

Further, the CHRC also considered Mr. Drinkwater’s performance in his interim role as Chief Financial Officer, including leading the preparation and filing of the Company’s quarterly financial statements for the second and third quarters of 2007.

Mr. Currie

On February 7, 2007, we announced that Mr. Currie decided to step down from his position as Executive Vice-President and Chief Financial Officer effective April 30, 2007 and entered into a letter agreement with Mr. Currie concerning the cessation of his duties. The agreement provided Mr. Currie with: (i) the sum of $52,083.33 per month as salary continuance for the period commencing on May 1, 2007 and terminating April 30, 2009, or the Currie Salary Continuation Period; (ii) continued eligibility to receive an incentive award payment for 2006 under and in accordance with the Incentive Plan, provided that any payment under the Incentive Plan would be determined based on the terms and conditions of the Incentive Plan and will be made using an individual performance factor of 1.0; (iii) continued participation during the Currie Salary Continuation Period of certain health and life insurance benefits; and (iv) continued vesting of outstanding options and restricted stock awards during the Currie Salary Continuation Period and, to the extent applicable, all equity awards subject to retirement provisions for applicable awards. We also agreed to provide indemnification in accordance with applicable Canadian law and the Company’s by-laws. In addition, Mr. Currie has certain non-disclosure and non-compete obligations under the agreement.

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Mr. Carey

Mr. Carey did not receive a base salary increase in 2007. The CHRC reviewed his base salary as compared to similar roles of the comparator companies and determined that no increase was required. On March 21, 2007, Mr. Carey was awarded 50,000 stock options, 25,000 restricted stock units and 25,000 performance stock units on March 21, 2007. These long-term incentives were awarded in order to recognize the extraordinary combination of his responsibilities, and to recognize him being a key driver for creating a high performance organization and a highly engaged workforce.

The following objectives and assessments of their achievements were material to the determination of Mr. Carey’s cash bonus of $357,500 under the Incentive Plan, as well as the increased scope and responsibility of his role in 2007 as he assumed additional responsibilities for each of the Lean Six Sigma and Global Quality, Strategic Pricing, and Real Estate organizations in addition to Information Technology, Human Resources, Business Transformation, Change Management, Corporate Responsibility and Knowledge Services:

2007 Performance Objective	Assessment
• Deliver cost savings	• Significant annual gross savings under the Business Transformation initiatives, including the achievement of a substantial reduction in Corporate Operations costs
• Enhance organization and talent management	• Successful completion of strategic decision making process with respect to organizational effectiveness, feedback to leaders (performance, potential, development), succession planning, early identification of high-potential talent and continuous leadership development • Strengthened the leadership team through worldwide recruitment and internal promotions of key executives • Drove managerial excellence program design and launched an improved program to identify and develop emerging leaders at all levels
• Drive customer and employee satisfaction	• Directed a substantial number of Lean Six Sigma projects focused primarily on customer satisfaction improvement • Employee satisfaction increased with world-class participation levels in employee survey

Mr. Lowe

Mr. Lowe did not receive a base salary increase in 2007. The CHRC reviewed his base salary as compared to similar roles of the comparator companies and determined that no increase was required. His base salary was increased from $475,000 to $500,000 effective March 20, 2006. The differences in base salary provided in the “Salary” column in the “Summary Compensation Table for Fiscal Year 2007” reflects that Mr. Lowe did not earn a full year’s base salary at this rate in 2006. On March 21, 2007, Mr. Lowe was awarded 38,400 stock options, 19,200 restricted stock units and 19,200 performance stock units on March 21, 2007, which were awarded in order to recognize the highly technical nature of his roles and responsibilities as leader of Carrier Networks, which is a significant business unit. Further, Mr. Lowe was successful in achieving improvements on most financial, customer, product and quality objectives for the Carrier Networks business.

The following objectives and assessments of their achievements were material to the determination of Mr. Lowe’s cash bonus of $250,000 under the Incentive Plan:

2007 Performance Objective	Assessment
• Drive profitable growth in Carrier Networks	• Revenue for Carrier Networks increased by $111 million in 2007 • Management earnings before taxes for Carrier Networks increased by $339 million in 2007
• Improve customer satisfaction	• Reduced costs related to warranties and key product deficiencies • Achieved significant improvement in plan of record predictability and in time to market intervals

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Mr. Hackney

Mr. Hackney’s base salary was increased from $425,000 to $459,000 effective March 19, 2007 in connection with his role as Senior Vice-President, Global Operations and Quality based on the CHRC’s assessment of such role as compared to similar roles of the comparator companies. Effective on the September 19, 2007 date of his appointment as President, Enterprise Solutions, Mr. Hackney’s base salary was increased from $459,000 to $500,000. This increase was awarded by the CHRC in recognition of the additional roles and responsibilities of this new position. On March 21, 2007, Mr. Hackney was awarded 38,400 stock options, 19,200 restricted stock units and 19,200 performance stock units in recognition of his demonstrated leadership abilities and his significant strengthening of workforce, processes and structures through improvement in key business metrics.

The following objectives and assessments of their achievements were material to the determination of Mr. Hackney’s cash bonus of $325,000 under the Incentive Plan:

2007 Performance Objective	Assessment
President, Enterprise Solutions
• Improve financial metrics	• Achieved strong operational growth (Q4 revenues up 14% from Q3)
• Increased competitiveness	• Driving growth in new markets
Senior Vice-President, Global Operations and Quality
• Increase customer satisfaction	• Substantial improvement in customer satisfaction including increasing customer response times and outage resolution
• Improved competitiveness	• Drove variable cost productivity and reduced sales, general and administrative expenses • Decreased inventory days and improved cash conversion cycle

Mr. Slattery

On September 19, 2007, we announced the departure of Mr. Slattery as President, Enterprise Solutions effective September 30, 2007. We entered into a letter agreement with Mr. Slattery concerning the cessation of his employment. The agreement provides for the following: (i) payment of a severance allowance pursuant to the Nortel Enhanced Severance Allowance Plan from October 1, 2007 through March 31, 2009, or the Slattery Severance Period, paid in a bi-weekly amount of $19,230.77; (ii) an election to continue to participate in certain health and life insurance benefits for the duration of the Slattery Severance Period provided that Mr. Slattery pay applicable employee contribution rates; (iii) no eligibility for consideration for futures grants of stock options, restricted stock units and performance stock units; (iv) forfeiture of all previously granted performance stock units; (v) subject to any applicable trading restrictions, the right to exercise any vested stock options or settle any vested restricted stock units in accordance with the terms of the applicable instruments of grant/award, stock option plans and any other relevant documents governing the stock options and restricted stock units; (vi) senior executive outplacement services; (vii) income tax preparation services for the tax years 2007 and 2008; (viii) $5,000 in attorney’s fees; and (ix) no eligibility to receive a payment under the Incentive Plan for 2007. Mr. Slattery was awarded 38,400 stock options, 19,200 restricted stock units and 19,200 performance stock units on March 21, 2007 prior to the cessation of his employment. Under the terms of the severance agreement the performance stock units were forfeited. We also agreed to provide indemnification in accordance with applicable Canadian law and the Company’s by-laws. In addition, Mr. Slattery has certain non-disclosure and non-compete obligations under the agreement.

Mr. Joannou

On August 1, 2007, we announced the departure of Mr. Joannou as President, North America effective August 31, 2007. We entered into a letter agreement with Mr. Joannou concerning the cessation of his employment. The agreement provides for the following: (i) payment of a severance allowance pursuant to the Nortel Enhanced Severance Allowance Plan from September 1, 2007 through February 28, 2009, or the Joannou Severance Period, paid in a bi-weekly amount of $20,000; (ii) an election to continue to participate in certain health and life insurance benefits for the duration of the Joannou Severance Period provided that Mr. Joannou pay applicable employee contribution rates; (iii) no eligibility for consideration for futures grants of stock options, restricted stock units and performance stock units; (iv) forfeiture of all previously granted performance stock units, as well as all stock options and restricted stock units granted to him in 2007; (v) subject

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to any applicable trading restrictions, the right to exercise any vested stock options or settle any vested restricted stock units granted to him prior to 2007 in accordance with the terms of the applicable instruments of grant/award, stock option plans and any other relevant documents governing the stock options and restricted stock units; (vi) senior executive outplacement services; (vii) income tax preparation services for the tax years 2007 and 2008; and (viii) no eligibility to receive a payment under the Incentive Plan for 2007. Mr. Joannou was awarded 50,000 stock options, 25,000 restricted stock units and 25,000 performance stock units on March 21, 2007 prior to the cessation of his employment, all of which were forfeited under the terms of the severance agreement. We also agreed to provide indemnification in accordance with applicable Canadian law and the Company’s by-laws. In addition, Mr. Joannou has certain non-disclosure and non-compete obligations under the agreement.

Reported Versus Received Pay

Given the complexity of disclosure requirements concerning executive compensation, and in particular with respect to the standards of financial accounting and reporting related to equity compensation above under “— Long-Term Incentives”, there is a difference between the compensation that is reported in the “Summary Compensation Table for Fiscal Year 2007” versus that which was actually paid to and received by the executive officers for 2007.

Summary Compensation Table for Fiscal Year 2007

The following table sets forth the compensation awarded to, earned by, or paid to each of the Company’s named executive officers for services rendered by them to the Company during the 2007 fiscal year.

																Change in
																Pension Value
																and Nonqualified
													Non-Stock			Deferred
									Stock		Option		Incentive Plan			Compensation		All Other
Name and			Salary			Bonus			Awards		Awards		Compensation			Earnings		Compensation			Total
Principal Position	Year		($)			($)			($)(1)		($)(1)		($)(2)			($)(3)		($)(4)			($)
M.S. Zafirovski		2007		1,272,941	(5)		—			3,307,423		3,116,588		1,288,853	(5)		698,714		378,559	(5)		10,063,078
President and Chief		2006		1,198,991	(5)		—			1,873,624		2,279,594		1,174,263	(5)		690,396		1,060,553	(5)		8,277,421
Executive Officer
P.S. Binning(6)		2007		97,191	(5)		—			38,966		—		—			—		17,260	(5)		153,417
Executive Vice-President and Chief Financial Officer
D.W. Drinkwater(6)		2007		512,486	(5)		93,179	(5)(7)		516,875		174,490		225,494	(5)		—		65,964	(5)		1,588,488
Former Chief Financial Officer (interim)/Chief Legal Officer
P.W. Currie(6)		2007		208,333			—			1,497,423		1,747,422		—			—		533,374	(5)		3,986,552
Former Executive		2006		619,656			—			690,478		560,810		312,500			—		69,644	(5)		2,253,088
Vice-President and Chief Financial Officer
D.J. Carey		2007		550,000			—			965,766		206,382		357,500			22,539		583,825	(5)		2,686,012
Executive Vice-President, Corporate Operations
R.S. Lowe		2007		500,000	(8)		—			864,003		836,007		250,000			304,314		3,691			2,758,015
President, Carrier Networks		2006		494,656	(8)		—			466,544		689,196		225,000			302,109		9,000			2,186,505
J.J. Hackney, Jr.		2007		463,405			—			765,746		386,419		325,000			—		98,038			2,038,608
President, Enterprise Solutions		2006		425,000			125,000			420,054		271,998		195,500			—		248,761	(5)		1,686,313
S.F. Slattery(9)		2007		375,000			—			1,075,796		983,304		—			52,938		232,386			2,719,424
Former President, Enterprise Solutions
D.C. Joannou(9)		2007		346,667			375,000	(10)		815,959		812,838		—			24,177		251,662			2,626,303
Former President,		2006		515,725			375,000	(10)		447,561		412,980		325,000			25,264		9,000			2,110,530
North America

 (1)  Amounts set forth in the “Stock Awards” and “Option Awards” columns represent the respective amounts recognized as compensation expense by Nortel for financial statement reporting purposes in fiscal years 2007 and 2006 with respect to outstanding restricted stock unit and performance stock unit awards and stock option awards, respectively, in accordance with FAS 123R. A discussion of the assumptions used in this valuation with respect to awards made in fiscal year 2007 may be found in note 17, “Share-based compensation plans” to the accompanying audited consolidated financial statements. A discussion of the assumptions used in this valuation with respect to awards made in fiscal years prior to fiscal year 2007 may be found in the corresponding notes to the Company’s consolidated financial statements for the fiscal year in which the award was made. The following table sets forth the amount out of the total in the “Stock Awards” and “Option Awards” column that is compensation cost related to awards granted in each of 2007 and 2006, respectively, and certain specified instances of accelerated compensation cost recognition.

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			Stock Awards		Option Awards
Name	Year		($)		($)
M.S. Zafirovski		2007		817,307		620,200
		2006		470,093		282,562
P.S. Binning		2007		38,966		—
D.W. Drinkwater		2007		173,300		62,481
P.W. Currie(a)		2007		—		—
		2006		160,961		50,608
D.J. Carey(b)		2007		320,925		120,393
R.S. Lowe(c)		2007		246,471		455,452
		2006		140,841		306,545
J.J. Hackney, Jr.		2007		246,471		88,534
		2006		92,553		33,739
S.F. Slattery(d)		2007		330,496		227,726
D.C. Joannou(e)		2007		—		—
		2006		140,841		42,173

(a)	No awards were granted in 2007. The entire compensation cost recognized in 2007 is related to awards granted prior to 2007 and reflects accelerated recognition of compensation cost for stock awards and stock options granted in 2005 and 2006 due to accelerated vesting upon retirement.
(b)	Compensation cost reported for 2007 also reflects accelerated recognition of compensation cost for stock options granted in 2006 and 2007 due to retirement eligibility as of the first fiscal quarter of 2009.
(c)	Compensation cost reported for 2007 and 2006 also reflects accelerated recognition of compensation cost for stock options granted in 2007 and 2006, respectively, due to retirement eligibility.
(d)	Compensation cost reported for 2007 reflects accelerated recognition of compensation cost for stock awards and stock options granted in 2005, 2006 and 2007. Mr. Slattery began his severance period effective October 1, 2007. The severance period does not represent a substantive service requirement. As all performance conditions have been completed, compensation costs have been accelerated.
(e)	Awards granted in 2007 were forfeited at termination. The entire compensation cost recognized in 2007 is related to awards granted prior to 2007 and reflects accelerated recognition of compensation cost for stock awards and stock options granted in 2005 and 2006. Mr. Joannou began his severance period effective September 1, 2007. The severance period does not represent a substantive service requirement. As all performance conditions have been completed, compensation costs have been accelerated.

(2)

Represents incentive cash awards earned under the Incentive Plan.

(3)

Represents the aggregate increase in the actuarial present value of accumulated benefits under the defined benefit and actuarial pension plans (including supplemental plans) from the plan measurement date used for financial statement reporting purposes with respect to the prior completed fiscal year to the plan measurement date used for financial statement reporting purposes with respect to the covered fiscal year as follows:

				Amount
Name	Year		Plan Name	($)
M.S. Zafirovski		2007	Special Pension Benefit Arrangement		698,714
		2006	Special Pension Benefit Arrangement		690,396
D.J. Carey		2007	Nortel Networks Retirement Income Plan		6,219
			Nortel Networks Restoration Plan		16,320
R.S. Lowe		2007	Nortel Networks Retirement Income Plan		1,840
			Nortel Networks Restoration Plan		(18,423	)
			Nortel Networks Managerial and Non-Negotiated Pension Plan		71,162
			Nortel Networks Excess Plan		223,238
			Nortel Networks Transitional Retirement Allowance Plan		26,497
		2006	Nortel Networks Retirement Income Plan		28,218
			Nortel Networks Restoration Plan		23,009
			Nortel Networks Managerial and Non-Negotiated Pension Plan		81,677
			Nortel Networks Excess Plan		156,363
			Nortel Networks Transitional Retirement Allowance Plan		12,842
S.F. Slattery		2007	Nortel Networks Retirement Income Plan		782
			Nortel Networks Restoration Plan		(4,883	)
			Nortel Networks Managerial and Non-Negotiated Pension Plan		20,935
			Nortel Networks Excess Plan		60,044
			Nortel Networks Transitional Retirement Allowance Plan		(23,940	)
D.C. Joannou		2007	Nortel Networks Retirement Income Plan		7,765
			Nortel Networks Restoration Plan		16,412
		2006	Nortel Networks Retirement Income Plan		6,762
			Nortel Networks Restoration Plan		18,502

 (4)  Incremental cost of travel on the company aircraft is calculated based on the total direct (or variable) operating costs (fuel, maintenance labor, parts and materials, outside services, crew expenses, catering and commissary, handling, landing and navigation fees, maintenance

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reserves and miscellaneous expenses) in month traveled divided by the total flight hours of the aircraft during the month. The cost per flight hour is then multiplied by personal flight hours (including so-called “deadhead” flights resulting from the plane returning empty to its home base after taking the executive to his or her destination, or for the aircraft traveling empty to a destination to pick up the executive). Incremental cost of all other perquisites is the actual cost incurred. The following amounts were paid by, or reimbursed by, Nortel in 2007 for:

M.S. Zafirovski	•   the incremental cost of personal travel on the company aircraft and commercial airlines principally related to commuting ($136,262), personal use of ground transportation ($25,595), relocation expenses, tax preparation service, financial planning fees and a business club membership
	•   Company contributions under the Managerial and Non-Negotiated Plan (Part III) defined contribution pension plan ($18,636) and the Nortel Networks Limited Investment Plan for Employees — Canada ($157,044)
P.S. Binning	•   relocation expenses, including temporary car lease ($15,830)
	•   taxes paid on his behalf for a car lease benefit and for tax preparation service
D.W. Drinkwater	•   tax preparation service ($2,489) and spousal travel costs ($10,279)
	•   Company contributions under the Managerial and Non-Negotiated Plan (Part III) defined contribution pension plan ($18,636) and the Nortel Networks Limited Investment Plan for Employees — Canada ($34,335)
	•   taxes paid on his behalf for tax preparation service
P.W. Currie	•   Company contributions under the Nortel Networks Limited Investment Plan for Employees — Canada ($61,110)
	•   payments made pursuant to the letter agreement dated February 5, 2007, concerning the cessation of his employment on April 30, 2007, for salary continuance ($416,667), accrued and unused vacation ($51,542) and tax preparation service
	•   taxes paid on his behalf for tax preparation service
D.J. Carey	•   the incremental cost of personal travel on the company aircraft and commercial airlines principally related to commuting ($38,777), relocation expenses ($161,605), personal use of ground transportation and tax preparation service
	•   taxes ($369,162) pursuant to the tax-equalization provisions in his employment agreement and taxes paid on his behalf for tax preparation service
R.S. Lowe	•   Company contributions under the Nortel Networks Long-Term Investment Plan ($3,462)
	•   taxes paid on his behalf for tax preparation service
J.J. Hackney, Jr.	•   Company contributions under the Nortel Networks Long-Term Investment Plan ($13,500) and the Nortel Networks Long-Term Investment Restoration Plan ($25,299)
	•   taxes ($58,916) pursuant to the Permanent Relocation Program provisions in his employment agreement and taxes paid on his behalf for tax preparation service
S.F. Slattery	•   Company contributions under the Nortel Networks Long-Term Investment Plan ($8,100)
	•   payments earned or made pursuant to the letter agreement dated September 18, 2007, concerning the cessation of his employment on September 30, 2007, for severance allowance ($125,000), accrued and unused vacation ($96,154) and attorney’s fees
	•   taxes paid on his behalf for tax preparation service
D.C. Joannou	•   Company contributions under the Nortel Networks Long-Term Investment Plan ($8,100)
	•   payments earned or made pursuant to the letter agreement dated July 27, 2007, concerning the cessation of his employment on August 31, 2007, for severance allowance ($173,333) and accrued and unused vacation ($70,000)
	•   taxes paid on his behalf for tax preparation service

(5)	Represents the U.S. Dollar equivalent of certain payments actually earned or paid in local currency. Amounts for the incremental cost of air travel in Canadian Dollars have been converted using the month-end exchange rate in effect during the applicable month of travel. Amounts representing relocation expenses and ground travel submitted in local currency have been converted using the exchange rate in effect at the time the expense is submitted for payment. All other compensation paid in Canadian Dollars has been converted using the average of the exchange rates in effect during 2007 equal to US$1.00 = CAN$1.0732 and during 2006 equal to US$1.00 = CAN$1.1343, respectively, other than Mr. Zafirovski’s salary from November 13, 2006 until December 31, 2006, which was converted to U.S. Dollars using the average of the month-end exchange rates for November and December 2006 equal to US$1.00 = CAN$1.1455, and Mr. Binning’s salary which was converted to U.S. Dollars using the average of the month-end exchange rates for November and December 2007 equal to US$1.00 = CAN$0.9849. Mr. Zafirovski did not receive a salary increase in 2007. Since November 13, 2006, Mr. Zafirovski’s base salary has been paid in Canadian Dollars, prior to which it was paid in U.S. Dollars. The increase between 2006 and 2007 reflected in the “Salary” column is attributable to this currency conversion.
(6)	On February 7, 2007, we announced that Mr. Currie decided to step down from his position as Executive Vice-President and Chief Financial Officer effective April 30, 2007. Mr. Drinkwater was appointed Chief Financial Officer on an interim basis, effective May 1, 2007. Effective November 12, 2007, Mr. Binning was appointed Executive Vice-President and Chief Financial Officer, at which time Mr. Drinkwater resumed his role as Chief Legal Officer.
(7)	Represents a one-time special bonus approved by the CHRC in recognition of Mr. Drinkwater’s service as Chief Financial Officer for the period from May 1, 2007 to November 11, 2007.
(8)	Mr. Lowe’s base salary was increased to $500,000 effective March 20, 2006. The differences in base salary showing from 2006 to 2007 reflects that Mr. Lowe did not earn a full year’s base salary at this rate in 2006. He did not receive a salary increase in 2007.

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(9)	On September 19, 2007, we announced the departure of Mr. Slattery as President, Enterprise Solutions effective September 30, 2007. On August 1, 2007, we announced the departure of Mr. Joannou as President, North America effective August 31, 2007.
(10)	Represents a special bonus pursuant to a letter agreement entered into on September 29, 2005 between the Company and Mr. Joannou. The first of two $375,000 installments was made in 2006 and the second was made in 2007.

  Material Terms of Employment Agreements and Arrangements with Named Executive Officers

The following is a summary of the material terms of the employment arrangements for the named executive officers. For more information regarding the named executive officers’ pension benefits and other post-employment compensation, see “— Pension Benefits for Fiscal Year 2007” and “— Potential Payments upon Termination or Change in Control”. For details of the letter agreement entered into with each of Mr. Currie, Mr. Slattery and Mr. Joannou with respect to the cessation of their employment, respectively, see “— Compensation Discussion and Analysis — 2007 Compensation for the Named Executive Officers”.

Mr. Zafirovski

Mr. Zafirovski’s employment agreement provides for tax equalization so that his after-tax compensation will be the same as if he were a resident of the State of Illinois. Compensation for this purpose includes salary, short-term incentive awards, long-term incentives and benefits under our employee benefit plans (including our relocation plan) to the extent such benefits shall be considered income for tax purposes and any other similar payments or awards. His employment agreement further provides for perquisites including annual reimbursement of up to $25,000 for financial planning, as well as tax preparation services and reimbursement of his relocation expenses. Mr. Zafirovski is also eligible to participate in the our employee benefit plans, including the Capital Accumulation and Retirement Program, or CARP, and our relocation program, in accordance with the generally applicable terms of such plans, as well as the CIC Plan.

Mr. Zafirovski was eligible for a special lifetime annual pension benefit of $500,000, including a 60% joint and survivor benefit for his spouse. At the June 28, 2006 meeting of the CHRC, Mr. Zafirovski proposed a voluntary 29% reduction of this special lifetime annual pension benefit, in conjunction with changes announced on June 27, 2006 relating to our current pension programs in the United States and Canada. The CHRC accepted Mr. Zafirovski’s proposal and recommended it to the Nortel boards for approval. At a joint meeting of the boards held on June 28, 2006, the boards approved the voluntary reduction. As a result, Mr. Zafirovski will now be eligible for a special lifetime annual pension benefit of $355,000 per year rather than $500,000 per year. Mr. Zafirovski’s eligibility for this special pension will accrue after five years of active employment. The special pension benefit will be payable monthly following retirement on or after age 60.

The termination of Mr. Zafirovski’s employment at or after five years will also be treated as a retirement for purposes of the terms of all equity incentive awards granted to Mr. Zafirovski under the Company’s stock option plans. In recruiting Mr. Zafirovski, it was also necessary to agree to a provision concerning involuntary separation.

Mr. Binning

We entered into an employment agreement with Mr. Binning in connection with his appointment as Executive Vice-President and Chief Financial Officer effective November 12, 2007. Pursuant to the terms of his employment agreement, Mr. Binning’s base salary is CAN$683,000. Under his employment agreement, Mr Binning was also entitled to receive a one-time grant of restricted stock units with an intended value of $1,350,000 under and subject to the terms and conditions of the SIP and Nortel’s policies and procedures at the time of grant. Based on the twenty day average closing price of NNC’s common shares on the NYSE on November 9, 2007 of $16.68, the intended value was converted to a new hire long-term incentive award of 81,000 restricted stock units on November 15, 2007. His restricted stock units have a five year vesting term which is greater than the standard three year term in order to further encourage retention. Mr. Binning’s employment agreement also provides that, in conjunction with our 2008 annual Integrated Talent Planning cycle, he will receive an award of long-term incentives valued at approximately $2,300,000 using our prescribed valuation method for equity vehicles applicable to senior executives of Nortel generally, in line with the 2008 long-term incentive program design approved by the CHRC and under and subject to the terms and conditions of the SIP (or any equivalent plan existing on the date thereof) and our policies and procedures at the time of grant.

Mr. Binning is also eligible to participate in certain employee benefit plans, our relocation program and the CIC Plan in accordance with the generally applicable terms of such plans. In recruiting Mr. Binning, it was also necessary to agree to a provision concerning involuntary separation.

200

Mr. Drinkwater

We entered into an employment agreement with Mr. Drinkwater in connection with his appointment as Chief Legal Officer effective December 19, 2005 under which Mr. Drinkwater is eligible to participate in certain employee benefit plans and the CIC Plan in accordance with the generally applicable terms of such plans. We did not enter into an agreement with respect to Mr. Drinkwater’s appointment as Chief Financial Officer on an interim basis from May 1, 2007 to November 11, 2007.

Mr. Carey

We entered into an employment agreement with Mr. Carey in connection with his appointment as Executive Vice-President, Corporate Operations effective January 30, 2006. Mr. Carey’s employment agreement provides for tax equalization so that his after-tax compensation will be the same as if he were a resident of the State of Illinois. Mr. Carey is also eligible to participate in certain employee benefit plans and the CIC Plan in accordance with the generally applicable terms of such plans. In recruiting Mr. Carey, it was also necessary to agree to a provision concerning involuntary separation.

Mr. Lowe

Mr. Lowe is an experienced executive who has been employed by us since June 1980. He is eligible to participate in certain employee benefit plans and the CIC Plan in accordance with the generally applicable terms of such plans.

Mr. Hackney

We entered into an employment agreement with Mr. Hackney in connection with his appointment as President, Enterprise Solutions as of December 13, 2007. This agreement updates and replaces the terms and conditions of the letter between Nortel and Mr. Hackney in connection with his appointment as Senior Vice-President, Supply Chain and Quality. Mr. Hackney is eligible to participate in the long-term incentive program and certain employee benefit plans, including relocation and the CIC Plan, in accordance with the generally applicable terms of such plans. Mr. Hackney has elected not to participate in any of our pension plans. In order to recruit Mr. Hackney, it was necessary to agree to a provision in his original employment agreement concerning involuntary separation and this provision was extended to his current agreement.

Grants of Plan-Based Awards in Fiscal Year 2007

The following table sets forth information concerning equity awards granted by the Company to the named executive officers under the SIP during the 2007 fiscal year and the possible payouts to the named executive officers under the Incentive Plan for the 2007 fiscal year. For a description of the material terms of the SIP, see “Equity-Based Compensation Plans — Nortel 2005 Stock Incentive Plan”. For a description of the material terms of the Incentive Plan see “— Compensation Discussion and Analysis — Short Term Incentives”.

																All
														All		Other
														Other		Option		Exercise					Grant
														Stock		Awards:		or					Date
		Estimated Possible												Awards:		Number of		Base			Closing		Fair
	Grant Date/	Payouts under						Estimated Future Payouts						Number of		Securities		Price of			Price on		Value of
	Corporate	Non-Equity Incentive						under Equity Incentive						Shares of		Under-		Option			Grant		Stock and
	Approval	Plan Awards						Plan Awards						Stock or		lying		Awards			Date on		Option
	Date	Target			Max			Threshold		Target		Max		Units		Options		($/Sh)			NYSE		Awards
Name	(1)	($)			($)			(#)		(#)		(#)		(#)		(#)		(2)			($)		($)(3)
M.S. Zafirovski	March 21/ March 15		—			—			—		—		—		—		269,000		25.82	(4)		26.11		3,190,537
	March 21/ March 15		—			—			67,000		134,000		268,000		—		—		—			—		2,906,299
	—		1,909,411	(5)		3,818,822	(5)		—		—		—		—		—		—			—		—
P. S. Binning(6)	November 15/ November 15		—			—			—		—		—		81,000		—		—			—		1,514,700
D. W. Drinkwater	March 21/ March 15		—			—			—		—		—		—		27,100		25.82	(4)		26.11		321,426
	March 21/ March 15		—			—			—		—		—		13,500		—		—			—		348,570
	March 21/ March 15		—			—			6,750		13,500		27,000		—		—		—			—		292,799
	—		409,989	(5)		819,978	(5)		—		—		—		—		—		—			—		—
P.W. Currie(7)(8)	—		—			—			—		—		—		81,000		—		—			—		1,514,700

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														All
												All		Other
												Other		Option		Exercise				Grant
												Stock		Awards:		or				Date
		Estimated Possible										Awards:		Number of		Base		Closing		Fair
	Grant Date/	Payouts under				Estimated Future Payouts						Number of		Securities		Price of		Price on		Value of
	Corporate	Non-Equity Incentive				under Equity Incentive						Shares of		Under-		Option		Grant		Stock and
	Approval	Plan Awards				Plan Awards						Stock or		lying		Awards		Date on		Option
	Date	Target		Max		Threshold		Target		Max		Units		Options		($/Sh)		NYSE		Awards
Name	(1)	($)		($)		(#)		(#)		(#)		(#)		(#)		(2)		($)		($)(3)
D.J. Carey	March 21/ March 15		—		—		—		—		—		—		50,000		25.82		26.11		593,037
	March 21/ March 15		—		—		—		—		—		25,000		—		—		—		645,500
	March 21/ March 15		—		—		12,500		25,000		50,000		—		—		—		—		542,220
	—		550,000		1,100,000		—		—		—		—		—		—		—		—
R.S. Lowe	March 21/ March 15		—		—		—		—		—		—		38,400		25.82		26.11		455,452
	March 21/ March 15		—		—		—		—		—		19,200		—		—		—		495,744
	March 21/ March 15		—		—		9,600		19,200		38,400		—		—		—		—		416,425
	—		500,000		1,000,000		—		—		—		—		—		—		—		—
J.J. Hackney, Jr.	March 21/ March 15		—		—		—		—		—		—		38,400		25.82		26.11		455,452
	March 21/ March 15		—		—		—		—		—		19,200		—		—		—		495,744
	March 21/ March 15		—		—		9,600		19,200		38,400		—		—		—		—		416,425
	—		500,000		1,000,000		—		—		—		—		—		—		—		—
S.F. Slattery(7)	March 21/ March 15		—		—		—		—		—		—		38,400		25.82		26.11		455,452
	March 21/ March 15		—		—		—		—		—		19,200		—		—		—		495,744
	March 21/ March 15		—		—		9,600		19,200		38,400		—		—		—		—		416,425
	—		—		—		—		—		—		—		38,400		25.82		26.11		455,452
D. C. Joannou(7)(9)	March 21/ March 15		—		—		—		—		—		—		50,000		25.82		26.11		593,037
	March 21/ March 15		—		—		—		—		—		25,000		—		—		—		645,500
	March 21/ March 15		—		—		12,500		25,000		50,000		—		—		—		—		542,220
	—		—		—		—		—		—		—		50,000		25.82		26.11		593,037

(1)	Grants were approved by the CHRC at its March 15, 2007 meeting in accordance with the equity policy. The grant to Mr. Zafirovski was approved at the March 15, 2007 meeting of the Nortel boards also in accordance with the equity policy. These grants were approved with a March 21, 2007 effective date provided that the following conditions were satisfied: (i) the opening of a window period as a result of the filing of financial statements for the year ended December 31, 2006; and (ii) satisfactory completion of consultation with the SEC. All 2007 long-term incentives were awarded in accordance with the SIP and applicable securities laws and stock exchange requirements. The grant for Mr. Binning was approved by the CHRC by written resolution with an effective date of November 15, 2007.
(2)	Stock options are awarded at an option price not less than the “market value” (as determined in accordance with the SIP) of a common share of the Company on the grant date. For a description of the methodology of determining the exercise price, see “Equity Based Compensation Plans — Nortel 2005 Stock Incentive Plan”.
(3)	Aggregate grant date fair values computed in accordance with FAS 123R. For a detailed description of the assumptions made in the valuation of stock options, restricted stock units and performance stock units, see note 18 “Share-based compensation plans” to the accompanying audited consolidated financial statements.
(4)	Canadian grants issued with an exercise price of CAN$29.90. Table reflects equivalent U.S. Dollar exercise price converted using the March 21, 2007 Bank of Canada noon rate of exchange rate of US$1.00 = CAN$1.1578.
(5)	Amounts have been converted using the average of the exchange rates in effect during 2007 equal to US$1.00 = CAN$1.0732.
(6)	Mr. Binning commenced employment on November 12, 2007. Based on his hire date, he was not eligible for an Incentive Plan award in 2007 as he was not actively employed in an eligible role for at least three full calendar months in the plan period.
(7)	Did not receive an Incentive Plan award in 2007 due to change in employment status. Employees who terminate before December 31 of a plan period are not eligible to receive a plan award for that plan period.
(8)	No stock awards or option awards were granted to Mr. Currie in 2007.
(9)	The stock awards and option awards granted to Mr. Joannou in 2007 were forfeited at termination.

202

Outstanding Equity Awards at End of Fiscal Year 2007

The following table sets forth information regarding unexercised options, restricted stock units that have not vested, and unearned performance stock units outstanding for each named executive officer as of December 31, 2007.

	Option Awards									Stock Awards
															Equity			Equity
															Incentive			Incentive
															Plan			Plan
															Awards:			Awards:
															Number of			Market or
													Market		Unearned			Payout Value
	Number of		Number of										Value of		Shares,			of Unearned
	Securities		Securities							Number of			Shares or		Units or			Shares, Units
	Underlying		Underlying							Shares or			Units of		Other			or Other
	Unexercised		Unexercised			Option				Units of			Stock That		Rights That			Rights That
	Options		Options			Exercise			Option	Stock That			Have Not		Have Not			Have Not
	(#)		(#)			Price			Expiration	Have Not Vested			Vested		Vested			Vested
Name	Exercisable		Unexercisable			($)(1)			Date	(#)			($)		(#)(2)			($)(3)
M.S Zafirovski		200,000		300,000	(4)		31.00		November 14, 2015		135,900	(5)		2,050,731		—			—
		41,875		125,625	(6)		21.20		June 13, 2016		—			—		56,500	(7)		852,585
		—		269,000	(8)		25.82	(9)	March 20, 2017		—			—		67,000	(10)		1,011,030
P. S. Binning		—		—			—		—		81,000	(11)		1,222,290		—			—
D.W Drinkwater		5,000		5,000	(12)		32.10	(13)	December, 18, 2015		4,734	(14)		71,436		—			—
		5,000		15,000	(15)		21.20	(16)	June 13, 2016		7,667	(17)		115,695		5,750	(7)		86,768
		—		27,100	(18)		25.82	(9)	March 20, 2017		13,500	(19)		203,715		6,750	(10)		101,858
P.W Currie		50,000		50,000	(20)		31.80	(21)	April 30, 2012(22)		16,666	(23)		251,490		—			—
		30,000		—			21.20	(16)	April 30, 2010(22)		13,334	(24)		201,210		10,000	(25)		150,900
D.J. Carey		6,250		18,750	(26)		21.20		June 13, 2016		45,000	(27)		679,050		8,750	(7)		132,038
		—		50,000	(28)		25.82		March 20, 2017		25,000	(29)		377,250		12,500	(10)		188,625
R.S. Lowe		2,800		—			112.90		January 28, 2008		—			—		—			—
		1,600		—			146.10		July 30, 2008		—			—		—			—
		3,200		—			101.48		October 28, 2008		—			—		—			—
		1,600		—			155.33		January 27, 2009		—			—		—			—
		2,666		—			71.60		November 29, 2009		—			—		—			—
		2,666		—			71.60		January 26, 2010		—			—		—			—
		1,333		—			71.60		June 28, 2010		—			—		—			—
		4,000		—			71.60		September 27, 2010		—			—		—			—
		4,000		—			71.60		January 24, 2011		—			—		—			—
		15,000		—			51.50		February 27, 2012		—			—		—			—
		37,500		37,500	(30)		31.80		September 6, 2015		—			—		—			—
		—		—			—		—		10,000	(31)		150,900		—			—
		6,250		18,750	(32)		21.20		June 13, 2016		11,667	(33)		176,055		8,750	(7)		132,038
		—		38,400	(34)		25.82		March 20, 2017		19,200	(35)		289,728		9,600	(10)		144,864
J.J. Hackney, Jr.		25,000		25,000	(36)		29.80		December 8, 2015		11,000	(37)		165,990		—			—
		5,000		15,000	(38)		21.20		June 13, 2016		7,667	(39)		115,695		5,750	(7)		86,768
		—		38,400	(40)		25.82		March 20, 2017		19,200	(41)		289,728		9,600	(10)		144,864
S.F. Slattery		720		—			112.90		January 28, 2008		—			—		—			—
		1,066		—			101.48		October 28, 2008		—			—		—			—
		1,866		—			71.60		June 29, 2009(22)		—			—		—			—
		1,666		—			71.60		June 29, 2009(22)		—			—		—			—
		2,000		—			71.60		June 29, 2009(22)		—			—		—			—
		20,000		—			51.50		June 29, 2009(22)		—			—		—			—
		37,500		37,500	(42)		31.80		June 29, 2009(22)		—			—		—			—
		—		—			—		—		10,000	(43)		150,900		—			—
		6,250		18,750	(44)		21.20		June 29, 2009(22)		11,667	(45)		176,055		—			—
		—		38,400	(46)		25.82		June 29, 2009(22)		19,200	(47)		289,728		—			—

203

	Option Awards								Stock Awards
														Equity		Equity
														Incentive		Incentive
														Plan		Plan
														Awards:		Awards:
														Number of		Market or
												Market		Unearned		Payout Value
	Number of		Number of									Value of		Shares,		of Unearned
	Securities		Securities						Number of			Shares or		Units or		Shares, Units
	Underlying		Underlying						Shares or			Units of		Other		or Other
	Unexercised		Unexercised			Option			Units of			Stock That		Rights That		Rights That
	Options		Options			Exercise		Option	Stock That			Have Not		Have Not		Have Not
	(#)		(#)			Price		Expiration	Have Not Vested			Vested		Vested		Vested
Name	Exercisable		Unexercisable			($)(1)		Date	(#)			($)		(#)(2)		($)(3)
D. C. Joannou		133		—			112.90	January 28, 2008		—			—		—		—
		1,066		—			101.48	October 28, 2008		—			—		—		—
		1,333		—			155.33	January 27, 2009		—			—		—		—
		1,333		—			71.60	May 29, 2009(22)		—			—		—		—
		333		—			71.60	May 29, 2009(22)		—			—		—		—
		800		—			71.60	May 29, 2009(22)		—			—		—		—
		9,000		—			51.50	May 29, 2009(22)		—			—		—		—
		37,500		37,500	(48)		30.70	May 29, 2009(22)		10,000	(49)		150,900		—		—
		6,250		18,750	(50)		21.20	May 29, 2009(22)		11,667	(51)		176,055		—		—

(1)	Historical exercise prices have been adjusted to reflect the 1-for-10 consolidation of NNC’s issued and outstanding common shares effective December 1, 2006.
(2)	The market value is computed by multiplying the closing market price of NNC’s common shares on the NYSE on December 31, 2007 ($15.09), by the number of shares or units held.
(3)	The number of unearned performance stock units is based on a threshold payout of 50% of award.
(4)	100,000 options will vest on each of November 15, 2008, November 15, 2009 and November 15, 2010.
(5)	45,300 restricted stock units will vest on each of November 15, 2008, November 15, 2009 and November 15, 2010.
(6)	41,875 options will vest on each of June 14, 2008, June 14, 2009 and June 14, 2010.
(7)	Performance stock units will vest on December 31, 2008.
(8)	67,250 options will vest on each of March 21, 2008, March 21, 2009, March 21, 2010 and March 21, 2011.
(9)	Canadian grant issued with an exercise price of CAN$29.90. Table reflects equivalent U.S. Dollar exercise price converted using the March 21, 2007 Bank of Canada noon rate of exchange of US$1.00 = CAN$1.1578.
(10)	Performance stock units will vest on December 31, 2009.
(11)	16,200 restricted stock units will vest on each of November 15, 2008, November 15, 2009, November 15, 2010, November 15, 2011 and November 15, 2012.
(12)	2,500 options will vest on each of December 19, 2008 and December 19, 2009.
(13)	Canadian grant issued with an exercise price of CAN$37.40. Table reflects equivalent U.S. Dollar exercise price converted using the December 19, 2005 Bank of Canada noon rate of exchange of US$1.00 = CAN$1.1634.
(14)	4,734 restricted stock units will vest on December 19, 2008.
(15)	5,000 options will vest on each of June 14, 2008, June 14, 2009 and June 14, 2010.
(16)	Canadian grant issued with an exercise price of CAN$23.60. Table reflects equivalent U.S. exercise price converted using the June 14, 2006 Bank of Canada noon rate of exchange of US$1.00 = CAN$1.1122.
(17)	3,833 restricted stock units will vest on June 14, 2008 and 3,834 restricted stock units will vest on June 14, 2009.
(18)	6,775 options will vest on each of March 21, 2008, March 21, 2009, March 21, 2010 and March 21, 2011.
(19)	4,500 restricted stock units will vest on each of March 21, 2008, March 21, 2009 and March 21, 2010.
(20)	25,000 options will vest on September 7, 2008 and 25,000 options will vest on May 1, 2009. Accelerated vesting of final tranche of options due to retirement.
(21)	Canadian grant issued with an exercise price of CAN$37.80. Table reflects equivalent U.S. Dollar exercise price converted using the September 7, 2005 Bank of Canada noon rate of exchange of US$1.00 = CAN$1.1863.
(22)	Option term shortened due to change in employment status.
(23)	16,666 restricted stock units will vest on September 7, 2008.
(24)	6,667 restricted stock units will vest on June 14, 2008. The settlement of the remaining outstanding restricted stock units will be accelerated on a prorated basis with 5,845 restricted stock units settling on May 1, 2009 and the outstanding balance of 822 expiring on May 1, 2009.
(25)	Performance stock units will vest on December 31, 2008. Due to retirement a pro-rata settlement contingent on the achievement of the performance criteria will be made upon vest.
(26)	6,250 options will vest on each of June 14, 2008, June 14, 2009 and June 14, 2010.
(27)	22,500 restricted stock units will vest on each of June 14, 2008 and June 14, 2009.
(28)	12,500 options will vest on each of March 21, 2008, March 21, 2009, March 21, 2010 and March 21, 2011.
(29)	8,333 restricted stock units will vest on each of March 21, 2008 and March 21, 2009 and 8,334 restricted stock units will vest on March 21, 2010.
(30)	18,750 options will vest on each of September 7, 2008 and September 7, 2009.
(31)	10,000 restricted stock units will vest on September 28, 2008.
(32)	6,250 options will vest on each of June 14, 2008, June 14, 2009 and June 14, 2010.
(33)	5,833 restricted stock units will vest on June 14, 2008 and 5,834 restricted stock units will vest on June 14, 2009.

204

(34) 9,600 options will vest on each of March 21, 2008, March 21, 2009, March 21, 2010 and March 21, 2011.

(35)	6,400 restricted stock units will vest on each of March 21, 2008, March 21, 2009 and March 21, 2010.
(36)	12,500 options will vest on each of December 9, 2008 and December 9, 2009.
(37)	11,000 restricted stock units will vest on December 9, 2008.
(38)	5,000 options will vest on each of June 14, 2008, June 14, 2009 and June 14, 2010.
(39)	3,833 restricted stock units will vest on June 14, 2008 and 3,834 restricted stock units will vest on June 14, 2009.
(40)	9,600 options will vest on each of March 21, 2008, March 21, 2009, March 21, 2010 and March 21, 2011.
(41)	6,400 restricted stock units will vest on each of March 21, 2008, March 21, 2009 and March 21, 2010.
(42)	18,750 options will vest on September 7, 2008. The last tranche will expire unvested on severance end date.
(43)	10,000 restricted stock units vest on September 28, 2008.
(44)	6,250 options will vest on June 14, 2008. The remaining unvested options will expire on severance end date.
(45)	5,833 restricted stock units will vest on June 14, 2008. The remaining unvested restricted stock units will expire on severance end date.
(46)	9,600 options will vest on each of March 21, 2008 and March 21, 2009. The remaining unvested options will expire on severance end date.
(47)	6,400 restricted stock units will vest on each of March 21, 2008 and March 21, 2009. The remaining unvested restricted stock units will expire on severance end date.
(48)	18,750 options will vest on November 22, 2008. The remaining unvested options will expire on severance end date.
(49)	10,000 restricted stock units will vest on November 22, 2008.
(50)	6,250 options will vest on June 14, 2008. The remaining unvested options will expire on severance end date.
(51)	5,833 restricted stock units will vest on June 14, 2008. The remaining unvested restricted stock units will expire on severance end date.

Option Exercises and Stock Vested in Fiscal Year 2007

The following table sets forth information regarding the vesting of restricted stock units during the 2007 fiscal year for each of the named executive officers on an aggregated basis. None of the named executive officers exercised any options to purchase common shares during the 2007 fiscal year.

	Option Awards				Stock Awards
	Number of Shares		Value Realized on		Number of Shares		Value Realized on
	Acquired on Exercise		Exercise		Acquired on Vesting		Vesting
Name	(#)		($)		(#)		($)
M.S. Zafirovski		—		—		45,300		832,614	(1)
P.S. Binning		—		—		—		—
D.W. Drinkwater		—		—		3,833		96,937	(2)
		—		—		4,733		74,308	(3)
P.W. Currie		—		—		6,666		168,583	(2)
		—		—		16,667		282,339	(4)
D.J. Carey		—		—		22,500		569,025	(2)
R.S. Lowe		—		—		5,833		147,517	(2)
		—		—		10,000		169,800	(5)
J.J. Hackney, Jr.		—		—		3,833		96,937	(2)
		—		—		11,000		186,120	(6)
S.F. Slattery		—		—		5,833		147,517	(2)
		—		—		10,000		169,800	(5)
D.C. Joannou		—		—		5,833		147,517	(2)
		—		—		10,000		169,500	(7)

(1)	Based on November 15, 2007 NYSE market close price of $18.38.
(2)	Based on June 14, 2007 NYSE market close price of $25.29.
(3)	Based on December 19, 2007 NYSE market close price of $15.70.
(4)	Based on September 7, 2007 NYSE market close price of $16.94.
(5)	Based on September 28, 2007 NYSE market close price of $16.98.
(6)	Restricted stock units vested Sunday December 9, 2007. Based on December 7, 2007 NYSE market close price of $16.92.
(7)	Restricted stock units vested on November 22, 2007. Due to market holiday, settlement based on November 21, 2007 NYSE market close price of $16.95.

205

Pension Benefits for Fiscal Year 2007

The following table sets forth certain information regarding each plan that provides for pension benefits to the named executive officers at, following, or in connection with retirement.

		Number of
		Years		Present Value of			Payments
		Credited		Accumulated			During Last
		Service		Benefit			Fiscal Year
Name	Plan Name	(#)		($)(1)			($)
M.S. Zafirovski	Special Pension Benefit Arrangement		1.96		1,389,110	(2)		—
P.S. Binning	—		—		—			—
D.W. Drinkwater	—		—		—			—
P.W. Currie	—		—		—			—
D.J. Carey	Nortel Networks Retirement Income Plan		2		15,228	(3)
	Nortel Networks Restoration Plan		2		20,252	(3)
R.S. Lowe	Nortel Networks Retirement Income Plan		11		327,945	(3)		—
	Nortel Networks Restoration Plan		11		606,634	(3)		—
	Nortel Networks Managerial and Non-Negotiated Pension Plan		16.83		702,869	(4)		—
	Nortel Networks Excess Plan		16.83		786,895	(4)		—
	Nortel Networks Transitional Retirement Allowance Plan		16.83		108,938	(4)		—
J.J. Hackney, Jr.	—		—		—			—
S.F. Slattery	Nortel Networks Retirement Income Plan		12		179,595	(3)		—
	Nortel Networks Restoration Plan		12		375,088	(3)		—
	Nortel Networks Managerial and Non-Negotiated Pension Plan		9.50		302,967	(4)		—
	Nortel Networks Excess Plan		9.50		198,202	(4)		—
	Nortel Networks Transitional Retirement Allowance Plan		9.50		—	(4)		—
D.C. Joannou	Nortel Networks Retirement Income Plan		14		100,076	(3)		—
	Nortel Networks Restoration Plan		14		226,461	(3)		—

(1)	In accordance with CSA Staff Notice 51-314 — Retirement Benefits Disclosure, the present value of accumulated benefits are estimated amounts based on assumptions, which represent contractual entitlements that may change over time. The method used to determine such estimated amounts will not be identical to the method used by other issuers and, as a result, the figures may not be directly comparable across companies. For the underlying assumptions for the Company’s defined benefit plans, see note 8, “Employee benefit plans” to the accompanying audited consolidated financial statements.
(2)	Mr. Zafirovski is eligible for a special pension benefit. He is entitled to a pension of $355,000 per year after five years of service. The pension is to commence at age 60 and is payable as a joint and survivor 60% annuity. As Mr. Zafirovski was hired on October 17, 2005, he had accrued 1.96 years as at the plan measurement date of September 30, 2007. The accumulated benefit is based on the ratio of this period of service to five years. The present value represents this portion of the benefit discounted from the date of commencement back to September 30, 2007, based on a discount rate of 5.56% and post retirement mortality based on the RP2000 Table Projected to 2016.
(3)	The following assumptions were used in the calculations of the present value of accumulated benefits under the Nortel Networks Retirement Income Plan and the Nortel Networks Restoration Plan: Assumed retirement age: pension benefits are assumed to begin at each participant’s earliest unreduced retirement age, age 65; Discount rate: the applicable discount rates are 5.92% as of September 30, 2006 and 6.26% for the Nortel Networks Retirement Income Plan and 6.07% for the Nortel Networks Restoration Plan as of September 30, 2007; Future interest crediting rate assumption: Cash Balance amounts are projected to the assumed retirement age based on the future investment crediting rate assumptions of 6.00% as of September 30, 2006 and 5.50% as of September 30, 2007; Pension Service Plan (PSP) amounts are projected to the assumed retirement age based on the future investment crediting rate plan provision of 6.00%. These rates are used in conjunction with the discount rate to estimate the present value amounts.
(4)	The following assumptions were used in the calculations of the present value of accumulated benefits: Discount rate: the applicable discount rates are 5.61% for our Nortel Networks Managerial and Non-Negotiated Pension Plan Part I, 5.60% for the Nortel Networks Excess Plan, 5.42% for our Nortel Networks Transitional Retirement Allowance Plan and 5.56% for our Special Pension Benefit Arrangement; Consumer Price Index: 2.50%; Annual increases of 3.50% to the Income Tax Act (Canada), or ITA, maximum after 2009; Mortality Table: RP2000 Table Projected to 2016. The earliest age the member can retire without benefit reduction has been used as the assumed retirement age. A retirement age of 60 has been used for the Managerial and Non-Negotiated Pension Plan and the Excess Plan for Part I members and an assumed retirement age of 65 has been used for the Transitional Retirement Allowance Plan.

Nortel maintains various employee pension plans in the U.S. and Canada. The following descriptions relate to defined benefit pension plans in which the named executive officers participate. Mr. Zafirovski is eligible for a special lifetime annual pension benefit, as described under “— Material Terms of Employment Agreements and Arrangements with Named Executive Officers”. Messrs. Binning, Currie and Hackney elected to not participate in any of the Nortel pension plans. Messrs. Zafirovski and Drinkwater do not participate in the Nortel defined benefit pension plans.

Nortel Networks Retirement Income Plan

We maintain a defined benefit pension plan, the Retirement Income Plan, for eligible employees, including executives, who are employed by NNI and other Nortel controlled group members that are located in the U.S. Plan participants receive benefits determined under one of two formulas, depending on elections made by the plan participant: the Pension

206

Service Plan, or PSP, formula or the Cash Balance Plan formula. Mr. Carey participates in the Cash Balance Plan and Messrs. Lowe, Slattery and Joannou participate in the PSP.

The PSP formula is available for participants who enrolled in the plan prior to May 1, 2000, and who elected prior to May 1, 2000 to be covered by the PSP formula. As of May 1, 2000, the PSP formula under the Retirement Income Plan was closed to new participants. The PSP formula provides a benefit calculated as percentage pension credits multiplied by average earnings for the highest 1,095 consecutive calendar days of compensation out of the last 3,650 days prior to retirement or other termination of employment. Participants earn pension credits during each year of participation based on age attained in the year and on years of service, as follows:

If age + service years is	The percentage credit for the year is
45 or less	2%
46 — 55	5%
56 — 65	9%
66 — 75	13%
76 or more	20%

Eligible earnings include base salary and, where applicable, incentive awards or bonuses, if any, paid under the Incentive Plan, overtime, off-shift differentials and sales commissions. An employee becomes fully vested after completing four years of vesting service. An employee earns a year of vesting service for each calendar year in which the employee completes at least 1,000 hours of service.

Effective May 1, 2000, Nortel established the Cash Balance Plan, a defined benefit pension formula, based on pay credits and interest credits. The Cash Balance Plan formula provides a monthly credit equal to 4% of eligible earnings, with interest being credited monthly based on the month’s starting balance. Eligible earnings include base salary and, where applicable, incentive awards or bonuses, if any, paid under the Incentive Plan, overtime, off-shift differentials and sales commissions earned prior to retirement or other termination of employment. An employee becomes fully vested after completing two years of vesting service.

Normal retirement age is 65. An employee is eligible for early retirement on or after his or her 55th birthday, subject to satisfaction of the vesting requirement. The PSP and Cash Balance Plan benefits can be paid in a lump sum or as an actuarially equivalent annuity.

Nortel Networks Restoration Plan

U.S. employees, including executives, may also participate in the Restoration Plan. Messrs. Carey, Lowe, Slattery and Joannou participate in the Restoration Plan. The Restoration Plan is a non-qualified deferred compensation plan. The purpose of the Restoration Plan is to provide pension benefits in cases where the compensation exceeds the limitations placed by federal laws on compensation amounts that may be included under a qualified pension plan ($225,000 in 2007) as well as limitations on the total benefit that may be paid from such plans. Pension benefits that are based on compensation amounts below the limit are provided under our Retirement Income Plan and are funded through a qualified pension trust. Pension benefits applicable to compensation that exceeds federal limitations and pension benefits in excess of the limitations on total benefits are paid from our Restoration Plan, and are funded from NNI’s general assets. All of the material terms and conditions of benefits (including vesting and payment conditions and options) under the Restoration Plan are identical to the participant’s tax-qualified plan benefit under the Retirement Income Plan.

Nortel Networks Managerial and Non-Negotiated Pension Plan

We maintain the Nortel Networks Managerial and Non-Negotiated Plan or the Managerial and Non-Negotiated Plan, a defined benefit pension plan, for eligible employees, including executives, in Canada. The Managerial and Non-Negotiated Plan has two different formulas, called Part I and Part II. An employee becomes fully vested after completing two years of pensionable service. Normal retirement age is 65. Messrs. Lowe and Slattery participate in the Nortel Canada Part I formula, as a result of their prior Canadian service.

The Part I formula provides a monthly benefit at retirement based on years of service and a pension accrual of 1.3% of the average annual earnings of the best three consecutive years. A member is eligible to retire with an early unreduced pension if the member has attained age 60 and the aggregate of the member’s years of pensionable service and age equals at least 80. An early retirement reduction of 1/3 of one percent for each month by which the member’s age is less than age 60 applies for retirement prior to age 60, subject to a minimum rate of 1.04%. Eligible earnings include base salary

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and, where applicable, overtime, off-shift differentials and an individual sales commission factor. Effective January 1, 1999, the Part I formula was closed to new participants.

The Part II formula was introduced January 1, 1999. Employees who were participants in Part I could continue to participate in Part I, or move to the new Part II formula, at their election. Part II provides a benefit calculated as pension credits multiplied by the average annual earnings for the highest three consecutive years in the last ten years prior to retirement or other termination of employment. Pension credits are earned during each year of participation based on the participant’s age attained in the year and on years of service, as follows:

If age + service years is	The percentage credit for the year is
45 or less	2%
46 — 55	5%
56 — 65	9%
66 — 75	13%
76 or more	20%

Eligible earnings for Part II include base salary and, where applicable, incentive awards or bonuses, if any, paid under the Incentive Plan, overtime, off-shift differentials and sales commissions. Effective May 1, 2000, the Part II defined benefit formula was closed to new participants.

The Part II benefit can be paid in a lump sum or as an actuarially equivalent annuity. Under the annuity option there are reductions for retirement prior to normal retirement age of 65. Certain grandfathering rules exist for employees and executives who were participating in the pension plan as at December 31, 1998.

Nortel Networks Excess Plan

Employees, including executives, participating in our Managerial and Non-Negotiated Plan Part I and Part II may also participate in the Nortel Networks Excess Plan or Excess Plan. Messrs. Lowe and Slattery participate in the Excess Plan. The Excess Plan is a non-registered plan under Canadian tax laws. The ITA limits the amount of pension that may be paid under a registered pension plan. Pension benefits in amounts below the ITA limit are paid from a registered pension plan, the Managerial and Non-Negotiated Plan, which is funded through a pension trust. Pension benefits that exceed the ITA limits are paid from the Excess Plan, and are funded from NNL’s general assets and the general assets of Nortel Networks Technology Corporation, an affiliate of the Company. All of the material terms and conditions of benefits (including vesting and payment conditions and options) under the Excess Plan are identical to the participant’s registered benefit under the Managerial and Non-Negotiated Plan Part I and Part II.

Nortel Networks Transitional Retirement Allowance Plan

The purpose of our Nortel Networks Transitional Retirement Allowance Plan, or TRA Plan, is to recognize the long service of our employees, including executives, who retire under Part I of the Managerial and Non-Negotiated Plan. The TRA Plan is a non-registered plan under Canadian tax laws. The benefits under the TRA Plan are provided for out of the Company’s operating income. Messrs. Lowe and Slattery participate in the TRA Plan.

This benefit is payable to a member only upon retirement and who is eligible and elects to receive an immediate pension. A ‘member’ means an individual who retires under Part I after completing four or more years of continuous service and whose membership has not been terminated. The TRA Plan is calculated based on two components: (i) a lump sum amount based on age and service calculated according to several tables; and (ii) an earnings and service formula. A member may elect to receive payment as a lump sum, or monthly payments, or in a combination of a lump sum and monthly payments.

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Nonqualified Deferred Compensation for Fiscal Year 2007

The following table sets forth certain information with respect to each defined contribution or other plan that provides for the deferral of compensation on a basis that is not tax-qualified.

	Executive		Registrant			Aggregate			Aggregate		Aggregate
	contributions		contributions			earnings			withdrawals/		balance
	in last FY		in last FY			in last FY			distributions		at last FYE
Name	($)		($)			($)			($)		($)
M.S. Zafirovski		—		—			—			—		—
P.S. Binning		—		—			—			—		—
D.W. Drinkwater		—		—			—			—		—
P.W. Currie		—		—			—			—		—
D.J. Carey		—		—			—			—		—
R.S. Lowe		—		—			72,301	(1)		—		1,959,578	(1)
J.J. Hackney, Jr.		—		25,299	(2)		1,263	(2)		—		37,326	(2)
S.F. Slattery		—		—			3,054	(1)		—		115,551	(1)
D.C. Joannou		—		—			—			—		—

(1)

Amounts represent participation in the Nortel Networks U.S. Deferred Compensation Plan.

(2)

Amounts represent participation in the Nortel Networks Long-Term Investment Restoration Plan, which is a non-tax qualified plan. The Nortel Networks Long-Term Investment Plan is a tax qualified plan. The Long-Term Investment Restoration Plan is intended to provide employees with the portion of the matching contribution, if any, which cannot be made under the Nortel Networks Long-Term Investment Plan because of the compensation limitations of Section 401(a)(17) of the Code. The Company contributions to the Long-Term Investment Restoration Plan disclosed in the Nonqualified Deferred Compensation Table were made by the Company as matching contributions with respect to Mr. Hackney’s contributions to the Nortel Networks Long-Term Investment Plan and could not be made by the Company under the Nortel Networks Long-Term Investment Plan because of the compensation limits of Section 401(a)(17) of the Code. This amount is also reported in the Summary Compensation Table.

Nortel Networks U.S. Deferred Compensation Plan

Eligibility to participate in the U.S. Deferred Compensation Plan, or DCP, is limited to our U.S.-based employees above a certain compensation threshold. The threshold is $174,000, which is comprised of base salary plus a percentage of annual bonus. Participants may defer up to 80% of their base salary, 95% of Incentive Plan awards and up to 95% of commissions. The minimum annual deferral is $5,000.

Participants may allocate their deferrals among a variety of different investment crediting options, which are deemed investments in funds in which the participant has no ownership interest. The funds are only used to measure the gains or losses that will be attributed to the participant’s deferral account over time. Investment allocation changes can be made as often as monthly, while employed, after termination, retirement or long-term disability.

Investment returns are calculated based on the returns on the funds selected. The funds are designated by a committee composed of individuals appointed by the board to administer such employee benefit plans, including the CHRC or such other persons or committees of persons who may be designated by the CHRC to carry out responsibilities under the plan, including the administrative committee of the DCP.

To help meet our obligations under the DCP, Nortel purchased two life insurance products from Nationwide Life Insurance Company or Nationwide. The selected funds are wrapped within the life insurance products provided by Nationwide. Nationwide selects the funds that go into each product. Nortel has selected two of these products for the DCP — Nationwide Best of America Corporate Variable Universal Life and Nationwide Best of America Future Corporate Variable Universal Life. Nationwide reviews the fund offerings and manager on a regular basis and makes changes or adds funds within each product to continue to offer the most competitive investment options for its clients. We decided to include all of the investment options offered within each product to participants for notional investment under the DCP. There is an annual review of the funds in the DCP.

Messrs. Lowe and Slattery participate in the DCP. In 2007, Mr. Lowe allocated his account to 27 of the 104 investment funds offered. The 2007 average rate of return applicable to the 27 funds was 7.89%. Mr. Slattery allocated his account to 4 of the 104 investment funds offered. The 2007 average rate of return applicable to the 4 funds was 2.06%.

Prior to the beginning of each year participants in the DCP make an election to receive that year’s deferral balance (i) in a future year while the participant is still employed as a scheduled in-service withdrawal or (ii) after the participant’s employment ends as a termination payment. Distributions are made in a lump sum or, if available to the participant and

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elected, in installments of five, ten, or 15 years, the participant must meet certain eligibility requirements based on age, service and size of account balance.

Nortel Networks Long-Term Investment Restoration Plan

Our Nortel Networks Long-Term Investment Restoration Plan, or LTI Restoration Plan, is intended to provide employees with the portion of the matching contribution, if any, which cannot be made under the Nortel Networks Long-Term Investment Plan, or Investment Plan, because of the compensation limitations of Section 401(a)(17) of the Code. The LTI Restoration Plan is an unfunded and non-tax qualified pension plan.

Under the terms of the LTI Restoration Plan, an “eligible employee” means an employee of NNI or its affiliates who is considered an eligible employee under the Investment Plan and who has elected the “Investor Option” under the CARP and has elected to participate in the Investment Plan. An eligible employee shall become an active participant of the LTI Restoration Plan if such employee’s eligible compensation is not fully recognized under the Investment Plan because of the compensation limitations imposed by Section 401(a)(17) of the Code and the employee has made employee contributions to the Investment Plan during the applicable plan year.

Eligible compensation under the LTI Restoration Plan is the annual compensation of a participant that would otherwise be recognized under the Investment Plan for contribution purposes but without regard to the limit on compensation under Section 401(a)(17) of the Code, which was a $225,000 limit in 2007. The eligible compensation under the LTI Restoration Plan includes base pay, overtime pay, sales commissions, merit cash, promotion cash, career development cash, skill block awards, lead pay, shift differential and specific bonuses listed in the plan document.

For each plan year in which an eligible employee makes an employee contribution, the Company will contribute a matching amount to his or her account equal to the excess of (a) 100% of such active participant’s employee contribution up to a maximum of 6% of an active participant’s eligible compensation, over (b) the maximum matching company contribution made on his or her behalf under the Investment Plan for the applicable plan year. Matching contributions are added to an employee’s account at or about the time such contributions are made to the Investment Plan.

All accounts under the LTI Restoration Plan are credited with notional investment earnings in amounts and at times as determined by the plan administrator based on the actual returns of the funds. The notional investment funds available under the LTI Restoration Plan mirror the 16 funds offered by the Investment Plan. Mr. Hackney currently participates in the LTI Restoration Plan. In 2007, Mr. Hackney allocated his account to 4 of the 16 investment funds offered. The 2007 average rate of return applicable to the 4 funds was 9.63%.

The payment option for the LTI Restoration Plan is a lump sum payment. Participants are required to take a lump sum distribution at six months after termination. A lump sum is paid out immediately to the designated beneficiary upon death of participant.

Potential Payments upon Termination or Change in Control

CIC Plan

The purpose of the Change in Control Plan, or CIC Plan, is to reinforce and encourage the continued attention and commitment of specified executives to their respective duties without distraction in the face of the potentially disturbing circumstances arising from the possibility of a change in control. The material terms of the CIC Plan are described below.

Change in Control

For purposes of the CIC Plan, a change in control is deemed to occur if:

•  any person or group acquires beneficial ownership of securities of NNC representing more than 20% of the outstanding securities entitled to vote in the election of directors of NNC, other than in connection with a “permitted business combination” (as defined in the CIC Plan);

•  NNC participates in a business combination, including, among other things, a merger, amalgamation, reorganization, sale of all or substantially all of its assets, or plan of arrangement, unless: (i) the business combination only involves NNC, and one and more affiliated entities; or (ii) following the completion of all steps involved in the transaction or transactions pursuant to which the business combination is effected, NNC’s common shareholders beneficially own, directly or indirectly, more than 50% of the then-outstanding voting shares of the entity resulting from the business combination (or of the person that ultimately controls such entity, whether directly or indirectly) and at least a majority of the members of the board of directors of the entity resulting from the business

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combination (or the person that ultimately controls such entity, whether directly or indirectly) were members of the board of directors of NNC when the business combination was approved or the initial agreement in connection with the business combination was executed;

•  the persons who were directors of NNC on the effective date of the CIC Plan (or the incumbent directors) cease (for reasons other than death or disability) to constitute at least a majority of the board of directors of NNC; provided, that any person who was not a director on the effective date of the CIC Plan shall be deemed to be an incumbent director if such person was elected or appointed to the board of directors of NNC by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then qualify as incumbent directors, unless such election, appointment, recommendation or approval was the result of any actual or publicly threatened proxy contest for the election of directors; or

•  any other event occurs which the board of directors of NNC determines in good faith could reasonably be expected to give rise to a change in control, resulting from situations such as: (i) any person acquiring a significant interest in Nortel; or (ii) the election of a person to a Nortel board in circumstances in which management has not solicited proxies in respect of such decision.

Termination Due to Change in Control

The CIC Plan provides that if the Company terminates a participant’s employment without cause within a period commencing 30 days prior to the date of a change in control of the Company and ending 24 months after the date of a change in control of the Company, or the participant resigns for good reason (including, among other things, a reduction in overall compensation, geographic relocation or reduction in responsibility, in each case without the consent of the participant) within 24 months following the date of a change in control of the Company, the participant will be entitled to certain payments and benefits, including:

•  the payment of an amount equal to three times (in the case of the chief executive officer) and two times (in the case of tier 1 executives) of the participant’s annual base salary;

•  the payment of an amount equal to 300% (in the case of the chief executive officer) and 200% (in the case of tier 1 executives) of the participant’s target annual incentive bonus; and

•  subject to the provisions of any stock incentive plan that are contrary to the CIC Plan and which cannot be waived or amended by the Company:

•  accelerated vesting of all unvested stock options held immediately prior to the termination date for both the chief executive officer and tier 1 executives in accordance with the applicable stock incentive plan, provided that no award under the SIP become vested earlier than the first anniversary date of the effective date of such award;

•  continued ability to exercise vested stock options during the period ending on the third year anniversary of the termination date for the chief executive officer and during the period ending on the two year anniversary of the termination date for tier 1 executives; and

•  all unvested restricted stock units, performance stock units or other stock based incentive awards that are outstanding immediately prior to the termination date, other than stock options, (i) granted on or after June 1, 2007 deemed to have vested on a pro rata basis as of the termination date and (ii) granted prior to June 1, 2007 deemed to have fully vested based on 100% of unvested target amount; provided that payment in settlement of any such restricted stock units, performance stock units or other stock based incentive awards shall be in cash, shares or a combination thereof in accordance with the applicable settlement provisions of the CIC Plan, the applicable stock incentive plan and/or the instrument of award for the particular award.

Additionally, participants under the CIC Plan will also be entitled to the following in the event of termination due to change in control:

•  outplacement counseling services of a firm chosen from time to time by the participant, for a period not to exceed 18 months after the payment date;

•  maintenance of coverage for the maximum extended reporting period available under any directors’ and officers’ liability insurance that is in place on the termination date, in the event that such policy is cancelled or not renewed;

•  during the period ending on the three year anniversary of the termination date for the chief executive officer, and the two year anniversary of the termination date for tier 1 executives, continued coverage under each of the Nortel life insurance, medical, dental, health and disability plans or arrangements in which the specified executive was entitled to participate immediately prior to the earlier of the termination date or the change in control date at a cost to the executive no greater than the actual amount that the executive paid or would have paid for such coverage

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immediately prior to the earlier of the termination date or the change in control date and otherwise in accordance with the terms of such plans and arrangements as in effect immediately prior to the earlier of the termination date or the change in control date, provided that certain conditions are satisfied; and

•  if a specified executive participates in any deferred compensation, pension or supplementary retirement plans offered by Nortel, then upon such specified executive’s termination due to change in control, and except as otherwise specifically provided in the CIC Plan, such executive shall be entitled to payments under such plans in accordance with the terms of each such plan.

Potential Payments under the CIC Plan

If a change in control had occurred on December 31, 2007 and the employment of the named executive officer terminated as a result, the following payments to the named executive officers would have been required under the CIC Plan. Messrs. Currie, Slattery and Joannou were not serving as executive officers as of December 31, 2007.

													Health
							Stock						Benefits
			Salary		Bonus		Options		RSUs		PSUs		Coverage		Other		Total
Name	Tier		($)(1)		($)(2)		($)(3)(4)		($)(4)(5)		($)(4)(6)		($)(7)		($)(8)		($)
M.S. Zafirovski(9)		CEO		3,818,822		5,728,233		—		2,050,731		1,705,170		75,000		20,000		13,397,956
P.S. Binning(9)		1		1,272,829		1,272,829		—		—		—		50,000		20,000		2,615,658
D.W. Drinkwater		1		1,024,972		819,977		—		187,131		173,535		50,000		20,000		2,275,615
D.J. Carey		1		1,100,000		1,100,000		—		679,050		264,075		50,000		20,000		3,213,125
R.S. Lowe		1		1,000,000		1,000,000		—		326,955		264,075		50,000		20,000		2,661,030
J.J. Hackney, Jr.(9)		1		900,000		900,000		—		945,645		173,535		50,000		20,000		2,989,180

(1)	Salary payout is equivalent to three times annual salary for Mr. Zafirovski as President and Chief Executive Officer and two times annual salary for other named executive officers as Tier 1 executives. Mr. Zafirovski’s annual salary of CAN$1,366,120, Mr. Binning’s annual salary of CAN$683,000 and Mr. Drinkwater’s annual salary of CAN$550,000 have been converted to U.S. Dollars using the 2007 average exchange rate of US$1.00 = CAN$1.0732.
(2)	Bonus payout is equivalent to 300% of the annual bonus that Mr. Zafirovski would have been entitled to as Chief Executive Officer and to 200% of the annual bonus that each of the other named executive officers would have been entitled to as tier 1 executives. Bonus entitlement converted to U.S. Dollars using the 2007 average exchange rate of US$1.00 = CAN$1.0732.
(3)	Calculated as the intrinsic value per option, multiplied by the number of options that become immediately vested upon change in control. The intrinsic value per option is calculated as the excess of the closing market price on NYSE on December 31, 2007 of $15.09 over the exercise price of the option. If the value is less than zero, it is deemed to be zero for the purpose of this calculation.
(4)	The following number of options, restricted stock units and performance stock units would have immediately vested upon change of control, excluding all options, restricted stock units and performance stock units granted less than one year prior to December 31, 2007:

	Number of Options		Number of RSUs		Number of PSUs
Name	(#)		(#)		(#)
M.S. Zafirovski		425,625		135,900		113,000
P.S. Binning		—		—		—
D.W. Drinkwater		20,000		12,401		11,500
D.J. Carey		18,750		45,000		17,500
R.S. Lowe		56,250		21,667		17,500
J.J. Hackney, Jr.		40,000		18,667		11,500

(5)	Calculated as the intrinsic value per restricted stock unit, multiplied by the number of restricted stock units that become immediately vested. The intrinsic value per restricted stock unit is determined based on the closing market price on NYSE on December 31, 2007 of $15.09.
(6)	Calculated as the intrinsic value per performance stock unit, multiplied by the number of performance stock units that become immediately vested. The intrinsic value per performance stock unit is determined based on the closing market price on NYSE on December 31, 2007 of $15.09.
(7)	Based on an estimated annual cost of $25,000. Mr. Zafirovski’s payout is based on three year coverage as provided for the chief executive officer under the CIC Plan. Payout for the remaining named executive officers is based on two year coverage as defined under tier 1 executives under the CIC Plan.
(8)	Other coverage includes outplacement counseling estimated at a cost of $20,000 per named executive officer.
(9)	Payment to Mr. Zafirovski under his employment agreement would make him ineligible for these payments and benefits under the CIC Plan. Payment to Messrs. Binning and Hackney of these CIC Plan benefits would make them ineligible for the payments and benefits under their respective employment agreements.

Employment Agreements

In addition to the CIC Plan, Nortel has agreed to termination provisions with respect to Messrs. Zafirovski, Binning, Carey and Hackney. Additional details of the employment agreements of Messrs. Zafirovski, Binning, Carey and Hackney

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are described under “— Summary Compensation Table for Fiscal Year 2007 — Material Terms of Employment Agreements and Arrangements with Named Executive Officers”.

Mr. Zafirovski

Mr. Zafirovski’s employment agreement provides that in the event Nortel initiates his separation of employment as President and Chief Executive Officer or if Mr. Zafirovski initiates his separation of employment because his responsibilities or authority have been involuntarily changed and are not substantially equivalent to his current role, or because his total compensation is involuntarily changed in a manner that is materially inconsistent with other key executive officers, he will be provided in lieu of any other payment or benefit with the following:

•  the equivalent of two years base salary paid bi-weekly;

•  the equivalent of two years Incentive Plan payment at target to be paid in a lump sum; and

•  the opportunity to continue health, life insurance and AD&D benefits coverage in which he is then enrolled for two years following employment termination at active employee rates and the continued vesting of outstanding stock options or restricted stock units during the salary continuance period, other than the new hire stock options and restricted stock units, which immediately vest on the date of separation.

In addition, in the event any Incentive Plan payment is made to key employees of Nortel in the year of such separation, Mr. Zafirovski is entitled to a pro-rata Incentive Plan payment at target. The foregoing payments and benefits will not be provided to Mr. Zafirovski if his separation of employment arises out of termination for cause, as that term is defined in the CIC Plan. All payments and benefits are conditional on Mr. Zafirovski’s execution of a separation agreement. If payments are made to Mr. Zafirovski under this provision of his employment agreement, he will be ineligible for the payments and benefits under the CIC Plan as described above.

Mr. Binning

Mr. Binning’s employment agreement provides that in the event Nortel initiates his separation of employment or he initiates his separation of employment for Good Reason (as defined in the CIC Plan) he will be provided in lieu of any other payment or benefit with the following:

•  the equivalent of no less than 18 months base salary paid bi-weekly; and

•  the opportunity to continue health, life insurance and AD&D benefits coverage in which he is enrolled for 18 months following employment termination and active employee rates.

All of the new hire restricted stock units granted to Mr. Binning will continue to vest for 18 months following employment termination and, immediately prior to the end of this severance period, all of the unvested new hire restricted stock units will immediately vest. The foregoing payments and benefits will not be provided to Mr. Binning if his separation of employment is for Cause (as defined in the CIC Plan). All payments and benefits are conditional on Mr. Binning’s execution of a separation agreement. If payments are made to Mr. Binning under the CIC Plan as described above, he will be ineligible for the payments and benefits under this provision of his employment agreement.

Mr. Carey

Mr. Carey’s employment agreement provides that if Nortel initiates Mr. Carey’s separation of employment or if he initiates his separation of employment because his responsibilities or authority are involuntarily changed or not substantially equivalent to his current role, Mr. Carey will be provided in lieu of any other payment or benefit with the following:

•  the equivalent of 24 months base salary paid bi-weekly; and

•  the opportunity to continue health, life insurance and AD&D benefits coverage in which he is enrolled for 24 months following employment termination at active employee rates.

The foregoing payments and benefits will not be provided to Mr. Carey if his separation of employment arises out of conduct and/or inaction by Mr. Carey that are not in the best interest of Nortel. All payments and benefits are conditional on Mr. Carey’s execution of a separation agreement.

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Mr. Hackney

Mr. Hackney’s employment agreement provides that if Nortel initiates Mr. Hackney’s separation of employment he will be provided in lieu of any other payment or benefit with the following:

•  the equivalent of 18 months base salary paid bi-weekly;

•  the opportunity to continue health, life insurance and AD&D benefits coverage in which he is enrolled for 18 months following employment termination at active employee rates; and

•  acceleration of vesting of new hire stock option grant and restricted stock units to the later of his termination date or the first anniversary of the date of the grant.

The foregoing payments and benefits will not be provided to Mr. Hackney if his separation of employment arises out of conduct and/or inaction by Mr. Hackney that are not in the best interest of Nortel. All payments and benefits are conditional on Mr. Hackney’s execution of a separation agreement. If payments are made to Mr. Hackney under the CIC Plan as described above, he will be ineligible for the payments and benefits under this provision of his employment agreement.

Potential Payments under Employment Agreements

If involuntary termination of employment had occurred on December 31, 2007, the following payments would have been required under the respective employment agreements.

	Salary												Health
	Continuance		Base						Stock				Benefits
	Period		Salary			Bonus			Options		RSUs		Coverage		Total
Name	(# of Months)		($)			($)			($)(1)		($)(2)		($)(3)		($)
M.S. Zafirovski		24		2,545,881	(4)		3,818,822	(5)		—		2,050,731		50,000		8,465,434
P.S. Binning		18		954,622	(4)		—			—		1,222,290		37,500		2,214,412
D.J. Carey		24		1,100,000			—			—		930,540		50,000		2,080,540
J.J. Hackney, Jr.		18		750,000			—			—		474,837		37,500		1,262,337

(1)  The dollar value of stock options is calculated as the intrinsic value per stock option multiplied by the number of stock options that become vested. For stock options that become immediately vested on termination, the intrinsic value per stock option is determined based on the closing market price on NYSE on December 31, 2007 of $15.09. For stock options that continue to vest during the applicable salary continuance period, the intrinsic value per stock option is estimated based on the closing market price on NYSE on December 31, 2007 of $15.09. See “— Potential Payments under Equity Compensation Plans”. The following number of stock options would have vested if involuntary termination had occurred on December 31, 2007:

	Immediately Vest on		Vest During Applicable
	Termination		Salary Continuance Period
Name	(#)		(#)
M.S. Zafirovski		300,000		218,250
P.S. Binning		—		—
D.J. Carey		—		37,500
J.J. Hackney, Jr.		25,000		29,200

(2)  The dollar value of restricted stock units is calculated as the intrinsic value per stock option multiplied by the number of restricted stock units that become vested. For restricted stock units that become immediately vested on termination, the intrinsic value per restricted stock unit is determined based on the closing market price on NYSE on December 31, 2007 of $15.09. For restricted stock units that continue to vest during the applicable salary continuance period, the intrinsic value per restricted stock unit is estimated based on the closing market price on NYSE on December 31, 2007 of $15.09. See “— Potential Payments under Equity Compensation Plans”. The following number of restricted stock units would have vested if involuntary termination had occurred on December 31, 2007:

	Immediately Vest on		Vest During Applicable
	Termination		Salary Continuance Period
Name	(#)		(#)
M.S. Zafirovski		135,900		—
P.S. Binning		—		81,000
D.J. Carey		—		61,666
J.J. Hackney, Jr.		11,000		20,467

(3)	Based on an estimated annual cost of $25,000.
(4)	Mr. Zafirovski’s annual salary of CAN$1,366,120 and Mr. Binning’s annual salary of CAN$683,000 have been converted to U.S. Dollars using the 2007 average exchange rate of US$1.00 = CAN$1.0732.
(5)	Mr. Zafirovski’s bonus entitlement has been converted to U.S. Dollars using the 2007 average exchange rate of US$1.00 = CAN$1.0732.

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Potential Payments under Equity Compensation Plans

For a description of the treatment of outstanding stock options, restricted stock units and performance stock units if a named executive officer is terminated, see “Equity-Based Compensation Plans”.

Director Compensation for Fiscal Year 2007

The following table sets forth information regarding the compensation of each non-employee director of the Company and NNC for the fiscal year ended December 31, 2007. Mr. Zafirovski, as our President and Chief Executive Officer, does not receive any compensation as a director of the Company or NNC. For information regarding the compensation of Mr. Zafirovski, see “— Summary Compensation Table for Fiscal Year 2007”.

									Change in Pension
									Value and
									Nonqualified
									Deferred
	Fees Earned or						Non-Equity		Compensation		All Other
	Paid in Cash		Stock Awards		Option Awards		Incentive Plan		Earnings		Compensation			Total
Name	($)(1)(2)(3)		($)		($)		Compensation ($)		($)		($)(4)			($)
J.H. Bennett		150,000		—		—		—		—		526	(5)		150,526
Dr. M. Bischoff		162,500		—		—		—		—		1,502	(6)		164,002
The Hon. J.B. Hunt, Jr.		165,000		—		—		—		—		2,415	(6)		167,415
Dr. K.M. Johnson		145,810		—		—		—		—		2,415	(6)		148,225
J.A. MacNaughton		185,000		—		—		—		—		526	(5)		185,526
The Hon. J.P. Manley		165,000		—		—		—		—		526	(5)		165,526
R.D. McCormick		177,500		—		—		—		—		2,415	(6)		179,915
C. Mongeau		150,000		—		—		—		—		526	(5)		150,526
H.J. Pearce		512,500		—		—		—		—		2,415	(6)		514,915
J.D. Watson		150,000		—		—		—		—		526	(5)		150,526

(1)  Each non-employee director of the Company and NNC may elect to receive all or a portion of compensation for services rendered as a member of the Nortel boards, any committees thereof, and as board or committee chair, in the form of share units, in cash or in a combination of share units and cash, under the DSC Plans. For a summary of the applicable director fees, see “— Directors’ Compensation Schedule”. The directors made the following elections for 2007:

	Election — Board,	Election — Long-Term
Director	Committee and Chair Fees	Incentive Fees
J.H. Bennett	100% share units	100% share units
Dr. M. Bischoff	100% share units*	100% share units
The Hon. J.B. Hunt, Jr.	100% share units	100% share units
Dr. K.M. Johnson	50% share units, 50% cash	100% share units
J.A. MacNaughton	100% share units	100% share units
The Hon. J.P. Manley	100% share units	100% share units
R.D. McCormick	100% share units	100% share units
C. Mongeau	100% share units	100% share units
H.J. Pearce	50% share units, 50% cash* 100% cash — board chair fees	100% share units
J.D. Watson	100% share units	100% share units

*  Prior to October 1, 2007, Dr. Bischoff elected to receive 50% of his 2007 compensation in the form of share units and effective October 1, 2007, he changed his election to receive 100% of his future compensation in the form of share units.

(2)  Share units are credited on a quarterly basis, and the number of share units received is equal to the amount of fees expressed in U.S. Dollars, converted to Canadian Dollars, divided by the market value expressed in Canadian Dollars (as determined in accordance with the DSC Plans) of common shares on the last trading day of each quarter. Generally, share units are settled through open market purchases (net of taxes) on the fourth trading day following the release of NNC’s financial results after the director ceases to be a member of the applicable board, and each share unit entitles the holder to receive one common share. Nortel pays all administrative fees, including

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applicable brokers’ commissions, under the terms of the DSC Plans. Share units for the fiscal year ended December 31, 2007 were credited based on the following exchange rates and prices:

			Average of High and Low
			Prices for a Board Lot of
	Last Trading Day of	Bank of Canada Noon	Company Shares on NYSE
2007 Fiscal Quarter	Quarter	Rate of Exchange	(expressed in CAN$)
First quarter	March 30, 2007	US$1.00 = CAN$1.1529	$	27.67
Second quarter	June 29, 2007	US$1.00 = CAN$1.0634	$	25.81
Third quarter	September 28, 2007	US$1.00 = CAN$0.9963	$	16.93
Fourth quarter	December 31, 2007	US$1.00 = CAN$0.9881	$	15.14

(3)  The following table sets forth the number of share units received under the DSC Plans by each director during the fiscal year ended December 31, 2007 rounded down to the nearest whole number:

	Number of 2007			Number of 2007
	Share Units			Share Units
Director	(#)		Director	(#)
J.H. Bennett		7,763	Dr. M. Bischoff		6,858
The Hon. J.B. Hunt, Jr.		8,538	Dr. K.M. Johnson		5,733
J.A. MacNaughton		9,573	The Hon. J.P. Manley		8,538
R.D. McCormick		9,184	C. Mongeau		7,761
H.J. Pearce		5,887	J.D. Watson		7,761

For the aggregate number of outstanding share units held by each nominee director as of December 31, 2007, see “Board of Directors” in the Directors, Executive Officers and Corporate Governance section of this report.

(4)  All other compensation paid in Canadian Dollars has been converted using the average of the exchange rates in effect during 2007 equal to US$1.00 = CAN$1.0732.

(5) Represents amounts paid by the Company for (i) life insurance premiums and (ii) taxes with respect to the life insurance premiums.

(6)  Represents amounts paid by the Company for (i) life insurance premiums and (ii) taxes with respect to the life insurance premiums and non-resident tax return preparation services.

Directors’ Compensation Schedule

The compensation of directors is considered on a combined basis in light of the overall governance structure of the Company and NNC. Director compensation is set solely on an annual fee basis (paid quarterly in arrears) and additional fees are not paid for board or committee meeting attendance. During 2007 directors of the Company and NNC, other than Mr. Zafirovski, were entitled to receive the following annual fees:

Annual NNL board retainer			$	50,000
Annual committee membership retainer for serving on:
Nominating and governance committee of NNC			$	12,500
Audit committee of NNC	$	6,250	$	12,500
Audit committee of NNL	$	6,250
Compensation and human resources committee of NNC and NNL			$	12,500
Pension fund policy committee of NNL			$	12,500
Litigation committee of NNC			$	12,500
Annual fee for the non-executive chair of the board of NNC	$	180,000	$	360,000
Annual fee for the non-executive chair of the board of NNL	$	180,000
Annual retainer for chairing the:
Nominating and governance committee of NNC			$	15,000
Audit committee of NNC	$	17,500	$	35,000
Audit committee of NNL	$	17,500
Compensation and human resources committee of NNC and NNL			$	15,000
Pension fund policy committee of NNL			$	15,000
Litigation committee of NNC			$	15,000
Annual NNL long-term incentive fee*			$	75,000

*  On October 3, 2007, the Nortel boards approved an increase to the NNL long-term incentive fee from $75,000 to $125,000 per year payable quarterly effective January 2008.

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Directors entitled to the above remuneration are also reimbursed for reasonable travel and living expenses properly incurred by them in attending any meetings of the Nortel boards or their committees or for performing services as directors.

Nortel maintains, at its cost, life insurance for directors, who are not salaried employees of NNC or the Company. Such insurance coverage is for CAN$100,000 while a director and CAN$75,000 following retirement at or after age 65 or, at any lesser age after ten years of board membership (including NNL board membership) at the discretion of the nominating and governance committee, Nortel will no longer maintain the life insurance benefit for active directors effective upon the election of directors at the annual meeting of shareholders of NNC to be held on May 7, 2008. Directors are not currently eligible for retirement compensation. In addition, as of December 2007, Nortel provides tax preparation services for non-resident non-employee directors.

Share Ownership Guidelines

Effective January 1, 2004, the boards of directors of the Company and NNC amended share ownership guidelines to require each non-employee director (other than the chair) to own, directly or indirectly, common shares having a fair market value of at least $300,000 within five years from the earlier of the date the director was first elected or appointed to the Nortel boards. The chair of the Nortel boards must own, directly or indirectly, common shares having a fair market value of at least $1,600,000 within five years from the earlier of the date he or she was first appointed as chair of the Nortel boards. Directors are expected to continue to comply with these share ownership guidelines during the balance of their tenures as directors. Each of the current non-employee directors of the Company and NNC have been a director for less than the five year threshold under the share ownership guidelines. Share units credited under the DSC Plans are included in the calculation of the number of common shares owned by a director for this purpose. See the information presented for each nominee director under “Board of Directors” in the Directors, Executive Officers and Corporate Governance section of this report.

Indemnification

Pursuant to indemnification agreements entered into between NNC and each non-employee director, NNC has agreed to indemnify and reimburse each director for any injury, losses, liabilities, damages, charges, costs, expenses, fines or settlement amount reasonably incurred by such director, including reasonable legal and other professional fees:

•  in connection with a claim, action, suit, application, litigation, charge, complaint, prosecution, assessment, reassessment, investigation, inquiry, hearing or other proceeding of any nature or kind whatsoever, whether civil, criminal, administrative or otherwise, made, asserted against or affecting such director or in which such director is required by law to participate or in which such director participates at NNC’s request or in which such director chooses to participate, if it relates to, arises from, or is based on such individual’s service as a director or officer of the Company or service as a director or officer of another entity at our request; or

•  otherwise related to, arising from or based on such individual’s service as a director or officer of Nortel or service as a director or officer of another entity at our request, except if such indemnification or reimbursement would be prohibited by the Canada Business Corporations Act, or any other applicable law.

For the purposes of the indemnification agreements, NNC has confirmed its request that each such director serve as a director of NNL.

Compensation committee interlocks and insider participation

The members of the compensation and human resources committee of the Nortel boards are Mr. McCormick (Chair), who was appointed to the committee effective January 18, 2005, Mrs. Bennett and Mr. Manley each of whom was appointed to the committee effective June 29, 2005, Dr. Bischoff who was appointed to the committee effective June 29, 2006 and Dr. Johnson who was appointed to the committee effective November 30, 2006. No changes to the membership of the compensation and human resources committee occurred during 2007. No member of the compensation and human resources committee was an officer (within the meaning of applicable United States securities laws) or employee of Nortel or any of its subsidiaries at any time during 2007.

No executive officer of Nortel serves on the board of directors or compensation committee of any other entity that has or has had one or more of its executive officers serving as a member of the Nortel boards.

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Compensation committee report

The compensation and human resources committee of the boards of directors of the Company and NNC has reviewed and discussed with management the “Compensation Discussion and Analysis” required by Regulation S-K Item 402(b). Based on such review and discussion, the compensation and human resources committee recommended to the boards of directors that the “Compensation Discussion and Analysis” be included in this proxy circular and proxy statement and in NNC’s Annual Report on Form 10-K for the year ended December 31, 2007.

This report has been submitted by J.H. Bennett, Dr. M. Bischoff, J.P. Manley, R.D. McCormick and Dr. K.M. Johnson as members of the compensation and human resources committee of the board of directors of the Company and NNC.

ITEM 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Equity-Based Compensation Plans

Common Shares Issuable under Equity-Based Compensation Plans

The table below provides information as of December 31, 2007 under the SIP, the Nortel Networks Corporation 2000 Stock Option Plan, or the 2000 Plan, and the Nortel Networks Corporation 1986 Stock Option Plan, As Amended and Restated, or the 1986 Plan.

			Number of common shares
	Number of common shares		remaining available for issuance
	issuable on exercise or settlement	Weighted average exercise price of	under equity compensation plans
	of outstanding options, RSUs and	outstanding options	(excluding common shares
Plan category	PSUs(1)(a)	($)(2)(b)	reflected in column (a))(1)(c)
Equity compensation plans approved by shareholders(3)	Options: 28,998,281 RSUs: 2,705,673 PSUs: 819,300	Options: $72.84	Options, RSUs and PSUs: 13,514,289(4)
Equity compensation plans not approved by shareholders(5)	Options: 492,654	Options: $352.73	—
Total	Options: 29,490,935 RSUs: 2,705,673 PSUs: 819,300	Options: $77.52	Options, RSUs and PSUs: 13,514,289(4)

(1)	RSUs means restricted stock units issued under the SIP and PSUs means performance stock units issued under the SIP.
(2)	Weighted average exercise price of options only. RSUs and PSUs do not have an exercise price. Each RSU and PSU entitles the holder thereof to receive one common share upon settlement thereof.
(3)	Consists of the SIP, the 2000 Plan and the 1986 Plan.
(4)	Includes common shares previously available for issuance under the 1986 Plan and 2000 Plan which became available for issuance under the SIP as of January 1, 2006. Of the 13,514,289 common shares remaining available for issuance under the SIP, only 5,371,576 remain available for issuance as RSUs and/or PSUs.
(5)	Plans that were assumed by Nortel in merger, consolidation or other acquisition transactions and under which no subsequent grants may be made. Common shares are issued from treasury to satisfy such awards.

NNC and its subsidiaries maintain other equity-based compensation plans for the benefit of directors, officers and other employees, which plans may involve the delivery of common shares that are purchased on the open market for immediate delivery to plan participants and, accordingly, do not dilute shareholders equity.

Common shares deliverable upon the exercise or settlement of awards issued under the SIP, 2000 Plan and 1986 Plan may be new shares issued from treasury or may be purchased in the open market or in private transactions. Currently, NNC issues shares from treasury upon the exercise of awards granted under the SIP, 2000 Plan and 1986 Plan and there are no plans to purchase shares in the open market or in private transactions.

Nortel 2005 Stock Incentive Plan

The SIP was approved by the board of directors of NNC on April 27, 2005, and approved by NNC shareholders at our combined 2004 and 2005 annual meeting. On January 1, 2006, in accordance with such approvals, the number of common shares available for grants under the 2000 Plan and the 1986 Plan, or the Prior Plan Shares, and the number of common shares subject to options outstanding under the 2000 Plan and the 1986 Plan, to the extent such options thereafter expire or terminate for any reason without the issuance of shares, were transferred to the SIP. No new awards were made under either the 2000 Plan or the 1986 Plan after December 31, 2005. On November 6, 2006, the SIP was amended and restated

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in accordance with its terms in connection with the 1-for-10 consolidation of NNC’s common shares effective as of December 1, 2006.

On January 18, 2008, the board of directors of NNC amended the SIP to reflect amendments necessary to comply with Section 409A of the Code and certain other miscellaneous amendments, or the 409A Amendments. On February 22, 2008, the independent members of the board of directors of NNC further amended the SIP as follows:

•  to increase the number of common shares issuable under the SIP or the Share Increase Amendment, by 14 million;

•  to add certain additional types of amendments to the SIP or awards under it requiring shareholder approval, or the Amending Amendments; and

•  other amendments desirable to reflect current market practices or clarify or correct certain provisions of the SIP, or the Additional Amendments, and together with the Share Increase Amendments and the Amending Amendments, the 2008 Amendments.

As described under “Approval of Amendments to Nortel 2005 Stock Incentive Plan” in the 2008 Proxy, certain of the 2008 Amendments, in accordance with the rules of the TSX, the NYSE and the terms of the SIP, require approval by NNC’s shareholders.

Pursuant to certain of the Additional Amendments which do not require shareholder approval, the following amendments were made to the SIP: (i) amend the definition of “Market Value” in the SIP to remove reference to shares trading on the “composite tape” and replace with a reference to shares trading on the NYSE; (ii) amend the definition of “Performance Stock Unit” in the SIP to add, as a condition to vesting, that the attainment of the performance criteria determined by the CHRC may be graduated such that different percentages, which may be greater or lesser than 100%, of the performance stock units will become vested depending on the extent of the satisfaction of the performance criteria and (iii) amend the exercise provision for SARs giving the CHRC the ability to determine, at the time of granting the SARs, that if a participant does not exercise their stand-alone SARs within 30 days after vesting, such stand-alone SARs shall be settled 30 days after vesting.

The SIP is administered by the CHRC, all members of which are independent directors. The CHRC is authorized to select those key employees who will receive awards and, consistent with the provisions of the SIP, the terms and conditions of such awards. Non-employee directors of the Nortel boards are not eligible to participate in the SIP. No awards may be made under the SIP after the tenth anniversary of the effective date of the SIP, April 27, 2015. As of February 7, 2008, the number of employees eligible to receive awards under the SIP was approximately 25,200.

Common Shares Available for Issuance under the SIP

As at February 19, 2008, a maximum of 14 million common shares, including the Prior Plan Shares, (representing 3.2% of common shares outstanding on February 19, 2008) were available for issuance under the SIP. In addition, common shares subject to options outstanding under the 1986 Plan and the 2000 Plan are available for issuance under the SIP if they expire, are surrendered, cancelled or otherwise terminated without the issuance of common shares. Of such aggregate maximum number of common shares under the SIP, the maximum aggregate number of common shares available for awards of restricted stock units and/or performance stock units is limited to 9.5 million shares. As at February 19, 2008, a maximum of 5.4 million restricted stock units and/or performance stock units are available for awards under the 9.5 million limit and the maximum aggregate number of common shares available for awards of incentive stock options (within the meaning of the Code) is limited to 12.2 million shares. The aggregate maximum number of common shares issuable under the SIP to an individual during any five year period is limited to 2.5 million common shares issuable in respect of stock options and/or SARs and 1.5 million common shares in respect of restricted stock units and/or performance stock units.

The number of common shares issuable to insiders of NNC (as defined in the TSX rules) under the SIP and all other security-based compensation arrangements (also as defined in the TSX rules) of NNC may not exceed 10% of the issued and outstanding common shares and the number of common shares issued to such insiders within any one year under all such security-based compensation arrangements may not exceed 10% of the issued and outstanding common shares. If an award granted under the SIP is forfeited, cancelled, terminated or otherwise expires prior to delivery of any of the common shares subject to such award, such shares will be again available for future grants under the SIP. common shares subject to an award granted under the SIP that will be withheld upon exercise or settlement of such award to satisfy the participant’s liability for related tax or other source deductions or, in the case of exercise of options, to pay the related exercise price, are counted in determining the maximum number of shares that may be subject to awards granted under the SIP and will not be available for any future grants.

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Material Features of the SIP

The following summary of the material features of the SIP is qualified in its entirety by the specific language of the SIP, a copy of which is available free of charge on our website at www.nortel.com/shareholders or by writing to Nortel’s Corporate Secretary.

Awards under the SIP

The SIP permits grants of stock options, including incentive stock options, SARs, restricted stock units and/or performance stock units.

Stock Options and SARs

The normal term for options and SARs is ten years. The exercise price for each common share subject to an option must not be less than 100% of the “market value” of the shares on the effective date of the award of such option. The exercise price will be stated and payable in Canadian Dollars for Canadian awards and in U.S. Dollars for U.S. awards. The CHRC may grant stand-alone SARs or SARs in tandem with options granted under the SIP. Upon the exercise of a vested SAR (and in the case of a tandem SAR, the related option), a participant is entitled to payment equal to the excess of the “market value” of a NNC common share on the date of exercise over the subscription or base price under the SAR. Under the Additional Amendments, the CHRC may determine at the time of granting the award that in the event that all or any part of a stand-alone SAR becomes vested and exercisable, and the participant does not exercise the stand-alone SAR during a thirty day period following such vesting, such part of the stand-alone SAR that is vested, shall nonetheless be settled and paid. The CHRC determines whether payment in settlement of SARs is made in cash, shares or a combination of cash and shares. For a description of the definition of market value, see below under “— Definition of Market Value”.

If a SIP participant is terminated prior to the expiration of the normal term of an option or SAR, options and/or SARs then held by the participant will be treated as follows, unless the CHRC determines otherwise.

•  Retirement.  If a participant’s active employment terminates due to his or her retirement (as defined in the SIP), the participant’s unvested options and/or SARs will become vested as of the later of (i) the participant’s date of retirement and (ii) the first anniversary of the effective date of grant of such options and/or SARs. To the extent vested, the participant will have three years following the date of retirement to exercise his or her options and/or SARs.

•  Death.  If a participant’s active employment terminates due to his or her death, all of the participant’s unvested options and/or SARs will become immediately vested and will remain exercisable for two years following the date of the participant’s death.

•  Involuntary Termination other than for Cause.  If a participant’s active employment is terminated other than for cause (as defined in the SIP) and the participant receives severance benefits, including pay in lieu of notice, the participant’s unvested options and/or SARs will continue to vest during a period generally corresponding to the period following the participant’s termination for which he or she receives salary replacement payments. During such extended vesting period and for 90 days thereafter, the participant will be permitted to exercise vested options and/or SARs. A participant whose active employment is terminated by Nortel other than for cause and who does not receive severance benefits will have 90 days following termination to exercise vested options and/or SARs and his or her unvested options and/or SARs will be cancelled.

•  Termination for Cause.  If a participant’s active employment is terminated for cause (as defined in the SIP), any and all outstanding options, whether or not vested, will be immediately forfeited and cancelled.

•  Resignation by a Participant.  If a participant resigns from his or her employment, the participant’s unvested options and/or SARs will be cancelled, and the participant will have 90 days following his or her date of termination to exercise vested options and/or SARs.

Restricted Stock Units and Performance Stock Units

Each restricted stock unit or performance stock unit granted under the SIP generally represents the right to receive one common share. Vested units will generally be settled upon vesting by delivery of a common share for each vested unit or payment of a cash amount equal to the market value of a common share at the time of settlement, as the CHRC may determine, subject to the CHRC determining with respect to performance stock units, the different percentage, which may be greater or lesser than 100%, of the Performance Stock Units that will become vested depending on the extent of satisfaction of the performance criteria. The current terms of all outstanding restricted stock units and performance stock

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units provide that the award will be settled in shares. The CHRC may provide for the accrual of dividend equivalent amounts in respect of awards of restricted stock units or performance stock units prior to the settlement thereof.

If a SIP participant is terminated prior to the vesting of a restricted stock unit, restricted stock units then held by the participant will be treated as follows, unless the CHRC determines otherwise:

•  Retirement.  If a participant’s active employment terminates due to his or her retirement (as defined in the SIP), a pro rata portion of the participant’s unvested restricted stock units will immediately vest and the remaining portion will be forfeited and cancelled, provided, however, no portion of a restricted stock unit award shall become vested earlier than the first anniversary of the effective date of the award.

•  Death.  If a participant’s active employment terminates due to his or her death, a pro rata portion of the participant’s unvested restricted stock units will immediately vest and the remaining portion will be forfeited and cancelled, provided, however, no portion of a restricted stock unit award shall become vested earlier than the first anniversary of the effective date of the award.

•  Involuntary Termination Other than for Cause.  If a participant’s active employment is terminated other than for cause (as defined in the SIP) and the participant receives severance benefits, including pay in lieu of notice, the participant’s unvested restricted stock units will continue to vest during a period generally corresponding to the period following the participant’s termination for which he or she receives salary replacement payments after which time any unvested restricted stock units will be forfeited and cancelled. If after such severance period, the participant is eligible to retire under applicable laws, a pro rata portion of the then unvested restricted stock units will immediately vest and the remaining portion will be forfeited and cancelled.

•  Termination for Cause:  If a participant’s active employment is terminated for cause (as defined in the SIP), any and all outstanding restricted stock units will be immediately forfeited and cancelled.

•  Resignation by a Participant.  If a participant resigns from his or her employment, the participant’s unvested restricted stock units will be cancelled.

If a SIP participant is terminated prior to the vesting of a performance stock unit, performance stock units then held by the participant will be treated as follows, unless the CHRC determines otherwise:

•  Retirement.  If a participant’s active employment terminates due to his or her retirement (as defined in the SIP), a pro rata portion of the performance stock units to be settled will vest on the third anniversary of the beginning of the performance period, subject to the CHRC determining that the percentage, which may be greater or lesser than 100%, of the Performance Stock Units that will become vested depending on the extent of satisfaction of the performance criteria and provided the participant has been a regular full-time employee of Nortel for at least twelve months since the effective date of award of the performance stock units, and the remaining portion of such performance stock units will be forfeited and cancelled.

•  Death.  If a participant’s active employment terminates due to his or her death and the participant has been a regular full-time employee of Nortel for at least twelve months since the effective date of award of the performance stock units, a pro rata portion of the participant’s unvested performance stock units will immediately vest based on the target amount.

•  Termination (Involuntary or for Cause).  If a participant’s active employment is terminated (including for cause (as defined in the SIP)), the participant’s unvested performance stock units will be immediately forfeited and cancelled.

•  Resignation by a Participant.  If a participant resigns from his or her employment, the participant’s unvested restricted stock units will be cancelled.

Notwithstanding the above, the 409A Amendments also provide that any payments made as a result of separation from service (as defined in Section 409A of the Code) to an individual who qualifies as a specified employee as defined under Section 409A of the Code in the settlement of restricted stock units or performance stock units will not be made before the date that is six months after the date of separation from service or, if earlier, the date of the individual’s death.

Vesting Conditions

Vesting of all or any portion of awards granted under the SIP may be conditioned upon the participant’s continued employment, passage of time, satisfaction of performance criteria or any combination thereof, as determined by the CHRC; provided that no portion of an award may become vested prior to the first anniversary of the date such award is granted (except in the event of a participant’s death) and vesting conditions based upon achievement of performance objectives must provide for a performance measurement period or periods. Prior to the 409A Amendments, such performance measurement period or periods were required to exceed one year. One of the miscellaneous amendments

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under the 409A Amendments was to clarify that such performance measurement period or periods may be equal to or exceed one year. In addition (except in the event of a participant’s death or retirement, as determined by the CHRC) awards of time based restricted stock units shall not become vested more rapidly than ratably over three years. The CHRC may accelerate the vesting of all or any awards granted under the SIP or, except for performance conditions with respect to awards that are intended to qualify as performance-based compensation under Section 162(m) of the Code, may waive any performance conditions to vesting, except that the CHRC may not accelerate vesting of any award as of any date before one year from the grant date of the award. In addition, under the 409A Amendments the CHRC may not waive any performance conditions to vesting that would result in the violation of Section 409A of the Code.

Performance Vesting Conditions for Certain Awards Intended to Qualify as Performance-Based Compensation under Section 162(m) of the Code

Awards granted under the SIP may qualify as “performance-based compensation” under Section 162(m) of the Code in order to preserve federal income tax deductions by Nortel with respect to annual compensation required to be taken into account under Section 162(m) that is in excess of $1 million and paid to one of Nortel’s five most highly compensated executive officers, provided that determinations to grant options and other awards under the SIP must be made by a committee consisting solely of two or more “outside directors” (as defined under Section 162 regulations). The SIP’s limit on the total number of shares that may be awarded to any one participant during any five year period must also be satisfied. To the extent that an award is intended to qualify as “performance-based compensation” under Section 162(m), the performance criteria applicable to such award will be based upon one or more of the following “qualifying performance criteria,” as determined by the CHRC:

•   Cash Flow	•   Operating profit or net operating profit
•   Earnings per share	•   Operating margin or profit margin
•   Earnings before interest, taxes and/or amortization	•   Return on operating revenue
•   Return on sales	•   Return on invested capital
•   Total shareholder return	•   Market segment share
•   Share price performance	•   Product release schedules
•   Return on capital	•   New product innovation
•   Return on assets or net assets	•   Product cost reduction
•   Revenue	•   Brand recognition/acceptance
•   Income or net income	•   Product ship targets
•   Operating income or net operating income	•   Customer satisfaction

The CHRC determines whether the applicable qualifying performance criteria have been achieved. The CHRC may adjust any evaluation of performance under the qualifying performance criteria described above to exclude certain events that occur during a performance period, as set forth in the SIP.

Definition of Market Value

Under the SIP, “Market Value” is defined as the average of the high and low prices for a board lot of common shares traded in Canadian Dollars on the TSX during the relevant day or, if the volume of common shares traded on the NYSE during the relevant day in the U.S. exceeds the volume of common shares traded on the TSX on such relevant day, the average of the high and low prices for a board lot of common shares traded in U.S. Dollars on the NYSE during the relevant day. The market value so determined may be in Canadian Dollars or in U.S. Dollars. As a result, the market value of a common share covered by a Canadian award will be either (a) such market value as determined above, if in Canadian Dollars, or (b) such market value as determined above converted into Canadian Dollars at the noon rate of exchange of the Bank of Canada on the relevant day, if in U.S. Dollars. Similarly, the market value of a common share covered by a U.S. award will be either (a) such market value as determined above, if in U.S. Dollars, or (b) such market value as determined above converted into U.S. Dollars at the noon rate of exchange of the Bank of Canada on the relevant day, if in Canadian Dollars. If on the relevant day there is not a board lot trade in the common shares on each of the TSX and the NYSE or there is not a noon rate of exchange of the Bank of Canada, then the market value of a common share covered by a Canadian award and the market value of a common share covered by a U.S. award is determined as provided above on the first day immediately preceding the relevant day for which there were such board lot trades in the common shares and a noon rate of exchange. The market value of a common share shall be rounded up to the nearest whole cent.

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Transferability

Awards granted under the SIP are not transferable other than by testamentary disposition or the laws of intestate succession. The CHRC, however, may permit the transfer of awards without payment of consideration to members of a participant’s immediate family or entities controlled by the participant or his or her immediate family members. Certain of the Additional Amendments clarified that the CHRC could not otherwise permit the transfer of awards. See “Approval of Amendments to the Nortel 2005 Stock Inventive Plan — Amendment Procedures”.

Participants in Jurisdictions Outside of Canada and the United States

To accommodate differences in local laws, customs and tax practices, awards granted to participants in countries other than Canada and the U.S. may be subject to special terms and conditions, including any special supplement that may be added to the SIP, as the CHRC determines is appropriate.

Amendments

The board of directors of NNC may terminate, amend or suspend the SIP at any time; provided that the prior approval of shareholders will be required for any amendment that NNC determines constitutes a material amendment within the meaning of the applicable rules of the NYSE including any amendment that would:

•  increase the maximum number of NNC shares for which awards may be granted under the SIP;

•  reduce the exercise price or base price at which options or SARs may be granted;

•  reduce the exercise price or base price of outstanding options or SARs;

•  extend the term of the SIP or the maximum term of options or SARs granted under the SIP;

•  change the class of persons eligible for grant of awards under the SIP;

•  increase any other limit with respect to the number of Nortel shares that may be granted with respect to any type of award, a single participant or any group of participants; or

•  reduce below one year the minimum period required as a condition to the vesting of any award (other than in the case of a participant’s death).

Under the Amending Amendments, the board of directors of NNC amended the SIP to add certain additional types of amendments to the SIP or awards under it that will require the prior approval of shareholders, and this amendment requires shareholder approval. For a description, see “— Approval of Amendments to the Nortel 2005 Stock Incentive Plan” in the 2008 Proxy.

Adjustments

In the event of certain events affecting the capitalization of NNC, including a stock dividend, or certain other corporate transactions, the board of directors of NNC may adjust the number and kind of shares available for grant under the SIP or subject to outstanding awards and the exercise price or base price applicable under outstanding awards. Under the 409A Amendments, with respect to any awards subject to Section 409A of the Code, any such adjustments must conform to the requirements of Section 409A of the Code.

U.S. Federal Income Tax Consequences Relating to the SIP

The U.S. federal income tax consequences to us and our employees of awards under the SIP are complex and subject to change. The following discussion is only a summary of the general rules and tax consequences applicable to the issuance of options under the SIP.

As noted above, options granted under the SIP may be either incentive stock options or nonqualified stock options. Incentive stock options are options which are designated as such by us and which meet certain requirements under Section 422 of the Code and its regulations. Any option that does not satisfy these requirements will be treated as a nonqualified stock option.

Nonqualified Stock Options

Nonqualified stock options granted under the SIP do not qualify as “incentive stock options” and will not qualify for any special tax benefits to the participant. A participant generally will not recognize any taxable income at the time he or she is granted a nonqualified option. However, upon its exercise, the participant will recognize ordinary income for federal tax

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purposes measured by the excess of the then fair market value of the shares over the exercise price. The income realized by the participant will be subject to income and other employee withholding taxes.

The participant’s basis for determination of gain or loss upon the subsequent disposition of shares acquired upon the exercise of a nonqualified stock option will be the amount paid for such shares plus any ordinary income recognized as a result of the exercise of such option. Upon disposition of any shares acquired pursuant to the exercise of a nonqualified stock option, the excess of the sale price over the participant’s basis in the shares will be treated as a capital gain or loss and generally will be characterized as long-term capital gain or loss if the shares have been held for more than one year at their disposition.

In general, there will be no federal income tax deduction allowed to Nortel upon the grant or termination of a nonqualified stock option or a sale or disposition of the shares acquired upon the exercise of a nonqualified stock option. However, upon the exercise of a nonqualified stock option, Nortel will be entitled to a deduction for federal income tax purposes equal to the amount of ordinary income that a participant is required to recognize as a result of the exercise, provided that the deduction is not otherwise disallowed under the Code.

Incentive Stock Options

If an option granted under the SIP is treated as an incentive stock option, the participant will not recognize any income upon either the grant or the exercise of the option, and Nortel will not be allowed a deduction for U.S. federal tax purposes at such times. Upon a sale of the shares, the tax treatment to the participant and Nortel will depend primarily upon whether the participant has met certain holding period requirements at the time he or she sells the shares. In addition, as discussed below, the exercise of an incentive stock option may subject the participant to alternative minimum tax liability.

If a participant exercises an incentive stock option and does not dispose of the shares received within two years after the date such option was granted or within one year after the transfer of the shares to him or her upon exercise, any gain realized upon the disposition will be characterized as long-term capital gain and, in such case, Nortel will not be entitled to a federal tax deduction.

If the participant disposes of the shares either within two years after the date the option is granted or within one year after the transfer of the shares to him or her upon exercise, such disposition will be treated as a disqualifying disposition and an amount equal to the lesser of (1) the fair market value of the shares on the date of exercise minus the exercise price, or (2) the amount realized on the disposition minus the exercise price, will be taxed as ordinary income to the participant in the taxable year in which the disposition occurs. (However, in the case of gifts, sales to related parties, and certain other transactions, the full difference between the fair market value of the stock and the purchase price will be treated as compensation income). The excess, if any, of the amount realized upon disposition over the fair market value at the time of the exercise of the option will be treated as long-term capital gain if the shares have been held for more than one year following the exercise of the option. In the event of a disqualifying disposition, Nortel may withhold income taxes from the participant’s compensation with respect to the ordinary income realized by the participant as a result of the disqualifying disposition.

The exercise of an incentive stock option may subject a participant to alternative minimum tax liability. The excess of the fair market value of the shares at the time an incentive stock option is exercised over the exercise price of the shares is included in income for purposes of the alternative minimum tax even though it is not included in taxable income for purposes of determining the regular tax liability of an employee. Consequently, a participant may be obligated to pay alternative minimum tax in the year he or she exercises an incentive stock option.

In general, there will be no federal income tax deductions allowed to Nortel upon the grant, exercise, or termination of an incentive stock option. However, in the event a participant sells or otherwise disposes of stock received on the exercise of an incentive stock option in a disqualifying disposition, Nortel will be entitled to a deduction for federal income tax purposes in an amount equal to the ordinary income, if any, recognized by the participant upon disposition of the shares, provided that the deduction is not otherwise disallowed under the Code.

Other Possible Tax Consequences

Section 162(m).  Section 162(m) of the Code denies a federal income tax deduction by Nortel with respect to any annual compensation in excess of $1 million paid to any of Nortel’s chief executive officer and three other most highly compensated executive officers (other than any person who served as chief financial officer during the year), as applicable. Options granted under the SIP may qualify as “performance-based compensation” and so will not count against the

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$1 million limit. To so qualify, options must be granted under the SIP by a committee consisting solely of two or more “outside directors” (as defined under Section 162(m) regulations), be granted with a per share exercise price equal to fair market value of a common share on the date of grant and satisfy the SIP’s limit on the total number of shares that may be awarded to any one participant during any five year period.

Section 409A.  If granted with a per share exercise price equal to fair market value of a common share on the date of grant and containing no other deferral features, options granted under the SIP should not be subject to Section 409A of the Code.

Section 280G.  If the exercisability of an option is or was accelerated due to a change in control of the Company, under certain circumstances, the participant may incur a 20% excise tax and the Company may lose a deduction as a result of such acceleration pursuant to under Section 280G of the Code (the so-called “golden parachute” regulation).

New Plan Benefits

Future awards under the SIP are not currently determinable.

Nortel Networks Corporation 2000 Stock Option Plan and 1986 Stock Option Plan

Prior to the adoption of the SIP, the 2000 Plan and the 1986 Plan were the only compensation plans of the Company under which equity securities of NNC were authorized for issuance from treasury. The SIP has replaced the 2000 Plan and the 1986 Plan to the extent that no new awards will be granted under these stock option plans.

The following summary of certain terms relating to the 2000 Plan and the 1986 is qualified in its entirety by the specific language of such plans, copies of which are available free of charge by writing to Nortel’s Corporate Secretary.

Terms Relating to 1986 Plan (pre-May 15, 2000)

If a 1986 Plan participant whose options were granted prior to May 15, 2000 is terminated prior to the expiration of the normal term of an option, options then held by the participant will be treated as follows, unless the CHRC determines otherwise.

•  Retirement.  If a participant’s active employment terminates due to his or her retirement (as defined in the 1986 Plan), the participant’s unvested options will become vested on the later of (i) the date of the participant’s retirement and (ii) the first anniversary of the effective date of grant of such options. To the extent vested, the participant will have 36 months following the date of retirement to exercise his or her options.

•  Death.  If a participant’s active employment terminates due to his or her death, all of the participant’s unvested options will become immediately vested and will remain exercisable for 24 months following the date of the participant’s death.

•  Involuntary Termination Other than for Cause.  If a participant’s active employment is terminated other than for cause (as defined in the 1986 Plan) and the participant receives severance benefits, including pay in lieu of notice, the participant’s unvested options will continue to vest during a period generally corresponding to the period following the participant’s termination for which he or she receives salary replacement payments. During such extended vesting period, the participant will be permitted to exercise vested options. A participant whose active employment is terminated by Nortel other than for cause and who does not receive severance benefits must exercise unvested options before his or her termination date or his or her unvested options will be cancelled.

•  Termination for Cause.  If a participant’s active employment is terminated for cause (as defined in the 1986 Plan), all outstanding options will be immediately forfeited and cancelled.

•  Resignation by a Participant.  If a participant resigns from his or her employment, the participant’s unvested options will be cancelled.

Terms Relating to 1986 Plan (post May 15, 2000) and 2000 Plan

If a 2000 Plan participant or a 1986 Plan participant whose options were granted after May 15, 2000 is terminated prior to the expiration of the normal term of an option, options then held by the participant will be treated as follows, unless the CHRC determines otherwise.

•  Retirement.  If a participant’s active employment terminates due to his or her retirement (as defined in the 1986 Plan and 2000 Plan, as applicable), the participant’s unvested options will become vested on the later of (i) the date

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of the participant’s retirement and (ii) the first anniversary of the effective date of grant of such options. To the extent vested, the participant will have 36 months following the date of retirement to exercise his or her options.

•  Death.  If a participant’s active employment terminates due to his or her death, all of the participant’s unvested options will become immediately vested and will remain exercisable for 24 months following the date of the participant’s death.

•  Involuntary Termination Other than for Cause.  If a participant’s active employment is terminated other than for cause (as defined in the 1986 Plan and 2000 Plan, as applicable) and the participant receives severance benefits, including pay in lieu of notice, the participant’s unvested options will continue to vest during a period generally corresponding to the period following the participant’s termination for which he or she receives salary replacement payments. During such extended vesting period and for 90 days thereafter, the participant will be permitted to exercise vested options. A participant whose active employment is terminated by Nortel other than for cause and who does not receive severance benefits will have 90 days following termination to exercise vested options and his or her unvested options will be cancelled.

•  Termination for Cause.  If a participant’s active employment is terminated for cause (as defined in the 1986 Plan and the 2000 Plan), all outstanding options will be immediately forfeited and cancelled.

•  Resignation by a Participant.  If a participant resigns from his or her employment, the participant’s unvested options will be cancelled. Options vested on termination may be exercised during the 90 day period following termination.

Assumed Plans

As part of the acquisition of certain businesses between 1998 and 2000, NNC assumed the stock option plans of several entities that it acquired. As a result, the exercise of stock options previously granted under these assumed plans will be satisfied through the issuance of common shares. No additional stock options have been or will be granted under these assumed plans, and as the last of the options granted under each assumed plan are exercised, terminate or expire, the assumed plan expires as well. The last of these assumed plans are expected to expire in 2010.

Security ownership of directors and management

The following table shows the number of common shares beneficially owned, as of February 19, 2008 (unless otherwise noted), by each of the Company’s directors, nominees for election and the individuals named as named executive officers under “Executive Compensation”, as well as by the directors and executive officers as a group. No director or executive officer has pledged any of his or her common shares as security.

A person is deemed to be a beneficial owner of a common share if that person has, or shares, the power to direct the vote or investment of that common share. Under applicable U.S. securities laws, a person is also deemed to be a beneficial owner of a common share if such person has the right to acquire the share within 60 days (whether or not, in the case of a stock option, the current market price of the underlying common share is below the stock option exercise price). More than one person may be deemed a beneficial owner of a common share and a person need not have an economic interest in a share to be deemed a beneficial owner.

Share units, as referenced in the table below, represent share units issued under the DSC Plans. Each share unit represents the right to receive one common share of NNC and is not considered beneficially owned under applicable United States securities laws. The DSC Plans are described under “Executive Compensation — Director Compensation for Fiscal Year 2007”.

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		Amount and Nature of
	Title of Class	Beneficial Ownership
Name of Beneficial Owner	of Security	(#)(1)
J.H. Bennett	Common shares		—
	Share units		16,015
Dr. M. Bischoff	Common shares		—
	Share units		13,525
The Hon. J.B. Hunt, Jr.	Common shares		—
	Share units		16,795
Dr. K.M. Johnson	Common shares		—
	Share units		5,733
J.A. MacNaughton	Common shares		10,000
	Share units		18,537
The Hon. J.P. Manley	Common shares		—
	Share units		17,616
R.D. McCormick	Common shares		10,000
	Share units		18,642
C. Mongeau	Common shares		—
	Share units		10,809
H.J. Pearce	Common shares		11,600
	Share units		12,812
J.D. Watson	Common shares		—
	Share units		10,809
M.S. Zafirovski	Common shares		434,154	(2)
P.S. Binning	Common shares		—
D.W. Drinkwater	Common shares		28,434	(2)
D.J. Carey	Common shares		40,033	(2)
R.S. Lowe	Common shares		130,462	(2)
J.J. Hackney, Jr.	Common shares		61,261	(2)
Directors and executive officers as a group (consisting of 31 persons, comprised of the current directors and current executive officers)	Common shares Share units		1,195,344	(3) 141,293

(1)	Except as set forth below, each person has sole investment and voting power with respect to the common shares beneficially owned by such person. Includes common shares subject to stock options exercisable on February 19, 2008 or that become exercisable within 60 days after such date (whether or not the market price of the underlying common shares is below the stock option exercise price). As of February 19, 2008, each director and named executive officer individually, and the directors and executive officers as a group, beneficially owned less than 1.0% of the outstanding common shares.
(2)	Includes common shares subject to stock options as follows: 309,125 for Mr. Zafirovski; 16,775 for Mr. Drinkwater; 18,750 for Mr. Carey; 89,415 for Mr. Lowe; and 39,600 for Mr. Hackney; and restricted common shares subject to restricted stock units as follows: 0 for Mr. Zafirovski; 4,500 for Mr. Drinkwater; 8,333 for Mr. Carey; 6,400 for Mr. Lowe; and 6,400 for Mr. Hackney.
(3)	Includes 799,890 common shares subject to stock options, 66,781 common shares subject to restricted stock units and 1,420 common shares as to which investment and voting power is shared with one or more other persons.

VOTING SHARES

On February 19, 2008, 1,460,978,638 of NNL’s common shares were issued and outstanding. Each common share entitles its holder to one vote. The following table shows the number of NNL common shares beneficially owned by persons who are known to us to be beneficial owners of more than 5% of NNL common shares as of December 31, 2007:

	Amount and Nature		Percent of
Name and address	of Beneficial Ownership		Outstanding Common Shares
Nortel Networks Corporation 195 The West Mall Toronto, Ontario M9C 5K1		Common Shares		100	%

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ITEM 13.   Certain Relationships and Related Transactions, and Director Independence

Transactions with Related Persons

On January 19, 2007, the CHRC adopted a written policy regarding related party transactions and related procedures. The related party policy imposes a duty on directors and senior executives of Nortel to disclose any interests they have or their related parties have in certain interested transactions. The term “senior executives” as used in the related party policy means board appointed officers. The compliance committee, comprised of members of management, will review all material facts of all interested transactions and approve or disapprove of the entry into such transactions (except transactions where related party is a director). The compliance committee will report quarterly to the audit committee and to the nominating and governance committee on such approvals and disapprovals. Interested transactions involving directors will be reviewed by the audit committee. If the interested transaction could materially affect Nortel, the audit committee must review and approve the interested transaction. The related party policy contains standing approval for a list of certain transactions, which can be revised by the audit committee at any time. Violations of the related party policy can lead to disciplinary action up to and including termination of employment.

Board Composition

Each of the Nortel boards has the same non-executive chair and is currently comprised of the same 11 directors. Our Governance Guidelines limit the size of our boards to a maximum of 15 directors and limit the number of directors who may also be members of management to no more than three directors. It is also required that any person who is invited to stand for election or appointment to the boards to commit to serve for at least five years, provided that a director’s tenure generally may not exceed ten years and that a director who has reached the age of 70 years old will generally not be permitted to stand for re-election. Further, a former chief executive officer of Nortel may not stand for re-election as a director unless the Nortel boards determine that it would otherwise be in the best interests of Nortel at the relevant time. Governor Hunt turned 70 years of age during 2007. On May 31, 2007, the nominating and governance committee determined that, as a result of, among other things, his strong leadership qualities, Governor Hunt will be permitted to continue to serve on the Nortel boards for at least five years from the date of his first election. Governor Hunt abstained from the assessment and determination of his continued service.

Public Board Membership Policy

Under our public board membership policy, non-management directors are prohibited from sitting on more than four other public boards and the president and chief executive officer is prohibited from sitting on more than two other public boards, unless the nominating and governance committee exercises its discretion to permit public board membership in excess of these limits.

Interlocking Directorships

Mrs. Bennett and Mr. Manley also each sit on the board of directors of Canadian Imperial Bank of Commerce. The Board does not believe these interlocking board relationships impact on the ability of these directors to act in the best interests of Nortel.

Independence of Directors

Our Governance Guidelines require that a majority of our directors be “independent” as defined under the requirements of applicable stock exchanges and securities regulatory authorities and as determined in accordance with the Independence Standards which form part of our Governance Guidelines. They also require that the composition of committees comply with the applicable requirements of the Canada Business Corporations Act, the stock exchanges on which the Company and NNC list their securities and securities regulatory authorities, as adopted or amended and in force from time to time, including the requirements that the nominating and governance committee and the CHRC be composed solely of “independent” directors and that the audit committee be composed solely of “independent” and “financially literate” directors.

In accordance with our Independence Standards, the NYSE listing standards, and applicable SEC and CSA rules and policies, our boards have determined, based on information provided by each director as to their personal and professional circumstances, that except for Mr. Zafirovski, our President and Chief Executive Officer, each nominee director/each person who served as a director during 2007 is independent.

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In particular, the Nortel boards have determined that Mr. Manley’s association with the Canadian law firm of McCarthy Tétrault LLP, as an independent consultant with the title “Counsel”, does not constitute a material relationship with Nortel. McCarthy Tétrault LLP represents a former Nortel executive in connection with certain civil proceedings relating to such individual’s association with Nortel. In making this determination, the boards considered that Mr. Manley is not serving in a managerial position with such firm, Mr. Manley’s compensation will not be related in any way to fees paid in respect of the civil proceedings, and the Company and such firm have each adopted procedures to protect against potential conflicts of interest in connection with such representation, among other factors.

ITEM 14.   Principal Accountant Fees and Services

Auditor Independence

KPMG was appointed as the independent public accountants for the Company and NNC commencing with fiscal year 2007. Prior to fiscal year 2007, Deloitte & Touche LLP, or Deloitte & Touche, were the independent public accountants for the Company and NNC.

In accordance with applicable laws and the requirements of stock exchanges and securities regulatory authorities, the audit committees of the Company and NNC must pre-approve all audit and non-audit services to be provided by the independent auditors. In addition, it is the policy of the Company and NNC to retain auditors solely to provide audit and audit-related services and advice with respect to tax matters, but not to provide consulting services, such as information technology services.

Audit Fees

The Company and NNC prepare financial statements in accordance with U.S. GAAP. KPMG billed the Company and its subsidiaries $26.8 million for the following audit services related to fiscal year 2007: (i) the audits of the annual consolidated financial statements of the Company and of NNC for the fiscal year ended December 31, 2007, included in the Form 10-K; (ii) reviews of the financial statements of the Company and of NNC in Forms 10-Q for the periods ended March 31, June 30 and September 30, 2007; (iii) the audit of internal controls over financial reporting as required under the United States Sarbanes Oxley Act of 2002 for the fiscal year ended December 31, 2007; (iv) audits of individual subsidiary and other investments statutory financial statements; and (v) procedures with respect to securities regulatory filing matters. During 2007 Deloitte & Touche, the member firms of Deloitte Touche Tohmatsu and their respective affiliates, or collectively, Deloitte, billed the Company and its subsidiaries $4.2 million for the following audit services related to fiscal year 2006: (i) completion of audits of the annual consolidated financial statements of the Company and of NNC for the fiscal year ended December 31, 2006, including audits of the restated consolidated financial statements for the fiscal years ended December 31, 2005 and 2004 and reviews of the restated quarterly information for the periods ended March 31, June 30, and September 30, 2006 included in the 2006 Form 10-K; (ii) audit procedures performed to provide updated audit opinions on the annual consolidated financial statements of the Company and of NNC for the fiscal year ended December 31, 2006 to reflect the Company’s and NNC’s change in reportable segments and the addition of supplemental condensed consolidated financial information; and (iii) audits of individual statutory financial statements. Deloitte billed the Company and its subsidiaries $53.9 million for 2006 for the following audit services: (i) the audits of the annual consolidated financial statements of the Company and of NNC for the fiscal year ended December 31, 2006, including audits of the restated consolidated financial statements for the fiscal years ended December 31, 2005 and 2004 and reviews of the restated quarterly information for the periods ended March 31, June 30, and September 30, 2006 included in the Form 10-K; (ii) reviews of the financial statements of the Company and of NNC in Forms 10-Q for the periods ended March 31, June 30 and September 30, 2006; (iii) the audit of internal controls over financial reporting as required under the United States Sarbanes-Oxley Act of 2002 for the fiscal year ended December 31, 2006; (iv) audits of individual subsidiary and other investments statutory financial statements; and (v) comfort letters, attest services, statutory and regulatory audits, consents and other services related to SEC matters.

Audit-Related Fees

KPMG billed NNC and its subsidiaries $1.0 million for the following audit-related services related to fiscal year 2007: (i) audit of pension plan financial statements; (ii) finance transformation project; and (iii) other systems applications testing. Deloitte billed NNC and its subsidiaries $5.0 million for 2006 for the following audit-related services: (i) audit of pension plan financial statements; (ii) financial accounting and reporting consultations; (iii) finance transformation project; and (iv) director education.

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Tax Fees

KPMG billed NNC and its subsidiaries $2.4 million for tax compliance services related to fiscal year 2007. Deloitte billed NNC and its subsidiaries $1.8 million for 2006 for tax compliance services. Tax compliance services are services rendered based upon facts already in existence or transactions that have already occurred to document, compute and obtain government approval for amounts to be included in tax filings and consisted of: (i) assistance in filing tax returns in various jurisdictions; (ii) sales and use, property and other tax return assistance; (iii) research and development tax credit documentation and analysis for purposes of filing amended returns; (iv) transfer pricing documentation; (v) requests for technical advice from taxing authorities; (vi) assistance with tax audits and appeals; and (vii) preparation of expatriate tax returns.

All Other Fees

KPMG has not provided NNC and its subsidiaries any other services in 2007. Deloitte did not bill NNC and its subsidiaries for any other services in 2006.

Change in Independent Public Accountants

Deloitte & Touche were the independent public accountants for NNL, the principal operating subsidiary of NNC, for the fiscal year 2006.

Following an evaluation conducted by the Company as part of its corporate renewal process, on December 1, 2006, the board of directors of the Company proposed that KPMG serve as the Company’s independent public accountants commencing with fiscal year 2007, subject to shareholder approval of such appointment. KPMG’s appointment was approved by shareholders of the Company and KPMG were also appointed as NNC’s independent public accountants commencing with fiscal year 2007. The change in independent public accountants did not result from any disagreement or dissatisfaction between the Company and Deloitte & Touche.

The audit reports of Deloitte & Touche on the Company’s and NNC’s financial statements for the fiscal years ended December 31, 2006, and December 31, 2005, did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles.

As disclosed in the “Controls and Procedures” section of both the Company’s and NNC’s 2006 Annual Report on Form 10-K, management of the Company and of NNC concluded that a material weakness in internal control over financial reporting existed as of December 31, 2006. As a result, Deloitte & Touche expressed an unqualified opinion on management’s assessment of the effectiveness of internal control over financial reporting and an adverse opinion on the effectiveness of internal control over financial reporting as of December 31, 2006.

During the two fiscal years ended December 31, 2006 and December 31, 2005 and through March 16, 2007, there were no (1) disagreements with Deloitte & Touche on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Deloitte & Touche, would have caused Deloitte & Touche to make reference to the subject matter of the disagreement in connection with their report, or (2) reportable events described under Item 304(a)(1)(v) of Regulation S-K under the United States Securities Exchange Act of 1934 (Regulation S-K).

The Company furnished this disclosure to Deloitte & Touche for their review and provided them an opportunity to comment.

During the fiscal years ended December 31, 2006 and 2005, and through March 16, 2007, the Company did not consult with KPMG on the application of accounting principles to a specified transaction, either complete or contemplated, or the type of audit opinion that might be rendered on the Company’s financial statements, and neither a written report nor oral advice was provided to the Company that KPMG concluded was an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue, except that during the period prior to January 1, 2007, and as part of the Company’s process of consultation on complex accounting issues, the Company consulted with KPMG on issues arising in the Company’s analysis prior to reaching conclusions on accounting issues related to: revenue recognition, including the application of the criteria for separation of multiple element arrangements under Emerging Issues Task Force Issue 00-21 and American Institute of Certified Public Accountants Statement of Position (SOP) 97-2 and of the appropriate application of revenue recognition literature under one or more of SOPs 81-1 or 97-2 or Staff Accounting Bulletin No. 104 to certain contract arrangements; the measurement, evaluation and documentation of hedge effectiveness on interest rate swaps based on SFAS No. 133; the accounting for certain grants of

230

performance stock units under the Company’s Stock Incentive Plan based on SFAS 123 (revised 2004); and the evaluation of recognition criteria arising from interpretations of variable interest entities and other investments pursuant to Financial Accounting Standards Board Interpretation No. 46 (revised December 2003) and other relevant accounting guidance.

During the fiscal years ended December 31, 2006 and 2005, and through March 16, 2007, the Company did not consult with KPMG on any matter that was either the subject of a disagreement (as defined in paragraph 304(a)(1)(iv) of Regulation S-K) or reportable event (as defined in paragraph 304(a)(1)(v) of Regulation S-K).

The Company furnished this disclosure to KPMG for their review and provided them an opportunity to comment.

231

PART IV

ITEM 15.   Exhibits and Financial Statement Schedules

1.   Financial Statements

The index to the Consolidated Financial Statements appears on page 81.

2.   Financial Statement Schedules

	Page
Quarterly Financial Data (Unaudited)		160
Report of Independent Registered Chartered Accountants		83
II — Valuation and Qualifying Accounts and Reserves, Provision for Uncollectibles		162

All other schedules are omitted because they are inapplicable or not required.

3.   Other Documents Filed as a Part of This Report

Management’s Report on Internal Control over Financial Reporting	163
Report of Independent Public Accounting Firm	167

Individual financial statements of entities accounted for by the equity method have been omitted because no such entity constitutes a “significant subsidiary” requiring such disclosure at December 31, 2007.

4.   Exhibit Index

Pursuant to the rules and regulations of the SEC, Nortel has filed certain agreements as exhibits to this Annual Report on Form 10-K. These agreements may contain representations and warranties by the parties. These representations and warranties have been made solely for the benefit of the other party or parties to such agreements and (i) may have been qualified by disclosures made to such other party or parties, (ii) were made only as of the date of such agreements or such other date(s) as may be specified in such agreements and are subject to more recent developments, which may not be fully reflected in Nortel’s public disclosure, (iii) may reflect the allocation of risk among the parties to such agreements and (iv) may apply materiality standards different from what may be viewed as material to investors. Accordingly, these representations and warranties may not describe Nortel’s actual state of affairs at the date hereof and should not be relied upon.

The items listed as Exhibits 10.2 to 10.12, 10.15, 10.16, 10.22 to 10.24, 10.26 to 10.32, 10.34 to 10.42, 10.52, 10.60 to 10.62, 10.65 to 10.74 relate to management contracts or compensatory plans or arrangements.

Exhibit
No.			Description
	*2		Amended and Restated Arrangement Agreement involving BCE Inc., Nortel Networks Corporation, formerly known as New Nortel Inc., and Nortel Networks Limited, formerly known as Nortel Networks Corporation, made as of January 26, 2000, as amended and restated March 13, 2000 (including Plan of Arrangement under Section 192 of the Canada Business Corporations Act) (filed as Exhibit 2.1 to Nortel Networks Limited’s Current Report on Form 8-K dated May 1, 2000).
	*3	.1	Restated Certificate and Articles of Incorporation of Nortel Networks Limited (filed as Exhibit 3 to Nortel Networks Limited’s Current Report on Form 8-K dated October 18, 2000).
	*3	.2	By-Law No. 1 of Nortel Networks Limited (filed as Exhibit 3.2 to Nortel Networks Limited’s Annual Report on Form 10-K for the year ended December 31, 2000).
	*4	.1	Indenture dated as of November 30, 1988, between Nortel Networks Limited and The Toronto-Dominion Bank Trust Company, as trustee, related to debt securities authenticated and delivered thereunder, which comprised the 6% Notes due September 1, 2003, and the 6.875% Notes due September 1, 2023 issued by Nortel Networks Limited (filed as Exhibit 4.1 to Nortel Networks Corporation’s Annual Report on Form 10-K for the year ended December 31, 1999).
	*4	.2	Indenture dated as of February 15, 1996, among Nortel Networks Limited, as issuer and guarantor, Nortel Networks Capital Corporation, formerly Northern Telecom Capital Corporation, as issuer, and The Bank of New York, as trustee, related to debt securities and guarantees authenticated and delivered thereunder, which comprised the 7.40% Notes due 2006 and the 7.875% Notes due 2026 (filed as Exhibit 4.1 to Registration Statement on Form S-3 (No. 333-1720) of Nortel Networks Limited and Nortel Networks Capital Corporation).

232

Exhibit
No.			Description
	*4	.3	Indenture dated as of August 15, 2001 between Nortel Networks Corporation, Nortel Networks Limited, as guarantor, and Bankers Trust Company, as trustee, related to convertible debt securities and guarantees authenticated and delivered thereunder, which comprised the 4.25% Convertible Senior Notes due 2008 (filed as Exhibit 4 to Nortel Networks Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001).
	*4	.4	Amended and Restated Shareholders Rights Plan Agreement dated as of February 28, 2006 between Nortel Networks Corporation and Computershare Trust Company of Canada, as rights agent (filed as Exhibit 3 to Nortel Networks Limited’s Form 8-A12B/A dated June 29, 2006).
	*4	.5	Second Supplemental Indenture dated as of May 1, 2007 to Indenture dated as of July 5, 2006 among Nortel Networks Limited, Nortel Networks Corporation, Nortel Networks Inc. and The Bank of New York, as trustee (filed as Exhibit 4.2 to Nortel Networks Limited’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007).
	*4	.6	First Supplemental Indenture dated as of July 5, 2006 to Indenture dated as of July 5, 2006 among Nortel Networks Limited, Nortel Networks Corporation, Nortel Networks Inc. and The Bank of New York, as trustee (filed as Exhibit 4.2 to Nortel Networks Limited’s Current Report on Form 8-K dated July 6, 2006).
	*4	.7	Indenture dated as of July 5, 2006 among Nortel Networks Limited, Nortel Networks Corporation, Nortel Networks Inc. and The Bank of New York, as trustee (filed as Exhibit 4.1 to Nortel Networks Limited’s Current Report on Form 8-K dated July 6, 2006).
	*4	.8	Purchase Agreement dated June 29, 2006 among Nortel Networks Limited, Nortel Networks Corporation, Nortel Networks Inc. and the representative of the initial purchasers with regards to U.S. $1,000,000,000 Floating Rate Senior Notes due 2011, U.S. $550,000,000 10.125% Senior Notes due 2013, U.S. $450,000,000 10.750% Senior Notes due 2016 (filed as Exhibit 10.1 to Nortel Networks Limited’s Current Report on Form 8-K dated July 6, 2006).
	*4	.9	Registration Rights Agreement dated July 5, 2006 among Nortel Networks Limited, Nortel Networks Corporation, Nortel Networks Inc. and the representative of the initial purchasers with regards to U.S. $1,000,000,000 Floating Rate Senior Notes due 2011, U.S. $550,000,000 10.125% Senior Notes due 2013, U.S. $450,000,000 10.750% Senior Notes due 2016 (filed as Exhibit 10.2 to Nortel Networks Limited’s Current Report on Form 8-K dated July 6, 2006).
	*4	.10	Indenture dated as of March 28, 2007 among Nortel Networks Corporation, Nortel Networks Limited, Nortel Networks Inc. and The Bank of New York, as trustee (filed as Exhibit 4.1 to Nortel Networks Limited’s current report on Form 8-K dated March 28, 2007).
	*4	.11	Purchase Agreement dated March 22, 2007 among Nortel Networks Corporation, Nortel Networks Limited, Nortel Networks Inc. and the representatives of initial purchasers (filed as Exhibit 10.1 to Nortel Networks Limited’s current report on Form 8-K dated March 28, 2007).
	*4	.12	Registration Rights Agreement dated March 28, 2007 among Nortel Networks Corporation, Nortel Networks Limited, Nortel Networks Inc. and the representatives of the initial purchasers (filed as Exhibit 10.2 to Nortel Networks Limited’s current report on Form 8-K dated March 28, 2007).
	*10	.1	Third Amended and Restated Reciprocal Credit Agreement dated as of December 19, 2002 between Nortel Networks Corporation, Nortel Networks Limited and the other parties who have executed the agreement (filed as Exhibit 10.1 to Nortel Networks Corporation’s Annual Report on Form 10-K for the year ended December 31, 2002).
	*10	.2	Nortel Networks Supplementary Executive Retirement Plan, as amended effective October 18, 2001 and October 23, 2002 (filed as Exhibit 10.2 to Nortel Networks Limited’s Annual Report on Form 10-K for the year ended December 31, 2002).
	*10	.3	Statement describing the retirement arrangements of the former President and Chief Executive Officer (filed as Exhibit 10.5 to Nortel Networks Limited’s Annual Report on Form 10-K for the year ended December 31, 2001).
	*10	.4	Nortel Networks Corporation Executive Retention and Termination Plan, as amended and restated, effective from June 26, 2002, amended and restated with effect from June 1, 2007 including the name change to Nortel Networks Corporation Change in Control Plan (filed as Exhibit 10.4 to Nortel Networks Limited’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007).
	*10	.5	Assumption Agreement between Nortel Networks Corporation and Nortel Networks Limited dated March 5, 2001, regarding the assumption and agreement by Nortel Networks Corporation to perform certain covenants and obligations of Nortel Networks Limited under the Nortel Networks Limited Executive Retention and Termination Plan (filed as Exhibit 10.20 to Nortel Networks Limited’s Annual Report on Form 10-K for the year ended December 31, 2000).

233

Exhibit
No.			Description
	*10	.6	Nortel Networks Limited SUCCESS Plan approved on July 25, 2002, as amended and restated on July 28, 2003 with effect from January 1, 2003, as amended on July 28, 2003 with effect from January 1, 2003, as amended on February 26, 2004 with effect from January 1, 2004, as amended March 9, 2006 with effect from January 1, 2006, as amended March 15, 2007 with effect from January 1, 2007 including name change to Nortel Networks Limited Annual Incentive Plan (filed as Exhibit 10.5 to Nortel Networks Limited’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007).
	*10	.7	Supplementary Pension Credits Arrangement (filed as Exhibit 10.14 to Nortel Networks Corporation’s Registration Statement dated August 28, 1975 on Form S-1 (No. 2-71087)).
	*10	.8	Statements describing the right of certain executives in Canada to defer all or part of their short-term and long-term incentive awards (filed as Exhibit 10.4 to Nortel Networks Limited’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000).
	*10	.9	Statement describing eligibility for the Group Life Insurance Plan for directors who are not salaried employees of Nortel Networks Corporation (filed as Exhibit 10.30 to Nortel Networks Limited’s Annual Report on Form 10-K for the year ended December 31, 2002).
	*10	.10	Amended general description of cash bonus for employees and executives of Nortel Networks Corporation and Nortel Networks Limited as originally filed as Exhibit 10.3 to Nortel Networks Limited’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 (filed as Exhibit 10.1 to the Nortel Networks Limited’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003).
	*10	.11	Nortel Networks Limited Directors’ Deferred Share Compensation Plan effective June 30, 1998 and amended and restated as of May 1, 2000, as further amended and restated effective January 1, 2002, as amended and restated May 29, 2003, as amended and restated December 18, 2003 effective January 1, 2004, as restated on June 29, 2005 and amended December 7, 2005 (filed as Exhibit 10.66 to Nortel Networks Limited’s Annual Report on Form 10-K for the year ended December 31, 2005).
	*10	.12	Nortel Networks U.S. Deferred Compensation Plan (filed as Exhibit 4.3 to Post-Effective Amendment No. 1 to Nortel Networks Corporation’s Registration Statement dated May 16, 2000 on Form S-8 (No. 333-11558)).
	*10	.13	Master Facility Agreement dated as of February 14, 2003, and amended by Amending Agreement No. 1 dated July 10, 2003, between Nortel Networks Limited and Export Development Canada, and as further amended by letter agreements dated March 29, 2004, May 28, 2004, August 20, 2004, September 29, 2004, October 29, 2004, November 19, 2004, December 10, 2004, January 14, 2005, February 15, 2005, March 15, 2005, April 29, 2005, May 31, 2005, amended and restated as of October 24, 2005 and further amended by Amendment No. 1 and Waiver dated May 9, 2006 and Amendment No. 2 dated December 12, 2006 and Waiver dated March 9, 2007 and further amended by Second Amended and Restated Master Facility Agreement dated December 14, 2007 (filed as Exhibit 99.1 to Nortel Networks Limited’s Current Report on Form 8-K dated December 18, 2007).
	*10	.14	Master Indemnity Agreement dated as of February 14, 2003 between Nortel Networks Limited and Export Development Canada amended and restated as of October 24, 2005 (filed as Exhibit 10.3 to Nortel Networks Limited’s Current Report on Form 8-K dated October 28, 2005).
	*10	.15	Letter dated June 23, 2003 from the former President and Chief Executive Officer of Nortel Networks, to the Joint Leadership Resources Committee of the Board of Directors of Nortel Networks Corporation and Nortel Networks Limited regarding the voluntary return for cancellation of certain stock options to purchase common shares of Nortel Networks Corporation (filed as Exhibit 10.3 to the Nortel Networks Limited’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003).
	*10	.16	Summary statement of terms of initial compensation arrangements related to the president and chief executive officer approved by the Board of Directors of Nortel Networks Corporation and Nortel Networks Limited as of April 29, 2004 (filed as Exhibit 10.1 to Nortel Networks Limited’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004).
	*10	.17	Asset Purchase Agreement dated June 29, 2004 among Nortel Networks Limited, Flextronics International Ltd. and Flextronics Telecom Systems, Ltd., amended as of November 1, 2004, February 7, 2005, August 22, 2005 and twice as of May 8, 2006 (filed as Exhibits 10.2 and 10.3 to Nortel Networks Limited’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006).
	**10	.18	Amended and Restated Master Contract Manufacturing Services Agreement dated June 29, 2004 between Nortel Networks Limited and Flextronics Telecom Systems, Ltd., amended as of November 1, 2004 and May 8, 2006 (most recently filed as Exhibit 99.1 to Nortel Networks Limited’s current report on Form 8-K dated June 4, 2007).
	**10	.19	Master Repair Services Agreement dated June 29, 2004 between Nortel Networks Limited and Flextronics Telecom Systems Limited, amended as of February 8, 2005 and May 8, 2006 (most recently filed as Exhibit 99.2 to Nortel Networks Limited’s current report on Form 8-K dated June 4, 2007).

234

Exhibit
No.			Description
	**10	.20	Master Contract Logistics Services Agreement dated June 29, 2004 between Nortel Networks Limited and Flextronics Telecom Systems, Ltd., amended as of February 8, 2005 (most recently filed as Exhibit 99.3 to Nortel Networks Limited’s current report on Form 8-K dated June 4, 2007).
	**10	.21	Letter Agreement dated June 29, 2004 among Nortel Networks Limited, Flextronics International Ltd. and Flextronics Telecom Systems, Ltd. amended and restated as of May 8, 2006 (filed as Exhibit 10.6 to Nortel Networks Limited’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006).
	*10	.22	Letter, dated January 10, 2005, to Mr. Lynton (Red) Wilson, the Chairman of the Board of Nortel Networks Corporation, and modified March 1, 2005 and delivered on August 11, 2005 from certain officers of Nortel Networks Limited (filed as Exhibit 10.1 to Nortel Networks Limited’s Current Report on Form 8-K dated August 18, 2005).
	*10	.23	Peter W. Currie, Executive Vice-President and Chief Financial Officer, Letter Agreement dated February 4, 2007 (filed as Exhibit 10.4 to Nortel Networks Limited’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007). The Letter Agreement terminated the remuneration arrangement previously filed as Exhibit 10.2 to Nortel Networks Limited’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005.
	*10	.24	Summary statement of terms of the additional special pension benefits for the Vice-Chairman and Chief Executive Officer approved by the Joint Leadership Resources Committee of the Board of Directors of Nortel Networks Corporation and Nortel Networks Limited and the Independent members of the Board of Directors of Nortel Networks Corporation and Nortel Networks Limited on March 22, 2005 (filed as Exhibit 10.8 to Nortel Networks Limited’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005).
	*10	.25	Agreement and Plan of Merger dated as of April 25, 2005, by and among Nortel Networks Inc., PS Merger Sub, Inc. and PEC Solutions, Inc. (filed as Exhibit 99(d)(1) to Nortel Networks Inc. Current Report on Form SC TO-T dated May 3, 2005 and filed as Exhibit 10.9 to Nortel Networks Limited’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005).
	*10	.26	The Nortel 2005 Stock Incentive Plan (as filed with the 2005 Proxy Statement) as Amended and Restated on November 6, 2006 with effect on December 1, 2006 (filed as Exhibit 10.87 to Nortel Networks Corporation’s Annual Report on Form 10-K for the year ended December 31, 2006).
	*10	.27	Summary statement of the interest payable on the special pension benefits for the Vice-Chairman and Chief Executive Officer of Nortel Networks Corporation and Nortel Networks Limited approved by the Joint Leadership Resources Committee of the Board of Directors of Nortel Networks Corporation and Nortel Networks Limited and the independent members of the Board of Directors of Nortel Networks Corporation and Nortel Networks Limited on May 27, 2005 (filed as Exhibit 10.2 to Nortel Networks Limited’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005).
	*10	.28	Form of Indemnity Agreement effective on or as of June 29, 2005 entered into between Nortel Networks Corporation and each of the following Directors: Harry J. Pearce, Ronald W. Osborne, Richard D. McCormick, John A. MacNaughton, James B. Hunt, Jr. and Jalynn H. Bennett (filed as Exhibit 10.4 to Nortel Networks Limited’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005).
	*10	.29	Summary of remuneration, retirement compensation and group life insurance of the Chairman of the Board, Directors and Chairman of Nortel Networks Limited Committees effective June 29, 2005 (filed as Exhibit 10.5 to Nortel Networks Limited’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005).
	*10	.30	Nortel Networks Corporation 1986 Stock Option Plan, as Amended and Restated, as amended effective April 30, 1992, April 27, 1995, December 28, 1995, April 8, 1998, February 25, 1999, April 29, 1999, September 1, 1999, December 16, 1999, May 1, 2000 and January 31, 2002 (filed as Exhibit 10.1 to Nortel Networks Limited’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002).
	*10	.31	Nortel Networks Corporation 2000 Stock Option Plan as amended effective May 1, 2000 and January 31, 2002 (filed as Exhibit 10.2 to Nortel Networks Limited’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002).
	*10	.32	Forms of Instruments of Grant generally provided to optionees granted options under the Nortel Networks Corporation 1986 Stock Option Plan, as Amended and Restated or the Nortel Networks Corporation 2000 Stock Option Plan (filed as Exhibit 10.9 to Nortel Networks Limited’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005).
	*10	.33	Proxy Agreement effective as of July 29, 2005 with respect to Capital Stock of Nortel Government Solutions Incorporated by and among Nortel Networks Corporation, Nortel Networks Limited, Nortel Networks Inc., Nortel Government Solutions Incorporated, James Frey, Thomas McInerney, Gregory Newbold, and the United States Department of Defense (filed as Exhibit 10.1 to Nortel Networks Limited’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005).
	*10	.34	Escrow Agreement dated as of March 1, 2005 and as entered into on August 11, 2005 between Nortel Networks Corporation, Computershare Trust Company of Canada and certain officers of Nortel Networks Corporation (filed as Exhibit 10.3 to Nortel Networks Limited’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005).

235

Exhibit
No.			Description
	*10	.35	Termination Agreement dated September 7, 2005 between Nicholas DeRoma, Chief Legal Officer and Nortel Networks Corporation (filed as Exhibit 10.6 to Nortel Networks Limited’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005). This Agreement terminated the remuneration arrangement previously filed as Exhibits 10.2 and 10.3 on Form 10-K for the year ended December 31, 2001.
	*10	.36	William A. Owens letter agreement entered into on December 1, 2005, concerning the cessation of Mr. Owens’ responsibilities as Vice-Chairman and Chief Executive Officer of Nortel Networks Corporation and Nortel Networks Limited effective November 15, 2005 (filed as Exhibit 10.61 to Nortel Networks Limited’s Form 10-K for the year ended December 31, 2005). The letter agreement terminated the employment arrangements previously filed as Exhibit 10.2 to Nortel Networks Limited’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004.
	*10	.37	Nicholas DeRoma, former Chief Legal Officer, Letter Agreement dated December 20, 2005 amending the Termination Agreement dated September 7, 2005 (filed as Exhibit 10.62 to Nortel Networks Limited’s Form 10-K for the year ended December 31, 2005).
	*10	.38	Steve Pusey, Executive Vice-President and President, Eurasia, Letter Agreement dated September 29, 2005 concerning retention bonus (filed as Exhibit 10.63 to Nortel Networks Limited’s Form 10-K for the year ended December 31, 2005).
	*10	.39	Summary statement of employment terms and conditions for Mike Zafirovski, President and Chief Executive Officer effective November 15, 2005, as approved by the Joint Leadership Resources Committee of the Board of Directors of Nortel Networks Corporation and Nortel Networks Limited and the Independent members of the Board of Directors of Nortel Networks Corporation and Nortel Networks Limited on October 16, 2005 and form or instrument of award for restricted stock units and form of instrument of award for stock options granted on November 15, 2005 under the Nortel 2005 Stock Incentive Plan to Mike Zafirovski, President and Chief Executive Officer (filed as Exhibit 10.65 to Nortel Networks Limited’s Form 10-Q for the quarter ended September 30, 2006).
	*10	.40	Mike Zafirovski, President and Chief Executive Officer, Indemnity Agreement dated January 18, 2006 with effect from October 31, 2005 (filed as Exhibit 10.65 to Nortel Networks Limited’s Form 10-K for the year ended December 31, 2005).
	*10	.41	Pascal Debon letter agreement dated February 21, 2006, concerning the cessation of Mr. Debon’s responsibilities as Senior Advisor of Nortel Networks Corporation and Nortel Networks Limited effective December 23, 2005 (filed as Exhibit 10.67 to Nortel Networks Limited’s Form 10-K for the year ended December 31, 2005).
	*10	.42	Brian McFadden letter agreement dated February 21, 2006, concerning the cessation of Mr. McFadden’s responsibilities as Chief Research Officer of Nortel Networks Corporation and Nortel Networks Limited effective December 23, 2005 (filed as Exhibit 10.68 to Nortel Networks Limited’s Form 10-K for the year ended December 31, 2005).
	*10	.43	Notice of Blackout to Nortel Networks Corporation’s Board of Directors and Executive Officers Regarding Suspension of Trading dated March 10, 2006 (filed as Exhibit 99.2 to Nortel Networks Corporation’s Current Report on Form 8-K dated March 10, 2006).
	*10	.44	Commitment Letter dated February 1, 2006 among Nortel Networks Corporation, Nortel Networks Inc., J.P. Morgan Securities Inc., JPMorgan Chase Bank, N.A. and Citigroup Global Markets Inc. (filed as Exhibit 10.1 to Nortel Networks Limited’s Current Report on Form 8-K dated February 2, 2006).
	*10	.45	Commitment Advice Letter Agreement dated February 1, 2006 among Nortel Networks Corporation, Nortel Networks Inc., Royal Bank of Canada and J.P. Morgan Securities Inc. (filed as Exhibit 10.2 to Nortel Networks Limited’s Current Report on Form 8-K dated February 2, 2006).
	*10	.46	Commitment Advice Letter Agreement dated February 1, 2006 among Nortel Networks Corporation, Nortel Networks Inc., Export Development Canada and J.P. Morgan Securities Inc. (filed as Exhibit 10.3 to Nortel Networks Limited’s Current Report on Form 8-K dated February 2, 2006).
	*10	.47	Securities Demand Letter dated February 1, 2006 among Nortel Networks Corporation, Nortel Networks Inc., J.P. Morgan Securities Inc. and JPMorgan Chase Bank, N.A. (filed as Exhibit 10.4 to Nortel Networks Limited’s Current Report on Form 8-K dated February 2, 2006).
	*10	.48	Credit Agreement dated February 14, 2006 among Nortel Networks Inc., the lenders party thereto, JPMorgan Chase Bank, N.A., J.P. Morgan Securities Inc., Citigroup Global Markets, Inc., Citicorp USA, Inc., Royal Bank of Canada as amended May 9, 2006 and May 19, 2006 (filed as Exhibit 10.1 to Nortel Networks Limited’s Current Report on Form 8-K dated May 19, 2006).
	*10	.49	Guarantee Agreement dated February 14, 2006 among Nortel Networks Inc., Nortel Networks Limited, Nortel Networks Corporation, JPMorgan Chase Bank, N.A., and Export Development Canada. (filed as Exhibit 10.2 to Nortel Networks Limited’s Current Report on Form 8-K dated February 21, 2006).

236

Exhibit
No.			Description
	*10	.50	U.S. Security Agreement dated February 14, 2006 among Nortel Networks Inc., the subsidiary lien grantors from time to time party thereto, JPMorgan Chase Bank and Export Development Canada. (filed as Exhibit 10.3 to Nortel Networks Limited’s Current Report on Form 8-K dated February 21, 2006).
	*10	.51	Canadian Security Agreement dated February 14, 2006 among Nortel Networks Limited, Nortel Networks Corporation, the subsidiary lien grantors from time to time party thereto, JPMorgan Chase Bank and Export Development Canada (filed as Exhibit 10.4 to Nortel Networks Limited’s Current Report on Form 8-K dated February 21, 2006).
	*10	.52	Forms of Instruments of Award as amended on April 11, 2007 generally provided to recipients of Restricted Stock Units and Performance Stock Units granted under the Nortel 2005 Stock Incentive Plan, as Amended and Restated and Form of Instrument of Grant as amended on April 4, 2007 generally provided to recipients of stock options granted under the Nortel 2005 Stock Incentive Plan, as Amended and Restated (filed as Exhibit 10.6 to Nortel Networks Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007).
	*10	.53	Stipulation and Agreement of Settlement, dated June 20, 2006, in the matter captioned In re Nortel Networks Corp. Securities Litigation, United States District Court for the Southern District of New York, Consolidated Civil Action No. 01 Civ. 1855 (RMB) (filed as Exhibit 99.1 to Nortel Networks Limited’s current report on Form 8-K dated December 12, 2007).
	*10	.54	Stipulation and Agreement of Settlement, dated June 20, 2006, in the matter captioned In re Nortel Networks Corp. Securities Litigation, United States District Court for the Southern District of New York, Master File No. 05-MD1659 (LAP) (filed as Exhibit 99.2 to Nortel Networks Limited’s current report on Form 8-K dated December 12, 2007).
	*10	.55	Court Order, dated June 20, 2006, in the matter captioned Frohlinger et. al. v. Nortel Networks Corporation et. al., Ontario Superior Court of Justice, Court File No. 02-CL-4605 (Ont.Sup.Ct.J.) (filed as Exhibit 10.12 to Nortel Networks Limited’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006).
	*10	.56	Court Order, dated June 20, 2006, in the matter captioned Association de Protection des Epargnants et. al. Investisseurs du Quebec v. Corporation Nortel Networks, Superior Court of Quebec, District of Montreal, No. 500-06-000126-017 (filed as Exhibit 10.13 to Nortel Networks Limited’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006).
	*10	.57	Court Order, dated June 20, 2006, in the matter captioned Jeffery et. al. v. Nortel Networks Corporation et. al., Supreme Court of British Columbia, Vancouver Registry Court File No. S015159 (B.C.S.C.) (filed as Exhibit 10.14 to Nortel Networks Limited’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006).
	*10	.58	Court Order, dated June 20, 2006, in the matter captioned Gallardi v. Nortel Networks Corporation et. al., Ontario Superior Court of Justice, Court File No. 05-CV-285606CP (Ont.Sup.Ct.J.) (filed as Exhibit 10.15 to Nortel Networks Limited’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006).
	*10	.59	Court Order, dated June 20, 2006, in the matter captioned Skarstedt v. Corporation Nortel Networks, Superior Court of Quebec, District of Montreal, No. 500-06-000277-059 (filed as Exhibit 10.16 to Nortel Networks Limited’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006).
	*10	.60	Resolution effective June 28, 2006 for Mike Zafirovski, President and Chief Executive Officer of NNC and NNL outlining acceptance by Boards of Directors of Nortel Networks Corporation and Nortel Networks Limited of the voluntary reduction by Mr. Zafirovski of a special lifetime annual pension benefit by 29% resulting in a payout of US$355,000 per year rather than US$500,000 per year (filed as Exhibit 10.17 to Nortel Networks Limited’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006).
	*10	.61	Form of indemnity agreement entered into between Nortel Networks Corporation and members of the Board of Directors of Nortel Networks Corporation on or after September 6, 2006 (filed as Exhibit 10.4 to Nortel Networks Limited’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006).
	*10	.62	Summary statement of employment terms and conditions for Mike Zafirovski, President and Chief Executive Officer, November 15, 2005 as approved by the Joint Leadership Resources Committee of the Board of Directors of Nortel Networks Corporation and Nortel Networks Limited and the Independent members of the Board of Directors of Nortel Networks Corporation and Nortel Networks Limited on October 16, 2005 and form of instrument of award for restricted stock units and form of instrument of award for stock options granted on November 15, 2005 under the Nortel 2005 Stock Incentive Plan to Mike Zafirovski, President and Chief Executive Officer (filed as Exhibit 10.5 to Nortel Networks Limited’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006).

237

Exhibit
No.			Description
	**10	.63	Agreement between Nortel Networks Limited and Flextronics Telecom Systems, Inc. dated October 13, 2006, amending the asset purchase agreement dated June 29, 2004 among Nortel, and Flextronics International Ltd., and Flextronics Telecom, which was filed as Exhibit 10.3 to Nortel Networks Limited’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, as amended from time to time, the amended and restated master contract manufacturing services agreement dated as of June 29, 2004, which was filed as Exhibit 10.4 to Nortel Networks Limited’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, as amended from time to time, and the letter agreement dated June 29, 2004, which was filed as Exhibit 10.7 to Nortel Networks Limited’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, as amended and restated (filed as Exhibit 10.83 to Nortel Networks Limited’s Annual Report on Form 10-K for the year ended December 31, 2006).
	*10	.64	Share and Asset Sale Agreement between Nortel Networks Limited and Alcatel-Lucent dated December 4, 2006, as amended December 29, 2006 and June 28, 2007 (filed as Exhibit 10.5 to Nortel Networks Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007).
	*10	.65	Dion Joannou letter agreement dated July 27, 2007 concerning the cessation of Mr. Joannou’s responsibilities as President, North America of Nortel Networks Corporation and Nortel Networks Limited effective August 31, 2007 (filed as Exhibit 10.1 to Nortel Networks Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007).
	*10	.66	Compensation and Human Resources Committee Policy on Company Aircraft dated July 31, 2007 (filed as Exhibit 10.2 to Nortel Networks Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007).
	*10	.67	Paviter Binning, Executive Vice-President and Chief Financial Officer of Nortel Networks Corporation and Nortel Networks Limited, Employment Letter dated September 28, 2007 (filed as Exhibit 10.3 to Nortel Networks Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007).
	10	.68	Nortel Networks Corporation Share Purchase Plan for S. 16 Executive Officers dated November 8, 2007.
	10	.69	Amended and Restated Summary of remuneration, retirement compensation and group life insurance of the Chairman of the Board, Directors and Chairman of Committees of Nortel Networks Limited as amended October 3, 2007 with effect from January 1, 2008.
	10	.70	Nortel Networks Limited Directors’ Deferred Share Compensation Plan as amended and restated on October 3, 2007 effective August 30, 2007.
	10	.71	Joel Hackney, President, Enterprise Solutions Employment Letter amended effective September 19, 2007.
	10	.72	Nortel Networks Supplementary Executive Retirement Plan, as amended by Resolutions by the Pension Investment Committee dated December 19, 2007 and December 20, 2007 with effect from January 1, 2008.
	10	.73	The Nortel 2005 Stock Incentive Plan as amended and restated on January 18, 2008.
	10	.74	David Drinkwater, Chief Legal Officer, Letter regarding special bonus dated October 4, 2007.
	10	.75	Pay-Off Letter dated July 5, 2006 under the Credit Agreement dated February 14, 2006 among Nortel Networks Inc. and JPMorgan Chase Bank, N.A., J.P. Morgan Securities Inc. and Citigroup Global Markets Inc., Citicorp USA, Inc., Royal Bank of Canada and Export Development Canada, the Lenders party thereto.
	10	.76	Consent of Defendants Nortel Networks Corporation and Nortel Networks Limited dated September 28, 2007, in the matter captioned Securities and Exchange Commission V. Nortel Network Corporation and Nortel Networks Limited, United States District Court for the Southern District of New York, Civil Docket for Case No.: 1:07-cv-08851-LAP.
	12	.	Computation of Ratios.
	14	.	Nortel Code of Business Conduct.
	21	.	Subsidiaries of the Registrant.
	23	.1	Consent of KPMG LLP.
	23	.2	Consent of Deloitte & Touche LLP.
	24	.	Power of Attorney of certain directors and officers.
	31	.1	Rule 13a — 14(a)/15d — 14(a) Certification of the President and Chief Executive Officer.
	31	.2	Rule 13a — 14(a)/15d — 14(a) Certification of the Executive Vice-President and Chief Financial Officer.
	32	.	Certification of the President and Chief Executive Officer and Executive Vice-President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

*   Incorporated by Reference.

 **   Incorporated by Reference. Certain portions of this Exhibit have been omitted based upon a request for confidential treatment. These portions have been filed separately with the United States Securities and Exchange Commission.

238

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Toronto, Ontario, Canada on the 27^th day of February, 2008.

NORTEL NETWORKS LIMITED

  By:  /s/  Mike S. Zafirovski

(Mike S. Zafirovski, President

and Chief Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on the 27^th day of February, 2008.

Signature	Title
Principal Executive Officer
/s/  Mike S. Zafirovski (Mike S. Zafirovski)	President and Chief Executive Officer, and a Director
Principal Financial Officer
/s/  Paviter s. Binning (Paviter s. Binning)	Executive Vice-President and Chief Financial Officer
Principal Accounting Officer
/s/  Paul W. Karr (Paul W. Karr)	Controller

239

Directors

J.H. Bennett* (J.H. Bennett)	R.D. McCormick* (R.D. McCormick)
M. Bischoff* (M. Bischoff)	C. Mongeau (C. Mongeau)
J.B. Hunt, Jr.* (J.B. Hunt, Jr.)	H.J. Pearce* (H.J. Pearce)
K.M. Johnson* (K.M. Johnson)	J.D. Watson* (J.D. Watson)
J.A. MacNaughton* (J.A. MacNaughton)	M.S. Zafirovski* (M.S. Zafirovski)
J.P. Manley* (J.P. Manley)
	/s/  Gordon A. Davies By:* (Gordon A. Davies, as attorney-in-fact February 27, 2008.)

240

EX-10.68

Exhibit 10.68

NORTEL NETWORKS CORPORATION

SHARE PURCHASE PLAN FOR S.16 EXECUTIVE OFFICERS

This Plan is intended as a vehicle to enable certain executive officers (Participants) of Nortel Networks Corporation (NNC) and Nortel Networks Limited (NNL) to purchase NNC common shares (Shares) from NNC in order to satisfy NNC’s executive share ownership guidelines and comply with exemptions from the U.S. Securities and Exchange Commission’s short swing profit rules.

The Compensation and Human Resources Committee (the CHRC) of the Boards of Directors of NNC and NNL is responsible for the administration and interpretation of the Plan. The CHRC may delegate all or part of its authority to administer the Plan to a single person or committee designated by the CHRC to be responsible for the operation of the Plan (the Plan Administrator).

1. Term of Plan

This Plan commences the date hereof and purchases hereunder may be made until the maximum number of Shares allocated to the Plan have been purchased or the Plan is suspended or terminated by the CHRC.

2. Maximum Number of Shares Available for Purchase

The maximum number of Shares that may be purchased under this Plan is 450,000 subject to adjustment as appropriate, as determined by the CHRC, for any recapitalization, reorganization or other change in the capital structure or business of NNC.

3. Participants

Executive officers of NNC and NNL that are required to file insider reports pursuant to Section 16 of the United States Securities Exchange Act of 1934,as amended, may purchase Shares pursuant to this Plan. Participation in this Plan is voluntary.

4. Purchase Orders

A Participant may submit one order to purchase Shares using the form attached (a Purchase Order) at any time until 4:30 p.m. (Toronto time) on the first business day (an Order Day) of each Window Period (as defined in NNC’s Corporate Policy and Procedure 320.28 — “Use of Undisclosed Material Information”) provided that at such time the Participant is not subject to a trading prohibition implemented by NNC, in which case, if the trading prohibition is lifted prior to completion of the Window Period, the Order Day in respect of such Participant will be the first business day after such Trading Prohibition is lifted during the Window Period and provided, further, that in all circumstances the Participant is not in possession of material non-public information regarding NNC. Notwithstanding the forgoing, the first Order Day under this Plan will be the second business day after the date of receipt of all required regulatory approvals provided that such Order Date is within a Window Period and the Participant is not subject to a trading prohibition.

Participants may specify in a Purchase Order a number of Shares or a dollar value of Shares to be purchased. Where a dollar value is specified, the number of Shares to be purchased will be such value divided by the Market Price (as defined below) per Share rounded down to the nearest whole Share.

If the number of Shares for which Purchase Orders have been submitted on any Order Day exceed the number of Shares remaining available for issue under this Plan, then the Shares available under this Plan will be allocated pro rata among the Participants who have submitted Purchase Orders.

Upon delivery of a Purchase Order by a Participant to the Plan Administrator, such Purchase Order will constitute a binding agreement between NNC and such Participant in accordance with the terms of this Plan and such Purchase Order.

5. Market Price

The purchase price for each Share purchased under the Plan will be the volume weighted average trading price of the Shares for the 5 consecutive trading days on which at least a board lot of Shares trades on each of the Toronto Stock Exchange and the New York Stock Exchange, commencing on the Order Day, (the Trading Period) on the either (a) the Toronto Stock Exchange, or (b) the New York Stock Exchange, whichever is higher (the Market Price).

For the purposes of determining and paying the Market Price for Shares purchased hereunder, U.S. dollar trading prices on the New York Stock Exchange will be converted into Canadian dollars at the noon rate of exchange of the Bank of Canada on the applicable day on each of the 5 days in the Trading Period. The Market Price of a Share will be expressed in Canadian dollars and will be rounded up to the nearest whole cent.

The Plan Administrator will notify each Participant who has submitted a Purchase Order of the Market Price for the Shares to be purchased within 2 business days of completion of the applicable Trading Period.

6. Payment for Purchased Shares

The purchase price for Shares to be issued pursuant to a Purchase Order will payable in Canadian dollars by delivery of a certified cheque or wire transfer to the Plan Administrator within 2 business days of notification to the applicable Participant of the Market Price.

If a Participant fails to pay all or any part of the aggregate purchase price payable in respect of Shares that he or she has agreed to purchase pursuant to a Purchase Order, the unpaid amount of the purchase price may be deducted from such Participant’s salary.

7. Delivery of Shares

Upon receipt in full of the aggregate purchase price therefor, the Plan Administrator will deliver Shares purchased hereunder to Participants by delivering share certificates for such Shares to the Participant or by transferring such Shares into a brokerage account designated by the Participant as indicated by the Participant in the Purchase Order.

8. Transfer of Shares

Shares purchased hereunder may not be sold, transferred or otherwise disposed of in the United States by the purchasing Participant for at least 6 months following the date of purchase hereunder.

For the purposes hereof, the date of purchase for Shares purchased hereunder is the date on which the Market Price for such Shares is determined.

9. Date of Plan

This Plan is dated November 8, 2007.

NORTEL NETWORKS CORPORATION

SHARE PURCHASE PLAN FOR S.16 EXECUTIVE OFFICERS

PURCHASE ORDER

Name:
Address:
Office Tel:
Home Tel:
Number of Shares to be Purchased:
or
Canadian Dollar Amount of Shares to be Purchased:	Cdn$

Deliver the shares purchased pursuant to this Purchase Order to me as follows (check one):

o      Deliver share certificates to the address indicated above.

o      Transfer shares into the following brokerage account:

I hereby submit this Purchase Order pursuant to the Nortel Networks Corporation Share Purchase Plan for S. 16 Executive Officers (the Plan). I understand that this Purchase Order is non-revocable and agree to be bound by the terms of the Plan, which terms are incorporated by reference herein.

Date:

Signature:

EX-10.69

Exhibit 10.69

AMENDED AND RESTATED
NORTEL NETWORKS LIMITED (THE “CORPORATION”)

DIRECTORS’ REMUNERATION, RETIREMENT COMPENSATION
AND GROUP LIFE INSURANCE
(Amended to reflect changes effective January 1, 2008)

All information contained in this summary has been previously disclosed, or will be disclosed, in public filings of the Corporation.

	US Dollars
CHAIRMAN OF THE BOARD FEE:	$180,000 per annum*
BOARD RETAINER:	$50,000 per annum
LONG TERM INCENTIVE:	$125,000 (1)+
COMMITTEE MEMBER RETAINERS:	$12,500 per annum (2)
Audit Committee (2)
Pension Fund Policy Committee
Compensation and Human Resources Committee (3)
COMMITTEE CHAIRMAN RETAINER (4)	$15,000 per annum (5)
AUDIT COMMITTEE CHAIRMAN RETAINER	$35,000 per annum (6)

Note:

1.	Payable over four fiscal quarters commencing the third quarter of the year. +Increase of amount approved Oct. 3, 2007 effective Jan. 1, 2008 — quarterly $31,250.
2.	If on same Nortel Networks Corporation Committee, Committee member retainer is $6,250 per annum
3.	Joint Committee of the Board of Directors of the Corporation and Nortel Networks Corporation
4.	Except Audit Committee
5.	If Chairman of same Nortel Networks Corporation Committee, Chairman retainer is $7,500 per annum
6.	If Chairman of same Nortel Networks Corporation Committee, Chairman retainer is $17,500 per annum

*Restated February 20, 2008 to list Chairman of the Board Fees effective June 29, 2005

DIRECTORS’ DEFERRED SHARE COMPENSATION PLAN (THE “PLAN”)

The payment of fees may, at the election of the director, be deferred under the Nortel Networks Limited Directors Deferred Share Compensation Plan (the “Plan”). Directors are entitled to elect to receive all or a portion of their fees in the form of share units under the Plan (entitling the Directors to receive an equal number of common shares of Nortel Networks Corporation), with the remainder of such fees to be paid in cash. The share units will be settled subject to and in accordance with the Plan upon a Director’s retirement from the Board of Directors.

Note:

1.	Directors fees are paid in quarterly installments at the end of each calendar quarter.
2.	Directors’ fees generally are not payable to Directors who are salaried employees of Nortel Networks Corporation, Nortel Networks Limited or of any of its or their subsidiaries.

RETIREMENT COMPENSATION
DOES NOT APPLY TO DIRECTORS ELECTED AFTER JANUARY 1, 1996

Each non-employee director who shall have retired on or after April 1, 1982 shall be paid retirement compensation comprising (1) a base element equal to a portion of the board retainer paid at the date of retirement and (2) an indexed element equal to a portion of any excess of the current board retainer from time to time over the board retainer paid at the date of retirement, as follows:

	Base			Indexed
	Retirement			Retirement
	Compensation*			Compensation**
For directors who retired on or after April 1, 1984		75	%		56.25	%
For directors who retired prior to April 1, 1984		50	%		37.5	%

For non-employee directors who retired on or after April 1, 1987, retirement compensation shall be paid in U.S. funds.

*	75% of US$27,500 or 75% of the Board retainer fee payable when Director so ceased to hold office as such, whichever is greater;
**	Percentage of excess of prevailing Board retainer over Board retainer at date of retirement.

The retirement compensation shall be paid, during the lifetime of the director or their surviving spouse, for a period equal to the duration of the director’s tenure as a member of the board of directors of the Corporation or ten (10) years, whichever may be the shorter.

EX-10.70

Exhibit 10.70

NORTEL NETWORKS LIMITED

DIRECTORS’ DEFERRED

SHARE COMPENSATION PLAN

AS AMENDED AND RESTATED

Amended and Restated on October 3, 2007,
effective August 30, 2007

NORTEL NETWORKS LIMITED
DIRECTORS’ DEFERRED
SHARE COMPENSATION PLAN
AS AMENDED AND RESTATED

1. BACKGROUND; PURPOSE OF THE PLAN

The Nortel Networks Limited Directors’ Deferred Share Compensation Plan was amended and restated to reflect the transactions contemplated by the plan of arrangement (the “Plan of Arrangement”) described in the Amended and Restated Arrangement Agreement, made as of January 26, 2000, as amended and restated March 13, 2000, among BCE Inc., Nortel Networks Corporation, New Nortel Inc. and the other parties thereto. On May 1, 2000, the effective date of the Plan of Arrangement, New Nortel Inc. acquired from the holders of the common shares (other than BCE Inc. and its affiliates) of Nortel Networks Corporation all of the Nortel Networks Corporation common shares then held by such shareholders in exchange for an equal number of common shares of New Nortel Inc. and each shareholder of BCE Inc. received approximately 0.78 common shares of New Nortel Inc. for each common share of BCE Inc. then held by such BCE shareholder. In addition, the common shares of New Nortel Inc. were listed on the New York Stock Exchange and The Toronto Stock Exchange in substitution for the common shares of Nortel Networks Corporation. Also, as part of the Plan of Arrangement, Nortel Networks Corporation changed its name to Nortel Networks Limited (“Nortel Limited”) and New Nortel Inc. changed its name to Nortel Networks Corporation (“Nortel Corporation”).

In connection with, and effective as of May 1, 2000, Share Units granted or to be granted under the Plan and the shares subject to the Plan were adjusted and common shares of Nortel Corporation were substituted for common shares of Nortel Limited. In all other respects, the terms and provisions of the Plan were reaffirmed, as therein provided.

On May 25, 2000, the Board suspended the operation of the Plan, effective April 27, 2000, with the effect that, notwithstanding any other provision of the Plan, (i) no further Share Units would be credited to Participants in respect of Annual Retainer Fees (as defined in the Plan as at that date) or any other fees payable on or after April 27, 2000 in respect of services rendered by Participants to Nortel Limited or Nortel Corporation, (ii) Share Units, as so adjusted, credited to Participants’ accounts prior to April 27, 2000 would remain outstanding, (iii) Share Units, as so adjusted, would continue to be credited under Section 7 of the Plan for the period prior to the Settlement Date, and (iv) Share Units, as so adjusted, would be settled subject to and in accordance with the Plan and the terms and conditions of the Share Units.

  2

On June 9, 2000, the Board approved the amendment and restatement of the Plan, (i) effective as of May 1, 2000, to provide that Share Units would be credited to Participants in respect of services rendered by Participants to Nortel Limited only and that the Plan would be administered by the Board or by a Committee of the Board, and (ii) to reflect the suspension of the operation of the Plan, effective April 27, 2000, until otherwise specifically determined by the Board, with respect to the payment of Annual Retainer Fees (as defined in the Plan as at that date) or other fees payable to Participants after April 27, 2000.

On January 24, 2002, the Board approved a further amendment and restatement of the Plan, effective as of January 1, 2002, (i) to provide for the crediting of Share Units to Participants in respect of all services rendered by such Participants as members of the Board; (ii) to provide that each member of the Board who qualifies as an Eligible Director shall receive all fees payable to such member for services as a member of the Board in the form of Share Units credited in respect of such member under the Plan; and (iii) to reflect the re-commencement of the operation of the Plan as amended and restated herein.

On May 29, 2003, the Board approved an amendment to the Plan, effective immediately, to permit Eligible Directors to elect to receive between 0 — 100% of all fees payable to such member for services as a member of the Board in the form of Share Units, with the remainder of such fees to be settled in cash.

On December 18, 2003, the Board approved an amendment to the Plan, effective immediately, with respect to the manner in which Eligible Directors may elect to receive cash in lieu of Share Units under the Plan. On June 29, 2005, the Board approved amendments to the Plan, effectively immediately, with respect to the election by Eligible Directors to receive Fees in the form of Share Units, with the remainder of such Fees payable in cash. On October 3, 2007, the Board approved amendments to the Plan, effectively August 30, 2007, with respect to amendments necessary to comply with Section 409A of the Code.

The purpose of the Plan is to assist Nortel Limited in attracting and retaining individuals with experience and ability to serve as members of the Board and to promote a greater alignment of interests between Eligible Directors and the shareholders of Nortel Corporation.

2. DEFINITIONS

For the purposes of the Plan, the terms contained in this Section shall have the following meanings.

“Administrator” shall mean such administrator as may be appointed by Nortel Limited from time to time to assist in the administration of the Plan in accordance with Section 3 hereof.

“affiliated companies” shall have the meaning ascribed to the term “affiliated bodies corporate” in Section 2(2) of the CBCA, and shall include such other entities, as may be determined by the Committee.

“Aggregate Purchase Price” shall have the meaning assigned thereto in Section 8 hereof.

“Board” shall mean the Board of Directors of Nortel Limited.

3

“Broker” shall have the meaning assigned thereto in Section 10 hereof.

“Business Day” shall mean a day, other than a Saturday or Sunday, on which banking institutions in Canada and the United States are not authorized or obligated by law to close.

“CBCA” shall mean the Canada Business Corporations Act, R.S.C. 1985, c.C-44, as amended from time to time.

“Code” shall mean the U.S. Internal Revenue Code of 1986, as amended, the regulations thereunder and any interpretive guidance as may be issued from time to time.

“Committee” shall mean such committee of the Board comprised of members of the Board as the Board shall from time to time appoint to administer the Plan; provided, however, that if the Board does not appoint a Committee to administer the Plan, all references to the Committee shall be deemed to be references to the Board, mutatis mutandis.

“Common Share” shall mean a common share of Nortel Corporation, subject to Section 16.

“Election Form and Agreement” shall mean the election form and agreement, as it may be amended from time to time, entered into between Nortel Limited and an Eligible Director in accordance with Section 6 hereof.

“Eligible Director” shall mean each member of the Board who, at the relevant time, is not an employee of a Nortel Networks Company and such member shall continue to be an Eligible Director for so long as such member continues to be a member of the Board and is not an employee of a Nortel Networks Company; provided, however, that the Committee, in its sole discretion, may determine from time to time that one or more members of the Board who is or are employees of a Nortel Networks Company shall be an Eligible Director or Eligible Directors or that one or more members of the Board, who would otherwise be an Eligible Director or Eligible Directors, shall not be.

“Fees” shall mean the amount, expressed in U.S. dollars, of all fees payable by Nortel Limited to an Eligible Director (i) for all services rendered as a member of the Board, and/or any committees thereof, and (ii) for all services rendered as an executive or non-executive chairperson of the Board, and/or any committees thereof; except that, Fees shall not include any other fee that may be payable by Nortel Limited to the Eligible Director in connection with services rendered by such Eligible Director to Nortel Limited in any capacity other than as a member or chairperson of the Board, and/or any committees thereof.

“Market Value” of a Common Share shall mean the fair market value thereof, which shall be the price per common share which is equal to the average of the high and low prices for a board lot of the Common Shares traded in Canadian dollars on The Toronto Stock Exchange (“TSX”) on the relevant day or, if the volume of Common Shares traded on the composite tape in the United States exceeds the volume of Common Shares traded in Canadian dollars on the TSX on such relevant day, the average of the high and low prices for a board lot of Common Shares on the New York Stock Exchange (“NYSE”). The Market Value so determined may be in Canadian dollars or in U.S. dollars. As a result, the Market Value of a Common Share covered by a Share Unit shall be either (a) such Market Value as determined above, if in Canadian dollars, or (b)

4

such Market Value as determined above converted into Canadian dollars at the noon rate of exchange of the Bank of Canada on the relevant day, if in U.S. dollars. If on the relevant day, there is not a board lot trade in the Common Shares on the TSX or NYSE, any of such exchanges are not open for trading, or there is not a noon rate of exchange of the Bank of Canada, if required, then the Market Value of a Common Share shall be determined as provided above on the first day immediately preceding the relevant day for which there were such board lot trades in the Common Shares and a noon rate of exchange. If at any time the Common Shares are no longer listed or traded on the TSX or the NYSE, the Market Value shall be calculated in such manner as may be determined by the Committee from time to time, but shall always be established in relation to the fair market value of a Common Share. The Market Value of a Common Share shall be rounded up to the nearest whole cent.

“Nortel Corporation” shall mean Nortel Networks Corporation or its successors.

“Nortel Limited” shall mean Nortel Networks Limited or its successors.

“Nortel Networks Companies” shall mean, collectively, Nortel Corporation, Nortel Limited and their respective Subsidiaries and affiliated companies or, individually, any corporate entity included within such group, as the context indicates, and Nortel Networks Company shall mean any one of such corporate entities.

“Participant” shall mean an Eligible Director who participates in the Plan.

“Payment Date” shall mean, unless otherwise determined by the Committee for the purpose of Section 8, the date on which Common Shares (or cash in lieu thereof) shall be delivered to the Participant in settlement of Share Units in accordance with Section 8 hereof.

“Plan” shall mean the Nortel Networks Limited Directors’ Deferred Share Compensation Plan (as amended and restated) set forth herein and as may be further amended or restated from time to time.

“Plan of Arrangement” shall have the meaning assigned to such term in Section 1 hereof.

“Price per Common Share” shall have the meaning assigned thereto in Section 8 hereof.

“Quarter” means any of the four quarters of any financial year of Nortel Limited as may be adopted from time to time and, until the financial year of Nortel Limited is changed, shall mean the quarters ending March 31, June 30, September 30 and December 31.

“Quarterly Fee” shall mean the Fees earned for services rendered by an Eligible Director in the applicable Quarter.

“Reference Date” shall mean, with respect to any Quarter, the date used to determine the Market Value of a Common Share for purposes of determining the number of Share Units to be credited in respect of such Quarter to a Participant’s account and the Canadian dollar equivalent of the Quarterly Fee in respect to such Quarter pursuant to Section 4 hereof; which date shall be, unless otherwise determined by the Committee and approved by the Board,

5

(i)

the last trading day of such Quarter on which the Market Value of a Common Share may be determined and on which the Bank of Canada published a noon rate of exchange for U.S. dollars, or

(ii)

the Resignation Date of such Participant, if the Settlement Date with respect to a Participant occurs during the Quarter prior to the last trading day of such Quarter; provided that, if such Resignation Date is not a trading day on which the Market Value of a Common Share or, if required, a day on which the Bank of Canada noon rate of exchange for U.S. dollars may be determined, the Reference Date shall be the immediately preceding trading day on which such Market Value and, if required, the Bank of Canada noon rate of exchange for U.S. dollars may be determined.

“Resignation Date” shall mean in respect of a Participant, the earliest date on which both of the following conditions are met:

(a)	the Participant has ceased to be a member of the Board for any reason whatsoever, including the death of the Participant; and
(b)	the Participant is neither an employee nor a member of the board of directors of any Nortel Networks Company,

provided, however, the Resignation Date in respect of a Participant who is subject to Section 409A or to income tax under the Code shall mean the earliest date on which both of the following conditions are met:

(a)

the Participant has ceased to be a member of the Board for any reason whatsoever, including the death of the Participant; and

(b)

the Participant has ceased to provide services as an independent contractor, or member of the board of directors, of any Nortel Networks Company. The applicable definition of “separation from service” under Section 409A of the Code shall be used to determine the date of cessation of services as an independent contractor or member of the board of directors of any Nortel Networks Company, including Nortel Limited, for purposes of the foregoing proviso.

“Settlement Date” shall have the meaning set forth in Section 8, unless otherwise determined by the Committee from time to time.

“Share Unit” shall mean a unit credited to a Participant’s account in accordance with the terms and conditions of the Plan.

“Subsidiary” shall mean a body corporate that is a subsidiary of Nortel Limited or Nortel Corporation within the meaning of Section 2(5) of the CBCA.

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3. ADMINISTRATION OF THE PLAN

Except as herein otherwise specifically provided, the Plan shall be administered by the Committee in accordance with its terms, the whole subject to applicable law. The Committee shall have full and complete authority to interpret the Plan, to prescribe such rules and regulations and to make such other determinations as it deems necessary or desirable for the administration of the Plan. The Committee may from time to time, subject to the terms of the Plan, delegate to officers or employees of a Nortel Networks Company or to third parties, including an Administrator if one is appointed, the whole or any part of the administration of the Plan and shall determine the scope and terms and conditions of such delegation, including the authority to prescribe rules and regulations. Any interpretation, rule, regulation or determination made or other act of the Committee shall be final and binding on the Participants and their beneficiaries and legal representatives and Nortel Limited and its shareholders.

No member of the Committee or the Board shall be liable for any action or determination made in good faith pursuant to the Plan. To the full extent permitted by law, Nortel Limited shall indemnify and save harmless each person made, or threatened to be made, a party to any action or proceeding by reason of the fact that such person is or was a member of the Committee or is or was a member of the Board and, as such, is or was required or entitled to take action pursuant to the terms of the Plan.

Except as Participants may otherwise be advised by prior written notice of at least thirty (30) days, all costs of the Plan, including any administration fees and reasonable brokerage fees related to the purchase of Common Shares pursuant to Section 8, shall be paid by Nortel Limited. For greater certainty, Nortel Limited shall not pay or be responsible for brokerage or other fees incurred by Participants in respect of the disposition of any Common Shares.

4. PARTICIPATION

All Eligible Directors shall participate in the Plan. Each Eligible Director shall be paid one hundred percent (100%) of his or her Fees in the form of cash, unless the Eligible Director elects prior to the beginning of a calendar year to receive between 0-100% of his or her Fees for the next calendar year (and each calendar year thereafter unless and until such Eligible Director changes such election with respect to Fees payable for the calendar year commencing after such change in election is made) in the form of Share Units, with the remainder of such Fees to be paid in cash.

Notwithstanding the above, an election of a Participant subject to Section 409A or to income tax under the Code to receive between 0-100% of his or her Fees in the form of Share Units shall be irrevocable as of the last date of the calendar year preceding the calendar year in which such Fees are earned. In the event such an election is not made as of the last date of the calendar year preceding the year in which such Fees are earned, the Participant’s election from the prior calendar year shall apply to the subsequent calendar year. Such election shall be an “initial deferral election” as defined under Section 409A of the Code and shall only apply to Fees not yet earned. For greater certainty, no “subsequent deferral elections” as defined under Section 409A of the Code are permitted under this Plan in respect of a Participant subject to Section 409A or to income tax under the Code.

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Fees payable to an Eligible Director in the calendar quarter in which such Eligible Director is first appointed or elected to the Board shall be paid one hundred percent (100%) in the form of cash, unless such Eligible Director elects prior to, or within 30 days of, becoming an Eligible Director to receive, effective on the later of (i) the date he or she becomes an Eligible Director or (ii) the date of his or her election during such 30-day period, between 0-100% of his or her Fees for the remainder of such calendar year (and future calendar years) in the form of Share Units, with the remainder of such Fees to be paid in cash.

The Board may, in its sole discretion, permit an Eligible Director who is not subject to Section 409A or to income tax under the Code to elect at a time other than the times specified above to receive between 0-100% of his of her Fees in the form of Share Units, with the remainder of such Fees to be paid in cash for the period commencing no earlier than the beginning of a Quarter following the time of election.

The number of Share Units (including fractional Share Units rounded to four decimal places) to be credited on a quarterly basis with effect on the last day of each Quarter to an Eligible Director’s account under Section 9 hereof with respect to each Quarter shall be equal to the quotient determined by dividing: (i) the entire amount, expressed in U.S. dollars, of the Eligible Director’s Quarterly Fee for such Quarter which is to be paid in Share Units, converted into Canadian dollars at the noon rate of exchange of the Bank of Canada on the Reference Date for such Quarter; by (ii) the Market Value of a Common Share on the Reference Date for such Quarter, expressed in Canadian dollars.

A Participant who becomes an employee of a Nortel Networks Company or who, as a result of a determination by the Committee, shall no longer be eligible to continue to participate in the Plan, shall not be entitled to receive Share Units under this Section 4 in respect of his or her future Fees (if any) beginning with the calendar year following the year in which such event occurs. Share Units already credited to any such Participant’s account shall remain governed by the Plan and the Election Form and Agreement, and such Participant shall be entitled to continue to receive Share Units under Section 7 until such Participant’s Settlement Date.

5. SHARES SUBJECT TO THE PLAN

Neither Nortel Limited nor Nortel Corporation shall be required to cause to be delivered Common Shares or certificates evidencing Common Shares pursuant to the Plan unless and until such delivery is in compliance with all applicable laws, regulations, rules, orders of governmental or regulatory authorities and the requirements of any stock exchange upon which shares of Nortel Corporation are listed or traded. Neither Nortel Corporation nor Nortel Limited shall in any event be obligated to the Participants to take any action to comply with any such laws, regulations, rules, orders or requirements. Subject to the foregoing, Nortel Limited may from time to time provide a Broker with funds as herein provided to purchase Common Shares on the open market or by private transaction as required in order to administer the Plan in accordance with its terms.

In the event Nortel Limited or Nortel Corporation determines that Common Shares or certificates evidencing Common Shares shall not be delivered to a Participant or Participants in accordance with the foregoing, the Participant shall be entitled to receive from Nortel Limited, in cash, an

8

amount equal to the Market Value on the Settlement Date of the number of Common Shares that would otherwise be delivered in settlement of Share Units on the Payment Date, less any amounts withheld by Nortel Limited in accordance with Section 14 in respect of taxes payable or other source deductions in respect of such cash payment.

6. EXECUTION OF ELECTION FORM AND AGREEMENT

Each Eligible Director shall, in accordance with Section 4 and the Plan or at such other times as Nortel Limited deems appropriate, enter into an Election Form and Agreement in writing with Nortel Limited and, if applicable, the Administrator with respect to his or her participation in the Plan. Such Election Form and Agreement shall set out certain rights and obligations of the parties thereto pursuant to and in accordance with the Plan, and shall remain in full force and effect until all such Share Units credited to the account of such Participant shall have been settled and/or cancelled.

7. DIVIDENDS AND RELATED AMOUNTS

A Participant shall, from time to time during such Participant’s period of participation under the Plan, including the period following the Resignation Date and until the Settlement Date referred to in Section 8 hereof, be credited on each dividend payment date in respect of Common Shares with additional Share Units, the number of which shall be equal to the quotient determined by dividing: (i) the product determined by multiplying (a) one hundred percent (100%) of each dividend declared and paid by Nortel Corporation on its Common Shares on a per share basis (excluding stock dividends payable in Common Shares, but including dividends which may be paid in cash or in shares at the option of the shareholder), which, if declared in U.S. dollars, shall be converted into Canadian dollars at the noon rate of exchange of the Bank of Canada on the dividend payment date for such dividend, or if on such dividend payment date a noon rate of exchange of the Bank of Canada is not available, converted into Canadian dollars at the noon rate of exchange of the Bank of Canada on the immediately preceding day on which such exchange rate may be determined, by (b) the number of Share Units recorded in the Participant’s account on the record date for the payment of any such dividend, by (ii) the Market Value of a Common Share on the dividend payment date for such dividend, in each case, with fractions computed to four decimal places.

8. SETTLEMENT OF SHARE UNITS

Except as may be otherwise determined by the Committee or except as set forth below in this Section 8, Settlement Date for a Participant with respect to whom a Resignation Date shall have occurred shall be the fourth trading day following the release of Nortel Corporation’s quarterly or annual financial results immediately following the Resignation Date with respect to such Participant, provided that, if such Resignation Date occurs on the same date as the release of Nortel Corporation’s financial results, the Settlement Date shall, in such a case, be the fifth trading day immediately following such release of Nortel Corporation’s financial results.

A Participant shall receive, in full satisfaction of the number of Share Units recorded in the Participant’s account on the Settlement Date, a whole number of Common Shares equal to the whole number of Share Units then recorded in the account of the Participant (or as may be

9

adjusted pursuant to Section 16 hereof), reduced to reflect the amount of any applicable withholding taxes and other source deductions withheld by Nortel Limited in connection with the satisfaction of the Participant’s Share Units in accordance with Section 14. Any entitlement to fractional Common Shares shall be paid in cash by Nortel Limited based on the Price per Common Share (as defined below) on the Settlement Date.

If the Settlement Date would otherwise fall between the record date for a dividend on the Common Shares and the related dividend payment date, the Settlement Date shall be the day immediately following the date of payment of such dividend for purposes of recording in the account of the Participant the additional Share Units referred to in Section 7 hereof and making the calculation of Share Units recorded in the Participant’s account pursuant to this Section 8. Notwithstanding any other provision of the Plan, the Settlement Date shall not be later than the last day of the first calendar year that begins after the Resignation Date.

In the event that Nortel Limited is unable, by a Participant’s Settlement Date, to compute the final number of Share Units credited to such Participant’s account by reason of the fact that any of the data required in order to compute the Market Value of a Common Share is not available to Nortel Limited as a result of a cessation or disruption in the operation of the principal stock exchanges on which the Common Shares are listed, then the Settlement Date shall be the next following trading day on which such data is available to Nortel Limited.

On the Settlement Date, Nortel Limited may notify the Broker as to the number of Common Shares to be purchased by the Broker with respect to the Participant on the TSX, the NYSE, or any other stock exchange approved by the Committee. As soon as practicable thereafter, the Broker shall purchase the number of Common Shares which Nortel Limited has requested the Broker to purchase and shall notify the Participant and Nortel Limited of:

(a)	the aggregate purchase price (“Aggregate Purchase Price”) of the Common Shares;
(b)	the purchase price per Common Share or, if the Common Shares were purchased at different prices, the average purchase price (computed on a weighted average basis) per Common Share (“Price per Common Share”);
(c)	the amount of any reasonable brokerage commission related to such purchase of Common Shares; and
(d)	the Payment Date for such Common Shares.

On the Payment Date, upon payment of the Aggregate Purchase Price and related reasonable brokerage commission by Nortel Limited, the Broker shall deliver to the Participant, or to his or her designated representative, the certificate representing the Common Shares or shall cause such Common Shares to be transferred electronically to an account designated by such Participant.

If a Participant is a citizen or resident of a country other than Canada, Nortel Limited shall have the right, in its sole discretion, to pay entirely in cash on the Payment Date an amount equal to the Market Value on the Settlement Date of the Common Shares that would otherwise be delivered in settlement of Share Units (less any applicable tax withholdings or required source deductions), should it deem it desirable to do so in light of the regulatory or other requirements

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of the applicable foreign jurisdiction associated with the purchase of, or payment in, Common Shares.

Notwithstanding any other provision of this Section 8, with respect to a Participant subject to Section 409A or to income tax under the Code, the Payment Date shall be the Participant’s Resignation Date; provided that, for purposes of Section 409A, any payment made no later than the later of (x) two and one half months after the Participant’s Resignation Date and (y) the end of the calendar year in which the Participant’s Resignation Date occurs shall be deemed made on the Resignation Date; provided further, that for Participants subject to Section 409A, if the Settlement Date as set out in this Section 8 cannot comply with Section 409A, then the Settlement Date shall be the date that is four trading days prior to the day that is two and a half months after the Resignation Date and the applicable Share Units shall be settled in cash in accordance with Section 13.

9. PARTICIPANT’S ACCOUNT

Nortel Limited shall maintain or cause to be maintained in its records an account for each Participant recording at all times the number of Share Units credited to the Participant. Upon payment in satisfaction of Share Units pursuant to Section 8 herein, such Share Units shall be cancelled. A written notification of the balance in the account maintained for each Participant shall be mailed by Nortel Limited or by an Administrator on behalf of Nortel Limited to each Participant at least annually. A Participant shall not be entitled to any certificate or other document evidencing the Share Units.

10. PURCHASES ON THE OPEN MARKET

Purchases of Common Shares pursuant to the Plan shall be made on the open market by a broker independent from Nortel Corporation and Nortel Limited designated by the Participant and who is a member of the TSX, the NYSE, or any such other stock exchange as may be determined by the Committee from time to time (the “Broker”). Any such designation of a Broker may be changed from time to time. Upon designation of a Broker or at any time thereafter, Nortel Limited may elect to provide the designated Broker with a letter agreement to be executed by the Broker, the Participant and Nortel Limited, setting forth, inter alia:

(a)

the Broker’s agreement with being so designated, to acting for the Participant’s account in accordance with customary usage of the trade with a view to obtaining the best share price for the Participant in respect of the Common Shares to be purchased for the Participant, and to delivering to the Participant, or his or her representative, the share certificate for, or to transferring electronically to an account designated by the Participant, the Common Shares purchased upon receipt from Nortel Limited of payment of the Aggregate Purchase Price and related reasonable brokerage commission; and

(b)

Nortel Limited’s agreement to notify the Broker of the number of Common Shares to be purchased and to pay the Aggregate Purchase Price and the related reasonable brokerage commission,

provided, however, that none of the terms of such letter agreement shall have the effect of making the Broker or deeming the Broker to be an affiliate of, or not independent from, Nortel

11

Corporation or Nortel Limited for purposes of any applicable corporate, securities or stock exchange requirement.

The Share Units, and any related Common Shares that may be delivered under the Plan, have not been registered under the U.S. Securities Act of 1933, as amended, as of the effective date of the Plan and neither Nortel Corporation nor Nortel Limited has any obligation to register such Share Units or Common Shares. Accordingly, the Common Shares delivered under the Plan may not be offered or sold in the United States unless they become registered or an exemption from registration is otherwise available.

11. RIGHTS OF PARTICIPANTS

Except as specifically herein provided or provided in the Election Form and Agreement, no Eligible Director, Participant or other person shall have any claim or right to any Common Shares to be delivered in settlement of Share Units credited pursuant to the Plan. Nothing herein shall provide any Participant with an entitlement or right to be elected or appointed a director of Nortel Limited.

Under no circumstances shall Share Units be considered Common Shares nor shall they entitle any Participant to exercise voting rights or any other rights attaching to the ownership or control of Common Shares, nor shall any Participant be considered the owner of any Common Shares to be delivered under the Plan until after the date of purchase of such Common Shares for the account of such Participant as specifically provided herein.

12. DEATH OF PARTICIPANT

In the event of a Participant’s death, any and all Share Units then credited to the Participant’s account shall become payable to a dependant or relation of the Participant designated in writing by the Participant and provided to Nortel Limited, failing which to the Participant’s legal representative.

13. COMPLIANCE WITH APPLICABLE LAWS

Any obligation of Nortel Limited with respect to Common Shares pursuant to the terms of the Plan is subject to compliance with all applicable laws, regulations, rules, orders of governmental or regulatory authorities and the requirements of any stock exchange upon which shares of Nortel Corporation are listed or traded. Should Nortel Limited, in its sole discretion, determine that it is not desirable or feasible to provide for the settlement of Share Units in Common Shares pursuant to Section 8 hereof, including by reason of any such laws, regulations, rules, orders or requirements, such obligation shall be satisfied by means of a cash payment by Nortel Limited equal to the Market Value of the Common Shares on the Settlement Date that would otherwise be delivered to a Participant in settlement of Share Units on the Payment Date (less any applicable tax withholdings or required source deductions). Each Participant shall comply with all such laws, regulations, rules, orders and requirements, and shall furnish Nortel Limited with any and all information and undertakings as may be required to ensure compliance therewith.

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14. WITHHOLDING TAXES

Nortel Limited may withhold from any payment to or for the benefit of a Participant any amount required to comply with the applicable provisions of any federal, provincial, state or local law relating to the withholding of tax or the making of any other source deductions, including on the amount, if any, included in income of a Participant and may adopt and apply such rules and regulations that in its opinion will ensure that Nortel Limited will be able to so comply.

15. TRANSFERABILITY

The rights or interests of a Participant under the Plan, including the Share Units, shall not be assignable or transferable, otherwise than in case of death as set out in the Plan, and such rights or interests shall not be encumbered.

16. ALTERATION OF NUMBER OF SHARE UNITS SUBJECT TO THE PLAN

In the event that:

(a)	a dividend shall be declared upon the Common Shares or other securities of Nortel Corporation payable in Common Shares or other securities of Nortel Corporation (other than a dividend which may be paid in cash or in Common Shares at the option of the shareholder);
(b)	the outstanding Common Shares shall be changed into or exchanged for a different number or kind of shares or other securities of Nortel Corporation or of another corporation, whether through an arrangement, plan of arrangement, amalgamation or other similar statutory procedure, or a share recapitalization, subdivision or consolidation or otherwise;
(c)	there shall be any change, other than those specified in paragraphs (a) and (b) of this Section 16, in the number or kind of outstanding Common Shares or of any shares or other securities into which such Common Shares shall have been changed or for which they shall have been exchanged; or
(d)	there shall be a distribution of assets or shares to shareholders of Nortel Corporation out of the ordinary course of business,

then, if the Board shall in its sole discretion determine that such change equitably requires an adjustment in the number of Share Units credited to Participants pursuant to the Plan but not yet settled and cancelled, and/or a substitution, for each Common Share, of the kind of securities into which each outstanding Common Share has been so changed or exchanged and/or any other adjustment, then such adjustment and/or substitution shall be made by the Board and shall be effective and binding for all purposes.

In the case of any such substitution, change or adjustment as provided for in this Section 16, the variation shall generally require that the dollar value of the Share Units then recorded in the Participant’s account prior to such substitution, change or adjustment will be proportionately and

13

appropriately varied so that it shall be approximately equal to such dollar value after the variation.

No adjustment provided for in this Section shall entitle a Participant to receive a fractional Common Share or other security and the total adjustment with respect to each Share Unit shall be limited accordingly.

In the event that, at the time contemplated for the purchase of Common Shares under the Plan, there is no public market for the Common Shares or for securities substituted therefor as provided by this Section 16, the obligations of Nortel Limited under the Plan shall be met by a payment in cash on the Payment Date in such amount as is reasonably determined by the Committee to be fair and equitable in the circumstances, but shall always be established in relation to the fair market value of a Common Share within the period that begins one year before the Resignation Date and ends on the Settlement Date.

17. UNSECURED PLAN

Unless otherwise determined by the Committee, the obligations of Nortel Limited under the Plan shall be general unsecured obligations of Nortel Limited.

18. EFFECTIVE DATE OF THE PLAN

The Plan was originally effective with respect to certain fees payable to Eligible Directors on or after June 30, 1998. The Plan was amended and restated on April 27, 2000, effective as of May 1, 2000; was suspended on May 25, 2000, effective April 27, 2000; was amended and restated on June 9, 2000, effective May 1, 2000; was amended and restated and the suspension lifted on January 24, 2002, effective January 1, 2002; and was amended and restated on May 29, 2003. The Plan was amended and restated on December 18, 2003, effective immediately. The Plan was amended on December 7, 2005 and restated effective June 29, 2005. The Plan was amended and restated on October 3, 2007, effective August 30, 2007.

19. AMENDMENTS TO, SUSPENSION OR TERMINATION OF, THE PLAN

The Board may from time to time amend, suspend or terminate, in whole or in part, the Plan or amend the terms of Share Units credited in accordance with the Plan. If any such amendment will materially adversely affect the rights of a Participant with respect to Share Units credited to such Participant or under any Election Form and Agreement, the written consent of such Participant to such amendment shall be obtained. Notwithstanding the foregoing, the obtaining of the written consent of any Participant to an amendment which materially adversely affects the rights of such Participant with respect to any credited Share Unit or under any Election Form and Agreement shall not be required if such amendment is required to comply with applicable laws, regulations, rules, orders of governmental or regulatory authorities or the requirements of any stock exchange on which shares of Nortel Corporation are listed or traded.

If the Board terminates the Plan, Share Units previously credited to Participants shall, at the discretion of the Board, either (a) become immediately payable in accordance with the terms of the Plan in effect at such time, or (b) remain outstanding and in effect and settled subject to and in accordance with their applicable terms and conditions; provided, however, Share Units

14

previously credited to Participants subject to Section 409A or to income tax under the Code shall remain outstanding and in effect and settled subject to and in accordance with their applicable terms and conditions and in accordance with Section 409A of the Code.

20. GOVERNING LAW

Consent to membership on the Board and the resulting participation in the Plan by any Participant shall be construed as acceptance of the terms and conditions of the Plan by the Participant and as to the Participant’s agreement to be bound thereby. The Plan shall be construed in accordance with and governed by the laws of the Province of Ontario.

EX-10.71

Exhibit 10.71

CONFIDENTIAL-SPECIAL HANDLING

October 2, 2007

Joel Hackney
315 Meadowmont Lane
Chapel Hill, NC 27517

Dear Joel:

I am delighted to confirm your new role as President, Enterprise Solutions of Nortel Networks Corporation (“NNC”) and Nortel Networks Limited (“NNL”), reporting directly to me, effective September 19, 2007. This letter updates and replaces the terms and conditions of your offer letter dated December 13, 2005 (the “Prior Letter”). You will continue to be employed by Nortel Networks Inc. (“NNI”). NNC and/or NNL and/or any subsidiary, including NNI, where applicable, are collectively referred to herein as Nortel. NNC and/or NNL and/or any subsidiary, where applicable, are collectively referred to herein as Nortel.

The initial key responsibilities and focus of this position have been discussed and communicated to you. We look forward to you playing a key role in this area, and should you have any further questions, I would be pleased to review them with you. Further, it is important for you to realize that if you accept this position that as a senior executive of Nortel you will be expected to perform and represent Nortel at exemplary levels utilizing the highest of standards. You will see examples of these expectations in this letter.

Salary

Your base salary will be USD$500,000 calculated on a per annum basis and will be paid to you bi-weekly. Generally, salaries are reviewed on an annual basis, typically in the first fiscal quarter, in accordance with various evaluation processes and market-driven guidelines.

Incentive Award

You will continue to be eligible to participate in the Nortel Networks Limited Annual Incentive Plan pursuant to its terms and conditions, with a target cash award of 100% of your base salary.

Long Term Incentives

You will continue to be eligible to receive long term incentives in Nortel’s discretion and in accordance with the applicable plan. The current long term incentives available for award are stock options, restricted stock units and/or performance stock units. The Compensation and

Mike Zafirovski
President and Chief Executive Officer
Nortel
195 The West Mall, Toronto, ON M9C 5K1 T 905-863-1101 mikez@nortel.com

Human Resources Committee (the “CHRC”) of the Boards of Directors of NNC and NNL has the sole discretion to approve any equity mix.

Recoupment of Incentive Based Compensation

It is not anticipated in the normal course of events that you will have to re-pay Nortel for any incentive based compensation payments received during your employment tenure with Nortel. However, if the CHRC determines that you have committed intentional misconduct which contributes, directly or indirectly, to an error in financial information that materially affects the value of any incentive compensation realized by you, Nortel is entitled to issue proceedings to recover damages against you in respect of any losses incurred or as a result of or in connection with that intentional misconduct. Nortel may recoup any incentive compensation as an advance against such damages, whether or not proceedings are issued by Nortel. Incentive compensation payments that Nortel may recoup include all sales and incentive compensation, equity-based compensation, bonus payments and any matching pension plan payments made by Nortel. For further information please refer to the CHRC Policy Regarding Recoupment of Incentive Compensation.

Benefits

Your current entitlements under Nortel’s employee benefit plans will not change as a result of your new position. You will continue to be entitled to five weeks of vacation per annum. Vacation is accrued monthly at the rate of 2.08 days per month of employment.

We periodically review benefit plans, as well as compensation programs, and make modifications, including enhancements and reductions as we deem appropriate.

Your current participation in the Capital Accumulation and Retirement Program will not change as a result of you new position. You should be aware, however, of changes effective January 1, 2008.

All of our retirement programs are periodically reviewed and changes may result to the programs.

Change in Control

You will continue to be eligible to participate in the Change In Control Plan (“CIC”) as a Tier 1 Executive. The provision of payments and benefits to you under CIC will make you ineligible to receive payments and benefits described under all Involuntary Separation headings.

Involuntary Separation

Mike Zafirovski
President and Chief Executive Officer
Nortel
195 The West Mall, Toronto, ON M9C 5K1 T 905-863-1101 mikez@nortel.com

You will continue to be eligible for the following involuntary separation benefits: notwithstanding the employment relationship described in the paragraph of this letter entitled Employment Relationship, if Nortel initiates your separation of employment, you will be provided in lieu of any other payment or benefit with the following: the equivalent of eighteen months base salary paid bi-weekly, the opportunity to continue health, life insurance and AD&D benefits coverage in which you are then enrolled for one year following your employment termination (“Severance Period”) at active employee rates, and the acceleration of vesting of your new hire stock option grant awarded on December 9, 2005 and your new hire restricted stock units awarded on December 9, 2005 to immediately prior to your termination of employment. However, the foregoing payments and benefits will not be provided to you if your separation of employment arises out of conduct and/or inaction by you that are not in the best interests of Nortel. Additionally, the provision of any such payments and benefits will be conditioned upon your execution of a separation agreement, which will be prepared by Nortel and will contain, among other things, a full and final release of claims and a covenant not to compete against Nortel or solicit its employees during the Severance Period.

Reporting Insider

You will continue be designated a Reporting Insider under applicable Canadian securities legislation and a Section 16 Officer under applicable United States securities legislation with respect to trades of securities of NNC.

Share Ownership Guidelines

As a senior executive you will continue to be expected under the Share Ownership Guidelines to own common shares of NNC equivalent to 300% of your base salary within five years from the effective date of this role change. We strongly believe that it is important for senior executives to have this commitment. As a result, we review progress against these guidelines on a regular basis.

You will also be required to hold 50% of all settled vested equity awards (including stock options, restricted stock units and performance stock units) remaining after the payment of taxes and administrative fees associated with the award and the vesting thereof towards the maintenance and achievement of the Share Ownership Guidelines.

Senior Executive Duties

As stated earlier in this letter, as a senior executive of Nortel, you are expected to perform your responsibilities at an exemplar level while displaying the highest standards. As a result, during your employment you are expected, by way of example, to:

Mike Zafirovski
President and Chief Executive Officer
Nortel
195 The West Mall, Toronto, ON M9C 5K1 T 905-863-1101 mikez@nortel.com

(a)	faithfully and diligently perform such duties and exercise such powers consistent with your position as may from time to time be assigned to or vested in you by Nortel or the Nortel Boards;
(b)	comply with all reasonable and lawful requests made by Nortel or the Nortel Boards;
(c)	use your best endeavours to promote and protect and extend the business, reputation, welfare and the interests of Nortel;
(d)	be familiar with and act in a manner consistent with Nortel’s Code of Business Conduct (more fully described herein);
(e)	be familiar with and comply with Nortel policies and procedures relevant to your role or your actions as an employee; and
(f)	report to the Nortel Boards any matters of concern that come to your attention, it being your duty to report any acts of misconduct, dishonesty, breach of company rules or breach of any of the rules of any relevant regulatory bodies committed, contemplated or discussed by any Nortel employee or a third party. Nortel will keep confidential whatever is reported save as required by law or a court or authority of competent jurisdiction.

Code of Business Conduct

Nortel’s Code of Business Conduct is extremely important. As an industry leader and innovator, we have always strived to take a lead in setting out ethical guidelines for our employees, which we consider essential to the long-term success of Nortel. These guidelines are contained within the Code of Business Conduct. By signing this letter, you will continue to be required to comply with the Code of Business Conduct and Nortel’s policies and procedures.

Section 409A of the U.S. Internal Revenue Code

All benefits and payments to be made to you hereunder will be provided or paid to you in compliance with all applicable provisions of section 409A of the U.S. Internal Revenue Code of 1986 as amended, and the regulations issued thereunder (“the Section 409A Rules”). Compensation under this agreement which does not otherwise specify a payment date will be distributed within two and one half months of the taxable year in which vested. The parties also agree that this letter may be modified, as reasonably requested by either party, to the extent necessary to comply with all applicable requirements of, and to avoid the imposition of any additional tax, interest and penalties under, the Section 409A Rules in connection with, the benefits and payments to be provided or paid to you hereunder. Notwithstanding the foregoing or anything to the contrary contained in any other provision of this letter, if you are a “specified employee” within the meaning of the Section 409A Rules at the time of your “separation from service” within the meaning of the Section 409A Rules, then any payment otherwise required to be made to you under this letter on account of your separation from service, to the extent such payment (after taking in to account all exclusions applicable to such payment under the Section 409A Rules) is properly treated as deferred compensation subject to the Section 409A Rules, shall not be made until the first business day after (i) the expiration of six months from the date of your separation from service, or (ii) if earlier, the date of your death (the “Delayed Payment

Mike Zafirovski
President and Chief Executive Officer
Nortel
195 The West Mall, Toronto, ON M9C 5K1 T 905-863-1101 mikez@nortel.com

Date”). On the Delayed Payment Date, there shall be paid to you or, if you have died, to your estate, in a single cash lump sum, an amount equal to aggregate amount of the payments delayed pursuant to the preceding sentence.

Tax Conflict Review for Board Appointed Officers

As a Board appointed officer, you will continue to participate in Nortel’s Executive Tax Conflict Review Program. Under the terms of this program, your personal income tax return will be prepared or reviewed by our designated tax provider.

Executive Travel Services

You will continue to be eligible for executive travel reservation services while in the position of President, Enterprise Solutions. This service is accessible by a dedicated travel telephone #ESN 830-4698, externally (613) 274-4698.

Employment Relationship

You understand and agree that your employment with Nortel will be on an “at will” basis. Nothing herein, including such “at will” basis, will, however, adversely affect or limit the contractual obligations of Nortel created hereby.

I look forward to continuing to work with you and believe you will find your new position to be a challenging and rewarding experience.

If you are in accord and in agreement with the terms of this letter, please indicate your acceptance by signing and returning one copy of this letter to Leila Wong, Director, Executive and Equity Compensation, via fax to 905-863-2316 or ESN 333-2316, and retain the other for your files.

Sincerely,

/s/ Mike Zafirovski

Mike Zafirovski
President and Chief Executive Officer

Accepted this 13^th day of December, 2007

J. Joel Hackney, Jr.

Signature: /s/ J. Joel Hackney, Jr.  

Mike Zafirovski
President and Chief Executive Officer
Nortel
195 The West Mall, Toronto, ON M9C 5K1 T 905-863-1101 mikez@nortel.com

EX-10.72

Exhibit 10.72

NORTEL NETWORKS
SUPPLEMENTARY EXECUTIVE RETIREMENT PLAN

ADOPTION OF AMENDMENT

WHEREAS Nortel Networks Limited (“Nortel”) sponsors and maintains the Nortel Networks Supplementary Executive Retirement Plan (the “Plan”);

AND WHEREAS Nortel reserves the right to amend the Plan pursuant to section 6.1 of the Plan;

AND WHEREAS the Board of Directors of Nortel (“Board”) approved, in its meeting of June 2, 2006, important changes to the Plan, which were announced June 27, 2006;

AND WHEREAS those changes are reflected and detailed in the attached amendment to the Plan;

AND WHEREAS the amendments were proposed by the Retirement Plan Committee (“RPC”), a Nortel management committee, to which Nortel has delegated the authority to act as administrator of the Plan;

AND WHEREAS the amendments proposed by the RPC have been reviewed and approved by the additional committees and entities required for approval of such an amendment pursuant to the applicable governance mandates for the Plan, with the final approval granted by the Pension Investment Committee;

NOW THEREFORE, the following amendments to the Plan are approved, such amendments to be effective January 1, 2008, and the following individuals are hereby authorized to execute such amendments: any officer of Nortel. Such individuals are also authorized to execute and give effect to a subsequent restatement of the Plan which incorporates these amendments and the amendments adopted to achieve compliance with Section 409A of the U. S. Internal Revenue Code.

1. Section 2 of the Plan is amended by adding, in the appropriate alphabetical order, the following definitions.

“Earnings Termination Date” means:

(a)	in the case of a Grandfathered Executive, the date of termination of employment;
(b)	in the case of a Temporarily Grandfathered Executive who does not become a Grandfathered Executive and who does not return to active employment with the Corporation or an affiliate or subsidiary of the Corporation, the date of termination of employment;
(c)	in the case of a Temporarily Grandfathered Executive who does not become a Grandfathered Executive and who returns to active employment, on a particular

Supplementary Executive Retirement Plan
Amendment
Page 2 of 4

date, with the Corporation or an affiliate or subsidiary of the Corporation, the particular date;

(d) in any other case, the earlier of the date of termination of employment and December 31, 2007.”

““Grandfathered Executive” means an Executive who, as of December 31, 2007:

(a)	has at least 30 Actual Years of Service;
(b)	has attained age 55, where the total of the Executive’s age and Actual Years of Service equals at least 70 years; or
(c)	has attained age 60;

and includes

(d)	an Executive who, on June 27, 2006, was on a special leave of absence before retirement, as provided under the Corporation’s policies with respect to such leaves of absence; and
(e)	a Temporarily Grandfathered Executive who returns to active employment with the Corporation at a particular date and who, as of December 31, 2007, meets the requirements of any of paragraphs (a) to (c) of this definition.”

““Temporarily Grandfathered Executive” means an Executive who, as of December 31, 2007, is absent from work and is being paid benefits under the Corporation’s Long Term Disability Plan. An Executive ceases to be a Temporarily Grandfathered Executive on the date, if any, that the Executive returns to active employment with the Corporation or an affiliate or subsidiary of the Corporation.”

2. Section 2 of the Plan is amended by adding to the definition “Actual Years of Service” the following paragraph:

““Actual Years of Service” does not include:

(a)	in the case of a Temporarily Grandfathered Executive who does not become a Grandfathered Executive, any period after the Executive returns to active employment with the Corporation or an affiliate or subsidiary of the Corporation;
(b)	in the case of an Executive who is neither a Grandfathered Executive nor an Executive described in paragraph (a) of this definition, any period after 2007.”

3. Section 2 of the Plan is amended by adding to the definition “Capital Accumulation and Retirement Program” the following sentence:

“After 2007, the Investor Option will no longer be offered.”

4. Section 2 of the Plan is amended by deleting the definition “Final Average Earnings” and by substituting the following:

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Supplementary Executive Retirement Plan
Amendment
Page 3 of 4

““Final Average Earnings”, in relation to an Executive, means:

(a)	with respect to the calculation of a SERP I and SERP II benefit, the average of the three (3) highest consecutive years of Earnings of the Executive before the Executive’s Earnings Termination Date; and
(b)	with respect to the calculation of a SERP III benefit, the average of the three (3) highest consecutive years of Earnings of the Executive during the last ten (10) years of the Executive’s employment with Nortel Networks before the Executive’s Earnings Termination Date.”

5. Section 2 of the Plan is amended by adding to the definition “Percentage Credit” the following paragraph:

“For greater certainty, no credit shall be attributed:

(a)	in the case of a Temporarily Grandfathered Executive who does not become a Grandfathered Executive, to any year or part year after the Executive returns to active employment with the Corporation or an affiliate or subsidiary of the Corporation;
(b)	in the case of an Executive who is neither a Grandfathered Executive nor an Executive described in paragraph (a) of this definition, to any year after 2007.”

6. Section 2 of the Plan is amended by changing the last sentence of the first paragraph to read as follows and by adding to the definition “Retirement” and “Retired”, the following subsection “(f)”:

“However, satisfaction of the conditions described in subsections (d), (e), and (f) below shall not qualify an Executive for a SERP I Benefit:”

     “(f) the termination of employment is a “Termination Due to Change in Control” as defined under the Nortel Networks Corporation Change in Control Plan (the “CIC Plan”) as approved May 31, 2007, section 4.1(h) and the “Specified Executive” (as defined under the CIC Plan) has attained fifty (50) years of age on or before the “Termination Date” (as defined under the CIC Plan).”

7. Section 3 of the Plan is amended by deleting the first sentence of the second paragraph and by substituting the following sentence:

“To qualify as an Executive, such an employee must also have been a participant in the Traditional Option before 2008.”

8. Section 6.2 of the Plan is amended by deleting paragraphs (a) and (b) and by substituting the following:

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Supplementary Executive Retirement Plan
Amendment
Page 4 of 4

“(a)

Executives who transfer either to/from Canada/US will be given the options available in the Capital Accumulation and Retirement Program in the new country that are open to such Executive. If the Executive elects the Balanced Option or the Investor Option before 2008 upon his or her transfer to the new country, his or her participation in the SERP will be suspended during his or her employment in the new country.

(b)

If the Executive returns to the country of origin and if the Executive recommences participation in the Traditional option in accordance with policy established in the country of origin, the Executive will accrue SERP benefits with respect to the service after the return to the country of origin. If the Executive elects the Balanced or the Investor option before 2008 upon return to the country of origin in accordance with the policy established in the country of origin, the Executive would forfeit all SERP Benefits, even for service earned during the period preceding the initial transfer.”

* * * * *

I hereby execute the foregoing amendment to the Plan, effective January 1, 2008, for and on behalf of Nortel Networks Limited and in accordance with the approvals granted pursuant to the governance mandates that are applicable to the Plan.

Signature:	/s/ Gordon A. Davies
	Title: Gordon A. Davies, General Counsel —           Corporate and Corporate Secretary
	Date: December 19, 2007

Signature:	/s/ T. Connelly McGilley
	Title: Tracy S.J. Connelly McGilley, Assistant           Secretary
	Date: December 20, 2007

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CODE SECTION 409A AMENDMENT
TO THE
NORTEL NETWORKS SUPPLEMENTARY EXECUTIVE RETIREMENT PLAN

      WHEREAS, Nortel Networks Limited (the “Company”) sponsors the Nortel Networks Supplementary Executive Retirement Plan (the “Plan”) and has reserved the right to amend the Plan at any time; and

     WHEREAS, the Plan provides for the deferral of compensation within the meaning of Section 409A of the Internal Revenue Code of 1986, as amended (“Code”); and

      WHEREAS, the Company desires to amend the Plan to comply with Code Section 409A and the regulations promulgated thereunder; and

      WHEREAS, the Retirement Plan Committee proposed this amendment and the other committees responsible for review and approval of such an amendment have granted such approvals in accordance with the governance mandates applicable to the Plan;

      NOW, THEREFORE, the Plan is hereby amended, solely with respect to the portion of any Plan benefit which accrues, ceases to be subject to a substantial risk of forfeiture, or both, after 2004, provided such benefits are benefits not excluded under the “foreign plan” exception of Code Section 409A, as follows; and

      FURTHER, and officer of the Company is hereby authorized to execute the amendment and perform such other acts as may be necessary to put the amendment into effect and to approve any minor, non-material corrections to this amendment; and

      FURTHER, the Retirement Plan Committee is authorized to review and adopt a restatement of the Plan which incorporates these amendments:

1.

Effective January 1, 2005, and ending December 31, 2007, the existing provisions of the Plan shall be administered in accordance with a good faith, reasonable interpretation of Code Section 409A, including Treasury Department and legislative guidance upon which good faith reliance is permitted for such period. Effective December 31, 2007, the provisions of this Amendment shall apply with respect to the provisions of the Plan affecting the time and method of payment of Non-Grandfathered Benefits. Effective January 1, 2008, the following provisions of this Amendment shall apply in their entirety with respect to Non-Grandfathered Benefits.

2.

Section 2 of the Plan is amended by adding the following definitions for purposes of applying the provisions of this Amendment:

“Grandfathered Benefit” shall mean the portion of the Total Retirement Benefit representing the value of the vested accrued benefit under the Plan as of December 31, 2004.

“Non-Grandfathered Benefit” shall mean the portion of the Total Retirement Benefit representing the benefit of an Executive under the Plan which is either accrued or ceases to be

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subject to a substantial risk of forfeiture after 2004, i.e., any Plan benefit other than a Grandfathered Benefit. Only those benefits which are not exempt under the foreign plan rules of Code Section 409A shall be deemed Non-Grandfathered Benefits.

“Specified Executive” means a key employee (as defined in Section 416(i) of the Code without regard to paragraph 5 thereof) of the Company.

“Termination of Employment” means the termination of the Executive’s employment with the Company for reasons other than death. Whether a Termination of Employment takes place is determined based on the facts and circumstances surrounding the termination of the Executive’s employment and whether the Company and the Executive intended for the Executive to provide significant services for the Company following such termination. A change in the Executive’s employment status will not be considered a Termination of Employment if:

a.

the Executive continues to provide services as an employee of the Company at an annual rate that is twenty percent (20%) or more of the services rendered, on average, during the immediately preceding three full calendar years of employment (or, if employed less than three years, such lesser period) and the annual remuneration for such services is twenty percent (20%) or more of the average annual remuneration earned during the final three full calendar years of employment (or, if less, such lesser period), or

b.

the Executive continues to provide services to the Company in a capacity other than as an employee of the Company at an annual rate that is fifty percent (50%) or more of the services rendered, on average, during the immediately preceding three full calendar years of employment (or if employed less than three years, such lesser period) and the annual remuneration for such services is fifty percent (50%) or more of the average annual remuneration earned during the final three full calendar years of employment (or if less, such lesser period).

For purposes of this Amendment the definition of “Termination of Employment” shall apply to all uses of such term, whether capitalized or not.

3.

Section 8.1(b) of the Plan is amended to add the following language to the end thereof:

“Notwithstanding the foregoing, any Non-Grandfathered Benefit payable hereunder shall be paid in the form of a payment monthly for a period of fifteen (15) years with the Spouse as the beneficiary (or in a lump sum payment if the value of the benefit is $50,000 or less) following the Executive’s Retirement. If there is no Spouse, the Executive may elect another individual to be the beneficiary with respect to the remaining portion of the payment monthly for fifteen (15) years.”

4.

Section 8.1(c) of the Plan is amended to add the following language to the end thereof:

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“Notwithstanding the foregoing, any Non-Grandfathered Benefit payable hereunder shall be paid in the form of a payment monthly for a period of fifteen (15) years with the Spouse as the beneficiary (or in a lump sum payment if the value of the benefit is $50,000 or less) following the Executive’s Retirement. If there is no Spouse, the Executive may elect another individual to be the beneficiary with respect to the remaining portion of the payment monthly for fifteen (15) years.”

5.

Section 8 of the Plan is amended by adding, as a new section 8.4, the following:

           “8.4 Restriction on Timing of Distributions.

Notwithstanding any provision of this Plan to the contrary, if the Executive is considered a Specified Employee at Retirement under such procedures as established by the Company in accordance with Section 409A of the Code, distributions of Non-Grandfathered Benefits that are made upon Retirement may not commence earlier than six (6) months after the date of such Termination of Employment. Therefore, in the event this Section 8.4 is applicable to the Executive, any distribution of Non-Grandfathered Benefits which would otherwise be paid to the Executive within the first six months following the Termination of Employment shall be accumulated and paid to the Executive in a lump sum on the first day of the seventh month following the Termination of Employment. All subsequent distributions shall be paid in the manner specified.”

6.

Plan Section 11 “Amendment, Termination” is hereby amended to add the following to the end thereof:

“Effective January 1, 2008, the Plan will only permit an acceleration of the time and form of payment of Non-Grandfathered Benefits where the right to the payment arises in accordance with the following:

(a) Within thirty (30) days before or twelve (12) months after a Change in Control, as such is defined under Code Section 409A and the regulations promulgated thereunder, provided that all distributions are made no later than twelve (12) months following such termination of the Plan and further provided that all the Company’s arrangements which are substantially similar to the Plan are terminated so the Executive and all participants in the similar arrangements are required to receive all amounts of compensation deferred under the terminated arrangements within twelve (12) months of the termination of the arrangements;

(b) Upon the Company’s dissolution or with the approval of a bankruptcy court provided that the amounts deferred under the Plan are included in the Executive’s gross income in the latest of (i) the calendar year in which the Plan terminates; (ii) the calendar year in which the amount is no longer subject to a substantial risk of forfeiture; or (iii) the first calendar year in which the distribution is administratively practical; or

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(c) Upon the Company’s termination of this and all other arrangements that would be aggregated with this Plan pursuant to Treasury Regulations Section 1.409A-1(c) if the Executive participated in such arrangements (“Similar Arrangements”), provided that (i) the termination and liquidation does not occur proximate to a downturn in the financial health of the Company, (ii) all termination distributions are made no earlier than twelve (12) months and no later than twenty-four (24) months following such termination, and (iii) the Company does not adopt any new arrangement that would be a Similar Arrangement for a minimum of three (3) years following the date the Company takes all necessary action to irrevocably terminate and liquidate the Agreement;

In the event of an occurrence described in (a), (b), or (c) above, the Company may distribute a Non-Grandfathered Benefit to the Executive in a lump sum subject to the above terms.”

7.

The provisions of this Plan which apply to Non-Grandfathered Benefits are intended to be applied in a manner consistent with the requirements of Code Section 409A, and will be construed accordingly. However, the Company shall bear no responsibility for any determination by any other person or persons that the arrangement or the administration thereof is subject to the tax provisions of Code Section 409A.

      IN WITNESS WHEREOF, the undersigned duly authorized officer or delegate of the Company has caused this Amendment to be adopted by affixing his or her Signature hereto.

DATED the                      day of                                         , 2007.

NORTEL NETWORKS LIMITED
By:	/s/ Gordon A. Davies
	Title:	Gordon A. Davies, General Counsel — Corporate and Corporate Secretary
	Date:	December 19, 2007

By:	/s/ T. Connelly McGilley
	Title:	Tracy S.J. Connelly McGilley, Assistant  Secretary
	Date:	December 20, 2007

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EX-10.73

Exhibit 10.73

January 18, 2008

Nortel 2005 Stock Incentive Plan,
As Amended and Restated

     Section 1. Purpose of the Plan. The purpose of the Plan is to promote the long-term success of the Company by providing equity-based incentive awards to eligible employees. The Plan is designed to provide eligible employees a proprietary interest in Nortel and thereby encourage such employees to perform the duties of their employment to the best of their abilities and to devote their business time and efforts to further the growth and development of the Company. The Plan is also intended to assist the Company in attracting and retaining individuals with superior experience and ability.

     Section 2. Definitions. For purposes of the Plan, the following terms shall have the meaning set forth below:

          (a) “Award” shall mean an award of Options, Stock Appreciation Rights, Restricted Stock Units or Performance Stock Units granted to a Participant under the Plan.

          (b) “Base Price” shall mean the base dollar amount used to calculate the amount, if any, payable to a Participant with respect to a Share subject to a Stand-Alone SAR upon exercise thereof, which base dollar amount shall not be less than 100 percent of the Market Value of a Share on the Effective Date of the grant of the Stand-Alone SAR, subject to adjustment pursuant to Section 11.

          (c) “Board of Directors” shall mean the Board of Directors of Nortel.

          (d) “Canadian Award” shall mean an Award pursuant to which, as applicable, (i) in the case of Options (including any Tandem SARs), the Subscription Price is stated and payable in Canadian dollars (and, in the case of any Tandem SARs, any cash amount payable in settlement thereof shall be paid in Canadian dollars), (ii) in the case of Stand-Alone SARs, the Base Price is stated in Canadian dollars and any cash amount payable in settlement thereof shall be paid in Canadian dollars or (iii) in the case of Restricted Stock Units or Performance Stock Units, any cash amount payable in settlement thereof shall be paid in Canadian dollars.

          (e) “Cause” shall mean a Participant’s Termination, (i) for just cause or cause under applicable law or (ii) following his or her (A) willful breach or neglect of the duties of his or her employment; (B) failure or refusal to perform such duties after demand for performance or to comply with the Company’s rules, policies and practices, (C) dishonesty, (D) insubordination, (E) gross, serious or repeated misconduct, (F) conduct endangering, or likely to endanger, the health or safety of another employee, (G) conviction of a crime constituting a felony or other indictable offense, (H) serious breach of his or her contract of employment, where applicable, (I) gross incompetence, or (J) bringing the Company into disrepute; except that if, at the time of such Termination, (1) the Participant is covered by any severance, termination or similar plan or policy maintained by the Company that employs the Participant, the term “cause” shall have the meaning, if any, assigned thereto under such plan or policy or if there is no such definition of cause, the term “cause” shall mean the Participant’s Termination under circumstances in which the Participant is not entitled to receive notice of termination or compensation in lieu of notice

under such plan or policy or (2) the Participant is party to an employment, severance, retention, or similar contract or agreement with the Company that employs the Participant and that contains a definition of the term “cause” or a similar term, the term “cause” shall have the meaning, if any, assigned thereto (or to such similar term) in such contract or agreement.

          (f) “CBCA” shall mean the Canada Business Corporations Act, R.S.C. 1985, c-C-44, as amended.

          (g) “Code” shall mean the United States Internal Revenue Code of 1986, as amended.

          (h) “Committee” shall mean the Joint Leadership Resources Committee of the Board of Directors and the Board of Directors of Nortel Networks Limited, described in Section 3 hereof, or such other committee or joint committee as may be designated by the Board of Directors and, if applicable, the Board of Directors of Nortel Networks Limited from time to time to administer the Plan that meets the requirements of Section 3 hereof.

          (i) “Company” shall mean, collectively, Nortel and its direct and indirect Subsidiaries, or any such Subsidiary individually, as the context requires.

          (j) “Control” shall mean, with respect to any Person, the possession, directly or indirectly, severally or jointly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or credit arrangement, as trustee or executor, or otherwise.

          (k) “Effective Date” shall mean the date as of which an Award shall take effect, provided that the Effective Date shall not be a date prior to the date the Committee determines an Award shall be made and, unless otherwise specified by the Committee, the Effective Date will be the date the Committee determines an Award shall be made.

          (l) “Exchange Act” shall mean the United States Securities Exchange Act of 1934, as amended.

          (m) “Extension Period” shall mean, with respect to a Participant whose employment Terminates due to a Qualifying Termination Without Cause, the period beginning on such Participant’s Date of Termination and, unless determined otherwise by the Committee, ending on the earlier of (x) the twenty-four month anniversary of the Participant’s Date of Termination and (y) the date determined in accordance with the following:

(i) in the case of a Participant who receives severance or other termination compensation pursuant to the terms of an individual agreement entered into by such Participant and the Company that employs the Participant or pursuant to the terms of any plan, policy or practice of such Company, the last day of the period under (x) or (y), as determined by the Committee: (x) the period used to calculate the portion of the severance or other termination amount payable to the Participant under such agreement, plan, policy or practice on the basis of his or her base salary rate or (y) a period of calendar weeks equal to (A) the severance or

2

other termination amount payable to the Participant under such agreement, plan, policy or practice, divided by (B) the Participant’s weekly base salary rate; and

(ii)

in the case of a Participant who is party to a written contract of employment with the Company that employs the Participant that requires the Company to provide the Participant prior notice of such Qualifying Termination Without Cause or pay in lieu thereof (including payment of continued compensation during any period of “garden leave”), other than an individual agreement described in clause (i) above, the last day of any such notice period, in the case of a notice period that ends after the Participant’s Date of Termination, or the last day of the period for which the Participant receives pay in lieu of notice.

          (n) “Incentive Stock Option” shall mean an Option that, on the Effective Date, is intended to qualify and is designated by the Committee in the applicable instrument of grant as an Incentive Stock Option within the meaning of Section 422 of the Code (or any successor provision).

          (o) “Market Value” of a Share shall mean the average of the high and low prices for a board lot of Shares traded in Canadian dollars on the TSX during the relevant day or, if the volume of Shares traded on the composite tape during the relevant day in the United States exceeds the volume of Shares traded on the TSX on such relevant day, the average of the high and low prices for a board lot of Shares traded in U.S. dollars on the NYSE during the relevant day. The Market Value so determined may be in Canadian dollars or in U.S. dollars. As a result, the Market Value of a Share covered by a Canadian Award shall be either (a) such Market Value as determined above, if in Canadian dollars, or (b) such Market Value as determined above converted into Canadian dollars at the noon rate of exchange of the Bank of Canada on the relevant day, if in U.S. dollars. Similarly, the Market Value of a Share covered by a U.S. Award shall be either (a) such Market Value as determined above, if in U.S. dollars, or (b) such Market Value as determined above converted into U.S. dollars at the noon rate of exchange of the Bank of Canada on the relevant day, if in Canadian dollars. If on the relevant day there is not a board lot trade in the Shares on each of the TSX and NYSE or there is not a noon rate of exchange of the Bank of Canada, then the Market Value of a Share covered by a Canadian Award and the Market Value of a Share covered by a U.S. Award shall be determined as provided above on the first day immediately preceding the relevant day for which there were such board lot trades in the Shares and a noon rate of exchange. The Market Value of a Share shall be rounded up to the nearest whole cent.

          (p) “Nortel” shall mean Nortel Networks Corporation, a Canadian corporation, or any Successor thereto.

          (q) “NYSE” shall mean the New York Stock Exchange.

          (r) “Option” shall mean an option, granted in accordance with Section 6 hereof, to purchase a Share.

          (s) “Participants” shall mean those individuals to whom Awards have been granted from time to time under the Plan.

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          (t) “Performance Criteria” shall mean such financial and/or personal performance criteria as may be determined by the Committee, including any Qualifying Performance Criteria. Performance Criteria may be applied to either the Company as a whole or to a business unit or single or group of Companies, either individually, alternatively or in any combination, and measured either in total, incrementally or cumulatively over a specified performance period, on an absolute basis or relative to a pre-established target, to previous years’ results or to a designated comparison group, provided that the performance period for measurement or achievement of any such Performance Criteria (or incremental element thereof) shall in all events be equal to or exceed one year.

          (u) “Performance Stock Unit” shall mean a right, granted in accordance with Section 8 hereof, to receive one Share or a cash payment of the Market Value of a Share, as determined by the Committee, that generally becomes Vested, if at all, subject to the attainment of Performance Criteria and satisfaction of such other conditions to Vesting, if any, as may be determined by the Committee.

          (v) “Person” shall mean any natural person, firm, partnership, limited liability company, association, corporation, company, trust, business trust, governmental authority or other entity.

          (w) “Plan” shall mean this Nortel 2005 Stock Incentive Plan, as set forth herein and as the same may be amended and in effect from time to time.

          (x) “Prior Plan” shall mean the Nortel Networks Corporation 1986 Stock Option Plan As Amended and Restated and/or the Nortel Networks Corporation 2000 Stock Option Plan, individually or collectively, as the context requires.

          (y) “Prior Plan Available Shares” shall mean those Shares that, on January 1, 2006, were authorized for issuance and available for grant of new awards under a Prior Plan (for greater certainty, excluding Unissued Prior Plan Option Shares), subject to adjustment in order to reflect the consolidation of all of the issued and outstanding Shares, effective December 1, 2006, based on the consolidation ratio of 1 post-consolidation Share for every 10 pre-consolidation Shares

          (z) “Prior Plan Option” shall mean an option to purchase Shares granted to a participant under a Prior Plan that is outstanding, in whole or part, on January 1, 2006.

          (aa) “Qualifying Performance Criteria” shall mean any one or more of the following performance criteria, either individually, alternatively or in any combination, applied to either the Company as a whole or to a business unit or single or group of Companies, either individually, alternatively or in any combination, and measured either in total, incrementally or cumulatively over a period of more than one year, on an absolute basis or relative to a pre-established target, to previous years’ results or to a designated comparison group, in each case as determined by the Committee: (i) cash flow, (ii) earnings per share, (iii) earnings before interest, taxes and/or amortization, (iv) return on sales, (v) total shareholder return, (vi) share price performance, (vii) return on capital, (viii) return on assets or net assets, (ix) revenue, (x) income or net income, (xi) operating income or net operating income, (xii) operating profit or net

4

operating profit, (xiii) operating margin or profit margin, (xiv) return on operating revenue, (xv) return on invested capital, (xvi) market segment share, (xvii) product release schedules, (xviii) new product innovation, (xix) product cost reduction, (xx) brand recognition/acceptance, (xxi) product ship targets, or (xxii) customer satisfaction, in any such case, before or after interest and/or taxes. The Committee may appropriately adjust any evaluation of performance under a Qualifying Performance Criteria to exclude any of the following events that occurs during a performance period: (I) asset write-downs, (II) litigation or claim judgments or settlements, (III) the effect of changes in tax law, accounting principles or other such laws or provisions affecting reported results, (IV) accruals for reorganization and restructuring programs and (V) any extraordinary non-recurring items as described in Accounting Principles Board Opinion No. 30 and/or in management’s discussion and analysis of financial condition and results of operations appearing in the annual report of Nortel to shareholders for the applicable year.

          (bb) “Qualifying Termination Without Cause” shall mean a Participant’s Termination Without Cause if, as a result thereof, the Participant receives severance or other termination compensation, including pay in lieu of notice, from the Company that employs the Participant pursuant to the terms of any individual, written employment, severance or similar agreement entered into by and between the Participant and such Company or any severance or termination plan, policy or practice established and maintained by such Company.

          (cc) “Restricted Stock Unit” shall mean a right, granted in accordance with Section 8 hereof, to receive a Share or a cash payment of the Market Value of a Share, as determined by the Committee, that generally becomes Vested, if at all, based on the Participant’s period of employment with the Company.

          (dd) “Retirement” shall mean a Participant’s Termination (including at the end of a period of long-term disability, if applicable) in accordance with whichever of the following clauses is applicable: (i) a Participant’s Termination after completing a number of full years of service with the Company that, when added to the Participant’s age at his or her Date of Termination, equals 65 or more; provided that the Participant has attained at least age 55 as of his or her Date of Termination, unless determination of the Participant’s eligibility for enhanced rights in respect of an Award on the basis of age (in whole or in part) is not permitted under the laws of any jurisdiction that apply to the Participant, and (ii) in the case of a Participant described in the exception under the foregoing clause (i), the Participant’s Termination (w) after having satisfied all eligibility and other requirements under any special pension arrangement applicable to the Participant to qualify for immediate commencement of retirement benefits in accordance with the provisions of such special pension arrangement, in the case of a Participant who is party to a special pension arrangement with the Company that employs the Participant, (x) after having completed at least ten full years of service with the Company and, in addition, having satisfied all eligibility and other requirements under the pension or retirement plan of the Company that employs the Participant to qualify for immediate commencement of early or normal retirement benefits in accordance with the provisions of such pension or retirement plan, in the case of a Participant employed by a Company that maintains a pension or retirement plan, other than a Participant party to a special pension arrangement subject to clause (w), (y) after having satisfied all eligibility and other requirements under a national or other government sponsored public social security system covering such Participant to qualify for immediate commencement of retirement income payments under such national or other government

5

sponsored system, in the case of a Participant who does not participate in any pension or retirement plan and is not party to any special pension arrangement, as contemplated under the immediately preceding clause (ii)(w) or (ii)(x), or (z) in the case of any other Participant, as determined by the Committee.

          (ee) “Shares” shall mean the common shares without nominal or par value of Nortel and “Share” shall mean one common share without nominal or par value of Nortel, in each such case, subject to adjustment pursuant to Section 11.

          (ff) “Stand-Alone SAR” shall mean a Stock Appreciation Right that is granted on a stand-alone basis.

          (gg) “Stock Appreciation Right” or “SAR” shall mean a right, granted pursuant to Section 7 hereof, representing the right to receive upon the exercise thereof payment, in cash, Shares or any combination thereof, as determined by the Committee, equal to the excess of the Market Value of one Share over the Base Price or Subscription Price, whichever is applicable, on the terms and conditions and calculated in accordance with the provision of Section 7 hereof.

          (hh) “Stock Exchanges” shall mean the NYSE and the TSX.

          (ii) “Subsidiary” shall mean, with respect to any Person, each corporation or other Person in which the first Person owns or Controls, directly or indirectly, capital stock or other ownership interests representing 50% or more of the combined voting power of the outstanding voting stock or other ownership interests of such corporation or other Person and each “affiliated body corporate,” within the meaning of Subsection 2(2) of the CBCA, with respect to such first Person.

          (jj) “Subscription Price” shall mean, (i) with respect to an Option, the price payable by a Participant to purchase one Share on exercise of such Option, which shall not be less than 100 percent of the Market Value of a Share on the Effective Date of the grant of the Option covering such Share and (ii) with respect to a Tandem SAR, the Subscription Price applicable to the Option to which the Tandem SAR relates, in each such case, subject to adjustment pursuant to Section 11.

          (kk) “Successor” shall mean, with respect to any Person, a Person that succeeds to the first Person’s assets and liabilities by amalgamation, merger, liquidation, dissolution or otherwise by operation of law, or a Person to which all or substantially all the assets and/or business of the first Person are transferred.

          (ll) “Tandem SAR” shall mean a Stock Appreciation Right granted in tandem with an Option.

          (mm) “Termination” or “Date of Termination” (or any derivative thereof) shall mean (i) the date of termination of a Participant’s active employment with the Company that employs the Participant (other than in connection with the Participant’s transfer to employment with any other Company), whether such termination is lawful or otherwise, but not including a Participant’s absence from active employment during a period of vacation, temporary illness, authorized leave of absence or short or long-term disability, and (ii) in the case of a Participant

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who does not return to active employment with the Company immediately following a period of absence due to vacation, temporary illness, authorized leave of absence or short or long-term disability, the last day of such period of absence.

          (nn) “Termination Without Cause” shall mean a Participant’s Termination by the Company that employs the Participant for any reason other than Cause or due to the Participant’s Retirement, other than any such Qualifying Termination Without Cause.

          (oo) “Third Party Trust” shall mean a trust established pursuant to Section 3(c) with an independent, unaffiliated bank or other trust company, as trustee, to hold Shares for delivery from time to time to Participants upon exercise or settlement of Awards, that is established and maintained in accordance with the applicable banking and trust laws of the relevant jurisdiction and the requirements of Stock Exchanges.

          (pp) “TSX” shall mean The Toronto Stock Exchange.

          (qq) “Unissued Prior Plan Option Shares” shall mean those Shares that were subject to the unexercised portion of a Prior Plan Option on January 1, 2006, to the extent such portion of the Prior Plan Option thereafter expires or is forfeited, surrendered, cancelled or otherwise terminated without the issuance or delivery of such Shares, but not including any Shares subject to a Prior Plan Option that are withheld or otherwise not issued or delivered upon exercise of such Prior Plan Option in order to satisfy all or any portion of the holder’s obligation to pay the subscription price and/or withholding amounts related to the exercise of such Prior Plan Option, subject to adjustment in order to reflect the consolidation of all of the issued and outstanding Shares, effective December 1, 2006, based on the consolidation ratio of 1 post-consolidation Share for every 10 pre-consolidation Shares.

          (rr) “Vested” (or any applicable derivative term) shall mean, with respect to an Award, that the applicable conditions with respect to continued employment, passage of time, achievement of Performance Criteria and/or any other conditions established by the Committee have been satisfied or, to the extent permitted under the Plan, waived, whether or not the Participant’s rights with respect to such Award may be conditioned upon prior or subsequent compliance with any confidentiality, non-competition or non-solicitation obligations.

          (ss) “U.S. Award” shall mean an Award pursuant to which, as applicable, (i) in the case of Options (including any Tandem SARs), the Subscription Price is stated and payable in United States dollars (and, in the case of any Tandem SARs, any cash amount payable in settlement thereof shall be paid in United States dollars), (ii) in the case of Stand-Alone SARs, the Base Price is stated in United States dollars and any cash amount payable in settlement thereof shall be paid in United States dollars or (iii) in the case of Restricted Stock Units or Performance Stock Units, any cash amount payable in settlement thereof shall be paid in United States dollars.

     Section 3. Administration

          (a) Composition of Committee. The Committee shall consist of two or more individuals, each of whom qualifies as an independent director, within the meaning of the rules of the Stock Exchanges and other applicable securities legislative and regulatory requirements,

7

and at least two of whom qualify as (i) a “non-employee director” within the meaning of Rule 16b-3 under the Exchange Act, and (ii) an “outside director” within the meaning of United States Treasury Regulation Section 1.162-27(e)(3)) under the Code. In addition, the composition of the Committee shall comply with all other applicable securities legislation and rules of the Stock Exchanges and regulatory authorities.

          (b) Powers of the Committee. The Committee shall administer the Plan in accordance with its terms. Subject to and consistent with the terms of the Plan and subject to the limitations of Section 409A of the Code with respect to Awards granted to or held by Participants subject to taxation under the Code, in addition to any authority of the Committee specified under any other terms of the Plan, the Committee shall have full and complete discretionary authority to:

          (i) interpret the Plan and instruments of grant evidencing Awards;

          (ii) prescribe, amend and rescind such rules and regulations and make all determinations necessary or desirable for the administration and interpretation of the Plan and instruments of grant evidencing Awards;

          (iii) determine those key employees of the Company who may be granted Awards, grant one or more Awards to such employees and approve or authorize the applicable form and terms of the related instrument of grant;

          (iv) determine the terms and conditions of Awards granted to any Participant, including, without limitation, (A) the type, and number of Shares subject to, an Award, including whether the Award shall be a Canadian Award or a U.S. Award, (B) the Subscription Price or Base Price for Shares subject to an Award, if applicable, (C) the conditions to the Vesting of an Award or any portion thereof, including terms relating to lump sum or installment Vesting, the period for achievement of any applicable Performance Criteria as a condition to Vesting and the conditions, if any, upon which Vesting of any Award or portion thereof will be waived or accelerated without any further action by the Committee, (D) the circumstances upon which an Award or any portion thereof shall be forfeited, cancelled or expire, (E) the consequences of a Termination with respect to an Award, (F) the manner of exercise or settlement of the Vested portion of an Award, including whether an Award shall be settled on a current or deferred basis, (G) whether and the terms upon which an Award shall be settled in cash, Shares or a combination thereof and (H) whether and the terms upon which any Shares delivered upon exercise or settlement of an Award must continue to be held by a Participant for any specified period;

          (v) determine whether and the extent to which any Performance Criteria or other conditions applicable to the Vesting of an Award have been satisfied or shall be waived or modified;

          (vi) amend the terms of any instrument of grant or other documents evidencing Awards; and

8

          (vii) determine whether, and the extent to which, adjustments shall be made pursuant to Section 11 and the terms of any such adjustments.

          (c) Establishment of Third Party Trusts. From time to time, the Committee may direct one or more of the Companies to establish and maintain one or more Third Party Trusts, on such terms and conditions as the Committee shall determine, and to contribute Shares and/or cash for the purchase of Shares thereto, in such amounts as the Committee shall determine; provided that no Third Party Trust shall be established or maintained with respect to a Participant if the Committee reasonably determines that, as a result thereof, such Participant will be subject to early taxation or any increased amount of tax with respect to his or her Award(s).

          (d) Effects of Committee’s Decision. Any such interpretation, rule, regulation, determination or other act of the Committee shall be made in its sole discretion and shall be conclusively binding upon all Persons.

          (e) Liability Limitation. No member of the Committee or the Board of Directors shall be liable for any action or determination made in good faith pursuant to the Plan or any instrument of grant evidencing any Award granted under the Plan. To the fullest extent permitted by law, the Company shall indemnify and save harmless each person made, or threatened to be made, a party to any action or proceeding in respect of the Plan by reason of the fact that such person is or was a member of the Committee or is or was a member of the Board of Directors.

          (f) Delegation and Administration. The Committee may, in its discretion, delegate such of its powers, rights and duties under the Plan, in whole or in part, to such committee, Person or Persons as it may determine, from time to time, on terms and conditions as it may determine, except the Committee shall not, and shall not be permitted to, delegate any such powers, rights or duties (i) with respect to the grant, amendment, administration or settlement of any Award of a Participant subject to Section 16 of the Exchange Act or otherwise to the extent delegation is not consistent with the CBCA or the rules of any Stock Exchange or (ii) with respect to the establishment or determination of the achievement of Qualifying Performance Criteria and any such purported delegation or action shall not be given effect. The Committee may also appoint or engage a trustee, custodian or administrator to administer or implement the Plan or any aspect of it, subject to the exception of the immediately preceding sentence hereof.

     Section 4. Shares Subject to the Plan.

          (a) Aggregate Plan Limits. Subject to adjustment pursuant to Section 11, the maximum aggregate number of Shares that may be delivered in connection with Awards granted under the Plan shall not exceed the sum of (i) 12,200,000 Shares, (ii) the number of Prior Plan Available Shares and (iii) the number of Unissued Prior Plan Option Shares. Subject to adjustment pursuant to Section 11, of such aggregate maximum number of Shares, (i) no more than an aggregate of 9,500,000 Shares may be delivered in connection with Awards of Restricted Stock Units and/or Performance Stock Units and (ii) no more than an aggregate of 12,200,000 Shares may be delivered in connection with Awards of Incentive Stock Options. Any adjustment

9

pursuant to Section 11 to the limitation on the number of Shares available for Awards of Incentive Stock Option shall be consistent with the requirements of Section 424 of the Code.

          (b) Tax Code Limits. During any five year period, a Participant may not be granted Awards under the Plan of (i) Options and/or Stock Appreciation Rights covering more than an aggregate of 2,500,000 Shares or (ii) Restricted Stock Units and/or Performance Stock Units with respect to more than an aggregate of 1,500,000 Shares, in each such case, subject to adjustment pursuant to Section 11.

          (c) Certain Additional Limits. The number of Shares issuable to insiders of the Company (as defined in the rules of the TSX for this purpose) under this Plan and all other Company security-based compensation arrangements (also as defined in the rules of the TSX) shall not exceed 10% of the issued and outstanding Shares and the number of Shares issued to insiders within any one year under all Company security-based compensation arrangements shall not exceed 10% of the issued and outstanding Shares.

          (d) Computation of Available Shares. For purposes of computing the total number of Shares available for grant under the Plan, Shares subject to any Award (or any portion thereof) that has expired or is forfeited, surrendered, cancelled or otherwise terminated prior to the issuance or transfer of such Shares and Shares subject to an Award (or any portion thereof) that is settled in cash in lieu of settlement in Shares shall again be available for grant under the Plan. Notwithstanding the foregoing, any Shares subject to an Award that are withheld or otherwise not issued upon exercise of any Option or Stock Appreciation Right or settlement of any Award to satisfy the Participant’s withholding obligations or in payment of any Subscription Price shall reduce the number of Shares available for grant under the limitations set forth in this Section 4.

          (e) Source of Shares. Shares delivered to Participants in connection with the exercise or settlement of Awards may be authorized but unissued Shares, Shares purchased in the open-market or in private transactions or Shares held in one or more Third Party Trusts. From time to time, the Board of Directors shall authorize the issuance, or the purchase of shares on the open market or in private transactions, of such number of Shares as may be necessary to permit Nortel to meet its obligations under the Plan.

     Section 5. Terms of Awards In General

          (a) Instrument of Grant. Each Award granted under the Plan shall be evidenced by an instrument of grant, in such form or forms as the Committee shall approve from time to time, which shall set forth such terms and conditions consistent with the terms of the Plan as the Committee may determine. Each instrument of grant shall set forth, at a minimum, the type and Effective Date of the Award evidenced thereby, the number of Shares subject to such Award, whether the Award is a Canadian Award or a U.S. Award and the applicable Vesting conditions and may specify such other terms and conditions consistent with the terms of the Plan as the Committee shall determine or as shall be required under any other provision of the Plan. References in the Plan to an instrument of grant shall include any supplements or amendments thereto.

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          (b) Vesting Conditions. Subject to the terms of the Plan, the Committee shall determine any and all conditions to the Vesting of all and/or any portion of Awards and shall specify the material terms thereof in the applicable instrument of grant on, or as soon as reasonably practicable following, the Effective Date of the Award. Vesting of an Award, or portion thereof, may be conditioned upon passage of time, continued employment, satisfaction of Performance Criteria, or any combination of the foregoing, as determined by the Committee, provided that (i) except in connection with the death of a Participant, such conditions permit all or any portion of any Award to become Vested no earlier than the first anniversary of the Effective Date of the Award, (ii) performance conditions to Vesting of any portion of an Award will be measured over a period equal to or greater than one year, (iii) except in connection with the death or Retirement of a Participant, Awards of Restricted Stock Units will not become Vested more rapidly than ratably over the three (3) year period following the Effective Date thereof and (iv) with respect to any Award that is intended to satisfy the requirements for “performance-based compensation” under Section 162(m) of the Code, the applicable Performance Criteria shall be a measure based on one or more Qualifying Performance Criteria determined by the Committee on or prior to the Effective Date of such Award or as of any later time permitted under the applicable provisions of Section 162(m) of the Code. Subject to compliance with Section 162(m) of the Code, if applicable, the Committee may modify or supplement any Performance Criteria applicable to the Vesting of an outstanding Award to the extent the Committee deems appropriate to reflect any material change after the Effective Date of the Award in the relevant business operations of the Company or applicable business unit or individual or group of Companies.

          (c) Discretion of the Committee. Notwithstanding any other provision hereof or of any applicable instrument of grant, the Committee may (i) accelerate or waive any condition to the Vesting of any Award, all Awards, any class of Awards or Awards held by any group of Participants or (ii) if the Committee has reason to believe that grounds exist to terminate a Participant’s employment for Cause, suspend the right of a Participant to exercise any Vested Award or receive payment in settlement of any Vested Award pending resolution of such matter by the Company, provided, however, that the Committee shall not have or exercise any discretion under this Section 5(c) or any other provision of the Plan (x) that would permit or result in Vesting of an Award (or portion thereof) prior to the first anniversary of the Effective Date of such Award (except in the event of a Participant’s death), (y) to modify the terms or conditions of any Performance Criteria or waive the satisfaction thereof with respect to any Award that is intended to satisfy the requirements for “performance-based compensation” under Section 162(m) of the Code or (z) that would result in a violation of Section 409A of the Code.

          (d) No Repricing. The Subscription Price for Shares subject to any Award of Options and any related Tandem SARs and the Base Price for Shares subject to any Award of Stand-Alone SARs may not be reduced after the Effective Date of the Award thereof, either directly or indirectly, without prior shareholder approval, except for adjustments pursuant to Section 11 of the Plan.

          (e) Deferral of Payment or Other Settlement of Vested Awards. The terms and conditions applicable to any Award (or portion thereof) granted to a Participant who is subject to taxation under the Code and that constitutes “deferred compensation” subject to Section 409A of the Code are intended to comply with Section 409A of the Code. The terms of

11

any such Award (or portion thereof) permitting the deferral of payment or other settlement thereof or providing for settlement in cash in lieu of Shares shall be subject to such requirements and shall be administered in such manner as the Committee may determine to be necessary or appropriate to comply with the applicable provisions of Section 409A of the Code as in effect from time to time.

     Section 6. Stock Options

          (a) General. The Committee may from time to time grant one or more Awards of Options to key employees of the Company on such terms and conditions, consistent with the Plan, as the Committee shall determine. The instrument of grant evidencing an Award of Options shall specify the Subscription Price for each Share subject to such Option, the maximum term of such Option, whether Tandem SARs are granted with respect to all or any such Options and whether such Options (or any portion thereof) are intended to qualify as Incentive Stock Options.

          (b) Vesting Terms. Options granted under the Plan shall become Vested at such times, in such installments and subject to such terms and conditions consistent with Section 5(b) hereof (including satisfaction of Performance Criteria and/or continued employment) as may be determined by the Committee and set forth in the applicable instrument of grant.

          (c) Subscription Price. The Subscription Price for each Share subject to an Option shall not be less than 100% of the Market Value of a Share on the Effective Date of the Award of such Option. The Subscription Price shall be stated and payable in Canadian dollars, if a Canadian Award, and in United States dollars, if a U.S. Award.

          (d) Exercise of Vested Options. Vested Options may be exercised in accordance with such procedures as may be established by the Committee, including procedures permitting the exercise of Options through a broker-assisted sale and remittance program authorized by the Committee. The Participant must pay or satisfy, in accordance with the terms of this Subsection (d) and Section 15(b), the full amount of the Subscription Price and withholding amounts with respect to such exercise and the Company may require as a condition to such exercise and/or the issuance or delivery of Shares to a Participant upon the Participant’s payment or satisfaction of such amounts in full in accordance with this Section 6(d) and Section 15(b) hereof. The Subscription Price shall be payable on exercise of a Vested Option:

          (i) in Canadian dollars, if a Canadian Award, or in United States dollars, if a U.S. Award, unless the Committee determines otherwise, and may be paid in cash, or by wire transfer, certified cheque, banker’s cheque or bank draft or other similar methods of cash equivalent payment acceptable to the Committee or any combination thereof;

          (ii) by the surrender and transfer of Shares then owned by the Participant to such Person as the Committee may direct;

          (iii) by the withholding of Shares otherwise issuable upon exercise of such Vested Option or by payment pursuant to a broker-assisted sale and remittance program authorized by the Committee; or

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          (iv) in any combination of the foregoing.

     Shares surrendered or withheld in accordance with clause (ii) or (iii) of this Subsection (d) shall be valued at the Market Value thereof on the date of exercise, determined in Canadian dollars if used to purchase a Share subject to a Vested Canadian Award or in United States dollars if used to purchase a Share subject to a Vested U.S. Award. The Committee may impose, at any time, such limitations and prohibitions on the use of Shares in payment of the Subscription Price as it deems appropriate and shall determine acceptable methods of surrendering or withholding Shares as payment of the Subscription Price.

          (e) Option Period. Unless the Committee provides for a shorter option period at or after the Effective Date of an Award of Options and subject to Section 9 hereof, all or any part of the Options covered by an Award shall, to the extent Vested, be exercisable, from time to time, within the period commencing on the date such Option or part thereof becomes Vested and ending on the day prior to the tenth anniversary of the Effective Date of such Award.

          (f) Incentive Stock Options. Options intended to qualify as Incentive Stock Options may only be granted to employees of the Company within the meaning of the Code, as determined by the Committee. No Incentive Stock Option shall be granted to any Participant if immediately after the grant of such Award, such Participant would own stock, including stock subject to outstanding Awards held by such Participant under the Plan or any other plan established by the Company, amounting to more than ten percent (10%) of the total combined voting power or value of all classes of stock of the Company. To the extent that the instrument of grant evidencing the Award of an Option specifies that an Option is intended to be treated as an Incentive Stock Option, the Option is intended to qualify to the greatest extent possible as an “incentive stock option” within the meaning of Section 422 of the Code, and shall be so construed; provided, however, that any such designation shall not be interpreted as a representation, guarantee or other undertaking on the part of the Company that the Option is or will be determined to qualify as an Incentive Stock Option. If and to the extent that the aggregate Subscription Price of Options subject to any portion of any Award of Incentive Stock Options that become Vested in any calendar year exceeds the $100,000 limitation of Section 422 of the Code, such Options shall not be treated as Incentive Stock Options notwithstanding any designation otherwise. Certain decisions, amendments, interpretations or other actions by the Committee and certain actions by a Participant may cause an Option to cease to qualify as an Incentive Stock Option pursuant to the Code and, by accepting an Award of Options hereunder, the Participant thereby consents and agrees in advance to any such disqualifying action.

     Section 7. Stock Appreciation Rights

          (a) General. The Committee may from time to time grant one or more Awards of Stock Appreciation Rights to key employees of the Company on such terms and conditions, consistent with the Plan, as the Committee shall determine.

          (b) Tandem SARs. (i) Tandem SARs may be granted at or after the Effective Date of the related Award of Options, and each Tandem SAR shall be subject to the same terms and conditions and denominated in the same currency as the Option to which it relates and the additional terms and conditions set forth in this Section 7.

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          (ii) On exercise of a Tandem SAR, the related Option shall be cancelled and the Participant shall be entitled to an amount in settlement of such Tandem SAR calculated and in such form as provided in Subsection (d) below.

          (iii) Tandem SARs may be exercised only if and to the extent the Options related thereto are then Vested and exercisable and shall be exercised in accordance with such procedures as may be established by the Committee.

          (c) Stand-Alone SARs. (i) Stand-Alone SARs granted under the Plan shall become Vested at such times, in such installments and subject to such terms and conditions consistent with Section 5(b) hereof (including satisfaction of Performance Criteria and/or continued employment) as may be determined by the Committee and set forth in the applicable instrument of grant.

          (ii) The Base Price for each Share subject to a Stand-Alone SAR shall not be less than 100% of the Market Value of a Share on the Effective Date of the Award of such Stand-Alone SAR.

          (iii) Unless the Committee provides for a shorter period at or after the Effective Date of an Award of Stand-Alone SARs and subject to Section 9 hereof, all or any part of the Stand-Alone SARs covered by an Award shall, to the extent Vested, be exercisable, from time to time, within the period commencing on the date such Stand-Alone SARs or part thereof becomes Vested and ending on the day prior to the tenth anniversary of the Effective Date of such Award.

          (d) Exercise and Settlement. Upon exercise thereof and subject to payment or other satisfaction of all related withholding obligations in accordance with Section 15(b) hereof, Stock Appreciation Rights (and, in the case of Tandem SARs, the related Options) shall be settled by payment or delivery, in cash, Shares or any combination thereof, as determined by the Committee, of an aggregate amount equal to:

          the product of

(A) the excess of the Market Value of a Share on the date of exercise over the Subscription Price or Base Price for a Share under the applicable Stock Appreciation Right,

          multiplied by

(B) the number of Stock Appreciation Rights exercised.

     Any cash payment in settlement of a Stock Appreciation Right shall be payable in Canadian dollars, if made with respect to a Canadian Award, and in United States dollars, if made with respect to a U.S. Award. To the extent any portion of Stock Appreciation Rights are settled in Shares, such settlement shall be made by delivery of the greatest number of Shares having a Market Value on the date of exercise equal to the amount so settled.

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     Section 8. Restricted Stock Units and Performance Stock Units

          (a) General. The Committee may from time to time grant one or more Awards of Restricted Stock Units and/or Performance Stock Units to key employees of the Company on such terms and conditions, consistent with the Plan, as the Committee shall determine.

          (b) Vesting Terms. Restricted Stock Units and/or Performance Stock Units shall become Vested at such times, in such installments and subject to such terms and conditions consistent with Section 5(b) hereof as may be determined by the Committee and set forth in the applicable instrument of grant, provided that the conditions to Vesting of Restricted Stock Units shall be based on the Participant’s continued employment, without regard to the satisfaction of any Performance Criteria, and the conditions to Vesting of Performance Stock Units shall be based on the satisfaction of Performance Criteria either alone or in addition to any other Vesting conditions as may be determined by the Committee consistent with Section 5(b) hereof.

          (c) Settlement. Unless deferral of payment in settlement of Restricted Stock Units and/or Performance Stock Units is permitted or required under the terms of the Award thereof, Restricted Stock Units and Performance Stock Units shall be settled upon or as soon as reasonably practicable following the Vesting thereof, subject to payment or other satisfaction of all related withholding obligations in accordance with Section 15(b) hereof. Settlement shall be made in cash, Shares or any combination thereof, as determined by the Committee. Settlement of Restricted Stock Units and/or Performance Stock Units in Shares shall be made by delivery of one Share for each such Restricted Stock Unit or Performance Stock Unit then being settled. Settlement of Restricted Stock Units or Performance Stock Units in cash shall be made by payment of an aggregate amount equal to:

          the product of

(A) the Market Value of a Share on the applicable settlement date specified by the Committee,

          multiplied by

(B) the number of Restricted Stock Units or Performance Stock Units then being settled.

     Any cash payment in settlement of Restricted Stock Units or Performance Stock Units shall be payable in Canadian dollars, if made with respect to a Canadian Award, and in United States dollars, if made with respect to a U.S. Award.

     Notwithstanding any of the foregoing, any payments made as a result of a separation from service (as defined in Section 409A of the Code) to an individual who qualifies as a “specified employee” as defined under Section 409A of the Code in the settlement of Restricted Stock Units or Performance Stock Units that are subject to Section 409A of the Code will not be made before the date that is six months after the date of separation from service or, if earlier, the date of the individual’s death.

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          (d) Dividend Equivalents. The terms of an Award of Restricted Stock Units or Performance Stock Units may include provision for the accrual of dividend equivalent amounts with respect to cash dividends paid in the ordinary course to shareholders in respect of outstanding Shares. If the Committee determines that dividend equivalent amounts will be accrued in respect of Restricted Stock Units or Performance Stock Units subject to an Award, if and when cash dividends are paid with respect to Shares (other than any extraordinary dividend) to shareholders of record as of a record date occurring during the period from the Effective Date of the applicable Award to the date of settlement thereof, a number of additional Restricted Stock Units or Performance Stock Units, as the case may be, shall be granted to the holder of such Award equal to the greatest number of whole Shares having a Market Value, as of the payment date for such dividend, equal to the product of (i) the cash dividend paid with respect to a Share multiplied by (ii) the number of Restricted Stock Units or Performance Stock Units subject to such Award as of the record date for the dividend. The additional Restricted Stock Units or Performance Stock Units granted to a Participant shall be subject to the same terms and conditions, including Vesting and settlement terms, as the corresponding Restricted Stock Units or Performance Stock Units, as the case may be. The Committee may provide that, in lieu of the grant of additional Restricted Stock Units or Performance Stock Units, dividend equivalent amounts may be accrued and paid in cash, at the time and on the same terms and conditions, of settlement of the corresponding Restricted Stock Units or Performance Stock Units, as the case may be.

     Section 9. Consequences of Termination.

          (a) Options/Stock Appreciation Rights. Unless otherwise determined by the Committee, outstanding Options and/or Stock Appreciation Rights held by a Participant (or the executors or administrators of such Participant’s estate, any person or persons who acquire the right to exercise Options and/or Stock Appreciation Rights directly from the Participant by bequest or inheritance or any other permitted transferee of the Participant under Section 10 hereof) as of the Participant’s Date of Termination shall be subject to the following clauses (i) though (iv), as applicable; except that, (x) in all events, the period for exercise of Options and/or Stock Appreciation Rights shall end no later than the last day of the maximum term thereof established under Section 6(e) or 7(c)(iii), as applicable, and (y) unless otherwise determined by the Committee, any outstanding Options and/or Stock Appreciation Rights that are subject to Vesting conditions based in whole or part upon the satisfaction of Performance Criteria and that have not become Vested prior to the Participant’s Date of Termination shall immediately be cancelled and forfeited and all rights and interests of the holder or beneficiary thereof shall thereupon terminate, in all cases, for no consideration.

          (i) In the case of a Participant’s Termination due to Retirement, (x) those of the Participant’s outstanding Options and/or Stock Appreciation Rights that have become Vested prior to the Participant’s Date of Termination shall continue to be exercisable during the period ending on the three (3) year anniversary of the Date of Termination and (y) those of the Participant’s outstanding Options and/or Stock Appreciation Rights that have not become Vested prior to the Participant’s Date of Termination shall become Vested and exercisable as of the later of the Date of Termination and the one year anniversary of the Effective Date of the Award thereof and thereafter shall continue to be

16

exercisable for the remaining portion of the period ending on the three (3) year anniversary of the Date of Termination.

          (ii) In the case of a Participant’s Termination due to death, (x) those of the Participant’s outstanding Options and/or Stock Appreciation Rights that have not become Vested prior to the Participant’s Date of Termination shall become Vested and exercisable as of the Date of Termination and (y) all of the Participant’s outstanding Options and/or Stock Appreciation Rights shall continue to be exercisable during the period ending on the two (2) year anniversary of the Date of Termination.

          (iii) In the case of a Participant’s Termination due to the Participant’s resignation or the Participant’s Termination Without Cause, (x) those of the Participant’s outstanding Options and/or Stock Appreciation Rights that have not become Vested prior to the Date of Termination shall be forfeited and cancelled as of such Date of Termination and (y) those of the Participant’s outstanding Options and/or Stock Appreciation Rights that have become Vested prior to the Participant’s Date of Termination shall continue to be exercisable during the ninety (90) day period following such Date of Termination.

          (iv) In the case of a Participant’s Termination due to a Qualifying Termination Without Cause, (x) those of the Participant’s outstanding Options and/or Stock Appreciation Rights that have become Vested prior to the Participant’s Date of Termination shall continue to be exercisable during the Participant’s Extension Period and during the period ending ninety (90) days immediately following the last day of such Extension Period, (y) those of the Participant’s outstanding Options and/or Stock Appreciation Rights that have not become Vested prior to the Participant’s Date of Termination but would have become Vested during the Participant’s Extension Period subject only to the Participant’s continued employment with the Company for all or a portion of the Extension Period shall remain outstanding and shall become Vested and exercisable as of the scheduled date for Vesting as if the Participant’s employment had continued during the Extension Period, and thereafter shall continue to be exercisable during the remaining portion of the Extension Period and the ninety (90) day period immediately following the last day of the Extension Period and (z) subject to the proviso below, all other outstanding Options and/or Stock Appreciation Rights shall be forfeited and cancelled as of the Participant’s Date of Termination; provided however that if a Participant subject to this clause (iv) would have qualified for Retirement had his or her employment with the Company continued for all or a portion of the Participant’s Extension Period, the rights of such Participant (or any permitted transferee thereof) with respect to his or her outstanding Options and/or Stock Appreciation Rights shall be governed by clause (i) of this Section 9 effective as of the date the Participant would have first qualified for Retirement.

Options and/or Stock Appreciation Rights that are not exercised prior to the expiration of the exercise period following a Participant’s Date of Termination permitted under this Section 9(a) shall automatically expire on the last day of such period.

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          (b) Restricted Stock Units and Performance Stock Units. Unless otherwise determined by the Committee, upon a Participant’s Termination for any reason, any then outstanding Restricted Stock Units and Performance Stock Units that have not become Vested prior to the Participant’s Date of Termination shall immediately be cancelled and forfeited and all rights and interests in respect of such Restricted Stock Units and Performance Stock Units of the Participant (and the executors and administrators of such Participant’s estate, any person or persons acquiring any interest directly from the Participant by bequest or inheritance and any other permitted transferee of the Participant under Section 10 hereof)) shall thereupon terminate, in all cases, for no consideration.

          (c) Termination for Cause. Notwithstanding any other provision hereof or in any instrument of grant, in the case of a Participant’s Termination for Cause, any and all then outstanding Awards granted to the Participant, whether or not Vested, shall be immediately forfeited and cancelled, without any consideration therefore, as of the commencement of the day that notice of such termination is given.

     Section 10. Transferability.

          (a) Transfer Restrictions. Unless otherwise provided in the instrument of grant evidencing an Award, no Award, and no rights or interests therein, shall or may be assigned, transferred, sold, exchanged, encumbered, pledged or otherwise hypothecated or disposed of by a Participant other than by testamentary disposition by the Participant or the laws of intestate succession. No such interest shall be subject to execution, attachment or similar legal process including without limitation seizure for the payment of the Participant’s debts, judgments, alimony or separate maintenance.

          (b) Permitted Transfers. Notwithstanding the foregoing, the Committee may provide in the applicable instrument of grant that an Award is transferable or assignable (a) in the case of a transfer without the payment of any consideration, to the Participant’s spouse, former spouse, children, stepchildren, grandchildren, parent, stepparent, grandparent, sibling, persons having one of the foregoing types of relationship with a Participant due to adoption and any entity in which these persons (or the Participant) own more than fifty percent of the voting interests and (b) to an entity in which more than fifty percent of the voting interests are owned by these persons (or the Participant) in exchange for an interest in that entity. Following any such transfer or assignment, the Award shall remain subject to substantially the same terms applicable to the Award while held by the Participant to whom it was granted, as modified as the Committee shall determine appropriate, and, as a condition to such transfer, the transferee shall execute an agreement agreeing to be bound by such terms. An Incentive Stock Option may be transferred or assigned only to the extent consistent with Section 422 of the Code. Any purported assignment or transfer that does not qualify under this Section 10 shall be void and unenforceable against the Company.

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     Section 11. Alteration of Share Capital.

          (a) No Corporate Action Restriction. The existence of the Plan and/or the Awards granted hereunder shall not limit, affect or restrict in any way the right or power of the Board of Directors or the shareholders of Nortel to make or authorize (i) any adjustment, recapitalization, reorganization or other change in the capital structure or business of any Company, (ii) any merger, consolidation, amalgamation or change in ownership of any Company, (iii) any issue of bonds, debentures, capital, preferred or prior preference stocks ahead of or affecting the capital stock of any Company or the rights thereof, (iv) any dissolution or liquidation of any Company, (v) any sale or transfer of all or any part of the assets or business of any Company or (vi) any other corporate act or proceeding with respect to any Company. No Participant or any other Person shall have any claim against any member of the Board of Directors or the Committee, or any Company or any employees, officers or agents of any Company as a result of any such action.

          (b) Recapitalization Adjustment.

          (i) In the event that (A) a dividend shall be declared upon the Shares or other securities of Nortel payable in Shares or other securities of Nortel, (B) the outstanding Shares shall be changed into or exchanged for a different number or kind of shares or other securities of Nortel or of another corporation or entity, whether through an arrangement, plan of arrangement, amalgamation or other similar statutory procedure or a share recapitalization, subdivision, consolidation or otherwise, (C) there shall be any change, other than those specified in (A) or (B) above, in the number or kind of outstanding Shares or of any shares or other securities into which such Shares shall have been changed or for which they shall have been exchanged, or (D) there shall be a distribution of assets or shares to shareholders of Nortel out of the ordinary course of business, then, if the Board of Directors shall determine that an adjustment in the number or kind of Shares theretofore authorized but not yet covered by Awards, in the number or kind of Shares theretofore subject to outstanding Awards, in the Subscription Price or Base Price applicable under any outstanding Awards, in the number or kind of Shares generally available for Awards or available in any calendar year under the Plan and/or such other adjustment as may be appropriate should be made, such adjustment shall be made by the Board of Directors and shall be effective and binding for all purposes.

          (ii) In the case of any such adjustment as provided for in this Section, the Subscription Price or Base Price shall be adjusted appropriately to reflect such adjustment. No adjustment provided for in this Section shall require Nortel to issue a fractional Share and the total adjustment with respect to each outstanding Award shall be limited accordingly.

          (iii) Any adjustment made pursuant to this Section with respect to the terms of an Option shall require a similar modification with respect to the terms of the Stock Appreciation Right to which such Option relates.

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          (iv) With respect to Awards subject to Section 409A of the Code, any adjustments under this Section 11(b) shall conform to the requirements of Section 409A of the Code.

     Section 12. Amendment and Termination From time to time the Board of Directors may, in addition to its powers under the Plan, add to or amend any of the provisions of the Plan or suspend or terminate the Plan or amend the terms of any then outstanding Award granted under the Plan or its related instrument of grant; provided, however, that (a) no such amendment, suspension or termination shall be made at any time to the extent such action would materially adversely affect the existing rights of a Participant with respect to any then outstanding Award without his or her consent in writing, provided that the Committee may amend the terms of, or suspend or terminate, an Award of Incentive Stock Options at any time after the Effective Date of such Award in a manner that results or could result in the failure of such Options to qualify or continue to qualify as “incentive stock options” within the meaning of Section 422 of the Code without the consent of the Participant, and (b) Nortel shall obtain shareholder approval of any amendment that the Company determines constitutes a material amendment within the meaning of the applicable rules of the NYSE (other than an amendment pursuant to the adjustment provisions of Section 11), and such amendment shall become effective only upon shareholder approval thereof, including, without limitation, any such amendment that would:

          (i) increase the maximum number of Shares for which Awards may be granted under the Plan;

          (ii) reduce the Subscription Price or Base Price at which Options or Stock Appreciation Rights may be granted below the price provided for in Sections 6(c) and 7(c);

          (iii) reduce the Subscription Price or Base Price of outstanding Options or Stock Appreciation Rights;

          (iv) extend the term of the Plan or the maximum term of Options granted under the Plan;

          (v) change the class of persons eligible for grants of Awards under the Plan;

          (vi) increase the limits in Section 4;or

          (vii) a change which would permit all or any portion of an Award to become Vested prior to the first anniversary of the Effective Date of such Award, other than in the event of the death of a Participant.

     Section 13. Regulatory Approval. Notwithstanding anything herein to the contrary, Nortel shall not be obligated to cause to be issued any Shares or cause to be issued and delivered any certificates evidencing Shares pursuant to the Plan, unless and until Nortel is advised by its legal counsel that the issuance and delivery of the Shares and such Share certificates is in compliance with all applicable laws, regulations, rules, orders of governmental or regulatory authorities in Canada, the United States and any other applicable jurisdiction, and the requirements of the Stock Exchanges. Nortel shall in no event be obligated to take any action in

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order to cause the issuance or delivery of Shares or such certificates to comply with any such laws, regulations, rules, orders or requirements. The Committee may require, as a condition of the issuance and delivery of such Shares or certificates and in order to ensure compliance with such laws, regulations, rules, orders and requirements, that the Participant, or any permitted transferee of the Participant under Section 9 hereof or, after his or her death, the Participant’s estate, as described in Section 9 hereof, make such covenants, agreements and representations as the Committee deems necessary or desirable.

     Section 14. No Additional Rights. No Person shall have any claim or right to be granted Awards under the Plan, and the grant of any Awards under the Plan shall not be construed as giving a Participant any right to continue in the employment of the Company or affect the right of the Company to terminate the employment of a Participant. Unless otherwise determined by the Committee, neither any period of notice, if any, nor any payment in lieu thereof, upon Termination shall be considered as extending the period of employment for the purposes of the Plan.

     Section 15. Miscellaneous Provisions.

          (a) Shareholder Rights. A Participant shall not have the right or be entitled to exercise any voting rights, receive any dividends or have or be entitled to any other rights as a shareholder in respect of Shares subject to an Award unless and until such Shares have been paid for in full and issued and certificates therefor have been issued to the Participant. A Participant entitled to Shares as a result of the exercise of an Option or Stock Appreciation Right or the settlement of a Restricted Stock Unit or a Performance Stock Unit shall not be deemed for any purpose to be, or have any such rights as a shareholder of Nortel by virtue of such exercise or settlement, except to the extent a Share certificate is issued therefor and then only from the date such certificate is issued. No adjustment shall be made for dividends or distributions or other rights for which the record date is prior to the date such share certificate is issued, other than adjustments for dividend equivalent amounts to the extent provided under Section 8(d) hereof.

          (b) Withholding. The Company may withhold from any amount payable to a Participant, either under this Plan or otherwise, such amount as may be necessary so as to ensure that the Company will be able to comply with the applicable provisions of any federal, provincial, state or local law relating to the withholding of tax or that any other required deductions are paid or otherwise satisfied, including withholding of the amount, if any, includable in the income of a Participant. The Company shall also have the right in its discretion to satisfy any such liability for withholding or other required deduction amounts by retaining or acquiring any Shares, or retaining any amount payable, which would otherwise be issued or delivered, provided or paid to a Participant hereunder. The Company may require a Participant, as a condition to exercise of an Option or Stock Appreciation Right or the settlement of a Restricted Stock Unit or a Performance Stock Unit, to pay or reimburse the Company for any such withholding or other required deduction amounts related to the exercise of Options or Stock Appreciation Rights or settlement of Restricted Stock Units or Performance Stock Units.

          (c) Funding. With respect to any Awards subject to the provisions of Section 409A of the Code, such Awards shall not be funded by setting aside (directly or indirectly) assets

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in a trust or other arrangement located outside the United States or through a means that would result in a violation of Section 409A of the Code.

          (d) Governing Law. The Plan, all instruments of grant evidencing Awards granted hereunder and any other agreements or other documents relating to the Plan shall be interpreted and construed in accordance with the laws of the Province of Ontario, except to the extent the terms of the Plan or of any supplement or appendix to the Plan expressly provides for application of the laws of another jurisdiction. The Committee may provide that any dispute as to any Award shall be presented and determined in such forum as the Committee may specify, including through binding arbitration. Any reference in the Plan, in any instrument of grant evidencing Awards granted hereunder or in any other agreement or document relating to the Plan to a provision of law or to a rule or regulation shall be deemed to include any successor law, rule or regulation of similar effect or applicability.

          (e) Compliance with Laws of Other Jurisdictions. Awards may be granted to Participants who are citizens or residents of a jurisdiction other than Canada or the United States on such terms and conditions different from those under the Plan as may be determined by the Committee to be necessary or advisable to achieve the purposes of the Plan while also complying with applicable local laws, customs and tax practices, including any such terms and conditions as may be set forth in any supplement or appendix to the Plan intended to govern the terms of any such Award. In no event shall the eligibility, grant, exercise or settlement of an Award constitute a term of employment, or entitlement with respect to employment, of any employee.

     Section 16. Effective Date and Term of Plan.

          (a) Effective Date. The Plan, and any amendments to the Plan, shall become effective upon its or their adoption by the Board of Directors, subject to approval by the shareholders of Nortel at the next annual meeting of shareholders of Nortel or any adjournment thereof, if required. If the shareholders do not approve the Plan, or any amendments to the Plan requiring shareholder approval, the Plan or such amendments shall not be effective, and any and all actions taken prior thereto, including the making of any Awards subject to such approval being obtained, shall be null and void or shall, if necessary, be deemed to have been fully rescinded.

          (b) Termination. The Plan shall terminate on the date determined by the Board of Directors pursuant to Section 12 hereof and no Awards may become effective under the Plan after the date of termination, but such termination shall not affect any Awards that became effective pursuant to the Plan prior to such termination. No Awards may be made after the tenth anniversary of the effective date of the Plan.

** The Plan was originally adopted effective April 27, 2005 and was subsequently amended on (i) November 6, 2006, effective on December 1, 2006 being the effective date of the consolidation of all of the issued and outstanding common shares of Nortel based on the consolidation ratio of 1 post-consolidation share for every 10 pre-consolidation shares and (ii) on January 18, 2008 to reflect amendments necessary to comply with Section 409A of the Code and certain other miscellaneous amendments.

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EX-10.74

Exhibit 10.74

CONFIDENTIAL-SPECIAL HANDLING

October 4, 2007

To: David Drinkwater

From Mike Zafirovski

Subject: Special Bonus

Dear David:

In recognition of your appointment as Chief Financial Officer for the period from May 1, 2007 through November 11, 2007, I am pleased to inform you that the Compensation and Human Resources Committee has approved a special bonus of CDN$100,000 for you.

This bonus will be paid to you in the first quarter of 2008 at the same time as the bonus payment under Nortel Networks Limited Annual Incentive Plan (AIP Plan). If no 2007 bonus payment is made under the AIP Plan, this bonus will be paid on or before March 28, 2008.

I want to personally thank you for your continued leadership to both the Finance and Legal organizations.

Sincerely,

 

/s/ Mike Zafirovski  

Mike Zafirovski 

President and Chief Executive Officer 

Mike Zafirovski
President and Chief Executive Officer
Nortel
195 The West Mall, Toronto, ON M9C 5K1 T 905-863-1101 mikez@nortel.com

EX-10.75

Exhibit 10.75

July 5, 2006

Nortel Networks Corporation
Nortel Networks Inc.
8200 Dixie Road, Suite 100
Brampton, Ontario, L6T 5P6
Canada

Re: Pay-Off Letter for Nortel Networks Inc.

Ladies and Gentlemen:

     Reference is hereby made to the credit agreement dated as of February 14, 2006 (as amended, restated, modified or supplemented from time to time, the (“Credit Agreement”) among Nortel Networks Inc. (“Borrower”), the Lenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent (the “Agent”), J.P. Morgan Securities Inc. and Citigroup Global Markets Inc., as joint lead arrangers, Citicorp USA, Inc. as syndication agent, Royal Bank of Canada, as documentation agent and Export Development Canada, as managing agent. Terms used in that pay-off letter (this “Pay-Off Letter”) but not defined herein have the meanings assigned to such terms in the Credit Agreement.

     Borrower has advised the Lenders that is intends to prepay all amounts outstanding under the Credit Agreement and terminate its obligations under the Credit Agreement and the other Loan Documents, which will result in the release of the Liens granted to the Collateral Agent on the Collateral pursuant to the Security Documents under the terms of such Security Documents.

     The total amount necessary to pay, on the date hereof, the outstanding indebtedness and all other liabilities (other than (i) liabilities that by the terms of the Loan Documents survive the repayment of the Loans and (ii) any reimbursement obligations referred to in the following paragraph) owing by Borrower under the Credit Agreement and the Loans (such indebtedness and other liabilities, the “Liabilities”) is calculated as follows:

     (a)  The aggregate outstanding principal amount of the Tranche A Loans as of the date hereof is $850,000,000, plus

     (b)  The aggregate amount of accrued and unpaid interest on the Tranche A Loans as of the date hereof is $1,044,791.67, plus

     (c)  The aggregate outstanding principal amount of the Tranche B Loans as of the date hereof is $450,000,000, plus

     (d)  The aggregate amount of accrued and unpaid interest on the Tranche B Loans as of the date hereof is $646,875, plus

     (e)  The aggregate amount of accrued and unpaid legal fees, as of the date hereof, of Cahill Gordon & Reindel LLP (“Cahill”), counsel to the Agent, with respect to the Credit Agreement is $246,317.96, an invoice for which has been presented to the Borrower, plus

     (f)  The aggregate amount of accrual and unpaid work in progress, and unpaid legal fees, as of the date hereof, of Blake, Cassels & Graydon LLP (“Blakes”), Canadian counsel to the Agent, with respect to the Credit Agreement, is Cdn. $43,933.75, an invoice for which has been presented to the Borrower.

The sum of the foregoing clauses (a) through (f) is USD$1,301,937,984.63, and Cdn.$43,933.75, which, taken together, are referred to herein as the “Pay-Off Amount”.

     The Borrower acknowledges and agrees that its obligations and liabilities under the Credit Agreement and the other Loan Documents shall be reinstated with full force and effect, if at any time on or after the payment of the Pay-Off Amount, all or any portion of the Pay-Off Amount paid in connection herewith is voided or rescinded or must otherwise be returned to the Borrower upon the Borrower’s insolvency, bankruptcy or reorganization or otherwise, all as though such payment had not been made.

     Except as set forth below, payment of the Pay-Off Amount shall be made pursuant to Section 2.11(b) of the Credit Agreement, no later than 12:00 p.m., noon (New York City time), on July 5, 2006, by the Borrower to the Agent by wire transfer of immediately available funds in U.S. dollars to the following account:

JP Morgan Chase Bank, N.A.
ABA #021000021
Account No. #304631736
Account Name: Nortel
Attn: Maryann Bui

     All amounts owed to Cahill should be made to Cahill by a wire transfer of immediately available funds directed as follows:

Cahill Gordon & Reindel LLP
c/o HSBC Bank
100 Maiden Lane
New York, New York 10005
Account Name: Cahill Gordon & Reindel LLP
Account No.: 015-70965-5
ABA No.: 021001088
Reference: 57310.672

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     All amounts owed to Blakes should be made to Blakes by a wire transfer of immediately available funds directed as follows:

Blake, Cassels & Graydon LLP
Canadian Imperial Bank of Commerce
Main Branch, Commerce Court West
Toronto, Ontario M5L 1A2
Transit No. 00002
Swiftcode: CIBCCATT
Beneficiary: Blake Cassels & Graydon LLP, in Trust
Account No. 000021602314
Reference: FPA55795/24

     The Agent hereby certifies and confirms to Borrower that upon payment of the Pay-off Amount in the manner set forth above by no later than 12:00 p.m., noon (New York City time), on July 5, 2006, (i) the Liabilities shall be repaid in full, (ii) the Collateral Agent’s security interest in and liens on all the Collateral shall be automatically terminated and released, (iii) the Agent will execute and deliver to the Borrower any and all documents as Borrower reasonably requests in order to evidence or otherwise give public notice of such terminations and releases (provided that any and all reasonable expenses relating to the preparation, execution, delivery and/or recordation of any such terminations and releases (and all documentation with respect thereto) shall be paid by Borrower), (iv) the Agent will promptly return to the Borrower any and all certificated securities, instruments and other possessory collateral (together with any related stock powers or instruments of endorsement) previously delivered to the Agent by any Credit Party, and (v) the Credit Parties shall be fully authorized to file any and all Uniform Commercial Code financing termination statements, PPSA termination statements, Requisitions d’inscription d’une radiation volontaire, intellectual property filings and any other termination statements or other filings as it may reasonably deem necessary in order to terminate any Uniform Commercial Code financing statements, PPSA registrations, Quebec Register of Personal and Moveable Real Rights registrations, intellectual property filings or other filings or registrations on record in any jurisdiction that identify the Collateral Agent as the secured party and any Credit Party as the debtor under the Security Documents.

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     This Pay-Off Letter is hereby delivered by the undersigned on the date first written above.

JPMORGAN CHASE BANK, N.A.
By:	/s/  David M. Mallen
	Name:	David M. Mallen
	Title:	Vice President

Acknowledged and agreed
as of the date first written above

NORTEL NETWORKS INC.

By:	/s/  Allen K. Stout
	Name:	Allen K. Stout
	Title:	Vice President, Finance

Pay-Off Letter

EX-10.76

Exhibit 10.76

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK

SECURITIES AND EXCHANGE COMMISSION,
Plaintiff,
v.	Civil Action No.
NORTEL NETWORKS CORPORATION and NORTEL NETWORKS LIMITED,
Defendants.

CONSENT OF DEFENDANTS NORTEL NETWORKS
CORPORATION AND NORTEL NETWORKS LIMITED

     1. Defendants Nortel Networks Corporation and Nortel Networks Limited (“Defendants”) waive service of a summons and the Complaint in this action, enter a general appearance, and admit the Court’s jurisdiction over Defendants and over the subject matter of this action.

     2. Without admitting or denying the allegations of the complaint (except as to personal and subject matter jurisdiction, which Defendants admit), Defendants hereby consent to the entry of the Final Judgment as to Defendants Nortel Networks Corporation and Nortel Networks Limited in the form attached hereto (the “Final Judgment”) and incorporated by reference herein, which, among other things:

(a) permanently restrains and enjoins Defendants from violation of Section 17(a) of the Securities Act of 1933 (the “Securities Act”) [15 U.S.C. §77q(a)], Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the Securities Exchange Act of 1934 (the “Exchange Act”) [15 U.S.C. §§

	78j(b), 78m(a), 78m(b)(2)(A), 78m(b)(2)(B) and 78m(b)(5)], and Exchange Act Rules 10b-5, 12b-20, 13a-1 and 13a-13 [17 C.F.R. §§ 240.10b-5, 240.12b-20, 240.13a-1 and 240.13a-13];
(b)	orders Defendant Nortel Networks Corporation to pay disgorgement in the amount of $1;
(c)	orders Defendant Nortel Networks Corporation to pay a civil penalty in the amount of $35,000,000 under Section 20(d) of the Securities Act and Section 21(d)(3) of the Exchange Act [15 U.S.C. 15 §§ 77t(d) and 78u(d)(3)]; and
(d)	orders Defendants to perform the undertakings identified in Paragraph 5 below.

     3. Defendants acknowledge that the civil penalty paid pursuant to the Final Judgment may be distributed pursuant to the Fair Fund provisions of Section 308(a) of the Sarbanes-Oxley Act of 2002. Defendant Nortel Networks Corporation agrees to pay all costs incurred under any plan resulting from the distribution or payment of the $35,000,001 disgorgement and civil penalty, and there will be no deduction from the Fund for those costs. Regardless of whether any such Fair Fund distribution is made, the civil penalty shall be treated as a penalty paid to the government for all purposes, including all tax purposes. To preserve the deterrent effect of the civil penalty, Defendants agree that they shall not, after offset or reduction or any award of compensatory damages in any Related Investor Action based on Defendant Nortel Networks Corporation’s payment of disgorgement in this action, argue that they are entitled to, nor shall they further benefit by, offset or reduction of such compensatory damages award by the amount of any part of Defendant Nortel Networks Corporation’s payment of a civil

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penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a Penalty Offset, Defendants agree that they shall, within 30 days after entry of a final order granting the Penalty Offset, notify the Commission’s counsel in this action, and Defendant Nortel Networks Corporation shall pay the amount of the Penalty Offset to the United States Treasury or to a Fair Fund, as the Commission directs. Such a payment shall not be deemed an additional civil penalty and shall not be deemed to change the amount of the civil penalty imposed in this action. For purposes of this paragraph, a “Related Investor Action” means a private damages action brought against Nortel Networks Corporation and/or Nortel Networks Limited by or on behalf of one or more investors based on substantially the same facts as alleged in the complaint in this action.

     4. Defendants agree that they shall not seek or accept, directly or indirectly, reimbursement or indemnification from any source, including but not limited to payment made pursuant to any insurance policy, with regard to any civil penalty amounts that Defendant Nortel Networks Corporation pays pursuant to the Final Judgment, regardless of whether such penalty amounts or any part thereof are added to a distribution fund or otherwise used for the benefit of investors. Defendants further agree that they shall not claim, assert, or apply for a tax deduction or tax credit with regard to any federal, state, or local tax for any penalty amounts that Defendant Nortel Networks Corporation pays pursuant to the Final Judgment, regardless of whether such penalty amounts or any part thereof are added to a distribution fund or otherwise used for the benefit of investors.

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     5. Defendants agree to and shall perform the following undertakings:

          (a) Within 15 days of the entry of the Final Judgment, Defendants shall provide the Commission’s counsel in this action with a written report detailing what steps need to be taken, as of the close of Defendants’ second quarter 2007, to complete the remediation plan attached as Exhibit A to this Consent. Defendants shall continue to provide such reports to the Commission’s counsel in this action, within 30 days of the filing of each Form 10-K or 10-Q, until the remediation plan has been fully implemented.

          (b) Within 15 days of the entry of the Final Judgment, Defendants shall provide the Commission’s counsel in this action with a written report detailing what steps need to be taken, as of the close of Defendants’ second quarter 2007, to address and/or resolve the material weakness identified in Defendants’ 2006 Forms 10-K. Defendants shall continue to provide such reports to the Commission’s counsel in this action, within 30 days of the filing of each Form 10-K or 10-Q, until Defendants conclude that the material weakness identified in Defendants’ 2006 Forms 10-K has been resolved and no longer exists and Defendants’ outside auditor (currently KPMG LLP) attests or agrees with management’s conclusion that the material weakness no longer exists.

          (c) Upon reasonable notice, Defendants agree to make their representatives available (including, where appropriate, their Chief Financial Officer, their Controller, their Chief Compliance Officer and/or the Chair of Defendants’ Audit Committees) to meet with the Commission’s staff to discuss and answer any questions raised by any of the reports.

          (d) Defendants’ Chief Compliance Officer shall provide the Commission’s counsel in this action with written certifications of completion 45 days after Defendants have: (i) completed the implementation of the remediation plan attached as Exhibit A to this Consent; and

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(ii) concluded that the material weakness identified in their 2006 Forms 10-K has been resolved and no longer exists, and that conclusion has been attested or agreed to by Defendants’ outside auditor. The certifications shall be countersigned by Defendants’ Chief Executive Officer. The certifications shall provide written evidence of completion in the form of a narrative supported by exhibits sufficient to establish completion. The Commission staff may request such further evidence of completion as is reasonable, and Defendants agree to provide such evidence.

     6. Defendants waive the entry of findings of fact and conclusions of law pursuant to Rule 52 of the Federal Rules of Civil Procedure.

     7. Defendants waive the right, if any, to a jury trial and to appeal from the entry of the Final Judgment.

     8. Defendants enter into this Consent voluntarily and represent that no threats, offers, promises, or inducements of any kind have been made by the Commission or any member, officer, employee, agent, or representative of the Commission to induce Defendants to enter into this Consent.

     9. Defendants agree that this Consent shall be incorporated into the Final Judgement with the same force and effect as if fully set forth therein.

     10. Defendants will not oppose the enforcement of the Final Judgment on the ground, if any exists, that it fails to comply with Rule 65(d) of the Federal Rules of Civil Procedure, and hereby waives any objection based thereon.

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     11. Defendants waive service of the Final Judgment and agree that entry of the Final Judgment by the Court and filing with the Clerk of the Court will constitute notice to Defendants of its terms and conditions. Defendants further agree to provide counsel for the Commission, within thirty days after the Final Judgment is filed with the Clerk of the Court, with an affidavit or declaration stating that Defendants have received and read a copy of the Final Judgment.

     12. Consistent with 17 C.F.R. § 202.5(f), this Consent resolves only the claims asserted against Defendants in this civil proceeding. Defendants acknowledge that no promise or representation has been made by the Commission or any member, officer, employee, agent, or representative of the Commission with regard to any criminal liability that may have arisen or may arise from the facts underlying this action or immunity from any such criminal liability. Defendants waive any claim of Double Jeopardy based upon the settlement of this proceeding, including the imposition of any remedy or civil penalty herein. Defendants further acknowledge that the Court’s entry of a permanent injunction may have collateral consequences under federal or state law and the rules and regulations of self-regulatory organizations, licensing boards, and other regulatory organizations. Such collateral consequences include, but are not limited to, a statutory disqualification with respect to membership or participation in, or association with a member of, a self-regulatory organization. This statutory disqualification has consequences that are separate from any sanction imposed in an administrative proceeding. In addition, in any disciplinary proceeding before the Commission based on the entry of the injunction in this action, Defendants understand that they shall not be permitted to contest the factual allegations of the Complaint in this action.

     13. Defendants understand and agree to comply with the Commission’s policy “not to permit a defendant or respondent to consent to a judgment or order that imposes a sanction while

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denying the allegation in the complaint or order for proceedings.” 17 C.F.R. § 202.5. In compliance with this policy, Defendants agree: (i) not to take any action or to make or permit to be made any public statement denying, directly or indirectly, any allegation in the complaint or creating the impression that the complaint is without factual basis; and (ii) that upon the filing of this Consent, Defendants hereby withdraw any papers filed in this action to the extent that they deny any allegation in the complaint. If Defendants breach this agreement, the Commission may petition the Court to vacate the Final Judgment and restore this action to its active docket. Nothing in this paragraph affects Defendants’: (i) testimonial obligations; or (ii) right to take legal or factual positions in litigation or other legal proceedings in which the Commission is not a party.

     14. Defendants hereby waive any rights under the Equal Access to Justice Act, the Small Business Regulatory Enforcement Fairness Act of 1996, or any other provision of law to seek from the United States, or any agency, or any official of the United States acting in his or her official capacity, directly or indirectly, reimbursement of attorney’s fees or other fees, expenses, or costs expended by Defendants to defend against this action. For these purposes, Defendants agree that they are not the prevailing parties in this action since the parties have reached a good faith settlement.

     15. Defendants agree that they will cooperate fully with the Commission in any and all investigations, litigation, or other proceedings relating to or arising from the subject matter of the complaint in this action and the Commission’s investigation of the facts and circumstances which resulted in the Commission’s bringing this action and complaint, by undertaking to do the following:

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          (a) Appear and be interviewed by (and use their best efforts to encourage their executives, officers, directors, and/or employees to appear and be interviewed by) the Commission’s staff at such times and places as the staff requests upon reasonable notice;

          (b) Agree to accept service by regular or overnight mail or electronic transmission (including email) any notices or subpoenas issued by the Commission for documents or testimony at depositions, hearings, or trials, or in connection with any related investigation by Commission staff;

          (c) Appoint Defendants’ undersigned attorney as agent to receive service of such notices and subpoenas;

          (d) Agree, with respect to such notices and subpoenas, to waive the territorial limits on service contained in Rule 45 of the Federal Rules of Civil Procedure and any applicable local rules, and in the Hague Convention on Taking of evidence Abroad in Civil or Commercial Matters; and

          (f) Consent to personal jurisdiction over Defendants in any United States District Court for purposes of enforcing any such subpoena.

     16. Defendants agree that the Commission may present the Final Judgment to the Court for signature and entry without further notice.

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     17. Defendants agree that this Court shall retain jurisdiction over this matter for the purpose of enforcing the terms of the Final Judgment.

	NORTEL NETWORKS CORPORATION and NORTEL NETWORKS LIMITED
Dated: September 28, 2007	By:	/s/ Gordon A. Davies
	[Name, Title and Address]		Gordon A. Davies,
			Chief Legal Officer and Corporate Secretary
			195 The West Mall, Toronto Ontario M9C 5K1

On September 28, 2007, Gordon A. Davies, a person known to me, personally appeared before me and acknowledged executing the foregoing Consent with full authority to do so on behalf of Nortel Networks Corporation and Nortel Networks Limited as its Chief Legal Officer and Corporate Secretary.

/s/  Anna Ventresca 

Notary Public 

Commission expires: N/A 

Approved as to form:

/s/ William R. McLucas
William R. McLucas
Wilmer Cutler Pickering
   Hale and Dorr LLP
1875 Pennsylvania Avenue, NW
Washington, DC 20006
Counsel for Defendants
   Nortel Networks Corporation and
   Nortel Networks Limited

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EXHIBIT A

REMEDIATION PLAN REFERRED TO IN PARAGRAPH 5(a) OF THE CONSENT OF NORTEL NETWORKS CORPORATION AND NORTEL NETWORKS LIMITED

People:
(i)	New executive management has communicated, in multiple ways, consistently and frequently, its expectation to Nortel employees that all employees will be held accountable for their conduct. In connection with the inappropriate provisioning and revenue recognition practices identified by the independent inquiries, appropriate disciplinary sanctions were developed by management based on the individual conduct and knowledge of employees that were involved in these practices. After evaluating individual conduct and knowledge, management has taken further employee disciplinary actions in 2006.
(ii)	Recognizing that Nortel needed to “turn a new page” with new operational leaders, in November 2005 the four individuals who headed the business units in 2002 and 2003 and the individual who headed Nortel’s Global Operations unit during the same period left the Company.
(iii)	Management has made significant progress in upgrading the skill sets and experience of the Company’s Finance organization, both through external hires and through remedial and on-going training of current employees, and including the establishment of a new senior Finance management team and appointment of a Controller with extensive experience in U.S. GAAP. From January 1, 2004 to December 31, 2006, the Company filled 673 positions with external hires (476 in Control and 197 in Financial Planning & Analysis (“FP&A”)), of which 168 (142 in Control and 26 in FP&A) are certified public accountants. In 2005, the CFO reviewed the job requirements of every vacancy and new position in the Finance organization to ensure that candidates would have the appropriate skill sets, experience and professional designations for each such position. Starting in 2006, Finance leaders are required to review and approve the job requirements of every vacancy and new position. As well, the Finance organization has supplemented its capacity by retaining outside experts on a temporary or project basis.

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(iv) Through its Global Finance Training and Communications (“GFTC”) group, which reports to the Assistant Controller, Nortel has developed and offered (on a mandatory basis for targeted employee populations in 2006) remedial and ongoing training in areas of financial accounting that were found to be problematic in the restatements, including provisions and accruals, revenue recognition, foreign exchange and finance ethics. These training programs include the following:

– since 2004, a one-day mandatory training program for Finance employees related to provisioning focusing on SFAS No. 5 and expense accruals under U.S. GAAP. As of December 31, 2006, 1,373 Finance employees (representing approximately 89% of the 1,539 Finance personnel designated to take this mandatory training) have successfully completed the course.

– implemented in 2006, a supplemental training session on provisions accounting based on learnings and specific case study examples from the Company’s restatements which is mandatory for all Control employees with authority to approve manual journal entry transactions. As of December 31, 2006, 75 Control employees (representing approximately 70% of the 107 Control employees designated to take this mandatory training) have successfully completed the course.

– a comprehensive three-day revenue recognition training program, which was made mandatory in 2006 for a targeted population of FP&A and Control employees. As of December 31, 2006, 568 FP&A and Control employees (representing approximately 87% of the 650 FP&A and Control employees designated to take this mandatory training) have successfully completed the course.

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Nortel retained third party resources and expertise as it considered appropriate to assist with the development and delivery of these training programs. In addition, an Executive Global Finance Training Council has been established to oversee and set priorities for training for Finance employees in accordance with a new Finance training policy, which details minimum annual training requirements (by level) for all Finance employees. In addition to direct feedback from the Executive Finance Training Council (including direction from the Assistant Controller who is a member of the Council), the GFTC group identifies on-going training needs through a variety of sources such as: (i) recommendations from the Company’s technical accounting function relative to queries received and errors identified on a consistent basis as well as emerging issues and new accounting guidance; and (ii) informal feedback from other Finance leaders. As new accounting guidance, pronouncements and directives on U.S. GAAP are promulgated, the Controller and other members of the GFTC group now provide quarterly training and updates, by webcast. Further, Nortel is in the process of developing a Competency and Training Model to define the necessary skill sets for key positions and accompanying training requirements in FP&A and Control. In this connection, Nortel surveyed its Finance leadership team to identify core skills required to successfully perform certain Finance roles and compared the identified skills with its existing training curriculum. The Competency and Training Model will be used to facilitate employee development, evaluate candidates for vacant positions, provide guidelines on mandatory and elective training requirements, and further develop and refine the GFTC group’s priorities.

(v)

The Company initially created separate Offices of Ethics and Compliance, and in November 2006 combined these functions, which include Internal Audit and Security, under the responsibility of the Chief Compliance Officer. Nortel believes that this new structure will allow for more effective coordination of ethics and compliance activities and is in line with best practices of large multi-national corporations. The Board has appointed, in its assessment, a highly qualified individual to oversee these four key functions. Nortel believes that it has put in place a compliance infrastructure as well as a consistent approach to corporate discipline for breaches of its policies, procedures and Code of Conduct. The Chief Compliance Officer reports directly to the CEO and the Audit

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Committee and only the Audit Committee can hire or fire the Chief Compliance Officer. The Ethics function is responsible for recommending changes to and interpretations of Nortel’s Code of Conduct, improving employee awareness of the Code of Conduct, monitoring annual employee certification of the Code of Conduct, devising and conducting Code-specific and other training for employees, and intake of employee allegations of Code violations. An updated Code of Conduct was issued by the Ethics function in September 2006, and mandatory training in the new Code’s provisions and employee certification, where permitted by applicable law, has been implemented. The Compliance function has the following responsibilities: reviewing planned activities and transactions to ensure compliance with Company policies and applicable laws; reviewing policies and procedures to ensure compliance with applicable laws; developing employee compliance training; conducting compliance audits of the business units and regions in which compliance risks are assessed; reviewing findings of compliance audits; monitoring resolution of calls to Nortel’s ethics “hot line” to ensure complaints are promptly and thoroughly investigated and resolved; identifying risk areas that require additional training; and identifying potential areas of compliance risk, based on the internal and external environments, and developing corrective action plans. Nortel has enhanced its anti-fraud management process, including by establishing an anti-fraud policy and guidance on how to communicate knowledge of potential fraud under the Code of Conduct. To ensure that Nortel’s ethics hot line will remain an effective and active means for employees to report concerns, Nortel continues to promote the use and effectiveness of the hot line to employees. A highly visible icon was developed and is placed on Nortel’s Global Web home page to provide employees with a daily visible reminder of the hot line. As a further means of reminding employees of the hot line, posters advertising the hot line were prepared and placed at major facilities in 2006. A follow-up poster campaign is contemplated for 2007. Nortel’s ethics certification process requires employees to certify annually that they have read, understood and will comply with the Code of Conduct. The certification process is typically used as another opportunity to remind employees

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of the requirement to report actual and suspected violations, and of the existence of the hot line. In addition, many of Nortel’s general training sessions are used to reinforce the existence and importance of the hot line. Specialized training for Finance employees has also been used to remind Finance employees of the hot line. In late 2006, Nortel launched an on-line scenario-based ethics training module. The training is mandatory for all employees. This training module reinforces the existence and importance of the hot line. One scenario in particular involves using the hot line to deal with employee concerns. Nortel issues a quarterly Compliance newsletter which also publicizes the hot line. In addition to the above, communications from leaders have from time to time reminded employees of the hot line and encouraged them to use it. To demonstrate the effectiveness of the hot line, Nortel is implementing measures to communicate generally to employees, to the extent permitted by privacy laws and Nortel’s privacy policy, the results of disciplinary actions arising from reported allegations. This is intended to ensure employees understand that allegations are taken seriously, will be investigated and dealt with thoroughly, and employees are treated similarly. The primary vehicle for communicating such matters to employees will be the quarterly Compliance newsletter. In addition, employees reporting concerns are advised of the results of investigations, to the extent permitted by privacy laws and Nortel’s privacy policy. The quarterly Compliance newsletter, as well as Nortel’s annual ethics certification process, will serve as a continuing means to communicate the importance of compliance with Nortel’s Code of Conduct.

(vi)

The Company created a Compliance Committee in February 2006 to oversee the effectiveness of Nortel’s compliance program, policies, procedures and the Code of Conduct and provide direction to the Office of Compliance. The Compliance Committee is now composed of Nortel’s CEO, CFO, Chief Compliance Officer, Chief Legal Officer, and Executive Vice President, Corporate Operations, in order to ensure coordination of legal, compliance, ethics and risk management programs and activities throughout the Company. The Compliance Committee’s oversight responsibilities include: ensuring that the Company’s compliance program is well

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	communicated; regularly reviewing policies, procedures and other internal systems to ensure they are in compliance with the Code of Conduct, relevant laws, and are in alignment with the overall compliance program; receiving reports on calls to the ethics hot line and other sources to verify that each complaint is properly reviewed, investigated and resolved; monitoring on-going compliance training and awareness programs; reviewing the results of compliance audits and actions taken to address audit findings and recommendations; reviewing all reports of fraud or related unethical activities to ensure they are brought to the attention of the Audit Committee and investigated as appropriate; reviewing the compliance risk assessments and proactive actions to address the risks; and monitoring of discipline imposed by the Company to ensure that discipline is fair and consistent across the Company. The Chief Compliance Officer reports on the activities of the Compliance Committee to the Audit Committee on a quarterly basis, including the volume of usage of the ethics hot line and any areas identified by the Compliance function as requiring additional training or potential areas of compliance risk.
Processes:
(vii)	In response to the finding of the Independent Review that historically Nortel Finance employees responsible for meeting EBT targets, rather than employees in the Control organization, had authority to record and release provisions, the Board directed management to end that practice by separating the FP&A and Control functions and by vesting the Control organization with sole responsibility for accounting decisions and accounting entries. With the exception of joint venture entities and Nortel Government Solutions, Inc. (a variable interest entity for accounting purposes, which is subject to a “hold separate” arrangement to comply with U.S. national industrial security requirements), the Company implemented the new segregated structure over a six-month period, from September 2005 to February 2006, and the FP&A functions are now separate from the Control function, and the Control organization has had the exclusive authority to approve and post general ledger entries commencing with the closing of Nortel’s books and records for the quarter ended March 31, 2006, other than tax-related entries which are approved by the Company’s Tax organization.

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(viii)

Management has restructured the Company’s technical accounting function into two groups to provide technical accounting guidance: one for revenue recognition issues, called Global Revenue Governance (“GRG”), and one for all other accounting issues, called Global Technical Accounting (“GTA”). Both GRG and GTA report directly to the Assistant Controller. The mandate of GRG is to render binding guidance on the accounting for revenue recognition for contracts and contract amendments and to serve as the final authority on revenue recognition decisions. The mandate of GTA is to make binding decisions for the accounting on all technical non-revenue issues, including issues related to provisions. Important issues arising out of either GRG or GTA are required to be raised with the Controller for resolution. Internal finance process guidelines (“FPGs”) have been adopted to formalize the authority of GRG and GTA. These FPGs contain matrices with dollar thresholds above which the Assistant Controller or the Controller, as applicable, must approve the accounting guidance. New directors of both GRG and GTA, with appropriate technical qualifications, have been recruited from outside Nortel. Management has also increased the staffing of GRG and GTA and upgraded the technical qualifications of their respective personnel.

(ix)

Since April 2004, responsibility for drafting and revising Nortel’s internal accounting and finance process guidelines has been vested in the Global Finance Policies & Process (“GFPP”) group, led by a certified public accountant. The mandate of GFPP is to keep Nortel’s internal accounting guidance current and in compliance with U.S. GAAP, to make that guidance “user-friendly” with “real life” examples of practical applications where appropriate and to identify changes to U.S. GAAP and update Nortel’s accounting policies accordingly. As at December 31, 2006, GFPP has developed twenty-five accounting guidelines on various topics, including accruals, provisions, revenue recognition and foreign exchange. In addition, GFPP has developed thirteen FPGs on various topics,

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including manual journal entries, balance sheet reviews, revenue recognition documentation and account reconciliations. Further, as at March 31, 2007, GFPP has reviewed and, where necessary, revised all key internal accounting guidelines and included “real life” examples of practical applications of such guidance where it was considered appropriate. Monthly newsletters to Finance employees are issued on new policies, accounting guidelines and FPGs.

(x)

As part of its remediation efforts and to compensate for the material weaknesses in Nortel’s internal control over financial reporting, management undertook intensive efforts in 2005 and early 2006 to improve its internal controls and procedures relating to revenue recognition. These efforts included, among other measures, an extensive collection and review by GRG of documentation on customer contracts, comprising approximately 75% of 2005 revenues, to determine whether Nortel’s revenue recognition accounting policies were being applied properly and consistently across the organization. As a result of these and other efforts, various revenue recognition errors were identified and adjusted in the 2005 Annual Report, as described in more detail in paragraphs 45-47 of the Settlement Agreement. In the first quarter of 2006, Nortel issued a new FPG requiring a review by GRG for all new contracts and amendments to existing contracts having a total revenue impact in excess of $5 million. The review is required to be completed by the time of the Audit Committee meeting in respect of the quarter in which the delivery of product, or performance of services or fulfillment of other contractual obligations, occurs. Additional measures have been implemented in an effort to ensure that all contracts are submitted to GRG for binding accounting guidance. For example, GRG is now provided with a quarterly confirmation of all contracts, and incremental approval from the Controller is required for amendments or superseding contracts that change the timing of revenue recognition. Both GRG and Nortel’s Contract Assurance group, which group’s mandate is to accurately execute on the application of U.S. GAAP and GRG guidance issued pursuant to the new FPG, now report to the Assistant Controller.

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(xi)

Starting in 2004, Nortel’s management has implemented significant controls around manual journal entries (“MJEs”) in an effort to reduce their susceptibility to human error and manipulation. These controls include the development and adoption of FPGs that specify the supporting documentation that must be provided before a MJE can be approved and posted to the general ledger, the authority level of individuals authorized to approve MJEs and the segregation of duties among the initiator, approver and poster of the MJE. MJEs and all supporting documentation are required to be loaded into a database to facilitate both record retention and access by all appropriate parties, such as the compliance reviewers, Internal Audit and the external auditors. Also, Finance employees received training on the application of the new MJE controls and their requirements. With the exception of joint venture entities and Nortel Government Solutions, Inc., incremental compliance reviews were commenced in 2005 for all MJEs over a specified dollar value for compliance with the new documentation requirements for MJEs. In 2006, Nortel established the Global MJE Center of Excellence to implement a consistent global compliance review process and global compliance reporting under the leadership of the Company’s U.S. Regional Controller, who reports directly to the Controller. Under this global incremental review process, any MJE that fails to satisfy one or more of the substantive requirements (such as failure to attach complete, relevant supporting documents or appropriate approvals) is required to be rejected by the reviewer and returned to the initiator of the MJE for remediation and subsequent validation by the reviewer.

(xii)

Beginning with the filing of Nortel’s 2004 Form 10-K, management adopted and began to implement a series of improved internal controls on the preparation and review of post closing adjustments (“PCAs”). Because all PCAs are MJEs submitted after the initial consolidation of the financial statements, management determined to apply all of the control requirements governing MJEs to PCAs. To eliminate the potential for inappropriate corporate initiation of PCAs, PCAs must be initiated in the regions or business units, with the exception of normal and appropriate corporate tax, consolidation and elimination entries. Once approved, proposed PCAs are subject to the same incremental compliance review as MJEs.

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	All of the materials relevant to each PCA are loaded into a database that is accessible by all appropriate parties including Nortel’s external auditors. The Director of Corporate Consolidations (the “Director”) is required to review each proposed PCA for materiality and, based on that analysis, recommend to the Controller the proposed PCAs that should be posted and those that should be placed on a list of unadjusted differences. The Director and Controller then review those recommendations and the underlying accounting rationale, and the Controller must determine which adjustments to record. Any unadjusted differences remaining at the end of this process which have been deemed to be immaterial are required to be reported to the Audit Committee. Management’s goal is to remediate the gaps in controls which do not operate effectively to prevent late entries. During 2006, the Corporate Consolidations group commenced a process to review the root causes of PCAs. This process has evolved and, starting in 2007, Corporate Consolidations, with assistance from the SOX group, collects information on each PCA to determine the root cause of the PCA, in particular what (if any) internal control deficiency gave rise to the PCA, and a remediation plan is developed and implemented by the initiator of the PCA, as appropriate, with specific timelines for completion of the required remedial activity. Corporate Consolidations is responsible for tracking the remedial actions against plans and timelines.
(xiii)	Commencing in 2005, the Controller initiated weekly meetings, held throughout the quarter-close process until the financial statements are filed, in which technical accounting issues are discussed, monitored and resolved. These meetings are attended by the Controller, Assistant Controller, senior managers in GRG and GTA and other employees, depending on the issues under discussion, and the external auditors.
(xiv)	Starting in 2005, Nortel’s management has implemented an enhanced balance sheet review (“BSR”) process in recognition that timely and thorough BSRs provide an effective internal control. With the exception of tax (which is the responsibility of the Company’s Tax organization), all balance sheet line items

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have been assigned an “owner” within the Control organization who is responsible for overseeing all transactional activity within the account, including determining the propriety of all such activity in compliance with U.S. GAAP and for preparing documentation about the account prior to each quarterly BSR. The BSR process includes a comprehensive evaluation of activity within key liability accounts and a specific focus on the review of provisioning activity as well as cumulative foreign exchange translation adjustment movements. The process also includes a review of restructuring charges, the monitoring of which has been centralized within the Control function. Each balance sheet account owner must explain the activity in the account and identify the triggering events for all substantial activity. The controls and review processes around current liability balances and related releases have been enhanced through the development of improved continuity schedules (which track quarterly changes in accrued liabilities accounts) with narrative explanation for substantial additions and identification of the triggering events for all substantial releases. The continuity schedules are required to be reviewed and analyzed by Nortel’s Corporate Consolidations group and presented by the Controller to the Audit Committee quarterly.

(xv)

Beginning in 2005, management enhanced the reviews conducted during its internal quarterly profit and loss meetings (“Results Calls”) to provide a forum for discussion of the results for each of its business units separately and the results on a consolidated basis, and discuss the variance analysis to budget, to the prior period and to the prior year. In the Results Calls for each business unit, the finance leader of the business unit, FP&A and the applicable Regional Controller are called upon to identify and discuss significant technical accounting issues, including revenue recognition items, that arose during the period that could affect the results for that period. Where technical accounting issues remain outstanding, they are discussed during the Results Calls as well as during the Controller’s accounting issues meetings. To the extent technical accounting issues have not been resolved at the time of the Results Calls, such issues are to be resolved and reported on during the BSRs, which occur prior to the filing of the financial statements.

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(xvi)	Recognizing that timely and accurate account reconciliations are a priority, Nortel’s new management has implemented a policy requiring timely account reconciliations to confirm the accuracy and completeness of ending balances in each general ledger account. In the third quarter of 2006, management issued a new global FPG on the account reconciliation process to outline the requirements for account reconciliations, and which requires quarterly reconciliation of each balance sheet account. Certain accounts determined to be high risk, based on an account risk analysis by the appropriate Control leader, must be reconciled prior to the Audit Committee meeting for the applicable reporting period. Reports are prepared to monitor the timely preparation and review of reconciliations.
(xvii)	With respect to foreign exchange, in 2005, Nortel’s management enhanced its annual functional currency study which ultimately determines the methodology for translating subsidiary foreign currency results to U.S. dollar reporting currency. The enhanced study improved the analysis and documentation to substantiate the functional currency determination, and is reviewed and approved by the appropriate regional Controller and corporate Controller. In addition, in 2005, management implemented a quarterly process to analyze inter-company balances for compliance with SFAS No. 52, paragraph 20. The Treasury function reviews inter-company loans quarterly and inter-company trade positions annually to assist Control in determining if any balances are of a long-term investment, whereby foreign exchange would be recorded in equity. Systems have been automated to support the translation of a significant operating subsidiary’s foreign currency results to U.S. dollar reporting.
(xviii)	The Audit Committee has established new priorities for the Internal Audit organization relating to the evaluation of risk exposures for financial reporting, and management has amended the charter for the internal audit function to include oversight responsibilities for the adequacy and effectiveness of financial reporting controls. The Audit Committee realigned the reporting responsibilities for Internal Audit and directed senior management to strengthen significantly the internal audit function in the first quarter of 2004, and also hired a new Internal

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	Audit leader as of July 2005. The head of Internal Audit reports directly to the CEO and the Audit Committee to ensure that Internal Audit is independent from the activities it reviews. Beginning in 2005, Internal Audit work plans include a focus on accounting for transactions, financial reporting and financial reporting controls. Starting in 2006, the Internal Audit work plan includes an assessment of the adequacy and degree of compliance with financial, operational and system controls.
(xix)	As part of the efforts to increase awareness of and timely and appropriate remediation of internal controls, in the second quarter of 2006 Nortel established a SOX Steering Committee comprised of senior management from Finance, Legal, Human Resources, Internal Audit, Information Services and Operations. Regular reporting of remediation activities to senior management, including an escalation process to address areas where remediation planned dates were not met was implemented. The SOX vice president regularly meets with Internal Audit and reports to the Audit Committee on the ongoing development, implementation and progress of remedial measures. Training is provided for teams that document and administered controls to improve control design competencies. In addition, the SOX team implemented a revised SOX 404 scope, a comprehensive methodology redesign and changes to the documentation requirements to greatly improve the quality of the SOX 404 documentation. As a result of all of these activities, there was significant remediation in 2006 of internal control deficiencies identified in various business processes that impact the Company’s internal control over financial reporting.
(xx)	The Board has implemented processes for Nortel’s management to provide quarterly assessments in respect of the overall quality and transparency of the Company’s financial reporting and suggestions for improvements in its form and content, which Nortel’s external auditors have the opportunity to review and comment on. These processes include quarterly reporting by the CFO and Controller to the Board and by the SOX vice president and head of Internal Audit to the Audit Committee. Further, the presidents of the business units are expected

A - 14

	to take full responsibility for the respective financial results of their businesses and, commencing in 2007, will be required, on a quarterly rotation basis, to provide presentations to the Board with the Vice President, Finance on the financial results of their respective business units. In addition, the Audit Committee will periodically hold separate executive sessions with the Vice President, Finance to discuss financial issues specific to each business unit.
Technology:
(xxi)	In an effort to improve Nortel’s financial reporting systems and capabilities, to simplify its multiple accounting systems, and to reduce the number of MJEs, Nortel retained an outside consulting firm to advise on the appropriateness of implementing a Systems, Application and Products (“SAP”) platform worldwide that would consolidate many of Nortel’s systems into a single integrated financial software system. Based on that advice, Nortel adopted the SAP platform to integrate its processes and systems, and undertook an assessment of existing financial systems and processes to determine the most effective implementation of standard SAP software. The finance design and build for the initial scope of the SAP system, including general ledger functionality, was completed by the end of August 2006, and these processes are planned to be tested and fully deployed during 2007. Once fully deployed, Nortel estimates that MJEs will be reduced by approximately 30%. Processes for additional activities will be built upon this first phase of functionality. Process design for these additional activities has been completed and management expects that the build, testing and deployment will be completed by the third quarter of 2007.
(xxii)	The Company’s general computing control (“GCC”) environment has been strengthened with the implementation of new and enhanced controls. During 2006, numerous control deficiencies were remediated across applications, interfaces and the infrastructure impacting internal control over financial reporting. In particular, Nortel established a standard user management process that facilitates the approval of all user access requests and the removal of accounts when appropriate and implemented regular reviews of business user accounts.

A - 15

Further, Nortel implemented standard and enhanced controls regarding change management to applications to ensure the changes are appropriately tested, approved and implemented. In addition, enhanced security protection of data files used to transfer data from one application to another were implemented. Segregation of duties was improved in the GCC environment by restricting the number of operating system administrators with privileged access maintaining an audit trail of software changes that are made to some key information system applications.

EX-12

Exhibit 12

NORTEL NETWORKS LIMITED
Computation of Ratio of Earnings to Fixed Charges and Dividends

	Years ended December 31,
	2007		2006			2005			2004			2003
(millions of U.S. Dollars)						As restated			As restated			As restated
Earnings (loss) from operations before minority interest, equity in net loss of associated companies and income taxes		387		42			(120	)		(163	)		301
Add:
Fixed charges		396		276			191			181			212
Amortization of capitalized interest		—		—			—			—			(2	)
Pre-tax losses of equity investees for which charges arising from guarantees are included in fixed charges		—		—			—			—			—
Distributed income from equity investees		—		—			—			—			—
Subtract:
Interest capitalized		5		—			—			—			—
Preference security dividend requirements of consolidated subsidiaries		—		—			—			—			—
Minority interest in pre-tax income of subsidiaries without fixed charges		73		21			12			11			24
Income (loss) as adjusted		705		297			59			7			487
Fixed charges:
Interest expense
- Long-term debt		257		187			124			108			95
- Other		24		22			6			8			26
1/3 of rental expense on operating leases deemed to be representative of interest expense		109		65			58			59			86
Preference security dividend requirements of consolidated subsidiaries		—		—			—			—			—
Amortized premiums, discounts and capitalized expenses related to indebtedness		6		2			3			6			5
Fixed charges		396		276			191			181			212
Nortel Networks Limited preference security dividend		70		63			43			37			42
Combined fixed charges and preference security dividend requirements		466		339			234			218			254
Ratio of earnings to fixed charges		1.8		1.1			*			*			2.3
Ratio of earnings to combined fixed charges and preference security dividend requirements		1.5		*	*		*	*		*	*		1.9

*	The earnings of Nortel Networks Limited were inadequate to cover fixed charges for the years ended December 31, 2005 and 2004 by $132 and $174, respectively
**	The earnings of Nortel Networks Limited were inadequate to cover combined fixed charges and preference security dividend requirements for the years ended December 31, 2006, 2005 and 2004, by $42, $175 and $211, respectively

EX-14

Exhibit 14

“My expectations are that every officer and employee will commit to the highest standards of business conduct and corporate governance and will act with the utmost integrity.”

Letter from the CEO

As you know, we have set the bar high for all of our activities in remaking Nortel into a great company. One of our key areas of focus is ethics and integrity, and my expectations are that every officer and employee will commit to the highest standards of business conduct and corporate governance and will act with the utmost integrity. You can be assured that every member of the Board, including myself, has made the same commitment.

Without this personal commitment, we won’t reach our full potential as a world-class company. Honesty and integrity must underpin everything we do, and our Code of Business Conduct will help all Nortel employees, officers and directors maintain this commitment.

The Code describes what acting with integrity means at Nortel and how it relates to our core beliefs and leadership. It outlines principles to guide ethical decision making and gives practical answers to many of the ethical questions we face in the course of our work. Often these questions are difficult, and the Code directs us to resources within the company for assistance. Scrupulously and consistently adhering to these guidelines ensures that our customers, employees, suppliers and investors can rely on our integrity and establishes the climate for our long-term success.

Our commitment to the Code will help ensure that leaders in the company “walk the talk” and that together we maintain a culture based on trust and truthfulness. It’s about taking responsibility for all business actions and commitments made in the name of Nortel.

By signing up to the Code, we agree to abide by its guidelines, including all applicable laws and regulations, and all Nortel policies and procedures. In doing so, we commit to report any violation of the Code and to challenge any action that may undermine the principles in this Code and Nortel’s reputation for integrity and honesty.

The Code of Business Conduct, and your commitment to it, is an essential component of our plan for growing Nortel’s future as a profitable, world-class networking and innovation leader.

Mike Zafirovski
President and CEO
Nortel

2

Table of Contents

Introduction to the Code	5
Why Nortel has a Code of Conduct	5
Responsibilities under the Code	5
Reporting Violations or Requesting Advice	6
Violation of a Provision of the Code	7
Limitations to the Code	7
Waivers of the Code	8
Our Commitment to our Customers and to Fair Competition	9
Competition Laws	10
Agreements with Competitors	10
Agreements with Suppliers and Customers	10
Other Sales and Marketing Standards	11
Bribery and Corruption	11
Foreign Bribery and Corrupt Practices	11
Gifts, Entertainment, and Third Party Travel	13
Giving and Receiving Gifts Generally	13
Receiving Gifts and Entertainment from Companies Doing Business or Seeking to Do Business with Nortel	13
Providing Gifts and Entertainment to Government Employees	14
Paid Speaking Engagements	14
Business Travel Involving Third Parties	14
Information about Competitors	15
Quality	16
Selling to the Government	16
Money Laundering and Exchange Control	16
Our Commitment to Our Company	17
Financial Reporting	18
Obligations of All Employees	18
Additional Obligations of All Employees with Financial or Accounting Responsibilities	18
Senior Financial Managers	19
Recording and Reporting Other Types of Information	19
Maintaining Information	19
Conflicts of Interest	20
Avoidance and Disclosure of Conflicts of Interest	20
Interest in Contracts or Transactions	20
Corporate Opportunities	20
Relationships with Other Companies	21
Managerial Relationships with Family Members and Close Personal Friends	22
Receiving Gifts, Entertainment, and Third Party Travel	22
Loans and Guarantees of Indebtedness	22
Conflicts Disclosure Process	22

— Continued

3

Table of Contents — Continued

Use of Company Assets	23
Safeguarding Company Property	23
Use of Nortel Name, Facilities, and Relationships	23
Travel and Living Expenses	23
Computer and Network Use	24
Contractual Commitments	24
Conducting Research	24
Nortel’s Confidential Information	25
Employee Duties Regarding Nortel’s Confidential Information	25
Confidential Information Received from Third Parties	26
Protecting Intellectual Property — Nortel’s and Others’	27
Copyright Protection	27
Inside Information	28
Communications with Media and Speaking on Nortel’s Behalf	29
Responding to Legal Proceedings	30
Our Commitment to Each Other	31
Nortel Forbids Discrimination and Harassment	32
Nortel Promotes Diversity	32
Drugs and Alcohol	33
Workplace Health and Safety	33
Privacy	34
Our Commitment in Doing Business Globally	35
Export Control	36
Customs	37
U.S. Anti-Boycott Act	37
Foreign Bribery and Corrupt Practices	37
Our Commitment to Our Communities	38
Corporate Citizenship	39
Environmental Responsibility	40
Political Involvement	40
Contact Information for Compliance Resources	41
Index	42

4

Code of Business Conduct

Introduction to the Code

Why Nortel has a Code of Conduct

This Code of Business Conduct provides guidance on how we should conduct ourselves as Nortel directors, officers, and employees. It is Nortel’s policy to comply with all applicable laws and regulations. Nortel is also committed to conducting business in an ethical manner and to acting with integrity in dealing with our customers, suppliers, partners, competitors, employees, and other stakeholders. Integrity is one of our core values and underpins everything we do.

Responsibilities under the Code

Every Nortel director, officer, and employee is responsible for:

• Abiding by the Code and Nortel policies and procedures.

• Requesting advice from a manager, Human Resources, the Law Department, Compliance, the Compliance Action Line, or the Compliance Action Web Tool when an ethical issue arises.

• Promptly reporting any known or suspected violations of the Code, laws and regulations, and Nortel policies and procedures or requests that might constitute violations using the reporting procedures set forth in this Code.

• Challenging any business practice or behavior that may undermine the principles in this Code and the integrity of our Company.

• Cooperating in internal investigations about a reported violation.

Managers have additional responsibilities to:

• Create an atmosphere that promotes ethical behavior and encourages employees to ask questions and raise concerns.

• Make sure that employees are aware of the principles contained in the Code.

• Answer employees’ questions about the Code or direct them to an appropriate source for information.

• Demonstrate a commitment to the Code through their words and actions.

• Use reasonable care to prevent and detect violations of the Code.

• Report any compliance risks or Code violations and promptly seek guidance on how to implement appropriate remedial measures.

• Handle all employee reports promptly, confidentially, and in a manner consistent with Company policy.

Q & A:

Q: My manager asked me to do something improper. I told him it would violate the Code, but he persisted. I didn’t do what he asked. Do I have any other responsibilities?

A. Yes, because your manager persisted in his request for you to do something that you believe would violate the Code, you must report the request using the procedures set forth in the Code.

5

Q & A:

Q. As a manager, how do I promote ethical behavior?

A. There are many ways. One is by setting an ethical example by the way you conduct yourself. A second is to invite questions and feedback from employees. A third is that when an ethical issue arises, use it as a teaching opportunity.

Reporting Violations or Requesting Advice

To report known or suspected violations or ethical concerns or request assistance, you have the following options:

1)	Discuss the issue with your manager (unless you are uncomfortable doing so or believe that the issue will not be satisfactorily resolved). Or discuss the issue with Human Resources, the Law Department, Compliance, Corporate Security, or Internal Audit. If however you are uncomfortable with the resolution of the issue, you should report the issue using one of the following options.
2)	Call the confidential Compliance Action Line: ESN 333-3014 or (905) 863-3014 (worldwide); 1-800-683-3503 (North America only) or use the Compliance Action Web Tool. Your identity will not be revealed when you use either of these reporting tools, if you choose. (However, identifying yourself may assist the Company in investigating your report.) You also have the option of reporting financial concerns directly to the Audit Committee of the Board of Directors.
3)	Contact Chief Compliance Officer Bob Bartzokas by telephone (972-684-9530 or ESN 444-9530) or email (rboffice@nortel.com) or send a written communication marked “Private and Confidential — Complaint” to him at Nortel, 2221 Lakeside Boulevard, Richardson, TX 75082. Or you may contact any other member of Compliance. Contact information can be found on page 41.
4)	Contact one of the Compliance representatives in your region as listed on the Corporate Compliance web page under “Contact Us.”
5)	You may also communicate your concerns directly to the Nortel Board of Directors, the Chairman of the Board, or any individual director, including the Chairman of the Audit Committee, by writing to him or her in care of the Corporate Secretary at Nortel headquarters at 195 The West Mall, Toronto, Ontario, Canada M9C 5K1. Mark your envelope “Private and Confidential — Complaint.” All such correspondence will be forwarded to the director to whom your correspondence is addressed.
6)	Members of the Board should consult with the Chairman, the President and Chief Executive Officer, the Chief Financial Officer, the Chief Legal Officer, the Corporate Secretary, or the Chief Compliance Officer.

If you choose to identify yourself when you report a known or suspected violation or ethical concern or otherwise seek guidance, your identity and the information that you provide will be treated confidentially and shared strictly on a ‘need to know’ basis.

6

Investigations

Nortel will investigate all reports of known or suspected wrongdoing and will not permit retaliation against any employee who makes a report in good faith, even if it turns out, after investigation, that there has not been a violation of law or policy.

Retaliation against an employee or other person who in good faith reports known or suspected wrongdoing is grounds for disciplinary action, including possible termination of employment.

Violation of a Provision of the Code

Employees who violate the Code are subject to disciplinary action including possible termination of employment (subject to applicable law). The following are examples of conduct that may result in discipline:

• Violating the Code, Nortel policy or procedure, or applicable law or regulation.

• Requesting or permitting others to violate the Code, Nortel policy or procedure, or applicable law or regulation.

• Assisting another person in violating the Code, Nortel policy or procedure, or applicable law or regulation.

• Failing to promptly report a known or suspected violation of the Code, law or regulation, or Nortel policy or procedure.

• Failing to cooperate fully with Nortel investigations or audits.

• Retaliating against another employee or a third party for reporting a violation or for cooperating with a Nortel investigation.

• For managers and supervisors, failing to use reasonable care to prevent or detect a violation.

Limitations to the Code

The Code addresses only some of the legal and ethical issues that can arise in the course of business. Because no code of conduct can anticipate all such issues, it is also your responsibility to be aware of all Nortel policies and procedures applicable to your job. While such policies and procedures are not part of the Code, they are an important source of additional information. Some of them are provided as links in this Code.

From time to time, there may be revisions to the Code. When this happens, you will receive notice that the Code has been revised and will be responsible for familiarizing yourself with the revised Code. The Code is not contractual in nature and does not confer any rights on individuals.

As a global company, we are sensitive to local customs and requirements, but we must always conduct ourselves in a way that is consistent with the Code. The Code is sometimes more restrictive than applicable laws and regulations, and you are required to abide by the Code even when it imposes requirements that go beyond legal obligations.

Q & A:

Q. How do I know that my reporting through the Compliance Action Line or the Compliance Action Web Tool is really anonymous?

A. The Compliance Action Line and Compliance Action Web Tool are managed by an independent outside vendor, which does not track identifying information and reports it only if you agree to provide it.

Q & A:

Q. I reported an ethics concern about my manager. I know my manager was unhappy with my actions, and a short while later my manager took a couple of accounts away from me with no explanation. What should I do?

A. You should report the matter to Compliance, which will ensure that the issue is investigated and that, if a violation has occurred, appropriate discipline is imposed, which in serious cases could lead to terminating the manager’s employment.

7

Questions to Ask

Some ethical issues are obvious, but many are not. If there is no Company policy that addresses an issue it may help you to analyze the issue by asking yourself the following questions:

• Would the action feel right?

• Would the action be honest in all respects?

• How would the action affect others?

• Would the action embarrass me if it became known to my customers, co-workers, professional colleagues, family, or friends?

• How would I feel seeing my action reported in a newspaper?

• Would additional advice or information help me in resolving this issue?

Of course, you may also seek assistance from one of the resources listed in the Code.

The country in which you work has additional laws or standards that apply to you. In addition, you may be subject to the laws of other countries in which Nortel operates even if you do not work in those countries.

If you are uncertain of the applicable legal requirements or if you believe that you are subject to conflicting legal obligations, you should bring the matter to the attention of the Law Department immediately. If you have questions or are unsure about an ethical or legal matter, you must consult with your manager, Human Resources, the Law Department, Compliance, the Compliance Action Line, the Compliance Action Web Tool, or other appropriate Company resource, as set forth in this Code, for guidance.

Waivers of the Code

The Company will waive application of the provisions of this Code only in rare circumstances based upon a clear showing that such a waiver is in Nortel’s best interests. Waivers of the Code for directors and executive officers may be made only by the Board of Directors as a whole or the Audit Committee of the Board and will be disclosed as required by law or regulation. Any requests for waiver by others must be made to the Ethics Office.

Under certain circumstances, our failure to take action regarding a possible violation within a reasonable period of time may expose Nortel to liability if such incident has not been addressed by the Company and publicly disclosed if required. For this reason it is very important that all incidents be reported to the Ethics Office.

8

Our Commitment to our Customers and to Fair Competition

We always compete vigorously. However, we must take care to avoid any unlawful or unethical conduct; such conduct undermines the trust that our customers place in Nortel, and their trust is the foundation of our success.

• Competition Laws

• Other Sales and Marketing Standards

• Bribery and Corruption

• Gifts, Entertainment, and Third Party Travel

• Information about Competitors

• Quality

• Selling to the Government

• Money Laundering and Exchange Control

9

Competition Laws

Competition laws, also known as antitrust or cartel laws, preserve fair, honest, and vigorous competition. While competition laws in countries differ, they generally prohibit similar conduct.

Agreements with Competitors

Competition laws generally prohibit agreements with competitors that unreasonably restrict competition, such as:

• Price-fixing.

• Dividing or allocating customers, bids, markets, or territories.

• Refusing to sell to particular customers or to buy from particular suppliers.

• Exchanging non-public sales, cost, profit, or price information.

Both express agreements and informal understandings between competitors may
constitute illegal agreements.

It is inevitable that you will meet competitors from time to time, attend the same industry conferences, or participate together in meetings of trade associations or standards organizations. In all contacts with competitors, do not discuss pricing policy, contract terms, sales, costs, profits, product plans, production levels and capacity, or any other confidential information. Because discussions of these subjects with a competitor can be illegal, if a representative of a competitor raises any of them, you should object, stop the discussion, and, if necessary, leave the meeting. You should report immediately to the Law Department any incident involving a ‘prohibited’ subject.

Agreements with Suppliers and Customers

Competition laws generally prohibit agreements with customers to restrict the price at which the customer may resell a product or service to a third party. Similarly, they prohibit agreements with suppliers to restrict the price at which Nortel may resell a product or service.

Nortel may have a number of different relationships with another organization. For example, a customer may be a reseller of Nortel’s products, and a supplier may also be a customer. It is important to understand each of the relationships Nortel has with another organization and to act in a way appropriate to each such relationship.

Competition laws are complex and the penalties for violations — for both companies and individuals — can be severe. If you are not sure how to handle an issue that arises, you must discuss it with your manager, the Law Department, or Compliance. (See also, ‘Other Sales and Marketing Standards.’)

10

Other Sales and Marketing Standards

All sales and promotional efforts must be free from deliberate misrepresentations.
Moreover, it is Nortel’s policy to sell products and services on their own merits
and not to disparage our competitors or their products. Among other things, you
must not:

• Mislead customers or prospective customers regarding Nortel products and services.

• Make false or misleading comments about our competitors or their products and services. Any comparisons to competitors and their products and services must be substantiated, accurate, and not misleading.

• Urge a company to violate a contract it has with a competitor.

(See also, ‘Competition Laws’ and ‘Quality.’)

Maintaining the Trust of Our Customers

We want to build long-term relationships with our customers. Every time we commit to a timetable that is not met or a feature that is not delivered, hard-earned trust may be lost.

We must not make promises to our customers unless we are reasonably confident that we will be able to keep them. This means that each person who provides input to support a contract proposal or other commitment must be reasonably confident that the information that he or she provides is accurate.

If unforeseen circumstances make it impossible to meet a commitment, or if we have made an error, we should let the customer know as soon as practicable.

Bribery and Corruption

Giving or receiving bribes or other corrupt or improper payments, directly or indirectly, is prohibited. Among other things:

• Countries generally prohibit the bribery of their government officials, and it is Nortel policy to comply strictly with all such laws.

• Giving bribes and kickbacks to employees of private businesses and entities, as well as government employees, is prohibited.

• This prohibition applies even if you believe that such conduct is commonplace in a given location or market.

Foreign Bribery and Corrupt Practices

Many countries in which we do business have laws that prohibit the bribery of officials, including officials of other countries. These laws may also prohibit bribery of employees of entities owned or controlled in whole or in part by the government. Violations of these laws can result in significant criminal and civil penalties.

Q & A:

Q. I know it is unlawful to give money to a government official, but can I help arrange a scholarship for her collegebound daughter, or make a contribution to the official’s favorite charity?

A. In either case, you may be seen as providing something of value, and therefore could violate anti-corruption laws. Whenever an issue arises concerning providing gifts or entertainment to a government employee, you must follow the procedures set forth in the Guidelines for Gifts, Entertainment, and Third Party Travel or consult the Law Department.

11

Be Alert about Using Agents and Other Third Parties

Because Nortel may be liable for the actions of third parties — even if we are not aware of their actions — it is essential that we use due care in all our dealings with agents.

• Do not engage as a Nortel agent any individual with a reputation for paying bribes or engaging in other unlawful practices.

• Beware of individuals with family or other relationships that could improperly influence the decision of a customer or government official.

• Beware of a demand for a cash payment prior to an award decision.

• Beware of requests to make payments in countries or to entities not related to the transaction.

• Do not agree to pay a commission that is disproportionate to the services the individual provides.

For example, under the Canadian Corruption of Foreign Public Officials Act and the U.S. Foreign Corrupt Practices Act — both of which apply to all Nortel employees wherever they are located — it is illegal, among other things, to make a payment, directly or indirectly, to a government employee of any country for the purpose of obtaining or keeping business.

These laws have a broad reach. They prohibit:

• Providing anything of value — not just monetary payments — as consideration for an act or omission. For example, gifts and other forms of entertainment could be considered unlawful, as could loans, services, or using one’s influence to benefit the official.

• Improper payments made by representatives, agents, sales consultants, and other third parties on behalf of Nortel, if Nortel has actual knowledge of such conduct or acts with conscious disregard or deliberate ignorance of the impropriety. Thus, when a representative, agent, or sales consultant is retained, a clear record of reasonable due diligence and resolution of any ‘red flags’ is essential to demonstrate compliance with applicable law.

To ensure compliance with these laws, you must not provide money, gifts, entertainment, business travel, or anything else of value to government employees or employees of government-owned entities, unless permitted under the Guidelines for Gifts, Entertainment, and Third Party Travel, which generally require prior written approval. If you have any questions in this area, contact the Law Department. (See also, ‘Financial Reporting,’ ‘Gifts, Entertainment, and Third Party Travel,’ ‘Selling to the Government,’ ‘Conflicts of Interest,’ and ‘Political Involvement.’)

Canadian and U.S. law also impose significant civil and criminal penalties for creating false financial records. Our policy requiring accurate financial records is addressed on page 18 of this Code.

Related Policies and Procedures:

200.09 — Anti-Corruption

209.01 — Appointment of Representatives, Agents and Consultants to Facilitate Sales

Anti-corruption laws can be very complex, and for this reason Nortel has established a more detailed policy, including a specific procedure applicable to the appointment, termination, and approval of representatives, agents, and sales consultants which can be accessed at the link above. You are responsible for being familiar with and following this policy if you sell to or otherwise deal with government bodies (including government-owned entities), manage employees with such responsibilities, or work in a related finance or accounting function.

12

Gifts, Entertainment, and Third Party Travel

Business gifts and entertainment are courtesies designed to build understanding and goodwill among people in a business relationship, and in some cultures they play a very important role. Problems arise when they compromise — or even appear to compromise — the recipient’s ability to make objective and fair business decisions or when they are contrary to applicable laws. Directly or indirectly offering or receiving any gift or entertainment that might be perceived to improperly influence a business interaction violates our commitment to maintaining objectivity and transparency in our relationships. Similar issues can arise in the context of business travel involving other companies, provided to or by Nortel employees.

All gifts, entertainment, and business travel provided to or by third parties must be moderate and reasonable and comply with the Guidelines for Gifts, Entertainment, and Third Party Travel.

They must also:

• Comply with applicable law and the policies of the employer of the other party;

• Contribute to the business relationship and be consistent with business goals; and

• Not be of such a nature that they could embarrass Nortel if they were publicly disclosed. “Adult entertainment,” for instance, is always inappropriate.

These rules may not be circumvented by giving or receiving gifts, entertainment, or third party travel through family, friends, or others.

Giving and Receiving Gifts Generally

Certain types of gifts may not be given to or received from persons doing business or seeking to do business with Nortel:

• Cash, gift certificates, or any other cash equivalent

• Stock, stock options, or “friends and family stock”

• Discounts not generally available to the public

As a general rule, business entertainment is a more appropriate way to build relationships than an exchange of gifts.

Receiving Gifts and Entertainment from Companies Doing or Seeking to do Business with Nortel

Receiving gifts and entertainment from suppliers and others doing business or seeking to do business with Nortel may pose special problems as it may create unfairness or the appearance of unfairness in how we procure goods and services. Gifts and entertainment provided by companies doing or seeking to do business with Nortel must comply with the Guidelines for Gifts, Entertainment, and Third Party Travel, including the requirement that the receipt of certain items must be reported.

Q & A:

Q. May I invite an employee from a telecommunications company to a company golf outing?

A. A telecommunications company could be owned by the government, so you must first check with the Law Department.

13

Q & A:

Q. Nortel sometimes selects distributors or “channels” to sell our products to customers. Do our policies and procedures on gifts, entertainment, and business travel apply to dealings with or through them?

A. Yes. They apply to all companies with whom we are doing business (as well as those with whom we are seeking to do business or who are seeking to do business with us.)

Receiving gifts in special circumstances

In rare circumstances, the business custom in a country may effectively require the exchange of gifts of a greater value than generally allowed under the Guidelines for Gifts, Entertainment, and Third Party Travel. This is particularly true when you are visiting a country as a guest and the gift is offered as part of a public occasion and refusal would cause embarrassment to the person offering it. In that case, the best practice is usually to accept the gift on behalf of Nortel, report it to your manager or the Ethics Office, and turn the gift over to the Company for appropriate handling.

Providing Gifts and Entertainment to Government Employees

The laws in many jurisdictions strictly limit or prohibit providing gifts and entertainment to government employees, including the employees of enterprises owned in whole or in part by the government. Do not provide gifts and entertainment to government employees unless permitted under the Guidelines for Gifts, Entertainment, and Third Party Travel, which generally require prior written approval.

Paid Speaking Engagements

If you are authorized to speak or appear at an outside event on Nortel’s behalf, it is considered part of your job. Therefore you should not request or receive a fee without prior permission in writing from the Ethics Office. (See also, ‘Communications with Media and Speaking on Nortel’s Behalf.’)

Business Travel Involving Third Parties

In some circumstances, Nortel may need to provide business travel to third parties (such as customers). Similarly, other companies — such as suppliers — may offer business travel to Nortel employees. In all such circumstances, you may provide or receive travel-related expenses (such as transportation, lodging, and meals) only if and to the extent that such expenses are reasonably related to a legitimate Nortel business purpose and you comply with Guidelines for Gifts, Entertainment, and Third Party Travel. In addition, providing travel to employees of government agencies or government-owned entities could raise issues under the anti-corruption laws. In all such cases, you must follow the Guidelines for Gifts, Entertainment, and Third Party Travel, which require prior written authorization.

(See also, ‘Bribery and Corruption,’ ‘Selling to the Government,’ and ‘Conflicts of Interest.’)

14

Information about Competitors

It is often useful to obtain information about competitors. There are, however, restrictions on receiving and using such information, particularly confidential information.

Competitors’ Information

Competitive information is essential to enabling Nortel to compete effectively in the telecommunications market. However, we must not violate Company policies when obtaining, accepting, and retaining competitive information that may contain confidential information of another company.

This means, first, that you may receive certain information about other companies only if you have received appropriate assurance that the person providing the information is authorized to do so. Our policy regarding confidential information provides comprehensive rules regarding what types of assurance is required for specified types of information. You must be familiar with and strictly abide by this policy. Second, under no circumstances should an employee use improper means to obtain competitors’ information, whether or not that information is confidential, such as by posing as an employee of a fictitious company or using other false pretenses, or by participating in a competitor’s telephone conference call without the competitor’s approval with full knowledge of the person’s identity and actual employer. Also prohibited is bribery or unauthorized access to a computer network. Such conduct could subject both Nortel and the individual involved to serious legal consequences. Third, we should not hire competitors’ employees for the purpose of obtaining confidential information. (See also, ‘Nortel’s Confidential Information.’)

Related Policies and Procedures:

200.17 — Collection and Retention of Competitive Information

252.05 — Review and Approval of the Collection and Retention of Competitive Information

400.02 — Handling Unsolicited Disclosure of Ideas from Other Parties

401.03 — Handling Unsolicited Disclosure of Ideas from Other Parties

712.04 — Supply Agreements

Confidential Information: What Is It?

It is any information that is not public, including financial, business, and technical information, no matter what form it is in, when reasonable measures have been taken by the owner to keep the information secret, and the information is actually or potentially valuable from not being publicly known. Laws regarding the protection of confidential information vary by jurisdiction and depend on a variety of factors. If an issue arises concerning the possible receipt of a competitor’s confidential information, it is your responsibility to promptly seek guidance from the Law Department.

Confidential Information of Competitors:

When Do Issues Arise?

Such issues may arise:

• When we work with Nortel employees who previously worked for competitors.

• When customers, suppliers, channels, or others offer to provide price or other information about competitors.

• During competitive bids.

• In a merger, acquisition, or divesture context.

In addition to creating significant legal risks, inappropriate actions regarding confidential information of competitors and other parties could have serious business consequences. For instance, our independent efforts to develop an idea, technology, or product could be stalled by a claim of misappropriation.

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Employees Should Watch Out for Transactions...

• That are inconsistent with your knowledge of the customer’s business and its sources of funds.

• Involving transfers of funds to or from third parties, or countries, unrelated to the transaction.

• Involving locations identified as bank secrecy havens.

• Involving complex or multiple transactions in unusual patterns that have no clear purpose.

• Involving a shell bank incorporated in a place where it has no physical presence and that is unaffiliated with a regulated financial group or unlicensed money remitters or currency exchangers or nonbank financial intermediaries.

• Where the customer seeks to avoid record-keeping or reporting requirements, through multiple transactions below a threshold amount that would trigger a reporting requirement, or through other means.

• Involving payments in cash or cash equivalents.

Quality

Nortel is committed to making our technology work for our customers. Our promise is to collaborate with customers to design and deliver solutions that enhance their competitiveness. We work to be the most valued supplier, delivering reliable products and services that are of the highest quality, competitively priced, and deployed on time. We are not satisfied with “good enough.” We focus on quality in every aspect of our business — in products and in processes, services, and our work environment as well. Among other things, this commitment means that you should bring any concerns about quality promptly to the attention of Nortel management. (See also, ‘Other Sales and Marketing Standards.’)

Selling to the Government

The laws and regulations that govern doing business with governments and government-owned entities are often more restrictive than those relating to commercial customers. Employees involved in government business are required to be aware of all applicable laws and regulations in this area. If you have any questions or concerns, you should consult with the Law Department.

You should avoid:

• Improperly seeking or accepting confidential bid information belonging to another party (such as the government or a competitor).

• Noncompliance with applicable government pricing, billing, and other procurement rules.

You must also use caution when initiating discussions regarding possible Nortel employment with a current or former government employee where Nortel has had recent business dealings with such person or in any other circumstance where the negotiation could give rise to a possible violation of law or appearance of impropriety. In such circumstances you must first consult the Law Department or Human Resources. (See also, ‘Bribery and Corruption’ and ‘Gifts, Entertainment and Business Travel.’)

Money Laundering and Exchange Control

Money laundering laws prohibit moving the proceeds of crimes to hide their source or transferring funds for criminal purposes, including terrorism, narcotics trafficking, or corruption.

• If you have any concern about the source of a customer’s funds, you must err on the side of caution and escalate the issue using the reporting procedures set forth in this Code or consult with the Law Department.

• Be aware of and comply with laws requiring that the receipt or importing of specified amounts of cash or cash equivalents be reported to the appropriate authorities.

Many countries also have currency and exchange control laws, which, among other things, may restrict the flow of such countries’ funds outside of that country. Nortel requires employees doing business in such countries to be familiar with and abide by these laws.

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Our Commitment to Our Company

We must be guided by what is best for Nortel in all aspects of our work.

• Financial Reporting

• Recording and Reporting Other Types of Information

• Maintaining Information

• Conflicts of Interest

• Use of Company Assets

• Nortel’s Confidential Information

• Communications with Media and Speaking on Nortel’s Behalf

• Responding to Legal Proceedings

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Be Alert for Inaccurate Financial Reporting:

The following are warning “red flags” which should cause you to carefully consider whether activities or reporting may be inappropriate:

• Inaccurate or unrecorded expense, revenue, asset, or liability entries.

• Financial records that do not accurately reflect the nature of the transaction or do not match underlying performance.

• Pressure to produce certain accounting results.

• Efforts to avoid standard review and control processes.

• Failure to perform required reviews of financial practices, records, and results.

• Estimates or reserves that are not supported by facts or appropriate documentation.

• Transactions that do not appear to have a reasonable business purpose.

Financial Reporting

Maintaining accurate and complete financial records is required by law and is fundamental to our ethical commitment to our shareholders. Inaccurate records can harm Nortel in many ways, including, but not limited to, subjecting us to legal sanctions, breaching our promises to stakeholders, and weakening the effectiveness of our internal controls.

Obligations of All Employees

All employees have the following responsibilities to help ensure accurate financial record keeping:

• Record transactions accurately, completely, consistently, and in a timely manner.

• Maintain books, accounts, and records using sufficient detail to reflect Nortel transactions accurately and fairly.

• Never mislead an internal or external auditor through false, incomplete, or non-responsive information.

• Maintain the confidentiality of Company information and disclose records and information as authorized by Company policy.

• Report any pressure to inappropriately influence reporting of financial results.

• Challenge any business practice or behavior that may undermine the principles in this Code and the integrity of our Company.

Additional Obligations of All Employees with Financial or Accounting Responsibilities

Employees with financial or accounting responsibilities must be aware of their special responsibilities. For example, they are obligated to:

• Fairly and accurately record all transactions and maintain records in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”).

• Ensure there is adequate and appropriate review and approval of all transactions recorded in accordance with U.S. GAAP and other applicable principles and standards.

• Communicate unfavorable as well as favorable information and provide professional judgments and/or opinions.

• Maintain awareness of and perform their duties in a manner consistent with finance and accounting-related laws, regulations, and professional standards and request appropriate professional advice as required.

• Be alert for and cognizant of potential violations of law and Nortel policies and procedures that may become apparent in the course of their work through financial data processing and knowledge of business operations and report these as appropriate.

• Retain financial records according to Company record retention policy.

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Senior Financial Managers also have obligations to:

• Ensure that financial and accounting staff have the appropriate level of functional expertise and resources to accomplish operational objectives and maintain professional standards.

• Support and promote continuous training and development of financial and accounting staff and ensure appropriate transition of duties to new personnel.

• Prevent and detect any pressure on financial or accounting personnel, with respect to accounting judgments and estimates, for the purpose of inappropriately influencing the reporting of financial results.

• Take all other steps necessary to ensure that the reports and other documents filed with government agencies, including the Canadian Securities commissions and the U.S. Securities and Exchange Commission, and all other public accounting and finance-related communications are accurate and complete in every respect and are filed in a timely manner.

(See also, ‘Bribery and Corruption.’)

Related Policies and Procedures:

100.22 — Disclosure of Material Information

101.01 — Disclosure of Material Information

300.33 — Financial Reporting

300.34 — Internal Audit Services

301.06 — Internal Audit Report Follow-up Process

301.07 — Internal Audit Implementation Procedure

GB 001 — Payment and Reporting of Taxable Benefits

US 003 — International Boycotts and IRS Boycott Reporting Requirements

300.03 — Travel, Living and Entertainment Expenses

303.23 — Travel, Living and Entertainment Expenses

Recording and Reporting Other Types of Information

In addition to financial matters, information of all kinds must be recorded and reported accurately and promptly and in sufficient detail so that the nature of the underlying transaction is clear. This includes, but is not limited to, information concerning research, development, production, marketing, sales, purchasing, and environmental and product test results. Travel and expense claims must be justified, accurate, and in accordance with Company policy.

Maintaining Information

Nortel has procedures to ensure that information is maintained and, when appropriate, disposed of in a manner consistent with applicable legal requirements and sound business practices. You are expected to be familiar with information handling policies and procedures, including classification, retention, safeguarding, and transmission requirements specific to your job. This is particularly important when dealing with highly confidential information or information subject to legal or regulatory controls.

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Special considerations applicable to serving on a board of directors or technical advisory board or otherwise advising another company that does not and is not likely to do business with or compete against Nortel.

Your serving on a board of directors or a managerial, advisory, or technical board of a commercial enterprise may be advantageous to Nortel. At the same time, it may present a conflict with Nortel interests, even where that company does not and is not likely to do business with or compete against Nortel. This is particularly true where such service could expose you to third-party intellectual property or adversely affect Nortel’s reputation. Accordingly, in all such cases, you must disclose all such relationships pursuant to the Conflicts Disclosure Process.

In addition, any regular document disposal must cease immediately if you are aware of a legal request for such documents. (See also, ‘Responding to Legal Proceedings.’)

Related Policies and Procedures:

205.04 — Protection of Confidential Information

252.01 — Retention, Storage, and Destruction of Company Records

Conflicts of Interest

Avoidance and Disclosure of Conflicts of Interest

Your duty of loyalty to Nortel requires that when acting on the Company’s behalf you make all decisions with only Nortel’s best interests in mind. If you believe that you have a conflict of interest, you must promptly disclose it pursuant to the Conflicts Disclosure Process (page 22). Moreover, even if you believe that the conflict will not affect your work or be detrimental to Nortel, if others could reasonably believe otherwise, you must disclose it. Apparent conflicts of interest can harm Nortel by undermining the trust of key stakeholders — shareholders, customers, suppliers, employees and others — which is necessary for our continued success.

You have a conflict of interest when any outside interest or activity:

• Prevents you from effectively and efficiently performing your regular duties.

• Causes you to compete against the Company.

• Influences your judgment when acting on behalf of Nortel in a way that could hurt the Company.

• Causes you to misuse Company resources.

Apparent conflicts are any circumstances that could cause another person to reasonably suspect that you might have a conflict of interest.

The following are examples of situations that may give rise to conflicts of interest in the business world. However, conflicts can arise in many other forms, and any actual or apparent conflict is subject to our policy.

Interest in Contracts or Transactions

You must promptly disclose, pursuant to the Conflicts Disclosure Process, the nature and extent of any interest that you have in a contract or transaction between Nortel and a third party.

Corporate Opportunities

Directors, officers, and employees must advance Nortel’s interests when the opportunity arises. You should not appropriate to yourself or to any other person or organization the benefit of any actual or potential business opportunity that belongs to Nortel. If you have any questions regarding this policy, it is your responsibility to contact the Law Department or the Ethics Office.

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Relationships with other Companies

Working for, serving as a director or advisor to, or having investments in competitors or companies with which Nortel has or is likely to have a business relationship, including business partners, distributors, suppliers, vendors and customers. You must avoid any circumstances that could affect judgments you make on behalf of the Company or that could create the appearance of divided loyalties. For this reason, as a general rule and subject to the Conflicts Disclosure Process and any contractual agreements with the Company, directors, officers and employees should not:

• Serve as directors, officers, employees, advisors, contractors, or consultants to any company that does or is likely to do business with or compete against Nortel.

• Have any direct or indirect investment in any such company (with the exception of a public company when the investment does not exceed one percent of the issued shares.)

You must disclose all such relationships and investments pursuant to the Conflicts Disclosure Process.

Doing part-time work for, or running, an outside business that is not, or is not likely to become, a competitor or have a business relationship with Nortel. Employees and officers may wish to run or be employed by an outside business or perform additional part-time work for commercial enterprises that are not competitors, suppliers, or customers. This, in and of itself, does not constitute a conflict of interest. However, a conflict may arise if, for instance:

• You interact with some of the same people as in your Nortel job;

• You use skills or tools paid for or developed by Nortel;

• You do the same or similar work for Nortel; or

• Your work prevents you from performing your Nortel job effectively and efficiently.

Before running or being employed by an outside business, you must seek prior approval pursuant to the Conflicts Disclosure Process.

Family and close personal relationships

If an immediate family member or someone with whom you have a close personal relationship works or consults for or is a director of an organization that competes or does or seeks to do business with Nortel, you should disclose that fact. You must also make disclosure if you are aware that such person has an ownership interest in such an organization (exceeding one percent of the issued shares if it is a public company.)

Q & A:

Q. My manager has a romantic relationship with the leader of an organization that she supports as Human Resources prime. Is this permissible under the Code?

A. Such a relationship creates at least an apparent conflict of interest and must be disclosed pursuant to the Conflicts Disclosure Process.

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Managerial Relationships with Family Members and Close Personal Friends

An actual or apparent conflict of interest may arise when family members or persons with whom employees have close personal relationships serve as their direct or indirect managers or are otherwise in a position to affect their employment. Accordingly, in all such cases, you must disclose all such relationships pursuant to the Conflicts Disclosure Process.

Receiving Gifts, Entertainment, and Third Party Travel

Receiving gifts, entertainment, and business travel from those doing or seeking to do business with Nortel can present conflicts of interest, as discussed previously in this Code. (See, page 13.)

Loans and Guarantees of Indebtedness

Nortel will not make loans to or guarantee the indebtedness of directors or executive officers.

Conflicts Disclosure Process

If you have an actual or apparent conflict of interest — or are uncertain whether you have a conflict or apparent conflict — such as those previously described or others, you must promptly and completely disclose the facts and receive authorization from the Ethics Office.

Decisions about outside activities will be based on such factors as the scope of your proposed role, the nature of the enterprise, and the time commitment involved. If it is determined that the activity is not likely to raise conflict of interest issues, you will be allowed to engage in the activity. However, no such permission is valid unless received in writing. If it is determined that the activity is likely to be a conflict of interest, Nortel will require that you not engage in, or cease, the activity or modify your involvement, on penalty of disciplinary action that could include dismissal (subject to applicable law.) In certain circumstances, an activity may be permitted if a potential conflict of interest can be avoided by implementing adequate controls.

There may be circumstances where an activity is approved and later circumstances change to make a conflict of interest more likely. As an example, if the company for whom you are doing consulting work seeks to become or becomes a supplier to Nortel, this could give rise to a conflict of interest. Where changed circumstances make a conflict more likely, you are obligated to bring the matter to the attention of Nortel and seek renewed approval through the Conflicts Disclosure Process.

Special rules apply to executive officers and directors. Before engaging in conduct or transactions that may create a conflict of interest, executive officers and directors must disclose all facts and circumstances to the Corporate Secretary, who shall inform and seek the prior approval of the Audit Committee of the Board of Directors.

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(See also, ‘Bribery and Corruption’ and ‘Gifts, Entertainment, and Third Party Travel.’)

Related Policies and Procedures:

200.01 — Ethical Business Practices

200.13 — Representation on Unaffiliated Boards of Directors

201.07 — Compliance Program

Use of Company Assets

Efficient and appropriate use of Company resources is critical to our success. We must therefore exercise good judgment and discretion when using Nortel’s tangible and intangible property.

Related Policies and Procedures:

200.05 — Corporate Security

200.19 — Appropriate Use of Nortel’s Network

205.04 — Protection of Confidential Information

206.01 — Systems Security

300.01 — Risk Management

300.03 — Travel, Living and Entertainment Expenses

320.28 — Use of Undisclosed Material Information

303.23 — Travel, Living and Entertainment Expenses

400.03 — Possession and Use of Third Party Software

901.05 — Network Data (Recording and Use)

Safeguarding Company Property

All employees are responsible for safeguarding Company funds and other property against loss, theft, or misuse, including unauthorized use. You must follow all procedures regarding the use of Company property and report any violations of which you become aware. Charitable contributions of Nortel property must be made in accordance with Company policy.

Use of Nortel Name, Facilities, and Relationships

You should not use Nortel’s name, facilities, or relationships for personal benefit (or for the benefit of a third party). Use of the Company’s name, facilities, or relationships for charitable or civic purposes may be made only with prior approval of the Chief Marketing Officer.

Travel and Living Expenses

We are all responsible for ensuring that business travel and living expenses are reasonable and commensurate with the business conducted and in compliance with Nortel’s expense policies and procedures.

Related Policies and Procedures:
300.33 — Financial Reporting

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Computer and Network Use

Nortel permits reasonable personal use of Company computers and telephones. However, such use must not:

• Interfere with or adversely affect your job performance or that of any other employee.

• Interfere with or impede the intended operation of the computer and associated network access provided to you or others. (For instance, music and games can consume significant storage capacity.)

• Be for personal business or the business of another person or company.

• Support any unlawful or other purpose that could cause embarrassment to the Company or otherwise adversely affect its interests.

• Be disruptive or offensive, involving, for instance, sexually explicit materials or materials that are discriminatory, hateful, or threatening to others. Nortel computers may not be used to access pornographic or other offensive web sites.

(See also, ‘Nortel Forbids Discrimination and Harassment.’)

You must also be familiar with and adhere to our information security procedures. You are responsible to ensure the secure operation of our network and the appropriate safeguarding of all information assets related to your work.

All data that moves over our network is and remains Company property (subject to the intellectual property rights of third parties.) Nortel may review voice and data transmissions on the network at any time without notice, subject to the
requirements of applicable law.

Related Policies and Procedures:

200.05 — Corporate Security

200.19 — Appropriate Use of Nortel’s Network

205.04 — Protection of Confidential Information

206.01 — Systems Security

901.05 — Network Data (Recording and Use)

Contractual Commitments

Nortel has designated the corporate personnel who are authorized to commit the Company to specific obligations. You must not sign any agreement on Nortel’s behalf or enter into any obligation that binds Nortel unless you are authorized to do so in accordance with Company procedures.

Conducting Research

Employees who conduct scientific and technical research must be aware of and comply with the standards of ethical conduct governing such work.

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Nortel’s Confidential Information

Nortel’s confidential information is one of its key corporate assets. The unauthorized release of confidential information can cause the Company to lose a critical competitive advantage, hurt relationships with customers, and embarrass or harm fellow employees. Nortel’s confidential information includes any information that is not public knowledge, including financial, business, and technical information, no matter what form it is in, when Nortel has taken reasonable measures to keep the information secret, and the information is actually or potentially valuable from not being publicly known. It may include technical information as well as business, and financial records, such as business plans, sales and marketing data, and employee personnel information.

Of particular concern is Nortel’s technical information, such as product plans; future product direction; technical information concerning Company products and services; manufacturing and development process information; engineering designs, drawings, and layouts; software code; trade secrets; know-how; pending patent applications; invention disclosure statements, and the like.

All such information must be accessed, stored, and transmitted in a manner consistent with Nortel’s policies and procedures. The inappropriate release of Nortel’s confidential information can damage the Company and violate the law. The inappropriate release of this and other types of confidential information can also diminish Nortel’s rights to such information, give others implied rights that we would not have knowingly permitted, or cause us to lose valuable information to competitors.

Other important reasons for preserving the confidentiality of Nortel’s information are addressed in the ‘Inside Information’ (page 28) and ‘Communications with Media’ (page 29) sections of this Code.

Related Policies and Procedures:
205.04 — Protection of Confidential Information

Employee Duties Regarding Nortel’s Confidential Information

• Ensure that information under your control is properly classified and safeguarded in accordance with Nortel policies and procedures.

• Be careful when you discuss or transmit confidential information:

• Outside Nortel (for instance, on cell phones or in public places);

• In situations where third parties are on Nortel premises. (For example, do not leave confidential information visible on an unattended computer monitor);

• In emails. Use encryption technology if feasible, as defined in Nortel policies and procedures; and

• In faxes that may be seen by third parties.

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• Safeguard the confidentiality of information provided to third parties, such as suppliers or customers, pursuant to applicable Company policies and procedures. For example, when engaging in discussions or negotiations that involve disclosing Nortel confidential information to third parties under a non-disclosure agreement, make sure that no statement, agreement, or transfer of technology is made that inadvertently grants the party a license or rights to use Nortel intellectual property. Prior to Nortel receiving any oral or written confidential information a non-disclosure agreement will usually need to be executed by Nortel and the other party. If you think a nondisclosure agreement may not be required in a particular case you should discuss this with the Law Department.

• Report any actual or suspected unauthorized release of confidential information, whether intentional or unintentional, to the Law Department immediately.

• If you see Nortel confidential information left unattended or otherwise made accessible to people who should not have it (even other Nortel employees), report this immediately to your manager. Discuss confidential information only with those employees who have a legitimate need to know.

• Make sure that tangible and electronic copies of Nortel confidential information are clearly and consistently marked as required by applicable corporate procedures.

Remember that your obligation to maintain the confidentiality of Nortel information continues even when your employment with the Company ends.

Related Policies and Procedures:

100.22 — Disclosure of Material Information

101.01 — Disclosure of Material Information

205.04 — Protection of Confidential Information

300.28 — Use of Undisclosed Material Information

320.28 — Use of Undisclosed Material Information

Confidential Information Received from Third Parties

Sometimes we receive information from our customers, suppliers, business partners, and other third parties on the condition that it be kept confidential. If we agree to those terms, we must take care to safeguard the confidentiality of such information, as provided in Nortel policies and procedures.

You should be aware of these guidelines concerning third-party confidential information:

• Nortel does not want third-party confidential information unless having such information is necessary in the context of a business transaction (such as a request for proposal or bid request, evaluation of a component or product to be incorporated into a Nortel system design, service for a customer’s system, or due diligence for a potential transaction).

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• Prior to Nortel receiving any oral or written confidential information, ask the Law Department if a non-disclosure agreement must first be signed and delivered by Nortel and the other party.

• If you accept third-party confidential information under a non-disclosure agreement, be sure an appropriate process has been established to meet our obligations and that the information is used only for the purposes permitted under the agreement.

• Do not accept or review an unsolicited disclosure of ideas (such as concepts, technologies, patent applications, invention disclosures, or license or marketing offers) from a person outside the Company. Instead, report the matter immediately to the Law Department.

(See also, ‘Confidential Information of Competitors’ and ‘Privacy.’)

Related Policies and Procedures:

200.17 — Collection and Retention of Competitive Information

252.05 — Review and Approval of the Collection and Retention of Competitive Information

400.02 — Handling Unsolicited Disclosure of Ideas from Other Parties

401.03 — Handling Unsolicited Disclosure of Ideas from Other Parties

Protecting Intellectual Property — Nortel’s and Others’

Certain information is characterized as “intellectual property,” such as patents, trade secrets, trademarks, copyrights, and other proprietary information. It is Nortel policy to establish, protect, maintain, and defend its rights in all commercially significant intellectual property and to use those rights in responsible ways. All employees must be aware of and comply with Company procedures necessary to safeguard these assets, including complying with any agreement relating to intellectual property and confidentiality signed upon the commencement of or during employment.

In addition to protecting its own intellectual property rights, Nortel respects the valid intellectual property rights of others. Unauthorized receipt or use of the intellectual property of others may expose the Company to civil law suits and damages. You must follow all Company procedures, including those governing the appropriate handling of unsolicited intellectual property.

Copyright Protection

You must not use copyrighted materials without appropriate permission. Copyright laws protect many of the materials we use in the course of our work: software, books, audio and videotapes, trade journals, and magazines are a few examples. Presentation slides, training materials, management models, and problem-solving frameworks produced by outside consultants or organizations may also be copyrighted. Copyright laws also cover songs, games, movie clips, text, and images found on the Internet. Copyrighted materials must not be produced, reproduced, distributed, modified, published, displayed, or performed in public without authorization (such as written permission or a license

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agreement) from the copyright owner or the owner’s authorized agents.

(See also, ‘Computer and Network Use.’)

Related Policies and Procedures:

501.02 — Intellectual Property

501.03 — Inventions by Employees — Patents, Industrial Designs and Invention Disclosures

400.06 — External Publication of Technology Information

401.02 — Review and Approval Process for External Publication or Presentation of Technology Information

Computer software licensed by Nortel must not be illegally copied for personal, company, or customer use. Also, use or incorporation of “free use” or “free trial” third-party software with Nortel products or services should be approached with the utmost caution. Approval for such use is determined by Nortel on a case-by-case basis according to Company policies and procedures.

Inside Information

If you are in possession of material inside (non-public) information about Nortel, you may not trade in Nortel securities including shares, units in stock funds under investment plans, or options. The same prohibition applies to trading in the securities of any other company, such as a Nortel customer, where you have material inside information about that company.

Trading (either buying or selling) securities of a company when you have material inside information about that company is “insider trading.” It is illegal, carries severe penalties, and is frequently prosecuted, even in cases involving small trades or where the violator received no profits from the trade. It is also illegal to pass on material inside information to anyone else, other than in the necessary course of business and with an appropriate non-disclosure agreement. This is sometimes known as “tipping.”

Generally, information will be considered material if:

• There is a substantial likelihood that a reasonable investor would consider it important in deciding whether to make an investment in a security or would view the information as having significantly altered the “total mix” of information available about the security or the company that issues it; and/or

• Public disclosure of such information would reasonably be expected to have a significant impact on the market price or value of the security.

Common examples of material information include financial results, financial forecasts, possible mergers, acquisitions or divestitures, significant product developments, and major changes in business direction.

Any Nortel director, officer, or employee who engages in any form of insider trading or tipping is subject to dismissal and prosecution (and, in the case of directors, a request to resign from the Board).

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While all Nortel directors, officers, and employees are subject to insider trading laws generally, there are certain individuals who, by virtue of their role, are “deemed insiders.” Generally, deemed insiders are Nortel officers, directors, senior executives and other leaders, and employees who frequently have access to material information. The trading activities of these individuals are restricted by Nortel: they may not engage in any trading activity in Nortel securities for specified periods of time throughout the year, known as “black out periods.” Deemed insiders can only trade during prescribed “window periods” and, even then, only if they do not have knowledge of any Nortel material inside information at that time.

In addition, Nortel directors, officers, and employees are prohibited at all times from engaging in certain types of transactions involving “calls,” “puts,” or “short sales” in Nortel securities.

The rules governing trading by insiders are complex and sometimes seem unclear. If you need assistance or are uncertain about whether or how the restrictions apply to you, you should contact the Law Department before taking any action.

(See also, ‘Communications with Media and Speaking on Nortel’s Behalf.’)

Related Policies and Procedures:

300.28 — Use of Undisclosed Material Information

320.28 — Use of Undisclosed Material Information

Communications with Media and
Speaking on Nortel’s Behalf

Securities laws require fair public disclosure of information concerning publicly-traded companies, such as Nortel, with serious penalties for companies and individuals who violate these requirements. Other legal and business considerations also govern the transmission of information about the Company to outside parties.

If you are contacted for an interview, comments, or other information by the media, you must refer them to Corporate Communications. If you are contacted by a securities analyst, investor, or other third party, you must refer them to Investor Relations.

In addition, comments made by Nortel employees — at trade shows or even on-line chat rooms — may be seen by others as representing an “official” Company position. You must refrain from speaking on Nortel’s behalf unless authorized to do so by appropriate Company personnel. (See also, ‘Inside Information.’)

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Responding to Legal Proceedings

The Law Department must be notified immediately of any lawsuit, investigation, inquiry, or legal proceeding in which the Company is or might be involved. This includes situations where an employee is involved as a third party (for example, as a witness) if the matter concerns the Company. No information, whether oral or written, or records or files of any nature should be furnished to any outside party in connection with a lawsuit or government investigation except with the prior approval of the Law Department.

In addition, employees must never, under any circumstances:

• Destroy, alter, or conceal any documents in anticipation of or following a request for those documents from any government agency or a court or in connection with any pending or threatened litigation, investigation, or official proceeding.

• Lie or make misleading statements in connection with, or fail to respond fully to, any government or other investigation or any legal proceeding, or cause another employee to do so.

(See also, ‘Maintaining Information.’)

Related Policies and Procedures:

252.01 — Retention, Storage, and Destruction of Company Records

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Our Commitment to Each Other

Nortel employees have an obligation to treat each other with dignity and respect and to maintain a safe and healthy work environment.

• Nortel Forbids Discrimination and Harassment

• Nortel Promotes Diversity

• Drugs and Alcohol

• Workplace Health and Safety

• Privacy

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Nortel Forbids Discrimination and Harassment

Nortel’s policy is to recruit, hire, train, compensate, promote, and make other employment decisions affecting employees and applicants without improper regard to a person’s race, color, religion, national origin, gender, sexual orientation, age, disability, or marital or family status. In addition, we must not discriminate based on any other factor protected by applicable law.

All employees deserve to work in an environment that is free from harassment based on any such characteristic. Such harassment is strictly prohibited. Subject to applicable law, breach of this principle will lead to disciplinary action, which may include dismissal. Harassment may include (but is not limited to) making unwelcome sexual advances, sending or displaying obscene or racist materials, or sending or telling offensive jokes or comments, verbally or otherwise.

The standards referred to above apply in all locations where we do business, and may be stricter than the legal standards in your own country.

If you believe that you have witnessed or are being subjected to discrimination or harassment, you should immediately report the matter using the reporting procedures set forth in this Code. (See also, ‘Computer and Network Use.’)

Related Policies and Procedures:

800.25 — Chronic Medical Conditions

802.19 — Sexual Harassment

CA.003 — Workplace Harassment

CA.005 — Equal Employment Opportunity

US.008 — Equal Employment Opportunity/Affirmative Action

AU.001 — Australia Discrimination, Harassment and Equal Employment Opportunity

HK.001 — Discrimination, Harassment and Equal Employment Opportunity (Hong Kong)

EMEA.001 — Harassment

Nortel Promotes Diversity

Differences in background, experience, perspective, and talent are important assets in the work we do. Diversity at Nortel means an inclusive environment in which differences are valued and appreciated. When we build on the wealth and variety of ideas that arise from our diverse work force, we create value and success for our customers.

As an employee, you should make an effort to leverage the benefits of your co-workers’ unique perspectives and approaches to help drive innovation. As a manager, you are responsible for creating and maintaining an environment that fosters and promotes diversity in a manner that is free from prohibited discrimination, and in which individuals that have different backgrounds, values and talents are given the opportunity to fully contribute to the achievement of Nortel’s objectives.

Related Policies and Procedures:

800.25 — Chronic Medical Conditions

802.19 — Sexual Harassment

CA.005 — Equal Employment Opportunity

CA.003 — Workplace Harassment

US.008 — Equal Employment Opportunity/Affirmative Action

32

Drugs and Alcohol

Any employee who is found to be under the influence of or using, selling, or possessing illegal drugs on Company or customer property or while conducting Nortel business is subject to discipline, including dismissal.

While conducting Nortel business you must not be under the influence of alcohol or other similar substances or improperly use medication in any way that could diminish — or raise questions concerning — your ability to perform your job or result in your doing things that might be harmful to the Company or your co-workers. While on Nortel’s premises you may not consume any alcohol, except in accordance with Nortel policies and procedures.

If you are taking medication that may affect your ability to perform your work or may affect the health or safety of you or your colleagues, discuss this with your manager, Human Resources, or a Nortel health professional.

Related Policies and Procedures:

800.24 — Drugs, Alcohol and Smoking in the Workplace

US.006 — Drugs and Alcohol

Workplace Health and Safety

In every aspect of our business, we must work to ensure the health and safety of our employees, comply with Company policies and procedures involving health and safety, and protect the general public from harm that could be caused by Nortel activities. Among other things, employees must promptly report to management any job-related injury or illness. Employees must also comply with Nortel policies and procedures regarding emergency response and preparedness, business continuity planning, and the security of our facilities and work sites.

A safe and secure work environment also means a workplace free from violence. Threats (whether implicit or explicit), intimidation, and violence have no place at Nortel and will not be tolerated. Any threatening behavior must be reported immediately to your manager, Human Resources, or appropriate security personnel.

Related Policies and Procedures:

100.02 — Crisis Communications

200.10 — Travel by Nortel Directors, Officers and Employees

200.16 — Protection of Key Corporate Employees

204.01 — Crisis Management

800.01 — Environment, Health and Safety

803.14 — Emergency Response

803.15 — EHS Management Systems

33

Privacy

We respect employees’ privacy and take care to maintain the confidentiality of employees’ personal data. We develop, implement, maintain, and audit privacy and data protection procedures and practices to ensure compliance with applicable legislation throughout Nortel global operations.

Employees with access to personal information about other employees (such as medical records or salary history) must be familiar with Nortel privacy policies and procedures and act diligently to safeguard its confidentiality. Personal information may only be shared with or provided to others for a proper business purpose and when permitted by Company policies and procedures and applicable law.

(See also, ‘Nortel’s Confidential Information.’)

Related Policies and Procedures:

800.29 — Privacy and Data Protection

802.20 — Privacy and Data Protection

AU.002 — Australia Workplace Surveillance

34

Our Commitment in Doing Business
Globally

Because Nortel is a global company, it is subject to laws that govern

commerce between nations, as well as local laws and regulations in the

countries where we operate.

• Export Control

• Customs

• U.S. Anti-Boycott Act

• Foreign Corrupt Practices

35

Export Control

To promote national security and foreign policy goals, many countries regulate exports of goods, technology, software, and services. All such products are exports when they leave the country of origin, even if they leave only temporarily and the products are not for sale.

Because the U.S. is a high-export country with the most restrictive export laws, it is our practice generally to apply U.S. export controls to all products we export, regardless of the country of origin, manufacture, or departure, in addition to other applicable export laws. U.S. law restricts exports to

(1) people and companies on the U.S. government’s denied persons lists and

(2) embargoed countries. It is your responsibility to check with Global Logistics or Government Relations to ensure that your proposed export would not violate any applicable laws.

Under U.S. law, an ‘export’ includes: (1) tangible exports — physical products that move across international borders, (2) intangible exports, such as data (including plans and software) and information that moves across international borders, and (3) ‘deemed exports’ — technology, technical data, or source codes to which a non-U.S. citizen in the United States has access.

International trade regulations and export controls are very complex. Employees should seek the help of Global Logistics or one of the Export Control Contacts (“ECC Contacts”) listed on Nortel’s Export Control Compliance web page (http://ecc.ca.nortel.com). They will help you to ensure that:

• You follow applicable international trade control regulations, including licensing, shipping documentation, import documentation, reporting, and record retention requirements, of all countries in which we conduct business or in which our business is located. In some cases, these restrictions will apply to international trade in goods, technology, software, and services as well as to financial transactions.

• Employees and third parties who are citizens or residents of countries subject to export control restrictions have access to our network only if and to the extent permitted by applicable law.

• All international transactions are processed through Nortel’s trade and compliance shipping systems, which are designed to help manage Nortel’s export control compliance. (Many but not all SAP-generated international orders are automatically reviewed for export control compliance at the time an order is placed with Nortel or at the time of shipment.) To determine whether an international transaction has been reviewed, employees should consult one of the ECC Contacts listed on Nortel’s Export Control Compliance web page (see above).

36

If you are uncertain whether your transaction or tangible or intangible transmittal of controlled data is compliant or if a Nortel employee is |appropriately licensed, you must contact Global Logistics, Government Relations, or the Law Department. It is your responsibility to work with our exporting resources to ensure compliance.

     Related Policies and Procedures:

     400.06 — External Publication of Technology Information

     400.04 — Export Control and Trade Compliance

     402.01 — Export Control and Trade Compliance Procedure

Customs

You are required to comply with all applicable customs requirements. All import and export documentation must be accurate and complete. Where a customer or agent is responsible for preparing such documentation, you must provide them with all necessary information.

U.S. Anti-Boycott Act

Under U.S. law, Nortel is required to report to the U.S. Government, and not to cooperate with, any request concerning boycotts or related restrictive trade practices. Employees may not take any action, furnish any information, or make any declaration that could be viewed as participating in an illegal foreign boycott. Requests to engage in boycotts — even if rejected — must be reported to the Law Department. This includes requests that are part of an actual order, as well as those that do not concern a specific transaction.

Foreign Bribery and Corrupt Practices

The strict prohibition under law and Nortel policy against corrupt activities regarding government officials is addressed elsewhere in this Code (See also, ‘Bribery and Corruption,’ ‘Gifts, Entertainment, and Third Party Travel,’ and ‘Selling to the Government.’)

37

Our Commitment to Our Communities

Our work for Nortel touches many communities. We must respect

them by working to conduct Company business in a socially responsible

manner, as well as by obeying laws dealing with the environment and the

political process.

• Corporate Citizenship

• Environmental Responsibility

• Political Involvement

38

Corporate Citizenship

As global citizens, companies have a role that extends well beyond the payment of taxes, employment of people, and provision of goods and services. We face a special challenge: to uphold our high corporate standards of ethical business conduct, while respecting the culture and varying business customs of the communities and countries in which we operate.

• We encourage recruiting qualified local personnel and purchasing local materials and services, where practical.

• We do not use forced labor or child labor and will not work with suppliers that do.

• We expect suppliers to observe our social responsibility standards, as set forth in the Supplier Code of Conduct.

Corporate citizenship means more than avoiding harmful activities. At Nortel, we aim to contribute directly, and through our directors, officers, and employees, to the well-being and improvement of the towns, cities, and regions in which we operate. Many of our employees are passionate about making a difference and contribute time, financial resources, and experience to address the needs of their communities.

In many locations, Nortel provides support to community programs in such areas as social welfare, health, and education. For many years, we have focused our efforts on mathematics, science, and technology education, by supporting universities, schools, students, and educators in communities across the globe. By sharing financial resources, equipment, and expertise, Nortel helps create innovative solutions to community challenges through the thoughtful application of communications technology.

When knowledge of product and manufacturing technology can be shared without harming our competitive position in the marketplace (or contravening national restrictions on the transfer of technology), we engage in technology cooperation projects with industry, institutions of higher education, and industry associations around the world.

Before committing Nortel to a project or undertaking work on the Company’s behalf in these areas, you should consult with your local Community Relations prime or, if there is not a prime for your location, the Corporate Social Responsibility team at NCSR@nortel.com.

     Related Policies and Procedures:

     100.04 — Corporate Contributions for Community Relations

     251.01 — Corporate Contributions for Community Relations

     800.27 — Support for Education

39

Environmental Responsibility

We work to comply with all applicable environmental standards established by governmental agencies in the locations where we operate and with Nortel policies and procedures. Any violation of environmental law, regulation, or policy by Company personnel or others acting on our behalf must be reported to the Environment Health and Safety Department immediately. We must always be prepared to respond to all environmental accidents and emergencies.

We take the initiative to develop innovative solutions to environmental issues before they arise. And we take responsibility for the environmental impacts of our products throughout their lifecycle — from design to final disposition. We work with customers, suppliers, industry associations, educational institutions, public interest groups, and governments throughout the world to promote the development and dissemination of innovative solutions to industry-related environmental impacts.

     Related Policies and Procedures:

     700.06 — Environmental Procurement

     712.17 — Environmental Procurement

     800.01 — Environment, Health and Safety

     803.14 — Emergency Response

     850.02 — EHS Audits, Compliance Assessments and Management Reviews

Political Involvement

Nortel’s interactions with governments must be above reproach in every respect. As a Company, we express views on local and national issues that affect our business and our industry. We support and participate in the political process in accordance with applicable laws and regulations.

• Employees involved in lobbying and other work for Nortel within the political process must ensure that they are aware of and comply with all applicable laws.

• All contacts for Nortel between employees of Nortel and members of government, other than direct sales contacts with technical or procurement officials, contacts with the patent or copyright offices, contacts by or authorized by the Law Department, and those required by statute, shall be coordinated through Government Relations.

• When you speak about political issues, always make it clear that your views and actions are your own and not those of Nortel.

• While Nortel encourages employees to participate in political activity, employees shall not contribute Company or subsidiary funds, property, resources, or employee work time to any political party or candidate unless approved by their manager and Government Relations. Strict laws govern corporate political contributions.

• If you plan to seek elective office or political appointment, you should notify your manager.

(See also, ‘Bribery and Corruption.’)

     Related Policies and Procedures:

     100.05 — Direct Governmental Financial Assistance

     100.07 — Federal Government Relations

     207.03 — Political Involvement by Employees

     207.04 — Visits by Elected Representatives, Political Candidates and Government Officials

40

Contact Information for Compliance Resources

How you can Report an Ethical Concern

1)	Discuss the issue with your manager (unless you are uncomfortable doing so or believe that the issue will not be satisfactorily resolved). Or discuss the issue with Human Resources, the Law Department, Compliance, Corporate Security, or Internal Audit.
2)	Call the Compliance Action Line:
	(Operates 24 hours a day, 7 days a week, in many languages.)
	ESN 333-3014 or (905) 863-3014
	1-800-683-3503 (toll free within North America)
	(Your name and number are not displayed when you call these lines.)
	This also gives you the option of reporting financial concerns directly to the Audit Committee of the Board of Directors.
3)	Submit your concern/question via the Compliance Action web tool: www.nortel.com/ethicsaction
4)	Send an E-mail: compliance@nortel.com
	(Please note that your e-mail address appears on the message. Alternatively, you may send an email marked “Private and Confidential — Complaint” directly to the Chief Compliance Officer, at rboffice@nortel.com.)
5)	Send a written communication:
	You may also send a written communication marked “Private and Confidential — Complaint” directly to Chief Compliance Officer Bob Bartzokas at Nortel, 2221 Lakeside Boulevard, Richardson, TX 75082, or another member of his staff.
6)	Call any member of Compliance directly, including:
	Bob Bartzokas, Chief Compliance Officer . . . . ESN 444-9530 or (972) 684-9530 Rob Timberg, Director, Ethics . . . . . . . . . . . . . . ESN 333-1246 or (905) 863-1246
7)	Communicate your concerns to the Nortel Board of Directors:
	You may communicate directly with the Board of Directors, the Chairman of the Board, or an individual Director, including the Chairman of the Audit Committee, by writing to his or her attention in care of the Corporate Secretary at:
	Nortel Networks Corporation
	195 The West Mall
	Toronto, Ontario
	Canada M9C 5K1

Mark your envelope “Private and Confidential — Complaint.” All such correspondence will be forwarded to the Director(s) to whom your correspondence is addressed. Any communication that relates to accounting, internal accounting controls, or financial matters will also be referred to the Chairman of the Audit Committee, if not already addressed to him or her.

41

Index

A
About the Nortel Code of Conduct	5
Accounting or auditing matters	18
Accurate books and records	18
Advertising	11
Agents, hiring overseas	10,12,36
Alcohol	33
Anonymously raising concerns	6,41
Anti-Boycott Act	37
Antitrust	10
Application of Code	5
Asking questions and raising concerns	18
Assets, protecting	23
B
Bid rigging	10
Board members, compliance with the Code	5
Board of directors, serving on	21
Books and records	18
Boycotts	37
Bribery	11,15,16,19,23,37,40
C
Calling the Compliance Action Line	6
Candidates for political office	40
Canadian Corruption of Public Officials Act	12
Cash gifts	13
Cash transactions, reporting	16,18
Child labor	39
Close relatives	21,22
Commercial bribery	11
Communities and society	39
Competing with Company	20
Competition Law	10
Competitors, criticizing and disparaging	11
Competitors, discussions and meetings with	10
Competitors, information and information about	10,15
Competitors, ownership interest in	21
Competitors, working for	21
Compliance Action Line	5-8, 41
Computer systems	15,24,25,28
Confidential Company information	25
Confidential information of others	10,26
Confidentiality	6,15,25,27
Conflicts of interest	20
Consequences of violations	7
Contributions for political campaigns	40
Copyright	27
Corporate opportunities	20
Corrupt business practices	11
Cultural events, accepting invitations to	13,14
Customers, ownership interest in	21
Customers	5, 8-12, 14-16, 20-21, 25-26, 28, 32-33, 36-37, 40
D
Directors	5,6,8,20,22,28,29,39,41
Disability	32
Discipline for retaliation	7
Disclosing proprietary information	25-29
Discrimination in workplace	32
Disparagement of competitors	11
Diversity	32
Dividing customers or markets	10
Drugs	33
E
Email	10,25
Employee confidentiality	34
Employee records	34
Employment discrimination	32
Employment outside of Company	21
Employment with competitors or suppliers	21
Entertainment, offering or receiving	13,14
Environment	40
Exchange Control	16
Exclusive dealing	10
Export controls	36
F
Fair competition	9,10
Family members and close personal relationships, doing business with	21,22
Finance managers, responsibility	5,6,18,19
Financial disclosure and reporting	18
Fixing prices	10
Forced labor	39
Foreign Corrupt Practices Act	12,37
Foreign countries and boycotts	37
Foreign laws	8,11,16
Foreign officials	11
Fraud:
Accounting, financial reporting	18
Bid rigging	10
Bribery	11
Company funds	18,19
Company resources	23
Company time	24
Employee fraud	23
Fraudulent financial reporting	18
Fundraising, political	40
Government contracts	16
Government inquiries	20,30
Records, false or misleading	18
Statements about competitors	11
Friends and family stock	13
G
Gender discrimination, workplace	32
Generally Accepted Accounting Principles	18
Gifts, offering or receiving	13
Government customers, dealing with	14,16
Government employees, discussing employment with	16
Government investigations	20,30
Gratuities, offering or receiving	13,14
Guarantees of debtors	22
Guidelines for Gifts, Entertainment, and Third Party Travel	11-14

42

H
Harassment	32
Harassment, reporting	32
Health and safety	33
Hiring government personnel	16
Hotline	5-8, 41
I
Industry association	10
Information gathering, competitive	15
Inside information	28
Insider trading	28
Intellectual property	27
Internet	27
Investigations	5,7,18,20,30
Investment analysts, contacts by	29
Investments in other companies	21
Investor Relations	29
J
Job offers to government employees	16
Job, outside Company	21
L
Lobbying	40
M
Management, responsibilities of	5,6,18,19
Market allocation	10
Material information	28
Meals, accepting or offering	13,14
Media, contacts by	29
Money laundering	16
Monopolistic conduct	10
N
Network security	24
News media, contact by	29
O
Off-books accounts prohibited	18
Offering gifts and entertainment	13
Outside employment	21,22
Overseas laws	8,11,16
Ownership in competitors and suppliers	21,22
P
Personal data, records	24,34
Personal use of company resources	24
Personnel data	34
Political activities	40
Political fund-raising	40
Political office, running for	40
Political parties, contributions to	40
Previous employers’ information	15
Price fixing	10
Privacy	34
Proprietary information, Company	25,27
Proprietary information, others	26,27
Public office, employees holding or running for	40
Q
Quality	16
R
Racial discrimination	32
Record-keeping	19
Relatives, conflicts of interest involving	20-22
Relatives, doing business with	21,22
Religious beliefs and practices, discrimination	32
Reporting suspected violations or problems	5,6,41
Retaliation	7
S
Safe workplace	33
Safety	33
Sales practice	11
Security	6,24,29,33,36
Sexual harassment	32
Sexual orientation, discrimination, workplace	32
Software	10,25,27,28,36
Sporting events, accepting invitations to	13,14
Supervisors, responsibilities	5
Supplier Code of Conduct	39
Suppliers, ownership interest in	21
Suppliers, working for	21
Suspicious transactions	11,12,16,18,36
T
Tipping, violation of securities law	28
Third-party payments	11
Trade associations	10
Trade restrictions	28
Trade secrets	10,25,26
Transshipments	36
Tying products or services	10
U
Unfair business practices	10
Unrecorded funds	16
Unsavory entertainment	13
Unsolicited ideas	26,27
W
Waivers	8
Where to go for help	6,41
Who the Code applies to	5
Who to contact	6,41
Window period for securities trading	29
Working for another company	21
Workplace harassment	32
Workplace safety	33

43

In the United States:	In Europe:
Nortel	Nortel
35 Davis Drive Research Triangle Park, NC 27709 USA	Maidenhead Office Park, Westacott Way Maidenhead Berkshire SL6 3QH UK Phone: 00 800 8008 9009
In Canada:
Nortel	In Asia:
195 The West Mall	Nortel
Toronto, Ontario M9C 5K1 Canada	United Square
	101 Thomson Road
In Caribbean and Latin America:	Singapore 307591
Nortel	Phone: (65) 6287 2877
1500 Concorde Terrace
Sunrise, FL 33323 USA

Nortel is a recognized leader in delivering communications capabilities that make the promise of Business Made Simple a reality for our customers. Our next-generation technologies, for both service provider and enterprise networks, support multimedia and business-critical applications. Nortel’s technologies are designed to help eliminate today’s barriers to efficiency, speed and performance by simplifying networks and connecting people to the information they need, when they need it. Nortel does business in more than 150 countries around the world. For more information, visit Nortel on the Web at www.nortel.com. For the latest Nortel news, visit www.nortel.com/news.

For more information, contact your Nortel representative, or call 1-800-4 NORTEL or 1-800-466-7835 from anywhere in North America.

Nortel, the Nortel logo, Nortel Business Made Simple and the Globemark are trademarks of Nortel Networks. All other trademarks are the property of their owners.

Copyright © 2007 Nortel Networks. All rights reserved. Information in this document is subject to change without notice. Nortel assumes no responsibility for any errors that may appear in this document.

NN104800-102207

EX-21

Exhibit 21

Subsidiaries of the Registrant

	Organized under the laws of
1328556 Ontario Inc.	Ontario, Canada
AC Technologies, Inc.	State of Delaware
Bay Networks do Brasil Ltda.	Brazil
Bay Networks Redes de Dados para Sistemas Informaticos, Lda.	Portugal
BNR Europe Limited.	United Kingdom
Brightspeed SAS.	France
Capital Telecommunications Funding Corporation.	Canada
Clarify K.K.	Japan
Clarify Limited.	United Kingdom
CTFC Canada Inc.	Canada
Frisken Investments Pty. Ltd.	New South Wales, Australia
Integrated Networks Limited.	United Kingdom
Guangdong-Nortel Telecommunications Equipment Company Ltd.	People’s Republic of China
LG-Nortel Co. Ltd.	Korea
Matra Communications Business Systeme GmbH Germany.	Germany
Matra Communication Cellular Terminals GmbH.	Germany
Nortel Australia Communication Systems Pty. Limited.	New South Wales, Australia
Nortel Communications Holdings (1997) Limited.	Israel
Nortel Communications Inc.	Ontario
Nortel de Mexico, S. de R.L. de C.V.	Mexico
Nortel Government Solutions Incorporated.	State of Delaware
Nortel Limited.	United Kingdom
Nortel Networks (Asia) Limited.	Hong Kong
Nortel Networks (Austria) GmbH.	Austria
Nortel Networks (Bulgaria) EOOD.	Bulgaria
Nortel Networks (CALA) Inc.	State of Florida
Nortel Networks (China) Limited.	People’s Republic of China
Nortel Networks (India) Private Limited.	New Delhi, India
Nortel Networks (Ireland) Limited.	Ireland
Nortel Networks (Northern Ireland) Limited.	Northern Ireland
Nortel Networks (Photonics) Pty Ltd.	New South Wales, Australia
Nortel Networks (Shannon) Limited.	Ireland
Nortel Networks (Thailand) Ltd.	Thailand
Nortel Networks AB.	Sweden
Nortel Networks AG.	Switzerland
Nortel Networks Applications Management Solutions Inc.	State of Delaware
Nortel Networks AS.	Norway
Nortel Networks Australia Pty Limited.	Australia
Nortel Networks BV.	The Netherlands
Nortel Networks Cable Solutions Inc.	State of Delaware
Nortel Networks Capital Corporation.	State of Delaware
Nortel Networks Chile S.A.	Chile
Nortel Networks Communications Engineering Ltd.	People’s Republic of China
Nortel Networks Communications (Israel) Limited.	Israel
Nortel Networks de Argentina S.A.	Argentina
Nortel Networks de Bolivia S.A.	Republic of Bolivia
Nortel Networks de Colombia S.A.	Colombia
Nortel Networks de Guatemala Ltda.	Guatemala
Nortel Networks de Mexico S.A. de C.V.	Mexico
Nortel Networks de Panama S.A.	Republic of Panama
Nortel Networks de Venezuela C.A.	Venezuela
Nortel Networks del Ecuador S.A.	Republic of Ecuador
Nortel Networks del Paraguay S.A.	Paraguay
Nortel Networks del Uruguay S.A.	Uruguay
Nortel Networks Eastern Mediterranean Ltd.	Israel

	Organized under the laws of
Nortel Networks Electronics Corporation.	Canada
Nortel Networks Employee Benefit Trustee Company Limited.	United Kingdom
Nortel Networks Engineering Service Kft.	Hungary
Nortel Networks Europe Sales Limited.	Ireland
Nortel Networks Financial Services Limited Liability Company.	Hungary
Nortel Networks France SAS.	France
Nortel Networks Global Corporation.	Canada
Nortel GmbH.	Germany
Nortel Networks Hispania, S.A.	Spain
Nortel Networks HPOCS Inc.	State of Delaware
Nortel Networks Inc.	State of Delaware
Nortel Networks India International Inc.	State of Delaware
Nortel Networks India Technology Private Limited.	India
Nortel Networks International Corporation.	Canada
Nortel Networks International Finance & Holding B.V.	The Netherlands
Nortel Networks International Inc.	State of Delaware
Nortel Networks Israel (Sales and Marketing) Limited.	Israel
Nortel Networks Japan.	Japan
Nortel Networks Korea Limited.	Korea
Nortel Networks Malaysia Sdn. Bhd.	Malaysia
Nortel Networks Malta Limited.	Malta
Nortel Networks Mauritius Ltd.	Mauritius
Nortel Networks NV.	Belgium
Nortel Networks Netas Telekomunikasyon A.S.	Turkey
Nortel Networks New Zealand Limited.	New Zealand
Nortel Networks Northern Telecom Services de Argentina S.A.	Argentina
Nortel Networks O.O.O.	Russia
Nortel Networks Optical Components Inc.	State of Delaware
Nortel Networks Optical Components Limited.	United Kingdom
Nortel Networks OY.	Finland
Nortel Networks Peru S.A.C.	Peru
Nortel Networks Polska Sp. z o.o.	Poland
Nortel Networks Portugal, S.A.	Portugal
Nortel Networks Properties Limited.	United Kingdom
Nortel Networks Romania Srl.	Romania
Nortel Networks S.A.	France
Nortel Networks SA.	Luxembourg
Nortel Networks S.p.A.	Italy
Nortel Networks S.R.O.	Czech Republic
Nortel Networks Singapore Pte Ltd.	Singapore
Nortel Networks Slovensko, s.r.o.	Slovak Republic
Nortel Networks South Africa (Proprietary) Limited.	South Africa
Nortel Networks Southeast Asia Pte Ltd.	Singapore
Nortel Networks Technology (Thailand) Ltd.	Thailand
Nortel Networks Technology Corporation.	Province of Nova Scotia
Nortel Networks Technology Ltd.	Cayman Islands
Nortel Networks Telecommunications Equipment (Shanghai) Co., Ltd.	People’s Republic of China
Nortel Networks Telecomunicacoes do Brasil Industria e Comercio Ltda.	State of Sao Paolo, Brazil
Nortel Networks Telecomunicacoes Industria e Comercio Ltda.	Brazil
Nortel Networks UK Limited.	United Kingdom
Nortel Technology Excellence Centre Private Limited.	India
Nortel Trinidad and Tobago Limited.	Trinidad and Tobago
Nortel Ukraine Ltd.	Ukraine
Nortel Ventures LLC.	State of Delaware
Nortel Vietnam Limited.	Vietnam
Northern Telecom Canada Limited.	Canada

	Organized under the laws of
Northern Telecom France SA.	France
Northern Telecom International Inc.	State of Delaware
Northern Telecom Maroc SA.	Morocco
Northern Telecom PCN Limited.	United Kingdom
Nor.Web DPL Limited.	United Kingdom
Penril Datacomm Limited.	United Kingdom
Periphonics Limited.	United Kingdom
Promatory Communications (UK) Limited	United Kingdom
PT Nortel Networks Indonesia.	Indonesia
Qtera Corporation.	State of Delaware
R. Betts Investments Pty. Ltd.	New South Wales, Australia
Regional Telecommunications Funding Corporation.	Canada
Shenyang Nortel Telecommunications Co., Ltd.	People’s Republic of China
Sonoma Systems Europe Limited.	United Kingdom
Star 21 Networks GmbH.	Germany
Telephone Switching International Limited.	United Kingdom
The Nortel Foundation.	State of Virginia
TSFC Canada Inc.	Canada
X-CEL Communications Limited.	United Kingdom

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the following Registration Statements and Amendments in effect of our reports dated February 27, 2008, with respect to the consolidated balance sheet of Nortel Networks Limited as of December 31, 2007, and the related consolidated statements of operations, changes in equity and comprehensive income (loss) and cash flows for the year then ended, and the related consolidated financial statement schedule, and the effectiveness of internal control over financial reporting as of December 31, 2007, which reports appear in the December 31, 2007 Annual Report on Form 10-K of Nortel Networks Limited:

• Registration Statement on Form S-8 and all Post-Effective Amendments thereto
(Nortel Networks U.S. Deferred Compensation Plan)
(333-11558)

• Registration Statement on Form S-3 and all Post-Effective Amendments thereto
(Common Shares, Preferred Shares, Debt Securities, Guarantees,
Warrants to Purchase Equity Securities, Warrants to Purchase Debt Securities,
Share Purchase Contracts, Share Purchase or Equity Units of Nortel Networks Corporation and
Guaranteed Debt Securities of Nortel Networks Limited)
(333-88164)

• Registration Statement on Form S-4 and all Amendments thereto
(Nortel Networks Limited Offers to Exchange:
$450,000,000 principal amount of 10.75% Senior Notes due 2016
$550,000,000 principal amount of 10.125% Senior Notes due 2013
$1,000,000,000 principal amount of Floating Rate Senior Notes due 2011)
(333-145972)

• Registration Statement on Form S-3 and all Amendments thereto
(Nortel Networks Corporation Proposed Sale to Public of:
$575,000,000 1.75% Convertible Senior Notes Due 2012
$575,000,000 2.125% Convertible Senior Notes Due 2014
35,937,500 Common Shares of Nortel Networks Corporation)
(333-146273)

/s/  KPMG LLP

Chartered Accountants, Licensed Public Accountants

Toronto, Canada
February 27, 2008

EX-23.2

Exhibit 23.2

CONSENT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS

We consent to the incorporation by reference in the following Registration Statements and Amendments of our reports dated March 15, 2007, except as to notes 4, 5, 6 and 21, which are as of September 7, 2007, relating to the consolidated financial statements, and consolidated financial statement schedule of Nortel Networks Limited (“Nortel”) as of December 31, 2006 and for the two year period ended December 31, 2006 (which audit report on the consolidated financial statements expressed an unqualified opinion, includes a separate report titled Comments by Independent Registered Chartered Accountants on Canada-United States of America Reporting Difference referring to changes in accounting principles that have a material effect on the comparability of the financial statements) appearing in the Annual Report on
Form 10-K of Nortel for the year ended December 31, 2007:

• Registration Statement on Form S-8 and all Post-Effective Amendments thereto
(Nortel Networks U.S. Deferred Compensation Plan)
(333-11558)

• Registration Statement on Form S-3 and all Post-Effective Amendments thereto
(Common Shares, Preferred Shares, Debt Securities, Guarantees,
Warrants to Purchase Equity Securities, Warrants to Purchase Debt Securities,
Share Purchase Contracts, Share Purchase or Equity Units of Nortel Networks Corporation and
Guaranteed Debt Securities of Nortel Networks Limited)
(333-88164)

• Registration Statement on Form S-4 and all Amendments thereto
(Nortel Networks Limited Offers to Exchange:
$450,000,000 principal amount of 10.75% Senior Notes due 2016
$550,000,000 principal amount of 10.125% Senior Notes due 2013
$1,000,000,000 principal amount of Floating Rate Senior Notes due 2011)
(333-145972)

• Registration Statement on Form S-3 and all Amendments thereto
(Nortel Networks Corporation Proposed Sale to Public of:
$575,000,000 1.75% Convertible Senior Notes Due 2012
$575,000,000 2.125% Convertible Senior Notes Due 2014
35,937,500 Common Shares of Nortel Networks Corporation)
(333-146273)

/s/  Deloitte & Touche LLP

Independent Registered Chartered Accountants
Licensed Public Accountants

Toronto, Canada
February 27, 2008

EX-24

Exhibit 24

POWER OF ATTORNEY

     KNOW ALL PERSONS BY THESE PRESENTS, that each of the undersigned directors of NORTEL NETWORKS LIMITED (the “Corporation”), which is about to file with the Securities and Exchange Commission (the “SEC”), Washington, D.C. 20549, under the provisions of the Securities Exchange Act of 1934, as amended, an Annual Report on Form 10-K (the “Annual Report”) for the fiscal year ended December 31, 2007, hereby constitutes and appoints David W. Drinkwater and Gordon A. Davies his or her true and lawful attorneys-in-fact and agents, and each of them, with full power to act without the others, for him or her and in his or her name, place and stead, in any and all capacities, to sign such Annual Report and any and all amendments thereto, and other documents related thereto, with power where appropriate to affix the corporate seal of the Corporation thereto and to attest said seal and to file such Annual Report and amendments thereto, with all exhibits thereto, and any and all other information and documents in connection therewith, with the SEC, hereby granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises, as fully as to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof.

     IN WITNESS WHEREOF, the undersigned have signed this Power of Attorney this 27^th day of February, 2008.

/s/ J. H. BENNETT	/s/ M. BISCHOFF	/s/ J.B. HUNT, JR.
J.H. Bennett	M. Bischoff	J.B. Hunt, Jr.
/s/ K.M. JOHNSON	/s/ J.A. MACNAUGHTON	/s/ J.P. MANLEY
K.M. Johnson	J.A. MacNaughton	J.P. Manley
/s/ R.D. MCCORMICK	/s/ C. MONGEAU	/s/ H.J. PEARCE
R.D. McCormick	C. Mongeau	H.J. Pearce
/s/ J.D. WATSON	/s/ M.S. ZAFIROVSKI
J.D. Watson	M.S. Zafirovski

EX-31.1

Exhibit 31.1

Certification

I, Mike S. Zafirovski, certify that:

1.	I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2007 of Nortel Networks Limited;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 27, 2008

/s/ Mike S. Zafirovski

Mike S. Zafirovski

President and Chief Executive Officer

EX-31.2

Exhibit 31.2

Certification

I, Paviter S. Binning, certify that:

1.	I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2007 of Nortel Networks Limited;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 27, 2008

/s/ Paviter S. Binning

Paviter S. Binning

Executive Vice-President and Chief Financial Officer

EX-32

Exhibit 32

Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)

Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), each of the undersigned officers of Nortel Networks Limited, a Canadian corporation (the “Company”), does hereby certify, to such officer’s knowledge, that:

The Annual Report on Form 10-K for the year ended December 31, 2007 (the “Form 10-K”) of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: February 27, 2008	/s/ Mike S. Zafirovski
	Mike S. Zafirovski
	President and Chief Executive Officer
Dated: February 27, 2008	/s/ Paviter S. Binning
	Paviter S. Binning
	Executive Vice-President and Chief Financial Officer